Friday, July 31, 2009

An Idea Devoid of Content

Richard Kagan writes on ‘Human rights and the news’ in The Daily Journal (Fergus Falls Minnesota) 30 July, HERE

Article 19 of the Universal Declaration of Human Rights expands on this right. It includes the freedom “to seek, receive and impart information.” It is not enough to have the right of a free press. It is our responsibility to seek and receive information that is necessary to our well-being.

Two areas in the Journal are particularly responsive to this task: namely economic opportunity and environmental stewardship. The Nobel Prize Laureate in Economics, Joseph Stiglitz has criticized the Adam Smith assumption that there is an “invisible hand” that controls or determines our economy. Professor Stiglitz counterargument declares that information has economic value because it allows individuals to make choices more rationally. Without sufficient economically relevant information, individuals can be conned into make self-destructive decisions. When one person has more or better information than the other, there is an imbalance in the knowledge of reality. This negative relationship can lead to exploitation and ill feelings. The more the Journal can cover issues of economic growth and opportunity, the more we can make logical decisions about the local and national economy

Adam Smith did not assume “that there is an invisible hand’ that controls or determines our economy”, or, if he did believe that, he did not say that he believed it.

In fact, he said remarkably little about the role of ‘an invisible hand’ and even less about its possible role in ‘our economy’.

He only mentioned it once in Wealth Of Nations and then only as a metaphor for some merchants who, being risk averse, preferred not to send their cargoes out of their sight and instead preferred to invest their capital locally, even if they earned a lower rate of profit from doing so.

Other local merchants, willing to take greater risks, did send their cargoes abroad and they earned higher profits from doing so if their investments returned safely (the North Atlantic is a risky proposition for shipping; the Caribbean was infested with pirates; and India was over a year round-trip just for sea transportation.

By investing locally, these merchants unintentionally added to national output and employment. They were most interested in their own security.

It was in reference to this conundrum of the choice between foreign versus domestic trade that Smith wrote in Book IV, chapter 2, of Wealth of Nations his, now famous, but for most of the hundred years after his book appeared in 1776 largely ignored, use of the common 18th-century metaphor of ‘an invisible hand’, which he deployed to describe the consequential behaviours of those merchants who were risk averse.

The risk-neutral (and risk-seeking) merchants were not considered further – no ‘invisible hand’ guided them apparently.

So when Smith describes the behaviours of the risk-averse merchants being ‘led by an invisible hand’, he was considering them only.

His use of the words ‘every individual’ refers to this group only, though it is a common error to assert that the metaphor applied to everybody in the community and thereby leads most modern commentators to imagine that Smith said ‘all individuals’ do what they do, irrespective of what they do.

Few of these modern commentators have read Wealth Of Nations leading them to formulate a view of the economy attributed to, but never part, of Smith’s analysis of markets. Notably, in Books I and II of Wealth Of Nations, Smith analyses the working of markets in detail without mentioning ‘an invisible hand’ at all.

If the invisible hand guides some individuals to invest abroad and some others to invest at home it become a nonsensical metaphor and certainly an idea devoid content. It adds nothing Smith exposition in paragraphs 1 – 9 of Chapter 2, Book IV.

Professor Stiglitz should know all this, but apparently does not. If Stiglitz gets it wrong, what chance has Richard Kagan?


Wednesday, July 29, 2009

A Confusion of Identities

In the Daily Klos Blog, Patrice Ayme writes HERE:


Adam Smith, having apparently confused his mastery of French with a mastery of economics, grabbed the word "laissez faire" from the French self christened "Economistes", and thought that this "invisible hand" had solved house management, for the better. Adam Smith did not invent the theory of the "invisible hand", either, it was written down before Smith was born (by Mandeville who subtitled his famous Fable of the Bees, with: "Private Vices Public Benefits" – this striking formulation pretty much extols the naivety of it all).

Well, "laissez faire" and invisibility of manipulators do not provide necessarily with the best housemanagement. Every country that has established a government insured health care system has long known that.”

