Thursday, February 09, 2006

Smith Wrote Nothing About Modern Corporations

A lively piece by Dave Taggart castigating currency speculation and speculators, such as George Soros (now in amoral remission, and giving the world the benefit of his somewhat changed views towards his past work as a speculator), in SCOOP: ‘An Occam’s razor’, 9 February. Unfortunately, Taggart, drags “Wealth of Nations” into the case for ‘Tobin’s Tax’.

This form of trading [currency speculation] has absolutely nothing to do with human labour or productivity; it is not the ‘marketplace’ of Adam Smith’s day.”

Even in Smith’s day paper bills were traded in active markets. The Admiralty in London always honoured bills drawn on a Royal Navy officer’s King’s Commission for goods purchased in overseas ports, not matter how long they took to make their way back to London for payment in cash at their face value – the amount of discounting and re-selling was signified by the number of signatures on their reverse side as they passed from merchant to merchant. There was also a lively trade in the purchase of such discounted bills by Royal Navy and merchant ships calling at ports en route for London – Lieutenant Bligh, for example, purchased (speculatively) a number of these bills when HMS Bounty called at the Cape of Good Hope in 1788.

When Adam Smith wrote ‘The Wealth of Nations’ in 1776, markets dealt in material products, not currency speculation. Smith wrote (op. cit; Vol 1: 144), “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”. Doubtless, he would hold the Soroses of the world in similar contempt.”

What is Dave Taggart’s point here? The behaviour of ‘people of the same trade’ that Smith refers to in “Wealth of Nations” (WN I.x.c. 27, page 145) was from people who were dealers in tangible goods, not currency trades. Alluding to currency speculators as being of the same ilk as traders in tangible goods suggests that the behaviour Dave Taggart considers to be a new phenomenon among currency speculators today, and beyond the pale, has been the common behaviour of both traders in tangible goods and currency. This suggests that Taggart’s apparent approval of traders in tangible goods is forced. Taggart’s assumption, or rather presumption – and a ‘doubtless’ one at that – about whom Smith would have held in ‘contempt’ is of doubtful provenance.

As Adam Smith stated (1776; Vol 2: 158)[?]; "Such exclusive companies, therefore, are nuisances in every respect: always more or less inconvenient in the countries in which they are established and destructive to those which have the misfortune to fall under their government." Smith’s “exclusive companies” are, of course, corporations. His visionary contempt of the then fledgling corporate phenomenon is never acknowledged by the neo-cons who cherry-pick his writing, but I am sure he would have endorsed the Tobin Tax.’

Again a quotation stretched from its original context in “Wealth of Nations” into a completely different context in the 21st century. Smith’s “exclusive companies” were not modern ‘corporations’ at all. He was referring to the chartered monopolies, such as the East India Company, that did more than trade with India; it ruled the country for much of the over two hundred and fifty years (1600-1858) it operated as a monopoly. Hence, Smith’s reference to its “nuisances in every respect: always more or less inconvenient in the countries in which they are established and destructive to those which have the misfortune to fall under their government”, as India had the misfortune to suffer from.

Not all chartered monopolies, operating as ‘joint stock companies, in the 17th-19th centuries were as prone to bad governments of those areas over which they exercised their monopolies to the same extent as the East India Company upon which he heaped odium and disgust. Smith considered most of these monopolies ‘useless’ as trading entities.
His ‘contempt’ for them was not ‘visionary’. He wrote about these specific institutions in the here-and-now of his observations of them in the 18th century. He had no vision of how competitive joint stock companies would develop in the 19th century as the main vehicle of the, to him, unknown phenomenon of capitalism (a phenomenon of which he neither knew nor a word which he knew about – it was first used in 1854).

No conclusions should be drawn from the completely different joint stock companies in competitive markets compared to Smith’s views about trading monopolies operating under Royal Charters in the 17th-18th centuries.

Whatever ‘neo-cons’ (i.e., politicians in the 20-21st centuries) allegedly ‘cherry pick’ from Smith’s 18th-century writings, their interpretations are as likely to be biased as are Dave Taggart’s cherry-picking of “Wealth of Nations” to draw the extraordinary and ‘sure’ view that Smith “would have endorsed the Tobin Tax”. The basis for such a conclusion is undermined by the necessity for Dave Taggart to massage “Wealth of Nations” to arrive so confidently at, what must be, a wild assertion, irrespective of the merits of Professor Tobin’s usually excellent advice.

(Scoop: independent news (New Zealand): Dave Taggart’s article is found at:


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