Thursday, December 11, 2008

An Historian on British History

Richard Reeb asks in (9 December) HERE:

Whatever happened to political economy?”

“In a previous column I questioned the idea that there is something called “the economy” and suggested instead that we refer to our multiple transactions in the global marketplace with the term of the United States Constitution, viz., commerce.
This is not just a matter of semantics. For if we choose our words with care, we accurately name the things to which the words refer. Before the term “economy” was applied to our domestic and foreign commerce, it referred to a virtue — of individuals, businesses and nations. The first dictionary definition of economy, after all, is “careful, thrifty management of resources, such as money, materials, or labor.”

Just as households and businesses must practice economy in order to make the most prudent use of their resources, so must governments. But with its powers of taxing, spending and borrowing, government has access to considerably more resources than any household or business. That means the temptations and opportunities for abuse are much greater.

As the purpose of our national government is to make laws for the common defense and general welfare, it is not, by definition, designed, like the household, to meet the daily recurrent needs of anyone; or, like a business, to make a profit. It exists to make households and businesses safe and secure.

For most of our history, American government has practiced political economy, out of conviction and necessity. That is, it is limited in its scope and its powers and not entitled to huge sums to conduct its functions, however greater those were than anyone else’s. And as long as the federal government in particular performed its constitutional functions, heavy taxation was both difficult to justify and hard to obtain against jealous state governments.

To appreciate the soundness of this limited view of economy, it is helpful also to be mindful of what commerce is and why it is so indispensable to modern republics. In ancient times, commerce referred to sea-going trade, as commerce includes the root “mer,” meaning sea. Hence, Athens, a naval power, supported commerce that its rival, Sparta, a land-based power, took little interest in.

Commerce contributed greatly to the decline of medieval feudalism, a system that combined perpetual armaments and subjugation by the lords of the peasants. Those aristocrats who aspired to national crowns found the nascent commercial classes a vital alternative to depending upon their rivals for financing their kingdoms, especially their wars.

The middle class, so called because its members were neither aristocrats nor peasants, made money in trade with cities and states other than their own. In return for protection or favored treatment, they would lend money to kings.

There were essentially two approaches that kings of the early modern nation states took toward the generation of national wealth. One supported acquisition of precious metals and hoarding them for national purposes. Spain, the first great nation at this time, was an exponent of that view. Another view, favored in Britain, was that it was better to encourage merchants to build their fortunes with limited regulation, as a growing commerce funded government with minimal taxation.

Adam Smith’s Wealth of Nations provided the most powerful argument for the second view of national wealth. The British government was no less tempted to commandeer the resources of the country than the Spanish, but Smith made a compelling case for laissez-faire (let them do as they please) as far more productive than national missions to exploit natural resources the world over to enrich the government’s coffers. Smith’s famous “invisible hand” was not blind to the avarice of businessmen (quite the contrary) but rather saw them as more efficient producers than any government could ever be.

As we stand on the brink of massive efforts to “rescue our economy” from its current credit crisis, it is helpful to remember these historical lessons on how to build up national wealth and, by implication, what diminishes it. The federal government tried to spend its way of the Great Depression and failed, just as its massive programs 30 years later failed to end poverty. Only individuals and businesses practicing economy, supported by a government practicing the same virtue, can accomplish that.

To the extent that our government embarks on a massive program of public works, business bailouts, unemployment compensation, forced unionism and uneconomical energy schemes, our current crisis will become much worse and we will imagine only that we didn’t do enough rather than far too much to “save” our commerce.”

[Richard Reeb taught political science, philosophy and journalism at Barstow College from 1970 to 2003, and is the author of “Taking Journalism Seriously: ‘Objectivity’ as a Partisan Cause” (University Press of America, 1999)

On the whole Richard Reeb’s article is very good. It is quite close in its treatment of history to Adam Smith’s approach and analysis in his Lectures on Jurisprudence (1762-3), published in 1982 and, later, which he reproduced in Wealth Of Nations (1776), both republished by Liberty Press, Indianapolis. For this I was impressed by Richard Reeb’s understanding as presented in a few sentences.

First, I would agree which Richard’s depiction of the Spanish policy of mercantile political economy – seize the gold from its colonies in South America (of which Smith was extremely critical of their barbaric methods) and then hoard the gold in Spain under the misunderstanding that gold constituted real wealth.

I would agree that “Adam Smith’s Wealth of Nations provided the most powerful argument” that national wealth did not consist of gold and silver bullion, but consisted of the ‘annual production of the necessaries, conveniences, and amusements of life’ and ‘that it was better to encourage merchants to build their fortunes with limited regulation, as a growing commerce funded government with minimal taxation’ (I am not sure that Smith made an issue of the amount of taxation; he remarked also that the expenses of the State required the continuation of some level of tariffs and duties, despite this inhibiting some level of foreign trade).

