Wednesday, April 30, 2008

A Missed Opportunity

MarcLord in Adored by Hordes (HERE)

What's That Got To Do With The Price Of Rice?’:

In fact we know from his diaries that Darwin was reading Adam Smith's treatise, The Theory of Moral Sentiments, in 1839 while making notes for The Origin of Species. What I assail is compulsive focus on one particular aspect of Smith's observations and rank ignorance or denial of the rest; and that is precisely what the orthodoxy of the New School, Dr. Friedmanstein's economic monster, does. If Adam Smith were around today, he would be on CNN talking up man's instinctual curiosity, and forcefully arguing that free markets are just a myth. A useful myth, to be sure, but myth nonetheless--of course we require wise laws else we would be engulfed by slag heaps and puddles of mephitic filth like the ones he stepped round watching factories in Glasgow.”

”Smith had the Scotsman's love of thrift, and he would say of our bedazzled money-theorists: "What pleases these lovers of toys? How many people ruin themselves by laying out money on trinkets of frivolous utility?"

I thought “MarcLord’s” article had promise, opening by referring to Darwin reading Moral Sentiments but then drowning in make-believe about Adam Smith on CNN and ‘stepping round’ pollution while visiting almost non-existent ‘factories in Glasgow’, then a ‘garden town’, with warehouses, a few tanneries, a couple of small chemical plants, shops and a busy harbour full of sailing ships.

The industrial pollution of the mid-19th century was decades away; coal mines, yes, but they were well outside towns, and the biggest iron works of the day was in the countryside near Falkirk (the famous Carron Works, owned by Dr Roebuck), some 20 miles away from Glasgow.

As for the alleged ‘love of thrift’ by Scotsmen – a national stereotype if ever there was one - reflecting the relative poverty of Scotland and the shortage of cash (which bedevilled the behaviour even of the wealthy). The Scottish banking system was fairly primitive while Adam Smith was alive, with banks issuing their own paper currency, vulnerable to ‘runs’, which produced a necessary caution among those able to either borrow from them or able to risk accepting their paper money.

On the ‘myth’ of free markets, I am inclined to agree, especially in Smith’s time under mercantile political economy. But the rest is doubtful and the article’s main purpose is a rant against US military involvements, of which I have no view.

Adam Smith Was Not in the Prediction Business

Not knowing momentum's causes should not prevent us from acting. Followers of Adam Smith understand that markets work in invisible and unfathomable ways. There's a lot we don't know-a reality that effective advisors and investors accept, even embrace. Momentum sure seems real in the data. The question is what we should—or shouldn't—do about it.”

So says Gene Fama in his ‘The Big Mo’ in the 1 May issue of Financial Planning of New York (HERE).

Adam Smith knew how markets worked. They weren’t ‘invisible and unfathomable’. That’s a gross exaggeration. We can explain what happened after it has happened, or is happening in the abstract.

But what is ‘invisible and unfathomable’ is the future. Markets do not work in isolation from human behaviours. Our ability to predict how humans – all of them involved – will affect outcomes of myriad of transactions is severely limited, if not beyond us.

That’s where Gene Fama and his like come in. People with money want to make it work to give them more. Somebody wins and others don't whatever anybody predicts but whether anybody actually knows beforehand is doubtful.

Unfortunately, finance and its associated fields are not an exact science. It’s like predicting where a number of electrons are and will be next. You can’t be sure where they are or were, other than we know they are somewhere.

But if you can persuade investors that you know better than most others where their money is likely to increased, you can make a living, if your best guess is better than your rivals. Given that some ‘best guesses’ match what actually happens (sadly, many more do not), profits flow, fees are earned, and the investors and their advisers bask in their success. The others leave frustrated.

It’s the same with ‘investors’ who succeed in predicting the winners at the race track. One horse will win a race whatever (even whether) anybody bets.

All this has nothing to do with Adam Smith, who was not concerned with which tradesman, artisan or shopkeeper succeeded each week. He wasn’t in the prediction business; his task was to understand how the business of markets worked, leaving the winners and losers for them to discover for themselves, as they would whatever anybody wrote about them.

Trying to take economics, finance, horseracing or politics beyond that is ambitious, but lucrative if your clients' 'win' more often that they 'lose'.

Monday, April 28, 2008

Turning Adam Smith On His Head

Glenn W. Smith writes (27 April) in Open Left (HERE)

The Promise of Popular Democracy'

Can we repair our political practices and achieve something like the popular democracy that has remained always just around the corner? Popular democracy - a democracy in which the wisdom of a self-governing people is translated into policy - was opposed from the beginning of our nation's history by the likes of Alexander Hamilton. Hamilton was a shrewd authoritarian who had the insight that capitalist elites, protected by federal charter and largesse, could rule safely as invisible monarchs. This, of course, unraveled the naïve hopes of Adam Smith, who attempted to include compassion and human sympathy within his rationalist model, and who thought a free, unfettered market economy would promote human sympathy, equality and understanding.”

This assertion falls on the premise that: “This, of course, unraveled the naïve hopes of Adam Smith, who attempted to include compassion and human sympathy within his rationalist model, and who thought a free, unfettered market economy would promote human sympathy, equality and understanding.”

Adam Smith knew well enough the constraints of ‘rationalist model’ (like David Hume, he viewed ‘reason as the slave of the passions’, and he was sceptical about reason being enough to ensure the survival of the human species, or even for humans to conduct themselves within their social arrangements. Hence he did not attempt “to include compassion and human sympathy within his rationalist model” (where did that notion come from?); if anything he consciously excluded rational thinking from the set of human emotions.

The fault line in Glen Smith’s argument is that he confuses what neoclassical economists created as a rational mathematical model of an abstract economy and back-projected that onto Adam Smith. He has swallowed the line pedalled by Chicago trained economists who give credibility to their models by drawing a link to Wealth Of Nations (while deriding it as ‘unreadable’, ‘confusing’ and benefiting from being ‘cleaned up’ by their maths).

In the closing sentence of my quotation, Glen accuses Adam Smith of believing that who “a free, unfettered market economy would promote human sympathy, equality and understanding”. Not quite what Adam Smith had in mind. His moral philosophy (the chair he actually held from 1752-64) saw human sympathy as an age-old attribute of individuals living in societies; not just those living in commercial societies.

Humans were a long way from other animals in their social behaviours and these had deepened through time as individuals became more dependent on each other, a condition exacerbated by movement through the Four Ages of Man from hunting to commerce, or absolute independence to absolute dependence from the ‘propensity to truck, barter, and exchange’ and its necessary corollary, the division of labour.

Adam Smith was not a ‘utopian’ about “a free, unfettered market economy” – he expressed grave doubts that Britain would ever completely relinquish restrictions on free trade (Wealth of Nations, IV.ii.43: p 471) – and he didn’t consider it absolutely necessary for it to be perfectly ‘free’ to achieve his main interest in the ‘spread of opulence’ to the poorest majority – nor for that matter that commerce was necessary to “promote human sympathy, equality and understanding” (where was Adam Smith in favour of ‘equality’?). These passions – well, at least ‘human sympathy’ and ‘understanding’ were already present (‘equality’ was a 20th century ‘utopian’ goal; has Glyn confused ‘equality’ it with ‘egalitarian’ goals?).

In so far as legislators accepted his case for removing the policies of mercantile political economy, it was reasonable to assume that this historic decision would reduce the proclivity for wars with neighbours, inspired by ‘jealousies of trade’, which would improve life for their victims, but he was sanguine enough to accept that governments and the people who influenced them would not change their behaviours all that much, very quickly.

But ending trade wars – still going on in the 21st century was a step for the better - by ‘promoting human sympathy’ might be regarded as a necessary part of ending them, not the other way round.

Adam Smith Did Not 'Design' a 'Perfect' Economy

Ray Pairan writes in his Blog (HERE):

Contrived Economic System - Collapse Imminent”:

The current economic system that underlay's this totalitarian economic society is a contrivance that has evolved over decades bolstered by a civil society and social consciousness that corresponds to the precepts and direct control exerted by the business elite. It is just one of innumerable economic models humanly imaginable that could have served as a basis for the economic foundation of economic society. As it stands the global community has settled upon the 'bones' of what once may have been a 'free market' system envisioned by Adam Smith, Ricardo, and other utopian classical economic thinkers who failed to inject the element of human unpredictability into their 'perfect' economic models.

Do to the direct manipulation by the business elite of this malleable economic system we have ended up with a distorted hideous dysfunctional relic. The distortion of the labor market by the business elite in order to reduce our equality of interest within the system envisioned by Adam Smith is now perturbing the system (Chaos Theory, Complex Systems - Santa Fe Institute) sending ripple upon ripple of economic disturbance across the globe

There are few things more tedious than a prediction by somebody who has a ‘theory’ of how the world works, particularly when the ‘theory’ is based on such false premises as Ray’s, such as:

what once may have been a 'free market' system envisioned by Adam Smith, Ricardo, and other utopian classical economic thinkers who failed to inject the element of human unpredictability into their 'perfect' economic models.

Presented thus, and including Adam Smith on his main charge is, well, laughable, in the sense that it is so wrong that my flabber is gasted.

There was nothing perfect in Adam Smith’s world. He regarded mankind as ‘weak and imperfect’, to say the least, which, incidentally, led to his scepticism about the possibility of people living like saints (see his Moral Sentiments).