Patrice appears not to know that Adam Smith never used the phrase ‘laissez-faire’ at all in anything he wrote, so it seems strange that Patrice thinks he ‘grabbed’ it from French economistes (I think he means the Physiocrats).

Patrice is correct, however, though not in the way he thinks: Adam Smith did not ‘invent the theory of the invisible hand’ – he never had such a theory in anything he wrote.

For Smith it was a metaphor, not a 'theory', and its modern notion was invented by modern economists in Chicago in the 1930 and popularised from the 1940s. Its modern meanings had nothing to do with Adam Smith.

I am not clear how Bernard Mandeville gets into this story.

The rest of Patrice’s article is a long rant about health care ... I gave up reading it.

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Liberty More Important than Democracy

Samuel Gregg writes in Witherspoon Institute Blog, (Public Discourse, Ethics, Law and the Common Good) HERE

Samuel Gregg is Research Director at the Acton Institute. He authored On Ordered Liberty and The Commercial Society. His Wilhelm Röpke’s Political Economy, will be published in early 2010.

Reflecting upon the expression political economy might not be a bad place to start for those interested in rethinking economics’ foundations in a post-crisis era. In Adam Smith’s Wealth of Nations, the term acquires three meanings.

The first is the commonly accepted positive sense of political economy as the scientific study of “the nature and causes of the wealth of nations.” More broadly, however, Smith’s political economy also embraces the study of the interrelationship between economic theory and the political ideas and movements of a given time. Lastly, there is the sense in which Smith understood political economy in terms of what we today call economic policy: “a branch of the science of the statesman or legislator” whose objective was “more properly to enable [people] to provide such a revenue or subsistence for themselves; and . . . to supply the state or commonwealth with a revenue sufficient to the public services.”

On one level, the Wealth of Nations does involve abstract analysis of economic life. Smith carefully dissects the claims of prevailing economic thought, presents a fresh theory about how wealth is created, and elaborates on what should be done in policy-terms if wealth creation and society’s overall material enrichment are deemed desirable. But in doing so Smith also attempts to develop a powerful normative argument for an economy based around private property, free competition, and limited government over and against the mercantilist systems that dominated eighteenth-century Europe.

As the economic historian Emma Rothschild reminds us, Smith sees economic liberty as something to be approved and pursued partly because of its capacity to liberate people from many forms of oppression. For Smith, the move from mercantilist to market economies was not only a matter of following the promptings of scientific economic reasoning focused on wealth-creation. Smith also regards market economies as superior to previous economic arrangements on grounds of the greater efficiency and liberty they accorded to ever-widening numbers of people to seek human fulfillment.

Unfortunately, with some notable exceptions, this Smithian conception of political economy did not persist after Smith’s death in 1790. By John Stuart Mill’s time, political economy was being defined as studying the behavior of homo economicus, a creature whose nature is far removed from that of the more complex, not-always rational being found in Smith’s writings. From here, it was only a short step towards the reduction of much economics to a branch of applied mathematics, however valiantly this trend has been resisted by the Austrian and Public Choice schools

I find myself in broad agreement with this part of Samuel Gregg’s analysis and I commend his approach to you. I would add that I think liberty in Smith’s terms is more important than democracy as represented by mere elections which may be held regularly but are often, across the world, well short of being open, transparent, and an accurate reflection of the free choices of independent electors ( see Iran recently, as an example).

Liberty expressed by free speech, an independent judiciary, trial by jury, Habeas Corpus, rights of assembly, policing as a service - not a force of the politics of the government, and personal rights codified in law, is rare enough (as it has always been), and when its lack is covered up by farcical elections it is a disappointment for optimists for the human condition and a comfort for cynics and oppressors.


