Monday, January 19, 2009

Free Capitalism and Free Markets

C. Rick Koerber, of Free Capitalist Blog, discussed on Lost legacy, on Wednesday last (“Origins of the Word 'Capitalism'), has responded with a long commentary HERE:

My criticism of Rick Koerber’s article by focussed on the generality of his statements about the ‘Origins of the Word Capitalism’, which suggested a lack of specific knowledge of its origin and conclusively failed the report its origins, the presumed purpose, at least to this reader, of the article. It also offered a number of misleading origins, including that of Adam Smith’s role.

That some people believed this or that about origins of the word, capitalism, is no defence. The title of the article is specific: ‘Origins of the Word Capitalism’, and I expected a statement of what are verifiable facts of its origin somewhere in the article. But Rick did not state anything factual about the origin at all. Instead, he made misleading generalities about what others may have said, including Karl Marx, for example. This is what drew my attention and on which I commented.

My approach, as always, is educational; I stated the facts about the origins of the word, so that Rick and others could display command of the subject in future. Not knowing with whom I was dealing, but taking his statements at face value, I made no concession for his vague language and his failure to answer his own question.

I think clarity on these points is essential if he wants to promote market solutions to allocation and distribution issues in the 21st century. I added, for information, some facts about Adam Smith because it seemed to me that Rick did not appreciate his role.

Adam Smith did not write about ‘capitalist’ economies; he wrote about ‘commercial societies and markets’ (see his Lectures in Jurisprudence, [1762-63] 1978, and his Inquiry into the Nature and Causes of the Wealth Of Nations, [1776] 1976, Liberty Fund, Indianapolis, Indiana).

He did not even write a textbook on economics, mainly because there was no definitive and widely-agreed body of ideas suitable for a textbook treatment at the time (a discipline requires such a body of agreed material before it writes textbooks for wider study; by the time that body of knwoledge was acquired, the discipline had moved on from Adam Smith, at some cost in understanding).

Smith wrote a critique of the state-managed, mercantile society of mid-18th-century Britain and the consequences of the monopolistic British colonies of North America, with a subsidiary polemic against the activities of the Royal Chartered trading companies, then prevalent, especially the odious East India Company.

It should also be noted that the core ideas of Wealth Of Nations formed parts of his lectures to Moral Philosophy for students (aged 14-17) in his classes at Glasgow University from 1751-64. His main lectures were on ‘ethics’ and these appeared as his Theory of Moral Sentiments (1759), which I think, in its six editions, is a more significant book than Wealth Of Nations (five editions, while he was alive), because Moral Sentiments is about lasting themes for individuals in society, more so than his albeit brilliant polemic against 18th-century State-mercantile policies. But that is a personal opinion.

Because Smith did not mention the word ‘capitalism’, Rick and Seth argue that this, by itself, does not mean that he did not write about what became capitalism, per se. That is, of course, true. However, the fact remains that what he did write about was not the phenomena we now call capitalism.

The differences between his outlook and what happened after the influence of the popularly-called ‘industrial revolution’, was a long process.

It was characterized by an evolution of power-, not hand-, driven machinery. In Smith’s account he was concerned with ‘manufacturing’ in its original meaning, ‘by hand’. He did not foresee the evolution of what became the modern banking system of finance capital, nor an accelerating technological revolution (electricity, chemistry, etc.,) and what became eventually a mass-consumer market, associated with continuous increases in per capita income from sustained general economic growth, which changed many of the fundamentals in Europe and North America to an unrecognizable degree.

The agricultural sub-structure of the economies known to Adam Smith were subjected to major structural changes, from near dominance of society into agriculture becoming a minor segment of ‘GDP’, for example; from mainly local markets (fairs, market days, small shops) to ‘national’ and ‘world’ business–to-business markets, with movements of unimagined large capitals across Europe and the Atlantic, now the Pacific; from local ‘dearth’ of food (even famine) to general food security, but with national ‘depressions’ (‘business cycles’); the beginnings of ‘State macro-management’ of national economies, and to the continuation, but on an ever larger scale, of national capitalist producers with State political objectives, accompanied by substantial lobbying of legislators and people who influence them; extra-state activity of large trade unions, and protest-driven, populist political parties and powerful NGOs; all of which sum to a world vastly different from Smith’s concerns and horizons.

In Smith’s world. Government expenditure was dominated by military procurement; today, though in total much greater, it rarely rises about 7 per cent and mostly is under 3 per cent of GDP.

Indeed, Adam Smith did not predict forward to a possible future; he is characterized by ‘looking backward’ in his outlook; he was not in the prediction business. A rare ‘prediction’ that he made was on the prospects for the former British colonies in North America, while discussing the eventual outcome of a theoretical union between the mother country and its colonies, was that in ‘little more than a century [1880], perhaps, the produce of America might exceed that of British taxation’ (and, interestingly, the seat of the British government ‘would remove itself from’ London to the former British colonies) [ WN IV.vii.c.79: pp 625-26].

In the main, Adam Smith’s perspective was an historical account of how and why society, as it was, had developed in the manner that it did. The shadow of the Fall of Rome, and its affect on Western Europe, from 5th century, the ‘barbarian’ invasion and the destruction of functioning Roman markets, and their slow revival from the 14-15th centuries to the revived commercial societies on the 17th-18th centuries, were Adam Smith’s focus. His books are replete with classical references, both literary and historical.

To which Smith added long chapters on the negative affects of ‘mercantile political economy’, which dominated all European governments, but held back the natural ‘spread of opulence’, especially among the majority families of the labouring poor, matched by the perfidious monopolizing spirit of many ‘merchants and manufacturers’, feeding off the ignorance of the landlord aristocratic order, which dominated the legislature and those who influenced them from among the educated middle order.