Moreover, he specifically and explicitly rejected the notion that the society had to be ‘perfect’ for it to function:

Mr. Quesnai, who was himself a physician, and a very speculative physician, seems to have entertained a notion of the same kind concerning the political body, and to have imagined that it would thrive and prosper only under a certain precise regimen, the exact regimen of perfect liberty and perfect justice. He seems not to have considered that, in the political body, the natural effort which every man is continually making to better his own condition is a principle of preservation capable of preventing and correcting, in many respects, the bad effects of a political economy, in some degree, both partial and oppressive. Such a political economy, though it no doubt retards more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of the bad effects of the folly and injustice of man, in the same manner as it has done in the natural body for remedying those of his sloth and intemperance. (WN IV.ix.28: p 674)

That should dispose the ridiculous – there is no other suitable word for it – notion that he 'envisioned' “a 'free market' system”, and as one gratiously also described, as a “utopian”, because he was among those who “failed to inject the element of human unpredictability into their 'perfect' economic models”. This is a charge so manifestly untrue as to defy the excuses of a saint.

If there is one thing that separates Adam Smith from modern economists, it is that he injected large doses of ‘human unpredictability’ into his wordly political economy. Where does Ray Pairan get his ideas from? Certainly not from anything Adam Smith wrote.

I suspect Ray has never read Adam Smith, and yet he pontificates about the ‘imminent collapse’ of modern society!

Well Adam Smith also advised a young man who wrote to him about the ‘ruin’ of Britain following reverses in the British governmeent's attempts to supress the colonists in America: ‘There is a lot of ruin in a nation’.

Might be time for some youthful humility when predicting the end of the world as we know it and using Adam Smith as a star witness.

Sunday, April 27, 2008

Adam Smith in Context, Please

John Maxwell in The Jamaica Observer writes ‘
A hungry mob is an angry mob’, 27 April:

According to capitalist theory, commodity markets and all other free-market institutions are essential components of the equitable management of world trade, balancing supply and demand and performing a function so disinterested that it can almost be considered a public service.

'The father of capitalist theory, Adam Smith, thought otherwise. While he extolled the essential fairness of the 'invisible hand' he decried the 'inherent greed and self-interest to which most businessmen were prone'
. According to Adam Smith:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." (The Wealth of Nations: Vol 1, Book 1, Chap 10).”

John Maxwell’s lively articles liberally comes up with quotes by and assertions about Adam Smith, and I have commented occasionally on Lost Legacy over the months past.

In the above article he runs together assertions about ‘Capitalist theory’ (whose version?) and the status of Adam Smith (its ‘Father’?) and a quotation that is not quite it seems, though widely quoted as such.

First, the world, and certainly not anything experienced this century near the Caribbean, does not conform to a theory of ‘harmonious’ or ‘free trade’ capitalism, as outlined by anybody since ‘capitalism’ became a known phenomenon – plus since it became a word in English – around the 1850s.

Moreover, the ‘theory’ that capitalism consists of the ‘essential components of the equitable management of world trade, balancing supply and demand and performing a function so disinterested that it can almost be considered a public service’ is pure hyperbole.

True, those theorists promoting partial and, later, general, equilibrium, have found in mathematics a ‘proof’ that this could happen in the abstract, is a long way from establishing it in real world practice.

The place of Adam Smith, as ‘the father of capitalist theory’ is at odds with theories created after 1870 (Smith died in 1790). Adam Smith did not write about, did not know the word ‘capitalism’ (first used in English in 1854 by William Makepeace Thackeray in his novel, The Newcomes), and did know of the phenomenon of modern capitalism. Hence, he had no views upon it.

Smith wrote about commercial society as it operated in Britain from the 15th to the mid-18th century and not about ‘capitalist’ economies. The very quotation used by John Maxwell demonstrates this neatly:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." (The Wealth of Nations: Vol 1, Book 1, Chap 10).

Readers might find it more useful to read the whole of Chapter X and not just the quotation (it’s very readable). It is in two parts on the subjects of the ‘Inequalities from the Nature of the Employments themselves’ and the ‘Inequalities occasioned by the Policy of Europe’. In these parts, Adam Smith discusses, not a free market, but the extent to which markets are distorted in the determination of wage rates in actual societies. He notes:

But the policy of Europe, by not leaving things at perfect liberty, occasions other inequalities of much great importance.’ (WN I.x.c.1: p 135)

From here he discusses the ‘exclusive privileges of corporations’ as ‘the principal means’ of ‘restraining the competition in some employments to a smaller number than might otherwise be disposed to enter them’. Now, by ‘corporations’ he did not mean what we call Corporations today; he was talking of town governments drawn from the ‘incorporated trades’, which were bodies of ‘tradesmen’ (artisans) and shopkeepers (merchants of various kinds).

These ‘incorporated trades’ had gained monopoly privileges from governments after Elizabeth I in the 16th century that allowed them to decide on the number of apprentices their members were allowed (2), the length of their induction (up to 7 years), the exact trade secrets they were allowed to learn, and decide how they were to govern themselves. Broadly, these arrangements had the effect of ‘restricting competition’ to raise prices. Because each ‘trade’ had its own rules, and each abided by the monopolies accorded to other ‘trades’; collectively they had a stranglehold over the towns’ economic activity.

Adam Smith points out:

The government of towns corporate was altogether in the hands of traders and artificers; and it was in the manifest interest of every particular class of them, to prevent the market from being overstocked, as they commonly express it, with their own particular species of industry; which is in reality to keep it always under-stocked.’ (WN I.x.c.18: p 141)

It is the ‘clamour and sophistry of merchants and manufacturers’ that easily persuades ‘them that the private interest of a part, and a subordinate part of the society, is the general interest of the whole.’ (Ibid: p 144)

A paragraph later (p 145), Adam Smith declares his assessment of the outcome when people of the ‘same trade meet together’. He is specifically criticising the consequences of mercantile political economy dominated by Guilds, Incorporated Trades, and petty traders. He is not talking about large-scale multinational modern Corporations (which no doubt have their own deficiencies).
Adam Smith’s remedy was more, not less, competition, and fewer not more ‘regulations’.

John Maxwell also writes: ‘While he extolled the essential fairness of the 'invisible hand' he decried the inherent greed and self-interest to which most businessmen were prone.’

I know of nowhere in any of his books that Adam Smith ‘extolled the essential fairness of the 'invisible hand'. In fact, I don’t know what that sentence means.

Adam Smith never wrote about ‘invisible hands’ in connection with markets (Book I and II); his sole reference to ‘an invisible hand’ is in Book IV: p 456). H

He certainly ‘extolled’ the virtues and fairness of markets; it was the lack of them that attracted his ire. His solution was competition!

His critique of ‘greed’ (induced, not ‘inherent’!) of the ‘private interest’ of ‘merchants and manufacturers’, fuelled by their ‘clamour and sophistry’ was directed at them being given by legislators monopolistic powers to reduce competition. The remedy was for legislators to refrain from doing so.
John Maxwell, clear writer that he is, happens also on this evidence to be somewhat confused about the ideas of Adam Smith and the notions of modern economists who ascribe to him views he never held.

Indeed, the vary chapter 10, quoted from by John Maxwell is one of over 50 instances in Books I and II in Wealth Of Nations where he renounces the notion attributed to him in connection with the single use of the metaphor of ‘an invisible hand’ where he exposes the shallowness of the idea that he believed that ‘an invisible hand’ guides individuals to seek their own self interested outcomes and that this necessarily delivered the aggregated self interests of society.

Friday, April 25, 2008

A Hollywood Student Reads Wealth Of Nations

‘McGarmott’ describes himself/herself as a ‘Young, naively ambitious and embarassingly inexperienced Malaysian film student in Hollywood, CA’ (where else?) and writes on his Blog: ‘CINEMATIC CONCERNS’ and has posted this month on Adam Smith:

Summary On First Dozen Or So Pages Of The Wealth Of Nations
Okay, so I'm starting to read Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations. Go on, laugh.

Chapter I contains that econ cliche about a single pinmaker scarcely able to make 20 pins a day, "perhaps not one, even", while ten pinmakers practicing division of labour can produce up to 48,000. Then there is one amazingly-written, must-be-seen-to-be-believed, huge paragraph which seems doggedly intent in proving that no one person can survive alone economically, with an example of the woolen coat, the production of which is facilitated by such diverse professions as the shepherd, dyer, dresser, merchants, sail-makers, mill, miner, timber-feller, brickmaker + bricklayer, (and just when you think you've definitely gotten the point) the forger, the smith, the bedmaker, the baker, etc. And believe me when I say that is an abbreviated list of professions Mr Smith throws at us.

Chapter II explains why division of labour happens. Coz of humans' tendency to trade/barter. Huh? Well, it's the idea that people have talents (tendency to be better at one particular thing than the rest). And then he goes on to state, rather intriguingly, that in the modern debate of nature vs nurture, he subscribes to the latter. Anyway, long story short, humans trade and make contracts. Dogs don't. Humans practice division of labour. You don't see the mastiff, greyhound, spaniel or shepherd's dog (why on Earth did he call them that?) [GK: because these were common dog breeds in 18th century Scotland] use their stereotypical advantages to assist each other in the service of canine progress.