Monday, July 27, 2009

New Book by Steve Medema Looks Promising

Real Time Economics(“Economic insight and analysis from The Wall Street Journal”)carries a Guest Contribution: “The Invisible Hand Isn’t Broken

“The free market has gotten a bad rap, but the invisible hand was never meant to be completely unfettered, writes Steven G. Medema, professor of economics at the University of Colorado Denver and the author of “The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas” [Princeton University Press, 2009] HERE:

"The idea that the self-interested behavior could be good for the economy did not originate with Smith, but he provided the theoretical ammunition for this view and remains the historical figure with whom it is most closely associated. Smith’s view of things was that businessmen do indeed pursue their self-interest, but that such behavior can redound to the best interests of society as a whole — higher national wealth, lower goods prices for consumers, etc. — if that self-interested behavior is encased within a competitive market environment. This, of course, is Smith’s famous “invisible hand” argument, which has been championed by some as an argument for minimalist government and derided by others as a myth that has been disproved by events."

"But as convinced as Smith was of the utility of the market for promoting economic growth attended by benefits that extend across the population, he was not a champion of unfettered markets. Smith wrote at a time when various government schemes of protection established monopolies across the economy, which generated higher prices for consumers at the same time that they enriched the narrow classes of protected businessmen. He advocated the competitive process as an alternative to that system.
Smith saw an important role for the state within the market process. He was well aware that the unfettered pursuit of self-interest had many pitfalls associated with it, and he wrote at length about the need to embed the market system within an appropriate legal and moral environment, even going so far as to recommend legal ceilings on interest rates to prevent banks from lending large amounts of society’s financial capital for the pursuit of excessively speculative ventures”

Not quite there yet but definitely moving in the right direction.
From an automatic relationship of individual self-interest to social benefits (usually aided, directed even, by an invisible hand, there is a clear sign that this relationship is qualified by its dependence on the content of the self-interest embodied in it and its context (rule of law, justice, degree of competition, and types of behaviours).

Smith gave over 60 instances of self-interest working against the interests of other individuals in Wealth Of Nationssee footnote 3, Self interest is not always benign as far as Smith was concerned, but not a lot of modern economists seem understand that (most of them have never read Wealth Of Nations).

The Wall Street Journal article recognises this in part – follow the link to read Steve Medema’s important new book – I am about to start reviewing it for Lost Legacy and shall post my review soon.

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Sunday, July 26, 2009

Update on 19th Century Mercantile Britain

Up date on yesterday’s notice of Nye’s article on continuing mercantile policies of Britain in 19th century:

Douglas A. Irwin writes to mention his response to Nye’s paper: “Free Trade and Protection in Nineteenth-century Britain and France revisited: a comment on NyeHERE:

I have yet to read both papers carefully and I shall report later.


Saturday, July 25, 2009

Did Britain Ever Adopt Free Trade?

John V.C. Nye’s paper, “Political Economy of Anglo-French Trade, 1689-1899: Agricultural Trade Policies, Alcohol Taxes, and War” is published by the American Association of Wine Economists, as AAWE Working Papers, no 38 Economics, HERE:

From the Abstract:

“Britain – contrary to received wisdom – was not a free trader for most of the 1800s and, despite repeal of the Corn Laws, continued to have higher tariffs than the French until the last quarter of the century.

War with Louis XIV from 1689 led to the end of all trade between Britain and France for a quarter of a century. The creation of powerful protected interests both at home and abroad (notably in the form of British merchants, and investors in Portuguese wine) led to the imposition of prohibitively high tariffs on French imports -- notably on wine and spirits -- when trade with France resumed in 1714. Protection of domestic interests from import competition allowed the state to raise domestic excises which provided increased government revenues despite almost no increases in the taxes on land and income in Britain. The state ensured compliance not simply through the threat of lower tariffs on foreign substitutes but also through the encouragement of a trend towards monopoly production in brewing and restricted retail sales of beer (which began around 1700 and continued throughout the eighteenth century).

