A Respectful Reply to 'Jon'

Jon
Thank you for your helpful response. I am, however, concerned with what Adam Smith wrote in Wealth Of Nations, which is the original dispute that Chomsky expressed in his critique of Milton Friedman, a voice for rightist views in public debate. I observe that both Chomsky and yourself (both ‘leftist’?) also make comments at variance with Adam Smith’s writings, not just about his two references to “an invisible hand”.

You accept that Smith did not write of globalization as experienced in the 20th-21st centuries. You challenge my reading of Smith in Book IV, chapter 2 of Wealth Of Nations, and I am grateful for your observations and comments. Others also quote the paragraphs mentioned by you, for example, David Friedman (no relation?), a libertarian, who posted to me on Lost Legacy a couple of years ago.

In paragraph 1, Smith gives examples of the consequences of ‘Restraints upon the Importation from foreign commerce of such goods as can be produced at home’. That these restraints, Smith says in paragraph 2, benefit domestic industry and employment “cannot be doubted”, but whether that benefits society “is not, perhaps, altogether so evident”. His general proposition is that “general industry” can “never exceed what the capital of the society can employ”, but regulations cannot increase the employed capital; they can only divert it, which may not be as “advantageous to the society than that into which it would have gone of its own accord” (paragraph 3).

He switches to consider the individual exerting himself to “find out” the most advantageous employment for his capital, and this “finding out” process is naturally “most advantageous to society”, even though he seeks his own “advantage” (paragraph 4). He seeks to invest locally “as near home as he can”, which supports “domestick industry”, guided by “ordinary, or not a great deal less than ordinary profits” (paragraph 5). You quote part of paragraph 6 part. The other part, unquoted, says

“In the home–trade his capital is never so long out of his sight as it frequently is in the foreign trade of consumption. He can know better the character and situation of the persons whom he trusts, and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress. In the carrying trade, the capital of the merchant is, as it were, divided between two foreign countries, and no part of it is ever necessarily brought home, or placed under his own immediate view and command’ (paragraph 6, lines 3 to 5).

These express considerations of risk in trading outside “domestick industry”, including that of the “foreign trade of consumption” and “the carrying trade”, which were more riskier than distant parts of “domestick industry”. Smith gives over the long rest of the paragraph to give examples from distant foreign trade (paragraph 6, lines 8 – 32). The merchant, to avoid risks and trouble, when engaged in foreign trade, will always be glad to sell his cargoes domestically, and as a consequence will “put into motion a greater quantity of domestick industry [that] gives revenue and employment to the greatest number of people of his own country”. It is this convenience and security (lower risks) that leads to the consequence of “home being the centre, if I [Smith] may say so, round which the capitals … continually circulate”. The “natural” inclination to employ his capital in this manner, driven by risks of foreign or distant trade “gives revenue and employment to the greatest number of people in his own country” (paragraph 6 and 7). he whole is the sum of its parts.

This is clearly a consequential outcome of his risks, concerns and trouble of foreign trade, which also has the necessary consequence of slower turnover of his capital overseas – instead of turning over his capital for profit in months, the merchant may have to wait years (Smith discusses this elsewhere in Wealth Of Nations).

The inhibitions of some, but not all merchants (foreign trade was an increasingly significant element of the British economy from the 14th century) leading them to trade domestically’ is the object of his use of the metaphor of “an invisible hand”, which was a metaphor to “describe in a more striking and interesting manner” the personal inhibitions of traders in “domestick industry” (see Smith’s Lectures on Rhetoric, 1762). The metaphor had nothing to do him preferring to better "his home country' which caused him to be "led by an invisible hand” as an expression of a public benefit. Smith specifically says that he is “led by an invisible hand to promote an end which was no part of his intention” (the betterment of a public benefit), because "by pursuing his own interest (avoiding the risks and trouble of foreign trade) ‘he frequently promotes that of society more effectually than when intends to promote it” (paragraph 9). In short the "betterment" came as a consequence of him being "led by an invisible hand"; it was not the cause of him acting in this manner to avoid risk to the security of his capital. If he preferred to "better his country", it would not be consequence, but the reason for acting thus.