Chapter III makes the point that division of labour is limited by the size of the market. In a nice little hamlet somewhere remote (say, the Scottish Isles where I once cycled) [GK: An excellent choice of outdoor activity in one’s youth!] , there is no point in splitting up the tasks of a pinmaker to produce 48,000 x 365 pins a year when they'll barely use one day's worth in as much days.

Well, I guess the thing I'm just beginning to realise, is that books by Adam Smith and other great economists like Thomas Malthus and Thorstein Veblen aren't meant to be dry textbooks (as hard as they are to read) ... in fact, not meant to be textbooks, period. [GK: Absolutely right!] They're all just observations, no pretensions about trying to prove a point. (Apparently Veblen just lists his cynical and often ironic observations without explaining why or how or even bothering to prove his point. But I'll mention that when I get there.) Certainly they didn't try to be mathematical, like ALL FREAKING ECONS TEXTBOOKS these days. Mostly that's why I thought I should take the time to actually read these texts. Even though most econ students (and possibly a good number of our lecturers) never bothered to read them completely.

I think this is called a ‘treatment’ in the cinematic profession. It is one better than, as ‘McGarmott’ puts it: ‘most econ students (and possibly a good number of our lecturers) never bothered to read them completely,’ How true!

So praise is in order at least for reading so far and, judging by the more recent posts, so diligently, with, albeit, a lightness of touch that is somewhat ‘O’Rourke –ian’ in style.

It would be inviduous to subject the above and the subsequent posts in the series so far to a critical treatment – Hollywood treatments and indeed their scripts, are beyond criticism. It is perfectly legitimate in Hollywood to change stories, reverse the order of events, invent new historial characters, change the plot, make the villians honest and the honest despicable, all in pursuit of producing a good story, that sells to a cash-paying audience and wins prizes for the performers.

With which I have no quarrel. John Nash in Beautiful Mind invents a version of Adam Smith (critised in archived posts on Lost Legacy) and Hollywood’s treatments of William Bligh of Bounty fame reached travesties of historical fact that even some historians came to believe, but, let’s face it, they made for great entertainment (especially Charles Laughton’s 1930s version of Captain Bligh).

Visit his Blog and judge for yourself (HERE). It is well written and bodes well for “McGarmott’s” future Hollywood career … and in this case without disorting the facts too much, and which, as written, is well within the bounds of more fussy academic respectability.

Certainly, even now, he knows more about Adam Smith than his econ tutors!

Tuesday, April 22, 2008

Dani Rodrik Wins April's Lost Legacy Prize

Dani Rodrik in his Dani Rodrik’s Blog (‘Unconventional thoughts on economic development and globalization’) (HERE) 21 April, writes a most interesting piece around a quotation from Wealth Of Nations:

Adam Smith, the finance skeptic”:

“Was Adam Smith a finance skeptic? The following passage from the Wealth of Nations, written in connection with a banking collapse in Scotland, suggests so:
To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law, not to infringe, but to support. Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.”
(From Book 2, Chapter 2, paragraph 94.) Thanks to Frank Levy for the pointer

[Small quibble: I have restored the punctuation to how Adam Smith wrote it, as published in the definitive Glasgow Edition of the Works and Correspondence of Adam Smith, Wealth Of Nations, II.ii.94: p 324.]

Dani Rodrik also defines a libertarian stance on finance (in Guns, Drugs, and Financial Markets: in Project Syndicate:

‘First are the libertarians, for whom anything that comes between two consenting adults is akin to a crime. If you are selling a piece of paper that I want to buy, it is my responsibility to know what I am buying and be aware of any possible adverse consequences. If my purchase harms me, I have nobody to blame but myself. I cannot plead for a government bailout.’

And the counter-argument:

Non-libertarians recognize the fatal flaw in this argument: financial blow-ups entail what economists call a “systemic risk” – everyone pays a price. As the rescue of Bear Stearns shows, the government may need to bail out private institutions to prevent a panic that would lead to worse consequences elsewhere. Thus, many financial institutions, especially the largest, operate with an implicit government guarantee. This justifies government regulation of lending and investment practices.’

I always recommend the above quotation from Wealth Of Nations to those who assert that Adam Smith was in favour of laissez faire and, though he never used the words, often confuse references to Adam Smith’s assertions of Natural Liberty as ‘proof’ of his ‘libertarian’ views, showing simultaneously that they neither understand Smith’s aversion to laissez faire, taken literally, nor to the philosophical content of Natural Rights theory, which Smith learned from Francis Hutcheson, and through him, from Carmichael, Pufendorf and Grotius.

The chapter in Wealth Of Nations to which Dani Rodrick refers demonstrates the authentic Adam Smith who was never an ideologue of any kind. What worked was more important than what fitted a ‘theory’ of what ought to work.

The problem of bank paper (currency notes) was compounded by the behaviours of individuals – not all expressions of self-interest lead to socially beneficial outcomes, as students of Adam Smith know, but Nobel Prize winners in economics sometimes don’t, let alone legions of ‘top’ academics who pontificate on ‘his’ alleged theories with all the arrogant certainties of what Smith called ‘men of system’.

Dani Rodrik exposes the silliness of the so-called libertarian: ‘If my purchase harms me, I have nobody to blame but myself. I cannot plead for a government bailout’.

They ignore the fact that a banking crisis does not just harm the individual; it harms many others who were not party to the individual’s transaction. Justice in society, said Adam Smith (and similarly, said David Hume) is essential, otherwise it would ‘crumble into atoms’, and justice is not just about apportioning ‘blame’ to individuals who contribute to the problem, it is also about protecting other individuals who are affected by such actions.

I shall award Dani Rodrik the Lost Legacy Adam Smith Prize for April on the basis of his posting above (with a commendation to Frank Levy who drew Dani’s attention to it).

Regular readers will note the monthly prize has not been awarded recently because there has been a steady run of misrepresentations of Adam Smith across Blogland and the maintstream media. Thank you Dani Rodrik.

Sunday, April 20, 2008

Adam Smith's Distinction Between Productive and Unproductive Labour was About Economic Growth and Not Between Producers of Goods and Services

Scott H Young, ‘get more from life’ (HERE) writes on: "Adam Smith’s Definition of Productivity" (17 April):

I recently finished reading Adam Smith’s landmark book, The Wealth of Nations. It was written in 1776 and is widely considered to be the basis of the study of economics. One of the few interesting points I grabbed from the book was how Adam Smith defined productivity.

Smith divided up labor into two broad categories, productive and unproductive labor. Productive labor, according to Smith, was any work which fixed itself in a tangible object. Unproductive labor, was any work where the value was consumed as soon as it was created. Smith contrasted the role of laborers in a manufacturing plant (productive work) with the tasks of a servant (unproductive work).

I hadn’t seen productivity defined this way before, and it struck me as an interesting idea. The idea that unless your efforts fasten themselves in some investment, the work is unproductive

Scott H Young, by no means the first nor the last, has got hold of an idea from Adam Smith and arrived at the wrong conclusions. You can read what he does with it by following the link.

However, it is a useful hook upon which to account for what Adam Smith was talking about in respect of the categories of productive and unproductive labour, which is relevant for his understanding of how economies work.

Productive labor, according to Smith, was any work which fixed itself in a tangible object. Unproductive labor, was any work where the value was consumed as soon as it was created. Smith contrasted the role of laborers in a manufacturing plant (productive work) with the tasks of a servant (unproductive work).”

This is about where most people stop thinking and impute conclusions misleading distinctions.

What was Adam Smith getting at?

The distinction between productive and unproductive labour is a means to an end, specifically to Adam Smith’s explanation for economic growth in a commercial society. Bear in mind the Physiocratic belief that all wealth came from agriculture – you plant seeds and they produce many times more seeds than you plant, and commerce was ‘sterile’ – it only replaced the agricultural output it consumed.

Smith never accepted this view. He showed that commercial labour reproduced itself (wages), the rent of landlords, and the capital stock advanced by ‘merchants and manufacturers’, plus – and this is absolutely crucial – a profit over and above the costs of the vendible product. When labour did so, this was productive labour.

Unproductive labour did not reproduce its costs. The productive/unproductive distinction had nothing to do with the usefulness of what they produced, or their significance, or their necessity even. It was about whether their output was vendible or not.

Soldiers and seamen produced an absolutely essential product (defence for deterrence; or protective fighting capability in wars – the first duty of government), but they were not productive because their output was not sold as a vendible product. They were paid for from taxation and government borrowing.
Adam Smith’s distinction in the case of a “menial servant’s labour” serving food and drink in the household is unproductive, which sometimes leads people to draw the distinction between tangible products and services, but this can be misleading, if drawn too narrowly. It is the vendibility of the service that decides its productivity and not the fact that it is a service as such.

An Inn keeper’s staff, serving food and drink to paying guests, employs productive labour; a lawyer’s clerks producing legal documents paid for by clients are productive; even a brothel keeper’s employment of prostitutes who sells their services employs productive labour. In all such cases, no tangible product is produced – their output vanishes in its delivery – but they are all vendible, they reproduce their costs plus a profit to the Inn keeper, the Lawyer, and the Brothel keeper, which enables them to continue in business.