But from here I think Richard conflates his analysis of the errors of mercantile political economy and Adam Smith’s advocacy of his alternative policy to the dominant political economy of his age, to imply that with “the most powerful argument Wealth Of Nations” the errors of the old political economy were approved, replaced and practiced by Britain. Would that this happy event had happened!

The problem for the ‘most powerful argument’ of political economy is the politics part of it. Britain was engaged throughout the 18th century with numerous wars and their related diplomatic intrigues, and practised the far more important errors of mercantile political economy than the ‘gold-hoarding fallacy’, prominent as it may have been in the debates at the time.

I refer to the fallacy of the ‘jealousy of trade’ which necessarily led to trade wars, penal tariffs, trade monopolies such as the Acts of Navigation, and at the apex of the errors, the foundation of colonies.

Britain, an island commercial economy with a burgeoning naval power around Europe and across the north Atlantic and Caribbean, followed these aspects of mercantile political economy with a ruthlessness that made it a major European power, which not even the loss of its north American colonies (excepting Canada and its Caribbean possessions) dealt a stunning blow, or even a serious inhibition.

Adam Smith’s robust critique of the errors of mercantile political economy (Books III and IV of Wealth Of Nations), were not adopted by the British or any other government of the day, and, if I may suggest, are still largely ignored by modern historians of economics.

Richard Reeb, sees a set of ideas and assumes they became government policy; they were a menu for change but were treated by politicians more a la carte than table d’hote.

Indeed, having lost one Empire, Smith admonished the government (in the last paragraph of Wealth Of Nations, V.iii.92: p 947; Canaan, p 900) to “endeavour to accommodate her future views and designs to the real mediocrity of her circumstances”. Instead, Britain continued to found a second Empire around the remnants of the first in north America, the Caribbean, India, Australia, and New Zealand (and other spots around the globe).

My last comment, not surprising to regular readers of Lost Legacy, is the statement that “Smith’s famous “invisible hand” was not blind to the avarice of businessmen (quite the contrary) but rather saw them as more efficient producers than any government could ever be”.

This needs to be treated with caution on two grounds: first, the ‘invisible hand’ is and remains a myth as presented by Richard (details of Smith’s actual singular use of the metaphor in Wealth Of Nations can be consulted in regular posts, and my detailed critique downloaded from the Home page).

Second Smith’s preference for ‘businessmen’ over sovereigns and governments was conditional on competition, justice and education. He considered the damage that business monopolies, protected markets, tariffs, and ‘jealousy of trade’ did to the spread of opulence, severely qualified whether their merits on ‘efficiency’ worked for the public good.

Bad government and bad traders were close competitors in distorting a commercial economy; I would not give the latter the endorsement of a blank cheque for their superiority over the former.

But Richard Reeb's article is well worth reading and passing around.

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Blogger Richard Reeb said...

Thank you, Mr. Kennedy, for posting my article on economy and commerce at your web site and for so generously reading and commenting on it. I have very little to quarrel with, except (another point of agreement) that I do not assume that the presentation of a good argument necessarily translates into good public policy. A newspaper column has limited space and is intended for a popular audience; hence, I oversimplified my argument for clarity's sake. I did, however, concede that "[t]he British government was no less tempted to commandeer the resources of the country than the Spanish . . ." But despite Britain's lack of consistency and, as you rightly point out, its embrace of the mercantile approach, it became a far more productive country than any other in Europe--especially when it at least partially repented of its mercantile ways by adopting free trade policies in the 19th century. Certainly, it is true that no political system is altogether admirable, whether it is the British pursuit of empire and slave trading or the American dependence on chattel slavery. But Smith's ideas had a powerful effect in the United States as well as Britain, and we are the better for it. Of course, we have significantly strayed from those ideas. But then Keynesianism, which was thought to be triumphant in the United States, has taken its share of lumps, not only in the Reagan Administration but even in Clinton's. As to corrupt businessmen, of course they seek advantages for themselves at the expense of free trade. It is the price of liberty and government by consent. Yet even in the current bailout mania, most Americans still believe that corporations ought to sink or swim by their own efforts. Our duty is always to uphold the truth about human affairs and hope for the best. Once in awhile a talented person makes a major difference in politics and we are the gainers. Why God gives us only a few Washingtons, Lincolns, Churchills and Thatchers is known only to Him, but I am grateful whenever we are so blessed.

6:47 pm  
Blogger Gavin Kennedy said...

Thank you for your response.

Lost legacy is an educational forum and is often critical to assist understanding.

I agree that cramming ideas cannot be avoided in columns for otherwise busy readers.

Hence, I see your article as far better than the average I deal with here.

I hope readers take advantage of the ideas that you wrote about.


10:29 pm  
Anonymous Anonymous said...

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12:32 am  

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