People quote Adam Smith (selectively) who clearly have never read Wealth of Nations (otherwise they would know all of the above) and have never read Moral Sentiments (otherwise they would know about how societies are dependent on the quality of justice and the moral behaviour of its participants). Homo economicus, a late 19th century invention, played no part in Smith’s thinking, yet is attributed to him by careless commentators.

Hence, Lost Legacy reacts to expressions of, albeit unintentional, lapses from those who refer to his political economy as if it would be at home with modern State-Capitalist societies. True, the nefarious behaviours of which in kind, in many crucial areas, have hardly changed from the mercantile fallacies of Smith’s time.

If they read Wealth Of Nations at all they would recognize how modern States pursue the same fallacious policies of ‘jealousy of trade’ – hostility to trading partners – and protectionism. Why does Europe, and the even larger US, require tariffs against poorer countries’ exports with a political passion that is as absurd now as it was when Smith wondered why there were hostile tariffs against the import of a few Irish cattle, when even if all of them were sent to Britain it would hardly affect the British meat market? This is why Smith’s general critical approach has resonance today, if quoted carefully.

The quotation from Professor Mark Skousen is interesting in this regard:

The main character is Adam Smith…[His] captivating philosophy of natural liberty and the invisible hand rapidly became the central character of modern economics as the industrial revolution and political liberty exploded on the scene, and create a new era of wealth and economic growth over the next two centuries."

Adam Smith, like all moral philosophy students of Scottish Universities at the time, was introduced to Natural Law philosophy, as enunciated in a direct line, by 17th century philosophers, Grotius and Pufendorf, and by 18th century, Carmichael, and Hutcheson. Natural Law was and remains a set of ideas of jurisprudence (how civil governments ‘ought’ to be managed).

Natural Law was not a part of ‘laissez-faire’, though it is often confused with it, and, incidentally, Adam Smith never used the words ‘laissez-faire’, though he was familiar with them and what they meant from his contacts with the French Physiocrats (1764-66). He often refers to the natural law theories of natural liberty, which underlay his jurisprudential theory of individual rights. He was not, however, a purist and insisted there were justified exceptions to natural liberty Wealth Of Nations [WN II.ii.94: p 324].

I am not convinced that the origins, content and application of what Professor Skousen calls the “captivating philosophy of natural liberty” is understood by him when he goes on immediately to link it to “the invisible hand” as part of that same ‘captivating philosophy’. It wasn’t and isn’t.

Smith’s singular use of the metaphor of ‘an invisible hand’, mentioned only once in Moral sentiments (TMS IV.10, p 184), and only once in Wealth Of Nations, (WN IV.ii.9: p 456) was not a ‘theory’, captivating or otherwise; it was a literary metaphor that had nothing to do with markets. (See Lost Legacy, passim, for scores of explanations of the alleged role of ‘an invisible that are miscredited to Adam Smith.)

The ‘invisible hand’ was ignored by commentators on his books, including Malthus, Ricardo, Mill, and Marx, and was only joined to economics discourse when leading economists used it to beautify their theories of the triumph of their analysis from the mid-1950s.

Finally, I was not commenting on Rick’s sincerity, nor his enthusiasm for ‘capitalism’, which I may share, though I prefer freer markets to ‘corporate capitalism’, as I prefer Liberty to democracy (many of the world’s ‘democracies’ are alien to Liberty.

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Blogger Seth said...

Thank you for your thorough reply. While I agree with your description of the role of The Wealth of Nations and the different times Smith was living in, I think that your argument about the connection of Smith and capitalism depends on whether one believes that the modern banking and financial sector and power driven machinery are one of the characteristics that define capitalism.
I think that what is often meant by capitalism is, in short, an economic system in which people are free to obtain and use their means in whatever way they find most advantageous without extensive government interference or direct control. In this sense I don't think that Smith can be totally disassociated with the idea of capitalism.
I know my English leaves something to be desired but I hope my comment is understandable.

7:46 pm  
Blogger Gavin Kennedy said...

Hi Seth

Your Eglish is perfectly clear, and thank you for your comments.

I see what you mean by 'capitalism' and I would agree that you have presented a clear definition. I have problems with it, however.

It doesn't cover all (or perhaps, any) capitalist system operating at present (and, following Smith, I do not comment on the future, which is unpredictable).

There are quite strong differences between capitalisms, however defined, among Japan, say, and North America, and Scandinavian countries and Britain, and northern Continental countries like Germany and France, and southern European countries, like Italy, Spain and Greece, let alone the Middle East and Africa and Australasia.

Even capitalist countries, like North America, dominated as they are politically by Big Governments and Big Corporations, and which leave individuals 'free' to bring resources together for advantageous purposes, have quite limited scope for free markets, even at the local level, bound as they are by State Ordinances.

Smith lived in a different commercial society. Just as European feudalism grew out of the 'barbarian' allodial land tenure system, but it was not the same (except plants grew the same way), so did capitalism grow out of the 'commerical societies' of the 15th to 18th centuries, and were quite different, including in technologies.

A philosopher observing the allodial system, with no knowledge of the feudalism to come, would not have described feudalism, any more than a philosopher observing the despotic hydraulic societies of ancient Egypt, Babylon, India and China, could describe the allodial or feudal, or commercial societies that followed.

The reason that power-driven machinery, finance capital, complex services, etc., are essential for capitalism (though not for markets) is that the vast capital requirements required to fund activities involving tens of millions of people are the essential characteristic of capitalism.

The scalar enhancement from the mid-19th century changed the 'game' beyond recognition.

10:40 pm  

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