Smith noted that in reproducing their costs plus a profit, the Master who had outlaid the costs was able to assemble further rounds of production from his revenue, and, with the profits, he could choose to enhance his own consumption and make additional outlays to hire more labour, to augment labour, to purchase more materials, and thereby increase his total output of ‘necessaries, conveniences, and amusements of life’ in successive rounds to suit his ambitions.
To the extent that he chose to hire more domestic servants, engaged in consumption such as bigger or better houses, longer sojourns, indulge in gambling, better ‘equipage’ for his carriages, keep more horses, and such like, including going to theatres, puppet shows, spectacles and events, he would not add to his capital, but reduce it.

However, and note, the suppliers of ‘bigger or better houses’ were engaged in productive activity, unlike the purchasers. They combined the factors of production (land, labour, and capital) to recover their costs plus a profit. So in fact were the profitable gambling houses, keepers of stables, makers of equipage, owners of theatres, puppeteers, presenters of spectacles and events. Disregarding the productivity of the labour they used in these circumstances misses Adam Smith’s point.

In defence too, soldiers and sailors may be unproductive but the ship builders, foundries, forges, sail makers, gun smiths, sword smiths, suppliers of victuals, canvass, masts, flag poles, packing cases, blacksmiths, and the host of others supplying the unproductive defence forces, are most productive in the commercial economy. The growth of a commercial economy all turns – the ‘great wheel of circulation’ – on whether these suppliers make a profit, and what proportion of their profits above their costs they employ in adding to productive labour (frugality) or to unproductive labour (prodigality).

Smith was very clear about the importance of these individual choices. He thought it more likely that independent suppliers of goods and services would choose to contribute through their frugality (relative of course) to the continual expansion of national wealth (the annual production of the ‘necessaries, conveniences, and amusements of life’).

Increased annual output led to increased wealth and the slow and gradual spread of opulence. It didn’t need government intervention to ensure such a virtuous ‘wheel of circulation’ because people’s preferences for self-betterment would be strong enough for this to happen over long enough cycles.

If governments refrained from wasting taxation and curbed their borrowing they would assist this process; if they indulged in wasteful prodigality, especially when misled by mercantile political economy that induced negative growth policies such as tariff protection for some producers, allowed some of them legal monopolies, curbed the free movement of labour, and engaged in hostile jealousies of trade and wars with potential trading partners, they would worsen the reproductive advantages of commerce.

At stake was the spread of opulence, especially to the majority of poor labourers, as Adam Smith continually reminded his readers.

Friday, April 18, 2008

Adam Smith's Use of the Invisible Hand Metaphor is about Risk Avoidance Not a Theory of Finance

Jame DiBiasio writes (18 April) in the Asian Investor (Hong Kong: sorry no url given) on

Leverage through technology to blame for credit mess”:

[Some extracts]:

And like any market externality – something that harms society while benefiting only a few – it requires regulation, argues think-tank exec Woody Brock.

To explain this, Brock goes back through a bit of financial academic theory. In 1950, there was no theory of finance or way to explain the existence of securities markets, beyond Adam Smith’s “invisible hand”. This changed with John Von Neumann, a Hungarian-born American polymath whose work confirmed Smith’s insight that the price mechanism allows for the efficient allocation of capital – while adding his observation that such allocation takes place in an environment of uncertainty.

This uncertainty principle led to the realisation that capitalism works only if participants can hedge against uncertainty. From there he explained that markets exist to optimise the reallocation of risk, and that risk was just another commodity, like wheat or pork bellies.

From this promising theoretical start, however, came what Brock calls a “disaster”: the advent of the Chicago School of thought, a statistics-heavy philosophy of monetarism and rational expectations. Proponents assumed everyone knows the correct probability of default rates, or the outcome of unknowns, based on crunching historical data; the implication was that hedges are correct and therefore markets can’t suffer meltdowns.

Adam Smith wrote that capital is efficiently allocated when the government does not interfere – except when it leads to market externalities. The textbook example of an externality is pollution: a company left to its own devices will pour waste into a river to save costs, but this hurts society at large, mainly people who had nothing to do with the company and never entered into a voluntary contract with it.”

Wonderful thing having an economic theory, especially if you can link it somehow to Adam Smith by taking advantage of popular myths about him which, admittedly, are linked to the most prestigious modern names in the profession.

No, I am not saying that Jame DiBiasio is engaged in any form of skulduggery; his theory about the causes of the current financial problems may well be true and have some merit.

What I am saying is that the references to Adam Smith from his quotong from Woody Brock, a ‘think-tank exec’ in the article are wrong and untrue. There was still some hope that Brock was in the clear with the comment: ‘there was no theory of finance’ in the 1950s ‘beyond Adam Smith’s “invisible hand” but this evaporates with the statement that John von Neumann ‘confirmed Smith’s insight that the price mechanism allows for the efficient allocation of capital’.

Here, the loose thread begins to unravel. Adam Smith’s comprehensive theory of the ‘price mechanism’ is indeed very clear. It’s in Books I and II of Wealth Of Nations, which I encourage you to read – you will find no mention whatsoever in them of ‘an invisible hand’.

The habit of joining Adam Smith on prices seamlessly with his use of the metaphor of ‘an invisible hand’ borders on misleading, which only continues because the perpetrators of this literary sleight-of-hand are safe in the fact that almost all of their readers have not read, and are unlikely to read, Wealth Of Nations (and not only their readers; almost all senior authorities in the profession have not read Wealth Of Nations either).

As I have explained many times on Lost Legacy (and will continue to do so). Adam Smith uses the metaphor of the invisible hand in Book IV of Wealth Of Nations at the end of a discussion in Chapter ii (pp 452-72) of the problems of individuals choosing between exporting their capital to earn profits from investing in colonies and importing goods for consumption in Britain, and choosing to invest locally in Britain to produce goods for sale in Britain. Now that’s a simple enough exercise in economics.

Adam Smith points out that individuals consider the relative risks of their choices. Sending their capital to the colonies removes it from their immediate supervision, there are risks in shipping both ways across the ocean, risks in security of their possessions in places where a different legal regime operates, in the hands of people whom they do not know well, and in the long delays between their capital being applied and the goods it transports back home and being returned, plus a profit, from its sale.

From this, Adam Smith concludes that the risk averse merchant would prefer to invest it at home, where transport is local, where the law is familiar to him, where the people he deals with are known to him, and where his capital will turnover in shorter intervals. These advantages become decisive where the profits expected from home production and sale are the ‘same, or not very much less than the same’ from higher risk and higher profit ventures abroad.

In consequence, of this conclusion, Adam Smith concludes, that by investing locally, individuals who do so (for the reasons outlined above) will seek to deploy their capitals in the most advantageous (profitable) ways and thereby, all individuals who do so, in aggregate, will increase local output (wealth) and local profits by a greater amount than if they behaved differently and invested their capital abroad, thus increasing national output (wealth) more than otherwise.

His metaphor for this process was their being guided by ‘an invisible hand’ (his only reference in Wealth Of Nations to the metaphor, p 456). This was not a statement that there was an invisible hand (it’s a metaphor), but a summary of the effects of risk avoidance among individuals.

It is also an obvious truism by the laws of arithmetic: if the parts invested locally are greater than they would be in the absence of risk avoidance, then the total that is invested locally will be greater as the sum of the parts. This raises local wealth (the annual output of the ‘necessaries, conveniences, and amusements of life’) greater than it otherwise would be.

What this has to do with modern capital markets is interesting, but it has little to do with Adam Smith’s critique of mercantile political economy (the target on Book IV), which favoured exporting more than is imported (to accumulate gold), favoured monopoly markets domestically (tariff protection, prohibitions), favoured colonial monopolies (the Navigation Acts, monopoly of trade), and resisted competition with neighbouring potential trading partners (‘jealousy of trade’ policies) and wars for trivial ends (projection of power).

Thursday, April 17, 2008

On Becoming a Fellow of the Adam Smith Institute

A few months back I was invited to become a Fellow of the Adam Smith Institute, London, which publishes its influential Blog (here) daily and generally beavers away trying to influence legislators and those who influence them with radical - always Smithian - ideas on improving the UK economy (and, in the hope of imitation, the rest of the world).

I do not always agree with everything ASI promotes, though I do agree with most, and those aspects I occasionally disagree with are more often nuances rather than principles.

The ASI Annual Report has been published with a list of its Fellows and I am pleased to have been included. It is a singular honour to have one's work acknowledged and to be associated with the Institute. My remit is to comment on matters pertaining to Adam Smith's work and life. This is an extention of my efforts at Lost Legacy to just that, and I shall combined both roles with my usual diligence.

The next 'big event' at ASI is the unveiling of the statue of Adam Smith outside St Giles Cathedral in Edinburgh on 4 July, which I hope to attend. The statue was paid for in the strict ASI tradition from private subscriptions only (no taxpayers' money) and, from photograph's, it looks the part (though I think it portrays a somewhat slimmer Adam Smith than he was in real life, especially from 1784 onwards - but ours is not to quibble).

Permission to erect the statue was given by Edinburgh City Council (then Labour controlled) and that in itself was a welcome step forward in the modern acceptance of Smith's contribution to the world's knowledge during the Scottish Enlightenment and beyond.

