Thursday, October 11, 2007

A Classic Example of the Re-writing of Adam Smith's Legacy

Henry C. K. Liu, Chairman of a New York-based private investment group, writes (12 October) in Asia Times online, Kowloon Hong Kong, an interesting article: “Super Capitalism, Super Imperialism”, Part 1: ‘A Structural Link’ (here) and the following caught my eye:

Adam Smith published Wealth of Nations in 1776, the year of US independence. By the time the constitution was framed 11 years later, the US founding fathers were deeply influenced by Smith's ideas, which constituted a reasoned abhorrence of trade monopoly and government policy in restricting trade. What Smith abhorred most was a policy known as mercantilism, which was practiced by all the major powers of the time. It is necessary to bear in mind that Smith's notion of the limitation of government action was exclusively related to mercantilist issues of trade restraint. Smith never advocated government tolerance of trade restraint, whether by big business monopolies or by other governments in the name of open markets.

A central aim of mercantilism was to ensure that a nation's exports remained higher in value than its imports, the surplus in that era being paid only in specie money (gold-backed as opposed to fiat money). This trade surplus in gold permitted the surplus country, such as England, to invest in more factories at home to manufacture more for export, thus bringing home more gold. The importing regions, such as the American colonies, not only found the gold reserves backing their currency depleted, causing free-fall devaluation (not unlike that faced today by many emerging-economy currencies), but also wanting in surplus capital for building factories to produce for domestic consumption and export. So despite plentiful iron ore in America, only pig iron was exported to England in return for English finished iron goods. The situation was similar to today's oil producing countries where despite plentiful crude oil, refined petrochemical products such as gasoline and heating oil have to be imported.

In 1795, when the newly independent Americans began finally to wake up to their disadvantaged trade relationship and began to raise European (mostly French and Dutch) capital to start a manufacturing industry, England decreed the Iron Act, forbidding the manufacture of iron goods in its American colonies, which caused great dissatisfaction among the prospering colonials. Smith favored an opposite government policy toward promoting domestic economic production and free foreign trade for the weaker traders, a policy that came to be known as "laissez faire" (because the English, having nothing to do with such heretical ideas, refuse to give it an English name). Laissez faire, notwithstanding its literal meaning of "leave alone", meant nothing of the sort. It meant an activist government policy to counteract mercantilism. Neo-liberal free-market economists are just bad historians, among their other defective characteristics, when they propagandize "laissez faire" as no government interference in trade affairs.”

Henry C. K. Liu’s article consists of some correct accounts of the Adam Smith’s views plus some incorrect assertions.

Adam Smith criticised mercantile political economy, as espoused by British governments since at least Elizabethan times, and much of his criticism of government intervention was aimed at its mercantile economic policies and not at against all government interventions in general.

That this has been, and is now almost completely, mistaken as an advocacy of laissez-faire policies is absolutely correct. It was not until John Stuart Mill’s Principles of Political Economy, the dominant textbook of the 19th century, that Adam Smith was mistakenly identified as an advocate of laissez-faire, words he never used, though he was thoroughly conversant with those French Physiocrats who used the term and what they meant by it.

This error is often compounded by mistaking his advocacy of the Perfect Rights’ jurisprudence theories of Grotius, Pufendorf, Carmichael, and Hutcheson as being about laissez faire when in fact they are quite different subjects. Those Chicago neoclassical economists, who confused the two because of their similar sounding policies, though they refer to quite different meanings and contexts, exposed their relative ignorance of 17th-18th century moral philosophy.

Henry C. K. Liu’s assessment of the mercantile prohibitions of manufacturing in the British American colonies, imposed by the legislature under the persuasive influence of domestic manufacturers, was an expression of its mercantile policies and these affected the example of iron ore manufacturing. Adam Smith, in Book IV of Wealth Of Nations, heavily criticised this policy.

However, Liu quotes the date ‘1795’ as the trigger of the British ‘Iron Act, forbidding the manufacture of iron goods in its American colonies, which caused great dissatisfaction among the prospering colonials.’ By 1795, and since not long after 1776, British mercantile political economy had no influence on the now independent ex-colonies. Adam Smith died in 1790, and British economic legislation had no effects on the fledgling free states of America. The inhabitants were no longer 'colonials'! They were free to expand manufacturing, to trade with any country they wished, and they ran their own political economy.

Wealth Of Nations was not a textbook in economics; it was a polemic against British mercantile policies. If this is not understood, then Wealth Of Nations remains full of 'conundrums', such as Book V on the Expenses of Government, which amount to advocay of a substantial state sector, not just in defence and justice, but also in public works and institutions in support of commercial activity and progress towards opulence (including a national education sector partly funded by taxation and partly by private subscription, starting at the individual parish level, or upwards of 65,000 local schools).

Henry C. K. Liu continues:

Friedrich List, in his National System of Political Economy (1841), asserts that political economy as espoused in England, far from being a valid science universally, was merely British national opinion, suited only to English historical conditions. List's institutional school of economics asserts that the doctrine of free trade was devised to keep England rich and powerful at the expense of its trading partners and it must be fought with protective tariffs and other protective devices of economic nationalism by the weaker countries.’

List was a proto-German nationalist whose book, The National System of Political Economy (1841) and sicussed on Lost Legacy several times, launched a near paranoid attack on Adam Smith, asserting that his advocacy of free trade was a ‘sham’ to somehow mislead the world and that by free trade the British parliament cleverly used it as cover for its domination plans for the world.

The fact is that Adam Smith’s advocacy of free trade against mercantile protectionism and colonies was perfectly genuine. The 19th century application of British mercantile policies, which List complained about, or rather sought a German response to by imitation, continued unbroken from the 18th century when Smith wrote his books on perfect liberty and free trade (Moral Sentiments, 1759; Lectures on Jurisprudence, 1762-3; Wealth Of Nations, 1776), and through to the 21st century. There has never been a time when Britain ceased its (NOT Smith’s!) mercantile policies, latterly in the imperialist decades.

It was the almost complete avoidance of free trade and continued colonial involvement as in India (which Adam Smith attacked) by successive British governments and the great disconnect between what British legislatures, persuaded by ‘merchants and manufacturers’ said and did (of which the imperial venture into Empire was the most prominent folly), and what Wealth Of Nations and Moral Sentiments advocated, that is the lasting distinction of the Smith from Kirkcaldy and what his legacy has been transformed into by neoclassical epigones and post-Smithian politics.

Unfortunately, Henry C. K. Liu is not alone in his misunderstanding of Adam Smith’s legacy.


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