Friday, June 15, 2007

Adam Smith Understood in Wayne State

I came across an article, ‘Remembering the Classics’ on the Everyday Economist Blog after lunch (a la France) today and it was a great pleasure to read it. It is close to being a clear understanding of the role and context of Adam Smith’s contributions to moral philosophy and political economy as I have seen for many months.

I know little about the Everyday Economist Blog, so cannot elucidate on the background of its author (maybe I should know, but my memory is not as good as it was). He is Josh Hendrickson, who teaches Principles of Macroeconomics and Principles of Microeconomics at Wayne State University where he is also working on his Ph.D. On this evidence, economics at Wayne State University is in good hands.

Here are extracts (but you must read the article yourself to appreciate its importance):

Adam Smith’s Wealth of Nations derided mercantilism as confusing wealth as a finite stock of gold that could be earned only through competition and at the expense of others rather than something that could be mutually obtained through independence and specialization. In essence, it was a belief in a zero sum game. Mercantilists blindly sought to maintain trade surpluses for the purposes of accumulating an ever-increasing stock of gold often using cruel methods of ensuring their success.

Colonialism and slavery served as prime examples of this mercantilist mindset and were equally criticized by Smith and his contemporaries (somewhat ironically, they often erroneously considered as creations of capitalism because they remained as remnants of mercantilist philosophy for generations after Smith). Classical economists viewed slavery as inefficient because it deterred the voluntary acquisition of human capital and innovation. Further, few economists, let alone students, seem to recall Smith’s view of the British policy of colonialism in America and beyond as mercantilist nonsense, despite the fact that his book was written in the same year as the Declaration of Independence

With so many positives in the article, this is not the time for quibbles. Josh Hendrickson rightly connects Adam Smith to his critique of mercantile political economy (which many economists know as a set of facts, but they often fail to understand its significance, an inconvenience from not being political economists).

Wealth Of Nations is a report of Smith’s historical inquiry into the new phenomenon of the evident (from looking outside his window) rising national output, and the increasing production of the ‘necessaries, conveniences and amusements of life’ in Britain. Slowly and gradually there was an increasing per capita consumption by a minute per cent per year, and by several more percent per generation. This unexplained trend had been underway since the 15th century and had been preceded by a millennia of barbaric war-lord- and feudal-managed agriculture, with an unchanging, except when worsening, subsistence level in the lives of peasants, serfs and slaves, that followed the fall of Rome.

This was the main event in Smith’s historical viewpoint (he writes two chapters in Wealth Of Nations on it and it is never far away from themes in the rest of his book. In short, Wealth Of Nations was never a textbook on economics; it was an account of the transition from barbarism towards a commercial society (and note, please note, it included nothing about what we know as a modern capitalist economy from the mid-19th century, decades after Smith’s death, and nothing about the so-called ‘industrial revolution’ which changed modern society fundamentally).

Adam Smith’s focus was on his critique of mercantile political economy, which while a feature of it can with justice be ascribed the mercantile error of gold bullion stocks being a measure of ‘wealth’, its more important consequence was the increasing state power, mercantile inspired jealousy of trade, covetous rivalry of rich and richer neighbours, a proclivity for trivial wars against rivals, and their distructive rapine, and thef oundation of colonies based on seapower.

All these phenomenon disturbed the natural progression of domestic agricultural improvement, expanding manufacturing from the division of labour and extension of markets, foreign trade of consumption and the carriage trade. Mercantile political economy so disturbed the natural course of development, caused by a thousand years of post-Roman disruption, that the heavy on-costs of wars, colonialism, waste, prodigality, and regimes of regulation and monopolies, were far more likely to be disastrous for reaping the full benefits of commercial society, than legislators realised.

Smith regarded the American colonies as an enormous policy mistake because they drained scarce capital from Britain for a spurious monopoly of trade by shopkeepers, to the real detriment of domestic capital growth. The ‘loss’ of them was a blessing in disguise. Too bad the colonial error continued in the 19th and 20th centuries!

Wealth Of Nations would be called today a ‘wake-up call’. Unfortunately, Smith was not heeded, except on the fringes, and mercantile political economy continued through the following two hundred years. Its main disuptive features continue today (wars, protectionism, monopolies, jealousy of trade, obsession with trade balances, barriers to natural liberty, nationalism, and religious hostility to other religions and to secular freedoms). None of these variables appear in neoclassical equations of general equillibrium.

However, I believe that Everyday Economist is on the right track about Adam Smith. So much so, that I shall not comment on this sentence in his article: ‘It is nearly impossible to appreciate Smith’s concept of the “invisible hand” without understanding the circumstances in which he was writing.

Regular readers will know why this, for me, is a Cromwellian ‘self-denying ordinance’ on a massive scale.


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