Thursday, December 07, 2006

Smith's Realism About Market Behaviour Showed No Naivete About Commercial Society

For outsiders, US political descriptions of parties and policies are confusing. (‘join the peace team’) publishes an essay by James Richard Brett: ‘Libertarian Democrats?’ criticising their understanding of markets.

I am not sure who he is criticising and what their affiliations are, but it seems from the context that they are taking a ‘too idealistic’ view of how pure markets work in theory (it could be neoclassical theory) and how they work in practice.

“Trusting to an "unseen hand" of the market is the pursuit of a fantasy. There is no such thing as a perfect market where reason, where economic and social progress are anything but accidental epiphenomena of selfish greed. Moreover, the granularity of business is either too small or too large to have timely and desired effects. Moreover, the combined actions of industrial and corporate leaders are very visible and very predictable. In our times, if not Adam Smith's, a few players generally control the markets to their own selfish aims.”

Markets in Smith’s day were not ‘perfect’ and were far from ‘ideal’. That was one of his ‘complaints’. For the main part they were restrictive, monopolistic, protected by local Guilds and national tariffs, and engaged in combinations against the wage labourers and conspiracies against consumers.

No reading of Wealth of Nations could do other than demonstrate the direction and tone of his critique of how real markets operated.

Smith did not draw upon a literature of market economics, taught by mathematicians whose models were constructed in their libraries. Theories of political economy were fairly primitive in his day and were not presented as ideal constructs for successors to build upon. He spent a great of time visiting street markets, talking to labourers and to employers, and he knew many landowners who employed both. He reported what he observed and his ‘models’ of price determination and market exchange were crafted to explain what actually happened.
Other literary sources were available to him, many of which were in his library, and many others he read (he also talked to and corresponded with many leading figures in the broad discipline, particularly in the vibrant pamphlet literature from the 17th and early 18th centuries. His price model was simple and linked market price to ‘effectual demand’. That made his own constructs very real and practical.

His model (suggested by his friend James Oswald, MP) of the distribution of sales revenue between the factor contributors (landowners’ rents, labourers’ wages and employers’ profits) is realistic, though the distribution need not, and often does not, reward factors the full amount of their costs. But costs in relation to achieved prices act to trigger the movement of factors into and out of product lines. Sellers are always concerned about their costs of production; buyers about their costs of acquisition, and there is no reason why the two variables must coincide in a competitive market.

Distribution was a cost of production idea, though Smith recognised explicitly that costs of production did not determine prices – markets determined prices (a cardinal point often missed by his neoclassical critics). Without digressing, Smith did not have a labour theory of value for commercial prices – his reference to the labour theory of value applied to ‘savage’ or ‘rude’ societies only.

Now there is nothing untoward in his markets price theory at its simplest. Introduce political society into the context, add the history of the revival of commerce from the decline and end of feudal agriculture, within the shift from absolute to constitutional monarchy, and the spread of Guild-acquired monopolies over large swathes of products in the existing towns, the influence of merchants and manufacturers on the sovereigns, the legislators and the judiciary, with often wacky ideas on trade that led them to protectionism, and politicians to fears of national decline, a visible phenomena in Europe, plus the deadly embrace of revealed religion, and it is plain that markets in Smith’s day were anything but ‘perfect’, ‘ideal’ or a ‘fantasy’.

Interesting, that James Richard Brett appears unaware of these facts. Nor is he alone. Populist authors like Heilbroner (‘The Wordly Philosophers’) and Foley (‘Adam’s Fallacy’) spread the image of Smith as the ‘unworldly’ philosopher, and the neoclassical theorists spread the word about ‘invisible hands’ (recently beginning to be re-described as ‘unseen hands’) making even the most wicked individuals, and their criminality, their monopoly, polluting and protectionist practices, somehow alright because ‘an invisible hand’ turns their misbehaviour ‘miraculously’ into a social benefit (a complete apoligetic misconstruction of Smith’s use of the metaphor).

James Richard Brett is a retired academic administrator with a doctoral degree in Modern Russian and Soviet History. He is the founder and publisher of The American Liberalism Project. His Website is at:


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