I have tried to persuade “rightist” authors (David Friedman, Daniel Klein, and my friends in the Adam Smith Institute – where – disclosure – I am a Fellow, but so far to no avail) and ‘leftist authors, writing in defence of Chomsky (also, so far, to no avail). My concerns are nothing to do with 21st-century squabbles; they are in defence of Adam Smith and his legacy; I do not take sides in the Cold-War legacy in modern economics, inspired by false attributions, since Paul Samuelson’s 1948 text, Economics: an introductory analysis.

Many thanks, Jon, for your attention and interest.

Adam Smith on Education

D. Lewis posts (27 February) on Prolusion Six HERE

“Would Adam Smith Occupy Wall Street?”

While many point to his passages praising the productive power of the division of labor in Book I, it is easy to forget that in Book V, Smith is worried about the deadening effect that comes from performing the same operations over and over again which not only can make life a bore, but could undermine the moral fabric of society.

Smith believed the government should prevent such mental torpor through universal, public education, even for adults, so that their minds can stay sharp despite their monotonous labor. Smith’s drew a distinction – an important one, for advocates of Smithian economics – between government intervention into the market economy and other government services, and supporting the former does not have to come at the expense of the latter.

Comment
There is a common enough misleading interpretation of Smith’s account of the benefits to the social-economic application of the division of labour to manufacturing and to exchange, in Book I, Chapter 1,”Of the Division of Labour’ and some apparently contrary views expressed in Book V, Article II, ‘Of the Expence of the Institutions for the Education of Youth’. Many readers of Wealth Of Nations, even of such seniority as Chomsky, whom I have commented upon on Lost Legacy, just miss the point that Smith makes. I think they are misled by quotation hunting, instead, of interesting themselves in Smith’s methods of inquiry.

The section Book 5 in which he makes the apparently critical comments addresses specific questions: “ought the publick, therefore, to give attention … to the education of the people. Of if it ought to give any, what are the different parts of education which it ought to attend to in the different order of the people? And in what manner ought it to attend to them?” (WN V.i.f.48). Then follows the well-quoted paragraph about the consequences of “performing a few simple operations” (WN V.i.f.50).

This is the paragraph which D. Lewis, and many others, focus upon, and most others completely miss its significance. Given that Smith considered the division of labour as a most important – indeed the crucial – aspect of a future increase in the opulence of the ‘people’, particularly the poorest labourers, plus those unemployed, in the lower orders, and those most in need of waged employment, and given that basic education was usually non-existent for them in 18th-century England, manifestly there was a major problem, that was not addressed by the upper orders. Remember, Smith was not agitating against the upper orders; he was trying to persuade them to partly fund from government, plus contributory charges among families, a major programme of education to be initiated, along the lines of the existing ‘little schools’ operating over much of Scotland since the 17th century, which provided classes from 6 to 8 years, with the brightest, and the better off, staying until 14 years. The best went on to university, funded by local charitable grants and scholarships.

Smith was savvy enough to know that the ‘upper orders’ in England were unlikely to initiate the necessary education reforms without them perceiving a special need for themselves to do so. England had only two universities, Oxford and Cambridge, (compared to Scotland’s four universities, Edinburgh, Glasgow, St Andrews and Aberdeen) and only well-off male children had any formal education provision at all (funded by parental fees and charitable grants); girls were educated at home, but not at all. The children of labourers had no education at all, and were generally illiterate, uncultured, innumerate, and “generally [became] as stupid and ignorant as it is possible for a human creature to become”.

With the spread of commerce and manufacturing in conditions suitable for increasing division of labour, these problems of ignorance and stupidity were likely to spread and deepen: “in every improved and civilized society” the “great body of the people, must necessarily fall, unless the government takes some pains to prevent it”.

He concludes his argument with an appeal, not to reverse the facts of the division of labour (a misleading conclusion by the likes of Chomsky), but to be aware of the political consequences and dangers of the leaving the children of the labouring lower orders uneducated:

“The same thing may be said of the gross ignorance and stupidity which, in a civilized society, seem so frequently to benumb the understandings of all the inferior ranks of people. A man, without the proper use of the intellectual faculties of a man, is, if possible, more contemptible than even a coward, and seems to be mutilated and deformed in a still more essential part of the character of human nature. Though the state was to derive no advantage from the instruction of the inferior ranks of people, it would still deserve its attention that they should not be altogether uninstructed. The state, however, derives no inconsiderable advantage from their instruction. The more they are instructed, the less liable they are to the delusions of enthusiasm and superstition, which, among ignorant nations, frequently occasion the most dreadful disorders. An instructed and intelligent people besides are always more decent and orderly than an ignorant and stupid one. They feel themselves, each individually, more respectable, and more likely to obtain the respect of their lawful superiors, and they are therefore more disposed to respect those superiors. They are more disposed to examine, and more capable of seeing through, the interested complaints of faction and sedition, and they are, upon that account, less apt to be misled into any wanton or unnecessary opposition to the measures of government. In free countries, where the safety of government depends very much upon the favourable judgment which the people may form of its conduct, it must surely be of the highest importance that they
should not be disposed to judge rashly or capriciously concerning it” (WN V.i.f.61).

Smith’s warning is clear: the government (which meant the landed interests who dominated it, and merchants and manufacturers, and church dignitaries, should act, by supporting government spending on educational provision, to prevent existing craven stupidity worsening, or risk the consequences of the ignorant lower orders listening and being moved by “the delusions of enthusiasm and superstition, which, among ignorant nations, frequently occasion the most dreadful disorders”.

It was not the division of labour that was the problem (that division partly constituted the solution); it was the existing and continuing lack of education among the poor in the basic skills of “reading, writing and account” that threatened everything. It took a century before universal education was initiated in Britain.

D. Lewis appears partly to understand Smith’s point. If others also understood it, they would be better informed of what Adam Smith meant.

Welcome Surprise: Noam Chomsky Understands the IH Metaphor

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Noam Chomsky addresses an Occupy Washington Meeting (3 November) reported HERE

“Without going on with details, what’s being played out for the last 30 years is actually a kind of a nightmare that was anticipated by the classical economists. If you take an Adam Smith, and bother to read Wealth of Nations, you see that he considered the possibility that the merchants and manufacturers in England might decide to do their business abroad, invest abroad and import from abroad. He said they would profit but England would be harmed. He went on to say that the merchants and manufacturers would prefer to operate in their own country, what’s sometimes called a “home bias.” So, as if by an invisible hand, England would be saved the ravage of what’s called “neoliberal globalization.”

That’s a pretty hard passage to miss. In his classic Wealth of Nations, that’s the only occurrence of the phrase “invisible hand.” Maybe England would be saved from neoliberal globalization by an invisible hand. The other great classical economist David Ricardo recognized the same thing and hoped it wouldn’t happen. Kind of a sentimental hope. It didn’t happen for a long time, but it’s happening now. Over the last 30 years that’s exactly what’s underway. For the general population -- the 99 percent in the imagery of the Occupy movement --it’s really harsh and it could get worse. This could be a period of irreversible decline. For the 1 percent, or furthermore 1/10th of 1 percent, it’s just fine. They’re at the top, richer and more powerful than ever in controlling the political system and disregarding the public, and if it can continue, then sure why not? This is just what Smith and Ricardo warned about.”

Comment
I am pleased – and surprised – to say that Noam Chomsky has got Adam Smith’s use of the invisible hand metaphor right (almost). From merely repeating the modern invention of the myth of the “invisible hand”, as attributed to Adam Smith by modern economists, following Paul Samuelson (1948) and an oral tradition among some economists (A.C. Pigou) at Cambridge University, UK, and, a later, George Stigler, et la, Chicago (USA), namely that Adam Smith supposedly said that selfish motives led to the public good and equilibrium (he didn’t), Chomsky has correctly identified that Smith supposed that “the merchants and manufacturers in England might decide to do their business abroad” (many of them did).

This is a mighty step forwards in re-discovering Adam Smith’s legacy and I congratulate Noam Chomsky for so doing. It is based on Chomsky actually reading of what Adam Smith wrote in Book IV, Chapter 2, paragraphs 1-9 of Wealth Of Nations, and not just a couple of sentences in paragraph 9, as Lost Legacy has been banging on about (almost to little avail) each week since 2005.

Yes, I know I have been criticising Chomsky on this issue since 2009 – as recently as a month or so back this year – but scholars must adhere to the code that when someone gets it right, instead of like the majority persistently getting it wrong, their correction must be acknowledged among the Republic of Letters (and conversely, errors that come to light must be owned up to at the earliest opportunity).