This history is analyzed in terms of its effects on British fiscal and commercial policy from the early 1700s to the end of the nineteenth century. The result is a fuller, albeit revisionist account of the rise of the modern state that calls into question a variety of theses in economics and political science that draw on the naive view of a liberal Britain unilaterally moving to free trade in the nineteenth century.” (JEL Classification: F13, H20, N40, N43, N53, O13, Q17)

I received this paper this morning and was immediately attracted to it by the abstract.

Regular readers may have noted my occasional comment that Adam Smith’s free-trade reputation is often exaggerated and as often it is associated with claims that Wealth Of Nations ushered in an age of free trade policies in Britain. The mercantile political economy, of which Wealth Of Nations was heavily critical, is supposed to have been replaced by grateful legislators persuaded by Smith’s arguments.

I have long suspected that this picture is not just over done; it is absolutely wrong.

The end of the first British empire following the loss of the British colonies in most of North America (Canada, a prize won from the French, remained under the jurisdiction of Britain – from 1789 France turned in on itself; and the Caribbean island prizes remained slave colonies) did not usher in an era of free trade.

The old mercantile habits continued, and with them the lust for empire was nurtured.
In 1788 the penal colony of New South Wales was founded, to which New Zealand was added and the rest of Australia followed, by which time the disgrace that was India under the East India Company was taken over directly by London and the elements of the second British Empire took shape.

Into this mix, the idea grew that British foreign and domestic policy was one of free trade and the end of mercantile political economy with its regulations, restrictions, special interests, and jealousies of trade. I suspect this picture is untrue and I look forward to reading John Nye’s paper as a contribution to correcting part of the image.

I doubt if mercantile political economy has ever really gone away from Britain despite Adam Smith and the Wealth Of Nations and all the talk of major changes in the 19th century. The so-called industrial revolution – more like slow and gradual partial industrialisation – which produced the illusion of success affording the governments of the day the means to practise ‘business as usual’.

I shall keep you posted.

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Thursday, July 23, 2009


Yes, I know there should be no trouble re-connecting to the Internet when abroad but this is the first time I have been able to do this from rural France where I rely on Orange (formerly France Telecom-Wanadoo) for the Internet service.

I bought into the new Orange service a couple of years ago and connecting via their Livebox system has always been a lottery. But late last night when I turned to the connect routine via an updated Livebox it went straight through first time.

Hence, later today (Thursday) after various chores, including purchasing a new printer from about 20 miles away, and domestic shopping trips, re-introductory neighbourly visits (most important in rural France - thank God I no longer drink) I shall post again.


Wednesday, July 22, 2009

Interrupted Internet Connection

Once again I am journeying to France to resume my family holiday and I expect to be out of contact until Thursday or Friday (I do hope no longer).


I have a schedule of work:

a) I am completing my response to Daniel Kline on the invisible hand (due in August for September publication in Econ Journal Watch (see the May issue for the original exchange over my “Adam Smith and the Invisible Hand: from metaphor to myth”, and Dan’s reply).

b) I am preparing my paper, “The Hidden Adam Smith in his Alleged Theology” (new title), which I presented at the 10th Summer Institute for the Preservation of the History of Economic Thought, University of Richmond, Virginia, and at the 36th annual meeting of the History of Economics Society, University of Colorado, Denver, both in June 2009, for submission to an academic journal for the editorial consideration process.

I also have a social schedule: a neighbour’s daughter's wedding party; harvesting (hopefully) vegetables from our garden planted in April-May; various lunch and dinner parties (including at our favourite restaurants in St Emilion; Ruch and Pujols); meeting new neighbours who moved in while we were away; and shopping in local markets; plus some visitors arriving from a week or so.


Tuesday, July 21, 2009

A Welcome Step to Appreciating the Role of The Metaphor

Lawrance G. Lux write his Blog by the same name HERE:

Hole in One Golf’

“I have always believed in Adam Smith’s Invisible Hand, but not in the manner most cited; reread the previous paragraph, and ask whether the fiscal deficit as described is not a failure of a universal turn to that Invisible Hand. The award of Tax benefits without universal application negates the operation of the market, and the dysfunction of fiscal balance comes from the loss of guidance from that Hand

Follow the link for the rest of this interesting side-light on the invisible hand, which takes its meaning on it own terms. However, even on these terms it is partly contradicted by the context in which Adam Smith introduced the metaphor.