Another decision is eagerly awaited from Edinburgh City Counil, namely the disposal of Panmure House, Adam Smith's residence from 1778-1790. Currently, the new council (an alliance between the Scottish National Party and the Scottish Liberal Democrats) is considering the offers it has received in the Scottish system of 'blind auctions'. Being an 'A' listed building, Panmure House, buyers have to take account of 'public benefit' criteria as well as meeting the seller's aspirations (the minimum the Council will accept, which is likely to be more than the 'offers over' price of £700,000.

Those US Bloggers whose knowledge of Scottish property law is less than required to pontificate as some have done - including a few philistines simply saying 'sell it to the highest bidder' no matter what they intend to do with it. Edinburgh, as Scotland's capital has a remarkably good (though still relative) record on preventing the wholesale destruction of its historical legacy as has been the fate of many cities across the world, including in the United States.

Once destroyed, or allowed to decay by neglect, perfectly habitable and useable buildings, many of important architectural merit, become irreplaceable, until, when it has almost all gone, the people in the towns concerned realise what they have lost and start doing what they should have done a long time ago (as happened in Sydney, Australia during the 1970s - e.g. the Hordern Building).

However, no decision has yet been made and I await the eventual announcement in a few weeks time. Meanwhile, I shall watch for opportunities to answer queries from ASI on Adam Smith.

Tuesday, April 15, 2008

More Questions About Single-Dimensional Rational People in Markets

Raj Sheelavnt’s blog, IT Strategy, “Explaining Success of Social Media” (HERE)
comes to a similar theme to Irving Wladowsky Berger in a post below, namely that what they believe is Adam Smith’s moral political economy does not fit the IT/Internet world and may need to be changed:

But Adam Smith – father of economics has concluded that rational self-interest, free market economy can lead to economic well-being and prosperity. His observations and theories is the foundation for Capitalism. But, when people are willing to work for free as in the case of Wikipedia, how can you apply ‘free market economics’ in that case. So, does this mean that social media challenges the Market Economy and Capitalism as explained by Adam Smith?

Well I have been troubled by this very question for some time until I recently read ‘Predictably Irrational ’ by Dan Ariely. According to Ariely, our understanding of economics, now based on the assumption of a rational subject, should, in fact, be based on our systematic, unsurprising irrationality. Ariely argues that greater understanding of previously ignored or misunderstood forces (emotions, relativity and social norms) that influence our economic behavior brings a variety of opportunities for reexamining individual motivation.

In the chapter on “Cost of Social Norm”, Ariely argues that we live in 2 worlds, one ruled by ’social norms’ and the other ruled by ‘market norm’. Social Norms are friendly request and wrapped in social nature and need for community (for example asking your neighbor to move your couch). This plays to warm and fuzzy human nature. On the other hand Market Norms are based on sharp edge of monetary exchanges. In this domain you get what you pay for.

He does an interesting computer based exercise to explore the affects of social and market norm…..

….Based on the above experiment, when people work in the domain of market norm, Adam Smith’s Market Economics works fine. But if people can be made to work in the domain of social norm, then Adam Smith’s Economics does not hold true. In the past social norm was constrained by space (your friends were in your neighborhood). But technology has expanded space and you can ‘virtually’ collaborate with people across multiple time zones. Now ’social norm’ can be successfully applied to motivate people to collaborate and create value based on a unique business model

Starting from incorrect assumptions about Adam Smith’s political economy it is not surprising that you get refutations of the Chicago version of Homo economicus and its ‘rational’ single-dimensional participant in human societies. But this has little to do with Adam Smith’s moral philosophy and political economy.

I shall leave it to a Chicago-trained neoclassical, or neo-neo classical, economist to respond to Dan Ariely’s (and many other’s) findings in similar experiments.

Not in Adam Smith's Name

Seeking Alpha posts The Economy and Free Money: Too Late to Play it Straight? by Craig Jones (here):

Though we long ago took the fork in the road that veered away from Adam Smith’s invisible hand, one would hope that, as a democratic and ostensibly freedom loving society, we would endeavor to hold on to some basic tenets of a laissez-faire economic model. As in most election cycles, this year’s cadre of candidates, especially the Democrats, are promoting ideas to “fix” our economy that would make even Lord Keynes roll over in his grave.”

Craig Jones is off the pace in “the fork in the road that veered away from Adam Smith’s invisible hand” and in wanting to holding on “to some basic tenets of a laissez-faire economic model”.

Neither idea had much to do with Adam Smith. The ‘invisible hand’ was a metaphor for the consequences of risk avoidance – it didn’t exist otherwise and he never mentioned ‘laissez-faire’, not even once, which was one fewer times than he used the famous metaphor, which wasn’t about markets anyway.

Craig is long on clichés (‘Lord Keynes roll[ing] over in his grave’ and short on appreciating Adam Smith’s actual ideas about political economy.

Adam Smith on Sympathy

Irving Wladowsky Berger, prompted by a piece in The Economist on the sale in Edinburgh of Panmure House, Adam Smith’s residence from 1778-90, and joins the debate among ‘right’ and ‘left’ to which side of the political spectrum today would Adam Smith be classed as belonging. Without addressing that question – sometimes discussed on Lost Legacy – I think I. W. Berger’s other comments are worthy of a wider readership.

I don't think that Adam Smith had socialism in mind, but something much deeper - sympathy, that is, the very human ability to have a strong feeling of concern for another person. Experts generally agree that Smith advocated both the self-interest of Wealth of Nations, and the sympathy of Theory of Moral Sentiments, with no contradiction between these two positions. In his view, "individuals in society find it in their self-interest to develop sympathy as they seek approval of what he calls the impartial spectator. The self-interest he speaks of is not a narrow selfishness but something that involves sympathy.

I am very intrigued by this balance that Adam Smith wrote about between the fierce competition inherent in open, free markets and the supportive community behavior found in well functioning human societies.

I am a strong believer in open, free markets - not out ideology, but out of pragmatism. I totally agree with the notion of the invisible hand that while free markets are often chaotic and unrestrained, they generally produce the right results. Even though greed often guides the actions of individuals and groups, the benefit of competition will usually overcome the detriment of greed.

What has caused such breakdown in the human sympathy that Adam Smith believed would temper our most selfish behavior? What has made so many individuals oblivious to the implications of their selfish actions? It would be nice if open-market kinds of controls scaled beyond the relatively local communities Smith had in mind, but apparently, that does not seem to be the case.

Sympathy and feelings of community may work well at the tribe or neighborhood level. But perhaps, when communities reach a certain size, the kind of sympathy for our fellow humans that tempers our actions begins to decline. When we don't know the people getting hurt by our actions, when such people are beyond our lines of sight and our lines of feelings, - across a whole region and country, let alone around the world, - perhaps any notion of sympathy disappears altogether. That is why governments and regulatory bodies are needed to help control our worst excesses.

Achieving the right balance between self-regulated open markets and government-based regulatory controls is very, very tough. You go too far in one direction, and you risk stifling competition and innovation. You go too far in the other direction - as perhaps we have in the recent past - and you risk the kinds of systemic abuses that end up hurting so many people

From this perspective, I. W. Berger draws on the examples of web-based collaboration to argue for ‘community’ based more harmonious relationships, and I shall leave readers to visit the full article ‘Adam Smith 2.0’ and read it for themselves (HERE).

Adam Smith’s notion of sympathy was fundamental to his theory of moral sentiments. I. W. Berger sees it as expressing ‘supportive community behavior found in well functioning human societies’. He then restricts it to ‘communities’, when in fact for Adam Smith’s ‘theory’ to have validity, it had to function in all societies (historically and contemporary) and not just ‘in well functioning human societies’.

Smith speaks of it applying in a ‘society among robbers and murderers’ too (TMS II.ii.3.3, p 86). The essential characterisation of harmonious society is the absolute necessity of justice, not necessarilly through beneficence. It was the observation that men stand in need of ‘each others assistance’ and each is exposed to the risks of ‘mutual injury’. This is not something only applying today or in the 18th century; it is a universal truth of all ages.

Adam Smith’s point was that ‘where the necessary assistance is reciprocally afforded from love, from gratitude, from friendship, and esteem, the society flourishes and is happy’ but if this was a necessity for happiness, then’society’ would be confined to a small number – it being impossible to know everybody outside of a small community in face-to-face contact.

I. W. Berger may be missing this insight of Adam Smith’s, who further observed that should the ‘necessary assistance’ be not supplied by such ‘generous and disinterested motives’ and absent ‘mutual love and affection’, society, though ‘less happy and agreeable’, society will not necessarily ‘disolve’. Here, Smith states the condition clearly:

Society may subsist among different men, as among different merchants, from a sense of its utility, without any love or affection,; and though no man in it should owe any obligation, or be bound in gratitude to any other, it may be upheld by a mercenary exchange of good offices according to an agreed valuation’ (TMS II.ii.3.2: p 86).

This has been the case among neighbouring tribes of hunter-gatherers, neighbouring ‘civilisations’, and neighbouring and distant traders. Along with the ‘mercenary exchange of good offices’ there has been the ‘vile behaviour of the rulers of mankind’, of which condition throughout all human history he was pessimistic of finding a ‘remedy’. The main part of the remedy, should one be found, was the institution of the negative virtue of justice.

I. W. Berger accepts the invisible hand fallacy as being Adam Smith’s: ‘I totally agree with the notion of the invisible hand that while free markets are often chaotic and unrestrained, they generally produce the right results.’ It is a view of how society operates but it was not Smithian (for reasons which regular readers of Lost Legacy should be familiar).

