Saturday, February 25, 2006

Nostalgia is Not a Guide to Policy

Page 456 of “Wealth of Nations” probably constitutes one of the most misunderstood pages in Smith’s entire published writings. It spawned an almost religious, certainly mystical, belief in 'invisible hands' (sometimes even called a 'theory') guiding everybody who pursued their self interest to always benign outcomes. The facts is that contrary self-interested actions can also act against, and sometimes savagely, the public good too – think of pollution, fraud, shoddy and dangerous products, and buildings that fall down or deteriorate quickly).

It also is taken up as ‘gospel’ when discussing domestic versus foreign investments. Take this extract from an article today in the Asheville Citizen Times, North Carolina, USA:

We do not begrudge other nations new opportunities. Still, philosopher Adam Smith believed the quaint notion that entrepreneurs prefer investing in “the support of domestic to that of foreign industry.” But that view has become outdated. Country and community mean less now than next quarter’s profits. American working families might welcome some of Smith’s quaint, outdated patriotism about now.”

It was written by Thomas Sullivan, a professional engineer who consults for industries ranging from chemicals to biotech. Its title says much about its theme: “Behind every delusional ‘self-made’ man are the sacrifices and foresight of much wiser people”.

Overall it is a spirited piece on some simple ideas about patriotism, mixed with a bit of nostalgia for the known certainties of yesterday, which every age feels about the past – they know now what happened and they survived, but when it comes to the uncertain future they are anxious because they don’t know what will happen and it always looks as if the present age is unready and unable to cope the way 'we' were in the past age of our youth.

Fortunately, our grandchildren, looking back generations down line will know what happened and so the cycle of anxiety continues.

Adam Smith did not ‘believe’ in ‘quaint notions’. He was a philosopher of the past and present, not a seer of the future. He observed what was happened and what had happened and tried to analyse the ‘connections’ among things and events, and the people in active in them. Page 456 is about individual human motivations and how these have consequences, unintended and unplanned or co-ordinated by the people involved. There were no ‘quaint notions’ shared by entrepreneurs in “Wealth of Nations”.

The consequence of humans preferring to stay close to their families in their homes and close to their investments of their scarce capital stock had nothing to do with ‘preferring the support of domestic to that of foreign industry’. That is not how Smith articulated his assessment. It was the natural human anxiety about their livelihoods being out of their sight. Remember, these were times when capital stock was extremely scarce – a workman’s tools and materials; a horse and cart; farming implements; home based looms; a few pounds in money which they could lend out at interest to someone local whom they knew, or use to purchase sufficient materials from someone else they knew to add value to a line of output under the early division of labour. The amounts were small and being small if they chose wrongly the outcome was not just a loss, but labouring employment if they could get it, or abject destitution if they couldn’t. Risk aversion was high.

In these circumstances, keeping their scarce capital stock within reach and in sight of the others who used it was so fundamental to the cautious entrepreneur (mostly a skilled or semi-skilled tradesman) that it expressed their prudence (“Moral Sentiments”) not their sense of the balance of preferences driven by patriotism.

Only the richest of merchants or manufacturers could risk ventures based on distant sale, especially abroad. Again this was not because of their patriotism – though comfort could be gained if the British Union flag flew over the ship carrying their goods and over the warehouse where they stored their materials in transit – it was about opportunities to make a profit from the transactions.

I suspect that in reality Thomas Sullivan is importing into his argument about Smith’s alleged ‘beliefs’, a modern agenda that includes current concerns about the so-called export of ‘jobs’. How he considers the American colonists would have established their, at times, fragile occupation of the Americas without the export of capital stock (and jobs) from Britain is not stated. I suppose he would answer, but ‘that was then, and this is now’.

Today, there are vast flows of capital among countries. The minimum scale of capital owned by modern day corporations is a long way from the 18th-century early owners of minute amounts of capital stock. Much of US and European investment abroad is owned by US and European firms and the output of these enterprises is shipped back to the countries of origin, appearing in the economic scales as increases in the real wages of their citizens (what you can buy in dollar, pounds or euros). That has got to be a good deal for all participants, because the employed foreigners in their countries earn incomes that enable them to buy US and European products.

Read Mr Sullivan’s article at: ( article?AID=/20060225/OPINION04/60224038/1006)


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