What Lawrence appears to be saying is that he considers the invisible hand has only operating effectively in a free and competitive market, with minimal or no government, and certainly no government intervention on the scale presently practised in western ‘capitalist’ countries today, for example, the current fiscal deficit.

This implies – near to the truth – that the invisible hand was a metaphor for people reacting to social signals to behave in certain specified ways, such as in Moral Sentiments (TMS IV.i.10: 184) where rich landlords, reacting to the obvious need to feed, clothe, and shelter their labourers (and their families), would provide them with sufficient subsistence (no doubt, widely interpreted by the landlords retainer’s and overseers) to do so. The landlords could do not other, because without subsistence, the farm labourers would not last the winter, and who would prepare, plant, and harvest next season?

In the Wealth Of Nations the invisible hand was a metaphor for some local merchant traders deploying their capital locally to hire labour (creating employment) and to produce ‘the annual output of the necessaries, conveniences, and amusements of life’ and profits, which Adam Smith considered to be the real wealth of a society. The whole annual output is the sum of its contributory parts, hence the more that local merchant traders acted in this manner, the higher would be a county’s annual output. In this case, what behavioural signals prompted some, but definitely not all of them to behave in this manner?

From the commercial society, their motives included the profits they could make which replaced the capital they deployed, and the wages they paid to labourers to transform capital into output by the application of labour. Out of their revenues, after paying all their costs, they earned income, which was either consumed, hopefully frugally but in some cases it was spent in prodigality, and they invested in new rounds of transforming capital into new revenues ('the great wheel of circulation').

Here, most people read the 9th paragraph of the chapter (WN IV.ii.9: 456) too quickly. They forget the other social signals to all, not just some, merchant traders, who divided into two particular sets particularly. Individual merchant traders vary in their attitudes to risk – no investment round is absolutely certain to provide a return on their capital.

Merchant traders, who, considering their options and assessing whether to invest locally or to send their capital abroad, are swayed by the prospect of profits counter-balanced by their assessment of the risks of sending their capital out of their sight, to strange lands that may have different customs, uncertain local laws when deciding commercial disputes, and operated by people whose characters and reliability they know little or nothing about.

The different estimates of risk lead to two sets: those who are risk averse, and choose the home trade, and those who are risk neutral who choose the foreign trade, swayed by prospective higher profits.

Smith mentions, specifically, that the home trader who ‘intends only his security’ thereby invests locally ‘intending only his own gain’.

The foreign trade likewise ‘intends only his own gain’ but is relaxed about his security. The fact that the home trader, in consequence of this risk aversion, benefits home output and employment is the object of the metaphor of an invisible hand (which is all that most economists read from this passage) and which is related to the other fact that the foreign trader is not ‘led by an invisible hand’.

In short, the invisible hand is a metaphor for known behavioural social reactions to signals and it is not a prediction of how markets work to produce harmony or to result necessarily in beneficial results for society as a whole. Call this the neoclassical fallacy.

It seems to me that Lawrance G. Lux is close to understanding Adam Smith’s meaning behind his deployment of the metaphor of an invisible hand.

That some economists have made the metaphor into a theological interpretation of behaviours, that most regard it as somehow miraculous, and many have become immune to appreciate what is clearly staring them in the face, is far more mysterious a contagion of minds of many in our profession.

I remain optimistic that patient explanation will prevail in due course. So, I thank Lawrence for inciting this message on Lost Legacy.


Monday, July 20, 2009

An Innocent Adam Smith Charged Wrongly

Bob Matteson from Bennington posts in the HERE:

Time to shift away from greed”

“The dramatic juxtaposition of huge governmental bailouts and astronomical private bonuses in great financial institutions has highlighted America's over-reliance on speculative money-making, the more, the better, as the major drive wheel of the American economy. Adam Smith's "hidden hand," the supposed working of private greed for public benefit, is being severely challenged

Sorry, but Bob addresses the wrong person with his criticism.