Society exists in time and space, not in abstract equations of narrow elements of its constituent parts. ‘Mercenary exchange according to an agreed valuation’ covers a wide range of possible behaviours; humans have a long history and continuing present of exchange by plunder, fraud, force, and violence. The institution of justice is a counter-force to these behaviours. The arrest, imprisonment and heavy fines of those who breach necessary laws to preserve voluntary exchange against fraud, and such like, is evidence of a healthy society (or as healthy as it is reasonable to expect any human society, given the impossibilty of utopia) and not one that is terminally beyond repair.

Within distant societies (beyond the neighbourhood) the same conditions of sympathy operate within them. It is not a question, as implied in I. W. Berger’s understanding of Adam Smith, that our community exudes sympathy and there is a chasm between us and the rest of humanity, even the most distant.

In Moral Sentiments, Adam Smith discusses the parable of a ‘man of humanity in Europe’ and an ‘Earthquake in China’ (in Smith’s day the longest journey he knew of – a round trip by sea of a couple of years). I will not quote it all (read it TMS III.3.4: pp 136-8 – you can consult it online via the Adam Smith Institute at: - righthand sidebar for Moral Sentiments and Wealth Of Nations, downloadable – go to Book III, chapter 3, scroll down until you find ‘China’).

In this parable Smith discusses a distant earthquake and whether a man of humanity in Britain hearing of it sleeps soundly at night without a care even if 100 million of his brethren are killed in it, and noting that the European would care much more about hurting his finger than the deaths in China. This is as far as most readers get, and they draw the wrong conclusion which roughly corresponds to I. W. Berger’s restrictive view of sympathy not getting far beyond his immediate community.

But please read on (carefully) because Smith then raises the question of what would the European do if he was offered the chosie between losing his little finger and the earthquake killing 100 million distant Chinese. The first reaction is as expected by I. W. Berger – the European prefers to keep his little finger! But again read on (carefully).

Adam Smith responds:

To prevent, therefore, this paltry misfortune to himself, would a man of humanity be willing to sacrifice the lives of a hundred millions of his brethren, provided he had never seen them? Human nature startles with horror at the thought, and the world, in its greatest depravity and corruption, never produced such a villain as could be capable of entertaining it. But what makes this difference? When our passive feelings are almost always so sordid and so selfish, how comes it that our active principles should often be so generous and so noble? When we are always so much more deeply affected by whatever concerns ourselves, than by whatever concerns other men; what is it which prompts the generous, upon all occasions, and the mean upon many, to sacrifice their own interests to the greater interests of others? It is not the soft power of humanity, it is not that feeble spark of benevolence which Nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self-love. It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration. It is from him only that we learn the real littleness of ourselves, and of whatever relates to ourselves, and the natural misrepresentations of self-love can be corrected only by the eye of this impartial spectator. It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the smallest injury to another, in order to obtain the greatest benefit to ourselves. It is not the love of our neighbour, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own characters.”

In short, Smithian sympathy is of far wider applicability than merely our own personal interests and does extend to distant communities. This theme is elaborated throughout Moral Sentiments and sits at the core of Wealth Of Nations. China is no longer a distant country from anywhere else on earth. Every country is right in our homes via tv and the Internet. We see distant people in their homes too (U-tube, etc.,) and they are not abstractions. International travel abounds and we supply and consume distant products (according to mercenary valuations) and we may not even know our neighbours in the manner of our grandparents’ generations.

Of course we quarrels – sometimes violently – because humanity was ever thus, and not just with distant anonymous people – check out the tyrannies and injustice within families and neighbourhoods. We also live in relative harmony – even in celebration - with distant people. How many fans of ‘Manchester United’ have even been near Manchester? and how many weep when a distant person among celebrities, leaders, and popular figures that they do not know personally falls ill or dies? Human tragedies to distant others move millions to sympathy.

It’s not more regulation and government we need – we need better, because fewer, of both. We need fewer and better laws and certainty of punishment. We need incentives to increase participation in markets, not protection for producers in some of them and damn the consumers. Retreating to ideal communities from an imaginary past is no solution, though it may be part of the search.

Monday, April 14, 2008

P. J. O'Rourke Scores Again Despite Justified Criticism

Thud Factor reviews P. J. O’Rourke’s version of Wealth Of Nations – not a sympathetic review, though quite fair.
You can read it HERE (also scroll down the right side-bar for his other comments on it).

He is disappointed and admits that ‘I bought the book in spite of the blurb, not because of it’.

But that’s the point. He bought the book, which is why P. J. O’Rourke wrote it in his inimitable style.

P. J. O’Rourke is about the Wealth of P. J. O’Rourke and ‘Thud Factor’ has just contributed to it, of which I suspect that P. J. O’Rourke is mighty pleased….

Sunday, April 13, 2008

A Neoclassical Economist Abuses a Critic Shamelessly

EconJeff (an anonymous blogger from Ann Arbor, Michegan) goes after Robert Nadeau, ‘a professor of English (!) at George Mason University, [who] does not, like many "heterodox" critics of mainstream economics, actually understand neoclassical economics in any meaningful way.’

No prisoners taken here, then.

What has Robert Nadeau done to deserve what is surely a blistering personal attack? He published an article in Scientific American entitled ‘Brother can you spare me a planet’, which Econ Jeff (who obviously economises on his identity) summarises in the declamation: ‘Shame on Scientific American for publishing this rubbish’. (HERE)

Here are some quotations from 'Jeff':

Instead, while the author focuses his attention on a misunderstanding of the invisible hand metaphor, his piece actually reflects his failure to take full account of another facet of neoclassical economic that also dates back at least to Adam Smith, namely specialization and division of labor. Nadeau is no doubt a smart man, but evidently one who suffers from a surfeit of confidence in his own ability to apply his intelligence to quickly understand, at a level deep enough to write a broad, general, historically based critique, a field that others spend decades learning.”

Nadeau’s ‘misunderstanding’ of the ‘invisible hand metaphor’, though gives no clues as to the nature of his misunderstanding, which coming from, ‘Jeff’, a proudly self-proclaimed neoclassical economist. ‘a field that others (i.e., ‘Jeff’) spend decades learning’, as if the time spent doing anything determines its exchange value or the quality of the output (I would have thought a neoclassical economist, especially after ‘decades’ of study, would know this – in fact, students should know it after their first term in Economics 101).

In similar vein, in a ‘sauce for the gander’ mood, Adam Smith, certainly not a neoclassical economist, would have serious complaints about the misunderstanding of his use of the metaphor of ‘an invisible hand’, widely prevalent among modern neoclassical economists, but perhaps not ‘Jeff’, after his ‘decades of study’.

Jeff insists that Professor Nadeau’s article ‘posits a conspiracy theory to cover up "the existence of the unscientific axiomatic assumptions" by whole cohorts of economists.’ Having read the article, I did not notice a ‘conspiracy theory’ or a ‘cover up’. Nadeau notes that neoclassical economists ignore the historical origins of their axiomatic theories. That’s what happens in paradigm management; it’s ‘heads down’ and ‘don’t look out of your windows’.

After all, Adam Smith’s first essay on the ‘History Of Astronomy’ covers centuries in which believers in the Sun orbiting the Earth, who despite looking at the sky at night and making laborious calculations, none of which matched what they were observing, still clung to the belief that the Earth was the centre of the Universe and ridiculed those who dared question their ‘science’.

I’ll supply a few paragraphs from Nadeau’s article (which I should state here that I do not share his ‘environmental’ fatalism, being a sceptic about the what has become the climate-change religion, which treats dissent as unscientifically as apostasy):

Brother, Can You Spare Me a Planet? (Extended version) Mainstream Economics and the Environmental Crisis” by Robert Nadeau

These assumptions were first articulated by 18th-century moral philosophers (Adam Smith, Thomas Malthus and David Ricardo) who embraced a new understanding of God known as deism that resulted from attempts to understand the metaphysical implications of Newtonian physics. Because this physics assumes that the laws of gravity completely determine the future state of physical systems, the deists concluded that the universe does not require, or even permit, active intervention by God after the first moment of creation. They then imaged God as a clock maker and the universe as a clockwork regulated and maintained after its creation by physical laws.” [quoting from: Bruno Ingrao and Georgio Israel, The Invisible Hand: Economic Equilibrium in the History of Science, tr. Ian MacGilvray (Cambridge, Mass.: MIT Press, 1990). (Readers will know that Lost Legacy would not subscribe to this Deist thesis.)]

Malthus and Ricardo believed that the clock maker created a second set of laws to govern the workings of the clockwork—the natural laws of economics. Smith imaged the collective action of the forces associated with these laws as an "invisible hand," and this construct became the central legitimating principle in mainstream economic theory. Smith claimed that the invisible hand is analogous to the invisible force that causes a pendulum to oscillate around its center and move toward equilibrium or a liquid to flow between connecting chambers and find its own level. Given that Smith's invisible hand has no physical content and is an emblem for something postulated but completely unproved and unknown, why did he believe that it actually exists? The answer is that Smith was a deist and his belief in the existence of the invisible hand was an article of faith.”

