Saturday, May 13, 2006

Tim Harford on Adam Smith

Tim Harford who, like Tim Worstall, ‘knows economics and writes well’ – in fact, probably better than just ‘well’ - publishes a review in Friday’s Financial Times of James Buchan’s new book, ‘Adam Smith and the pursuit of perfect liberty’ (Profile Books, May 2006). And an excellent review it is too.

The following paragraphs caught my attention:

Buchan’s evident admiration for Smith doesn’t stop him attempting to deflate the idolatry of the philosopher by modern pundits. Scornfully dismissing a paean to Adam Smith by Alan Greenspan, then chairman of the Federal Reserve, Buchan sneers, “One could with better justice claim that Moll Flanders, a resourceful whore in the fiction of Daniel Defoe who also uses the phrase ‘invisible hand’, is another towering contributor to the stability of international markets.”

In this, Buchan goes too far. It is true that the phrase “invisible hand” was never used by Smith to refer to the smooth and socially beneficial operation of market forces. And it is also true that the commercial activities he so carefully observed, in marked contrast to the fact-free theorising of some of his followers, were part of the horse-and-cart economy of the 18th century, not the global finances of the 21st.

But Smith is unmistakeably a chronicler, theorist and great advocate of the virtues of the market, as Buchan shows. Twenty five years before his most famous work, The Wealth of Nations, was published, Smith argued in a public lecture in Glasgow that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes and a tolerable administration of justice”. Greenspan may have interpreted Smith’s ideas too loosely but he did not imagine some fictional hero

Tim Harford goes ‘too far’ himself with his polite chastisement of James Buchan for his correct identification of the transformation by Greenspan (who has no excuse being himself an accomplished economist) of Smith’s lone metaphor into a theory of markets. Smith never used the metaphor of the invisible hand as a theory of markets; he did not even use it in a discussion about markets.

This can be seen by anybody who reads the quotation mentioning the invisible hand metaphor in its place in the section of Wealth of Nations (Page 456). Surely, someone preparing an important speech to a distinguished audience, among them many economists of note, would check his references even assuming he was unfamiliar with the quotation – surely a wistful hope in the case of an eminent economist like Alan Greenspan.

That Tim Harford excuses the crass error of Greenspan is surprising; he should be congratulatory of James Buchan for making such a telling point about Moll Flanders, Defoe’s 1722 fictional character (Buchan, p 2, n 2). The invisible hand goes back further to Shakespeare’s Macbeth (3:2) in 1605. Yet it is repeated almost daily as Smith’s theory of markets when Smith was perfectly clear about how markets work without ‘miracles’ or great ‘mysteries’.

It wasn’t that Greenspan imagined ‘some fictional hero’, but that Greenspan imagined some fictional Adam Smith.

Tim Harford’s reference to Smith’s 1755 speech ‘twenty-five years’ earlier that Wealth of Nations (twenty-six actually) and its well-known summary that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes and a tolerable administration of justice’, on which I have commented in the Appendix, The 1755 Paper’, in ‘Adam Smith’s Lost legacy’ (Palgrave 2005), is apposite too. It does not mention markets. Indeed, Smith was of the opinion that if liberty was essential to each country that became opulent there would be few countries developing into opulence anywhere.

I think Smith’s point was that in a state of liberty, countries would develop towards opulence without the regrettable vestiges of oppression so much associated with the ‘rulers of mankind’. The oppressors, war mongers and tax collectors, so common in history were unnecessary for mankind’s well-being and happiness. To which I hope we can all agree.


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