Saturday, July 29, 2006

Wrong Twice In One Paragraph

Here is an example of someone crediting Smith with something he did not invent, nor claim that he did, and at the same time crediting somebody else with something Smith did write 90 years before. This comes from dim memories of Economics 101 or an edition of 'Bluff Your Way Through Classical Economics'. Either way it is poor journalism.

"Water of life" in The Telegraph (London) 29 July

'It was Adam Smith who spotted the paradox. "Nothing is more useful than water; but it will purchase scarce anything." Neo-classical economists developed his argument, noting that a man wandering the desert with a sack of diamonds would gladly exchange them all for a jug of water. Now, in a sweltering Tube carriage, their theory has come to life. "Mugged for a 40p bottle of water", said the headlines. To which our first reaction is, of course, shocked disbelief. Only 40p for a bottle of water?'

Of the many contributions that Adam Smith made to political economy, moral philosophy and jurisprudence, the ‘paradox of value’, he illustrated with water and diamonds, was not original to him and he was not the first to spot this paradox by millennia: cf: Plato (Euthydemus 304B).

As a student in Glasgow College (university) between 1737-40, he attended Francis Hutcheson’s lectures, which included the economics of the water-diamond paradox, and he read of the paradox in Samuel Pufendorf (De Jure Naturae et Gentium, 1672), a standard text in the moral philosophy class. Bernard Mandeville (Fable of the Bees, 1724) also includes the paradox of price and utility as affected by scarcity and plenty. And Ricard Cantillon mentions something similar about a pitcher of water from the Seine in Paris costing nothing, but the labour of collecting costing a sous (Essai Sur La Nature du Commerce in General, 1734). John Law, Money and Trade Considered, 1705, noted the water-diamond paradox.

Neo-classical economists who developed the water-diamond paradox had the benefit of marginal utility theory (1870s), but they were not original in noting how a thirsty man in a desert would pay much more for a glass of water than a professor in Glasgow walking to class through the rain.

This was one of Smith’s illustrations in his lectures in 1752-64, in which he tells the story of a merchant in the ‘deserts of Arabia’ who gave ’10,000 crowns for one cruise of water’ (Smith, Lectures in Jurisprudence, 5 April, 1763: Liberty Fund, 1982: p 358; a version in Lecture ‘B’, edited by Edwin Cannan, was available from 1895, and the Lecture ‘A’ series from 1958).


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