Smith’s use of the IH metaphor was not a new theory, a new concept, or a new paradigm, nor a discovery of the ‘hand of God’. It was not a game changer, as they say today. It was the statement of a notable fact of life. In re-stating what he did say, I shall make an important non-pedantic adjustment to Chomsky’s initial statement:

“he considered the possibility that the merchants and manufacturers in England might decide to do their business abroad, invest abroad and import from abroad.”

That merchants and manufacturers “might consider the possibility” of investing abroad, with the consequences that Chomsky noted, was already happening among them since the 14th century, when exports abroad were already significant. Britain is an island and exports and imports were a necessary consequence of its stirring towards commercial society, initially in the form of ‘exports’ and ‘imports’ within the national region (the Age of Commerce cannot develop and remain in an isolated village). Commerce spread out, notably, said Smith, near shippable rivers and the coast, to other regions and, eventually, to foreign coasts (also to move to troops in Europe for incessant wars and pilgrims).

The Fall of Rome (5th century) disrupted the first spread of the Age of Commerce in the Mediterranean and Western Europe, which was disrupted by the barbarian invasions of vast lands left undefended by Rome’s collapse, said Smith. In the revival from the 14th century, commerce re-appeared. Bulk shipping had not been dis-invented; it was revived with bulk cargoes to match (wool from England for ‘luxuries’, gold, etc. from Europe).

Smith’s point was about some, but not all, merchants considering exporting capital of foreign countries and the colonies in America who were put off by the risks implicit and actual in the “foreign trade of consumption” (of course, many weren’t). Among these risks are those associated with commercial trust in dealings with distant traders in foreign countries, also a real problem when trading locally, but a relatively lesser problem in the home-trade with traders he could meet, with known reputations, and proven creditworthiness.

“he can know better the character and situation of the persons whom he trusts, and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress” (WN IV.ii.6: 454).

Smith use of the IH metaphor referred to specific domestic and manufacturers” who were risk averse sufficient to prefer to invest in the “domestick industry” (identified twice) and Smith makes it clear that in so doing he prefers “domestick to that of foreign industry”. This introduced his use of the IH metaphor: “led by an invisible hand to promote and end which was no part of his intention.” (WN IV.ii.9: 456). In short, the ‘invisible hand” was a metaphor for the insecurity of their capital, which by investing locally in “domestick industry” instead, they added to “domestick revenue and employment” (i.e., the whole is the sum of its parts; so every capital invested locally adds to what we now call GDP). [Note: there was no "as if by an invisible hand" mentioned by Smith.]

This was the “public” benefit because domestic revenue adds to growth, while more employment benefits the labouring, jobless, poor. It had nothing to do with the mathematics of welfare, general equilibrium; it was simple arithmetic, Nobel prizes not withstanding.

In sum, with my short qualification, I welcome Noam Chomsky’s step away from merely repeating the modern myths of the IH metaphor. I hope his audience did too.

[Note: I make no comments about the rest of his piece about the ‘Occupation’ of public spaces for peaceful demonstrations of legitimate viewpoints.]

Noam Chomsky Almost Gets Adam Smith on the IH Metaphor

Noam Chomsky’s podcast on Adam Smith’s singular use of the metaphor of an “invisible hand” versus modern versions, which make it mean something entirely different, and which is now ubiquitous, is revealing (HERE):

This short statement – I assume he was speaking from memory - is an interesting and positive development. He makes clear that he has read (but perhaps too quickly) Adam Smith’ singular mention of “an invisible hand” in Wealth Of Nations and appreciates something of its context (which more than can be claimed by most neoclassical economists), though he muddles the full context and the circumstances of some, but not all, merchants who choose not to invest their capital in “domestick industry”, rather than export it abroad to participate in the “Foreign trade of consumption”.

Chomsky errs (unintentionally, I am sure) in consequence from his too hasty read because he misses Smith’s emphasis on the reason why they do so (mentioned several times, in fact), namely and specifically– their feelings for the “insecurity” of their capital once it is out of their sight. Other merchants, perhaps the majority of those investing “domestickly”, invest at home for other good reasons – habit, small scale, position in “domestick” markets, never having been tempted to invest abroad, and unfamiliar with how foreign trade works, and noticeably because they benefit from monopoly their positions in tariff-ridden Britain.