[If Adam Smith believed these assertions he certainly did not express them in anything he wrote. Neoclassical economists may believe these myths but nobody familiar with Adam Smith would subscribe to them.]

Nevertheless, these assumptions are now used to legitimate the existence of the invisible hand in its current form in the neoclassical economic paradigm—constrained maximization in general equilibrium theory.

[Yes, an entirely credible assertion about neoclassical miss-ascription of their theories of the invisible hand to their so-called scientific models, but they are not Smithian.]

Note what the writer of a textbook on environmental economics, quoted by Nadeau have to say about the dynamics of this process:

"The power of a perfectly functioning market rests in its decentralized process of decision making and exchange; no omnipotent planner is needed to allocate resources. Rather, prices ration resources to those that value them the most and, in doing so, individuals are swept along by Adam Smith's invisible hand to achieve what is best for society as a collective. Optimal private decisions based on mutually advantageous exchange lead to optimal social outcomes."

[Wrong about Adam Smith, but it is worth noting that he explained (in a reply to Dr Quesnay and the Phsyocrats: WN IV.ix.38: p678) that ‘perfection in markets’ is not necessary for growth and the spread of opulence.

The metaphor of the invisible hand had no such content, nor was it a ‘theory’, to be ‘swept along by’, because he shows over 50 occasions in Books I and II of Wealth Of Nations that sub-optimal outcomes, which are not ‘best for society’, when individual rulers, merchants and manufacturers, and others, act according to their self-interests. These instances are not ‘explained’ by weasel interpretations of a person’s ‘true interests’ by others, as if an individual, who Smith asserts knows his own best interests, is not guided by society’s interests or similar such sophistry.]

In summary, I criticise ‘Jeff’s’ treatment of Robert Nadeau’s criticism of neoclassical economics without agreeing with either of them (Nadeau shows in his article his familiarity with the criticism of the modern neoclassical economists use of 19th-century mathematics by modern mathematicians, which is behind modern complexity theory).

I do not necessarily agree with Nadeau’s use to which he wants to put a ‘different’ version of economics. ‘Tis a pity that he passes by appreciating what Adam Smith actually contributed to political economy because it might have helped him understand how economies work in the real world.

Saturday, April 12, 2008

Adam Smith Did Not 'Create' Capitalism

James’ in a Blog Debate with others about Wal-Mart writes:

The creator of capitalism was Adam Smith, who described the Capitalist system in his book ‘The Wealth of Nations’. At the times Adam Smith wrote his book, the world still used the economic system of ‘Mercantilism’. Metal nails were still being used as currency in the Scottish town where Adam Smith wrote his book.”

James’ makes the same mistake as did Tracy Warner, referred to in my post this week:

Adam Smith Did Not invent Capitalism’.

Is this because they both cribbed from the same “Students’ Notes” source. Such sources regularly create victims of ‘Chinese Whispers’, the game played by children (I remember it from my boy Scout days), which traces the way a simple statement changes as it is passed on orally between people – ‘send reinforcements, were going to advance’ becomes ‘send three-and-four pence, we’re going to a dance’.

There is a serious point here, apart from Adam Smith never knowing the word ‘capitalism’ nor the phenomenon; it was unknown to the English-speaking world until 1854 ,when an English novelist first used it in his book, ‘The Newcomes’.

Economic systems are not ‘invented’ or 'created', least of all by a moral philosopher, talented as he was, who ‘did nothing, but observed everything’. Changes in a mode of subsistence are not ‘designed’, 'created', 'invented', or decided upon before hand. All attempts to do so are futile and doomed to failure, as we have seen recently in the communist attempts since 1917 and approaching their denoument in Cuba.

People from time to time design ‘perfect’ communities, little ‘utopias’, and better societies, and they all end in failure eventually, whether they are based around religious precepts – strict interpretations of religious doctrine (the Essenes), and mass conversions to supposedly divinely-inspired beliefs, - or around political and behaviour codes drafted by motivated ‘leaders’.

Some may last for the lifetimes of the ‘founders’, but most change as they drift away from the original aims and new generations are born and suffer from the drifting away of increasing percentages of their followers. In intensely combative ‘utopia’ movements of true ‘believers’, major schisms are normal (Stalin’s Purges and the Moscow Trials, or Hitler’s Night of the Long Knives, or Mao’s ‘Communes’).

The subsistence norm for hundreds of millennia was expressed in various forms of hunter-gathering, incorporating untold millennia of scavenging and pure gathering (Adam Smith’s ‘1st Age of Man’: see his Lectures On Jurisprudence and Wealth Of Nations). Nobody ‘invented’ or 'created' it; gathering was already of ancient vintage among primates and the hominids, and took local forms among the dispersed low population densities of each species.

Shepherding and Farming (the ‘2nd and 3rd Ages of Man’) appeared in parts of the world, leaving the rest in the 1st Age of subsistence, where a few thousand (hundreds?) remain still. Again nobody ‘invented’ these forms of subsistence. Where they were discovered, accidentally (‘some fell on stony ground’ but some didn’t), they emerged eventually, slowly and gradually, and by imitation from dispersals of small groups, including parallel practises and reversions, and when propelled by global events like the ending of the Ice Age.

Adam Smith saw the emergence (‘at last’) of Commerce (the ‘4th Age of Man’) as the main event in parts of the world (China, India, Europe), interrupted and subject to reversal (the Fall of 5th-century Rome) and re-appearance from the 15th century in Europe, accompanied by local politically motivated stagnation in China.

In this historical context, to acclaim Adam Smith as the ‘inventor’ of ‘Capitalism’, or indeed as the ‘conqueror’ of ‘Mercantile Political Economy’ (please: not ‘mercantilism’, a word he never used nor knew, it being first used in Germany in the 19th century), is plain daft.

We might note too that despite Adam Smith’s strictures (in Book IV and V of Wealth Of Nations) discrediting the futile and dangerous mercantile policies prevalent in his time, these were never totally removed and “the world still [uses] the economic system of ‘Mercantilism’. Indeed, the main instruments of Mercantile Political Economy remain in rude health in policies still pursued by numerous leading governments, US, EU, Asian, Russian and LA included) across the world, such as the protection of producers at the expense of consumers, balance of trade myths, suspicion of trading neighbours, tariffs, quotas, outright bans, acts of retaliation, sanctions, ‘wars’, and jealousies of trade, this latter, the title of an essay by David Hume in 1752 and still worth reading in 2008 (HERE).

Friday, April 11, 2008

Tom Paine, Edmund Burke and Adam Smith

Peter Risdon writes in Freeborn John (11 April) Freeborn John - on Burke and Paine, prompted by a recent post by Peter Ryley in which he wrote (emphasis added):

there are those that are firmly anti-totalitarian but have little or no critique of domestic politics. They have made their peace with the establishment and the legacy of Thatcherism. However dramatic their declarations of human rights, they are Tom Paines abroad but Edmund Burkes at home.’

“The debates between Burke and Paine have come to represent the disagreements between left and right - Paine stands for the radical tradition and Burke for the conservative, which is reasonable enough in broad terms (though Burke was an Irish Whig he stands in some ways as the father of English conservatism).

In more detailed terms, though, it's a bit more complicated. Paine was certainly a radical. He was deeply involved in the American Revolution, then went to France and took part in theirs, even becoming a member of the French Assembly. It is from that assembly that we get our terms "right wing" and "left wing", based on the seating arrangements. Perhaps the first sign that this is not straightforward is the fact that Paine sat on the right of the French Assembly, in opposition to the sectarian violence of the Jacobins.

The man regarded as the Founding Father of capitalism and free-market economics is Adam Smith, so one might expect that being a "Burke at home" would include being a supporter of Smith. Luckily, Burke and Paine knew of Smith and of his work Wealth of Nations - the book that could be said to have founded the modern study of economics. Even more luckily, they brought Smith into their argument. Paine compared Burke unfavourably to Smith. In Part One of Rights of Man, Paine wrote:

Had Mr. Burke possessed talents similar to the author of "On the Wealth of Nations." he would have comprehended all the parts which enter into, and, by assemblage, form a constitution. He would have reasoned from minutiae to magnitude.

As a supporter of the American Revolution, Paine would have felt Smith was a sympathiser - Smith argued against colonialism and in support of the revolutionaries. In return, Paine was a supporter of economic freedom with the rider that he, in Part Two of Right of Man, laid some of the theoretical foundations of the modern Welfare State. This is, in passing, in complete accordance with Marko Hoare's suggestion of a consensus in support of "welfare capitalism" - he could have counted both Paine and, I think, Smith as supporters of that consensus. Burke took a swipe at Adam Smith when he lamented:

The age of chivalry has gone: the age of economists, sophists and calculators has arrived.

But despite this, and to complicate matters further, Burke was a personal friend of Smith and agreed with much of what he wrote.
So both Paine and Burke agreed in large part with Adam Smith's ideas - unsurprising, insofar as Smith's ideas were (and remain) plainly broadly correct.