Private greed for public benefit’ is close to its original author’s actual words (which were ‘Private Vice, Public Virtues’) but it wasn’t Adam Smith who penned them. It was Bernard Mandeville in his infamous book (1724), Fable of the Bees'.

Adam Smith regarded Mandeville as ‘licentious’ and his ideas as ‘pernicious’ – see Adam Smith, The Theory of Moral Sentiments, 1759 (TMSVii.4.6: 308).

Adam Smith’s use of the metaphor, ‘an invisible hand’, had nothing to do with ‘greed’ working for ‘public benefit’.

Bob claims that this misattributed notion ‘is being severely challenged’. I should hope so. It was challenged over two-hundred years by Adam Smith, though not I suspect until recently by Bob.

So, not only his Bob accusing an innocent man (Adam Smith) of a heinous offence, he obviously does not know anything about the real perpetrator (Bernard Mandeville) of the original crime. So much for justice, Bennington style!

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From Little Acorns Great Oaks Grow

David R Lawson writes a blog, Ponder Anew 2 ! HERE:

David R. Larson on "The Disappearance of Adam Smith's 'Invisible Hand”, in which he posts an article originally published in Spectrum HERE He quotes from my paper, “Adam Smith and the Invisible Hand: from metaphor to myth”, avaialble HERE:

David's article is sympathetic and interesting. The comments to it are exceptionally helpful for those trying to understand Adam Smith’s use of The Metaphor.


Sunday, July 19, 2009

Liberty and Property Require Civil Society

Thomas Brewton writes in AntiMisandry (‘curing feminist indoctrination’)(?) HERE:

Adam Smith’s Wealth of Nations (published in 1776) demonstrated that wealth and higher standards of living emanated, not from the political state, but from the sum of individuals working in conditions of political liberty, most especially private property rights.”

Adam Smith did no such thing. Thomas Brewton seems to think that a ‘political state’ is separate from the ‘conditions of political liberty’ and the assurance of ‘private property rights’, which is absurd.

Now, of course, the majority of states in the history of the human species did not guarantee political liberty (most do not do so today) and many have a chequered record on guaranteeing private property rights, but you cannot have either condition without a civil society behind them.

And Adam Smith understood and made these points several times Moral Sentiments (1759), Lectures in Jurisprudence (1762-63) and Wealth Of Nations (1776).

In fact he went further in Wealth Of Nations to assure readers that despite his adherence to the principles of liberty, though they were sufficient conditions for prosperity, they were not absolutely necessary, though, of course, they were preferable:

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 œconomy, in some degree, both partial and oppressive. Such a political œconomy, 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: 674)

Living standards and wealth (the annual output of the ‘necessaries, conveniences, and amusements of life’) have ‘prospered’ in many societies that were and are well short of liberty and the sanctity of private property; indeed, some of the worst oppressors and thieves of private property have also been the worst offenders in this regard.

Follow the link if you are curious about the rest of Thomas Brewton’s piece. He is a long-established contributor to the (ultra) conservative US press with strong opinions to match.


A Chicago Version of Adam Smith

Martin Mandelman writes the Mandelman Matters Blog HERE:

17th century economist, Adam Smith, in his treatise “The Wealth of Nations,” based his free market conclusions on the precept that human beings will act in their own self-interest, and by doing so, also be acting in the best interests of the society as a whole. Smith’s famous metaphor, “the invisible hand,” was used to describe the effect of everyone in the marketplace doing what’s best for themselves, and the economic growth that would result. But, time after time, when it comes to investing our own money, we continue to prove that we are flawed beings who are subject to acting out of greed and/or fear, even when it is clearly not in our best interest to do so.

Martin Mandelman has some way to go before he understands much about Adam Smith.