However, it is the former group of merchants of whom Smith specifically writes about. By choosing to invest in “domestick industry” these “insecure” merchants add to domestic “revenue and employment” – the former adds to the “Great Wheel of circulation” and “domestick” growth; the latter set new employees on society’s road to “opulence” (taking, of course, the long view). It is this aspect of the consequence of their behaviour that Smith comments upon as a “public” benefit.

Smith specifically says of this group that they are “led by an invisible hand” using a fairly common 17th-18th century literary metaphor to “describe in a striking and more interesting manner” the object of the metaphor, namely the “concern of these merchants for the “security” of their capital leading them to do act from choice in this way.

In short, it’s a metaphor; the “invisible hand’ describes what causes there merchants to behave as they do (you cannot see inside their heads – their motives are invisible; but it does not actually exist as a visible entity – that is: there is no “invisible hand”. The merchants’ “insecurity” of course, is invisible – it operates in their heads; the consequences are visible when they place their capitals in “Domestick industry”.

Hence, neoclassical theorists with their fantasies of “invisible hands” of markets, supply and demand, maximising “utility” functions, and so on are disingenuous. They clutch a flimsy straw and manufacture a mental image to explain the wonders of markets - which Smith did in Books I and II of Wealth Of Nations without mentioning the IH metaphor – even finding a miraculous “equilibrium” in this best of all worlds, when in fact it is probably only the least worse of all possible worlds (itself a positive achievement in this Vale of Tears, in my humble view).

Except, these imaginary inventions of modern, neoclassical, economics, had nothing to do with Adam Smith and his use of the IH metaphor, nor of the invented simile that Noam Chomsky brings into being when he undermined in his half-right version of Smith’s use of “led by an invisible hand”, by adding the wholly invented words “as if” to Smith’s own pristine words, “led by to invisible hand”, thereby making it a simile.

Now, we can be sure that Chomsky knows the difference between a simile and a metaphor (after all he is highly distinguished linguist). Ironically, Chomsky uses Smith’s metaphoric use of “led by an invisible hand” in order to chastise neoclassical theorists for their Cold-War inspired inventions of the magical properties of markets to show them superior to Soviet planned economies, from the 1930s, which anyway became disasters on their own account. Chomsky, of course, believes markets are also a capitalist (neo-con) disaster.

Oscar Lange, a Marxist, and a proponent of socialist planning (1936, 1938, 1945) was countered, first by Paul Samuelson in his famous textbook, Economics: an analytical analysis (1948), who claimed (absolutely wrongly) that Adam Smith said that the “invisible hand” meant “selfish” (he did not) behaviours were transformed (“miraculously”) into social benefits through markets (and repeated over the following 19 editions to 2010). This nonsense was widely disseminated to its to over 5 million readers and became the neoclassical orthodoxy (it still is) though its provenance is a compete invention, as is Chomsky’s “as if” insertion into Smith’s usage.

Lange, Chomsky, Samuelson, et al were all veterans of the Cold War. The “invisible hand” episode is a minor unintended consequence of the larger events wrapped in that global confrontation of yester decades. But the ideological confrontation continues in the functionality of markets, and Adam Smith’s legacy continues to be dragged into it despite the very obvious and glaring error in the counter-factual – specifically that very visible prices determine everything important needed for markets to work; there is no mystical invisible hand at work – nor needed.

The meaning of the metaphor lies in its “object” – see Adam Smith on the role of metaphors in his Lectures On Rhetoric and Belle Lettres ([1763] 1983, page 29, Oxford University Press). I am sure that Chomsky knows all about Smith’s conventional views on the role of metaphors.

The object of “an invisible hand” in Moral Sentiments was the absolute necessity, so obvious that it is invisible (cannot be seen by others) – that is, not thought about by the “unfeeling landlord” – yet still operates by leading him to distribute basic necessities to his slaves, serfs, peasants, and etc., form the mutual dependence on them (no food, no work) and their mutual dependence on him (no work, no food). In consequence, his dependents survived and procreated, and early agricultural society continued, with interruptions to the initiation of the “Commercial Age” with the Fall of Rome in the 5th century, and emerged again, gradually, after its reconstitution in the rule of War Lords, and then Feudal Lords, a thousand years later.

The object of “an invisible hand” in Wealth Of Nations was the “concern of some merchants for their capital’s security”, which, invisible to others operates in their heads, and leads them to invest in “domestick industry”. In consequence, domestic GDP grew and commercial society continued. The rest, as they say, is history.