Smith's ideas about the importance of enforceable contracts - still a foundation of the idea of free-market economics, though one that the left in general seems unable to understand, imagining that the free-market is some sort of Darwinian hell where might is right - chimed with Paine's fervent belief in the importance of constitutional democracy, a constitution being a form of contract, but one that limited the powers of governments. In Part Two of Rights of Man, Paine wrote (emphasis added):

Here we see a regular process — a government issuing out of a constitution, formed by the people in their original character; and that constitution serving, not only as an authority, but as a law of control to the government.
Burke felt Britain already had a constitution, founded on the Bill of Rights - Monarchy limited by representative democracy

The whole post is interesting and you should read it (HERE) to cover some interesting contrasts in political philosophy between two important 18th century figures.
I liked the Peter Riley sentence: ‘However dramatic their declarations of human rights, they are Tom Paines abroad but Edmund Burkes at home.’

Partly, this is a problem of attempting to squeeze 18th-century figures into a post-20th century political spectrum. Frankly, it can’t be done without rounding out rough edges and ignoring evidence of greater complexity than is covered by the revolutionary French convention, and its accidental ‘left-right divisions – the Jacobins had sat on the opposite side of the hall the labels would have been quite reversed so Marx would have been a rightwinger and Pat Buchanan a leftwinger (a theme for a playwright to work with?).

Once Again in France

Yesterday (Thursday) I was en route from Edinburgh to France, where I expect to remain until the middle of June for my annual reading and thinking session. I posted an explanation early on Thursday morning, but to my surprise it did not post -I missed something in a hurry for the airport.

Anyway, in France this morning I was interviewed by Swiss television on Adam Smith's legacy and how he is popularly known for things he never believed in, such as the invisible hand 'theory', the minimalist state, and modern capitalism. A few minutes but I hope it used the time well enough to spark an interest in Adam Smith.

With 'Adam Smith: a moral philosopher and his political economy' now in press, my thoughts are turning to the next project. In June, my paper on 'Adam Smith's Theory of Bargaining', will be presented at the History of Economics Society in Toronto (28-30 June) and I have submitted a suggested paper on the pre-history of bargaining to the organisers of a group interested in the multi-discipline evolution of economics in November.

This leaves a possible area for new work. After I had finished Lost Legacy (2005), I commenced a study of the people who had misused Adam Smith's original ideas from the 19th to the 20th century beginning with William Playfair (and 'editor' of Wealth Of Nations) and coninuing through many others, including through Ricardo, Mill, the 'marginalists', 'general equilibrium theorists', the Chicago school, Samuelson, and so on. This was interripted by the invitation from Tony Thirlwall, editor of the Great Thinkers in Economics series, to contribute a volume on Adam Smith. I may well return to this material and continue researching, identifing the epigones and tracing their damaging work.

I also have my unpublished ms on the 'Pre-History of Bargaining' ...

Meanwhile I am thinking this over. Any preferences from readers of Lost Legacy are most welcome.

Wednesday, April 09, 2008

Adam Smith Did Not 'Invent' Capitalism

Snippet from an online journal, ‘Wenatchee World’ that promotes Adam Smith, a moral philosopher who, among other things wrote Wealth Of Nations, didn’t have a vote under the then franchise in Scotland, didn’t have much capital except his annual salary, much of which he gave away to indigent relatives, lived with his mother and cousin frugally on the rest, ensuring that his regular Sunday dinners with family, friends and his ‘open house’ to guests, were likely as not to be far from Michelin-star standards, featuring beer, claret, and tea, though the conversation was no doubt ‘enlightening’, and who rented his house and disposed of his father’s modest properties, and, while visiting the businesses and farms owned by others, he was, as he explained in his earliest surviving essay (‘On Astronomy’), a philosopher ‘who did nothing, but observed everything’.

To what does Tracy Warner (editorial page director) promote Adam Smith here?:

Economists like to say that incentives matter. People are far more likely to do something if they realize a personal benefit, and less likely to act if they see nothing in it for them. It might seem selfish and self-centered, but that shouldn't be a surprise when dealing with human beings. This self-interest isn't a bad thing. Great good can come from it. The expectation of personal benefit is the basis of nearly every transaction, from trading stocks to buying a cup of coffee. It is fundamental to our economic well-being. "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest," said the founder of capitalism, Adam Smith’.

Yes, ‘the founder of capitalism’! Wow, that’s some accolade, but it is nowhere near the truth. It is rather silly in fact.

‘Capitalism’ as we know it was a phenomenon he knew nothing about. The word itself was not invented in English until 1854 by William Makepeace Thackeray in his novel, The Newcomes, and then popularised by Karl Marx.

Adam Smith described his fourth age of man as ‘commerce’, which he didn’t ‘invent’. It operated thousands of years before the fall of Rome in the 5th century, and Adam Smith noted how commerce revived in Western Europe from the 15th century onwards from observing its effects in gradually widening social choice and promoting technological change.

Smith saw the revival of commerce as contributing to the spread of opulence in Britain which would have a dramatic effect on the living standards, health and education of the labouring poor. By 1800 (Smith died in 1790) the uninterrupted experience of humans in society (except for a small ruling elite), for the first time ever, were to live in conditions that were better than minimal subsistence of the grandparents.

Instead of subsistence, and all that went with it, decade upon decade, living standards measured by the annual production of the ‘the annual production of the necessaries, convenience, and amusements of life’ were to slowly and gradually grow and significantly reduce absolute poverty in those countries that passed from purely agricultural and shepherding economies into mainly commercial economies, and later, much later, into capitalist economies. The rest took longer - and still lag behind - and remain poor, blighted by non-market economies, some by decades of communist experimentation and others by their politics.

But be clear, nobody ‘invented’ any of the ages of the four subsistence, least of all an observer like Adam Smith, talented as he was.

They emerged, slowly and gradually, from the inter-actions of unknown individuals learning how to ‘better themselves’ (as Smith put it) through experimentation, the application of retained and new knowledge about the physical world, the creation of appropriate institutions and social norms, regimes of law and justice, and, additionally, by the invention of new technologies, and the emergence of markets.

Tuesday, April 08, 2008

Malthus Was Not the Author of the 'Dismal Science'

Ren, writing in Accounting Solver (HERE) asks:

WORLD GRAINS PRODUCTION BALANCE SHEET 6: Can the balance be sustained?

He opens with the following:

"While Adam Smith introduced the invisible hand to economics, Thomas Malthus caused economics to be called the dismal science. Malthus observed that population was growing at a rate several times faster than food production, eventually leading to starvation and wars.

The World Grains Production Balance Sheet shows that there might be some truth in Malthus’ prediction…"

REN also provides an exposition in an earlier post (25 December 2007) of what he understands by the invisible hand:

Adam Smith’s invisible hand has pretty much influenced entrepreneurial and corporate thinking. The most common interpretation of the invisible hand is: in pursuing self-interest, individuals promote the common good; a free and democratic market is best for business and the economy. The common interpretation, however, ignores or has forgotten that Adam Smith also posited that there should be strong moral norms underlying the effective and efficient workings of the invisible hand. Without strong moral norms in individuals, societies and nations, the invisible hand leads to poverty and unequal distribution of wealth, big business taking advantage of instead of taking care of, wars for economic gain, even global warming.”

I agree that Ren’s exposition of the invisible hand that ‘The most common interpretation of the invisible hand is: in pursuing self-interest, individuals promote the common good’, but the trouble is that this is not what Adam Smith wrote.

It is what modern economists from the mid-20th century began to assert Adam Smith was the originator of such a theory, mainly to give justification to their theories of how markets work. Smith didn’t introduce ‘the invisible hand to economics’; Chicago economists did so indepedently of what is in Wealth Of Nations.

Adam Smith described how markets work in Books I and II of Wealth Of Nations without mentioning anything about invisible hands. Not a lot of economists either know nor believe that (and ignore it when advised of it, as I often do on Lost Legacy).

Usually the famous quotation about the ‘Butcher, the Brewer, and the Baker’ supplying your dinner from their self interest (they get in return your money price enabling them to purchase what they want elsewhere) and they then add to it (without admitting what they are doing – normally we would call that ‘sleight of hand’) a quotation from Book IV of Wealth Of Nations that mentions the metaphor of the invisible hand on an entirely different subject (risk avoidance).

To say this is a deception may be thought to be a trifle extreme, but that is exactly what it is. A student behaving thus in a tutorial would be spoken to about such use of argument by the tutor.

As for the allusion to Malthus and the ‘dismal; science’ that too is a matter of ignorance (wilful or accidental). It qualifies as an ‘urban myth’.

The notion of economics as the dismal science comes from a pamphlet written by Thomas Carlyle attacking John S. Mill in 1849, not Malthus or Ricardo in the early 19th century.

The cause was a slave rebellion in Jamaica of which Mill advanced the perfectly respectable notion that black slaves were every bit as human as their white slave masters and should be treated as such.

Carlyle was enraged at such a notion and railed against economists for purveying such notions in what, can only be described, as the most disgusting of terms. I leave it to readers to Google Carlyle on slavery to read his words, which was published in his pamphlet, ‘On the Negro Question’, an edition of which was published as ‘On the Nigger Question’.

Incidentally, Thomas Malthus was writing about what became known as the ‘Malthusian Trap’, in which per capita incomes of the majority of the population remained at subsistence level throughout all of human history (except for the elites) until around 1800, when in a corner of Western Europe, per capita incomes and consumption began to rise decade-on-decade for the very first time and have continued to do so.

The notion that Malthus and Ricardo represented economics as 'dismal' is a post 19th-century re-construction (Malthus being 'pessimistic', and Ricardo being 'difficult to read.