Skipping over the slip about which century Smith lived in – the 18th, not the 17th – and noting that he did not write a ‘Treatise’ (it was getting close to a 1,000 pages, depending on which edition you put on your shelf; reading it is a distinctly minority activity), nor did he hold to a ‘precept’ that “human beings will act in their own self-interest, and by doing so, also be acting in the best interests of the society as a whole” (emphasis added).

“Smith’s famous metaphor, the invisible hand” wasn’t his at all- it was a rather commonplace metaphor from ancient times (Ovid) and increasingly used from Shakespeare’s time (Macbeth), and in Smith's time appeared in numerous published sermons (several dozen authors have been identified), and also featured in several literary works (Daniel Defoe, Voltaire, Bonet, Robinet, Walpole, and Reeve.

Of course, since the 1950s The Metaphor has become ubiquitous, albeit it re-invented by modern economists to mean something quite different from the Adam Smith born in Kirkcaldy in 1723, though it is stubbornly attributed to him.

For Smith the metaphor of the invisible hand, in the only place he used it in Wealth Of Nations, was NOT “used to describe the effect of everyone in the marketplace doing what’s best for themselves, and the economic growth that would result”.

It was about what some, but by no means all, owners of capital did who were risk-averse regarding investing abroad, even in the colonial trade with North America, and therefore preferred to invest locally where they could see the people with whom they did business, and how this added to domestic capital investment, creating local employment and adding to the annual output of the ‘necessaries, conveniences, and amusements of life’.

Of course, without the others who preferred to invest abroad – their profit rates were higher – Britain’s economy would be negatively affected.

Martin gets to the import of his message: “we continue to prove that we are flawed beings who are subject to acting out of greed and/or fear, even when it is clearly not in our best interest to do so”.

Yes, he is in the advice business. But I wonder how good he is if he quotes Adam Smith for support for his message and gets him so wrong?


Saturday, July 18, 2009

Dreaming Can Be Dangerous

Joe Campbell writes an intelligent Blog, 2parse (HERE):

He has hit on something quite important. He has come up against a discontinuity in one of histories certainties: Adam Smith’s ideas, as taught by academia, are quite wrong. There is a lot missing in the modern image of Adam Smith and what he was about.

Smith did not speak of capitalism because the word was not yet invented in English; in 1854 William Thackeray used the word, capitalism, for the first time in English in his novel, The Newcomes (Oxford English Dictionary).

Joe offers his “modest proposal for the day:

Tear down our capitalist system and replace it with a free market.”

“The two terms are usually used synonymously – and I’m sure I am guilty of this myself. But after a long night of fevered dreams about politics and policy … I woke up realizing there is an important difference between the two ideas. (Perhaps as my unconscious mind dredged up some forgotten piece of writing from years ago.)

“The free market is a commonsensical idea – as it is based on the values of competition, individual opportunity, and liberty. Adam Smith (from what I know of him) was only a proponent of this system – which he called “the system of natural liberty” – rather than a proponent of “capitalism” – a term he never actually used. Smith – arguing for this system – argued against government being used to prop up industries or to direct them. What he did not argue for though was “capitalism” as it has been understood for the past century. In many ways, the idea of capitalism evolved to defend our system from Marxist ideas – so it evolved to preserve the status quo rather than to describe an ideal system.

“… Our economic system though was created in an ad-hoc manner – and the ideology which grew up to defend it lacked any clear ideals. So, this ideology was defined then by what it opposed rather than a positive protection of certain principles. Capitalism then means less government interference, less centralized control of the means of production, less regulation. What this capitalism has created though is a rather unfree market – in which a small number of individuals own most of the capital – in which competition is thwarted by monopolistic practices, by bigger and bigger mega-corporations, by regulations proposed by the mega-corporations to keep out competitors, by bailouts.

Our capitalist system is based on valuing capital over labor, of separating mangement and labor from ownership, of limiting the liability of individuals for their actions in corporate environments, of externalizing as much cost as possible to the public commons, of profit over all things. It is hard to see what most of these principles contribute to the creation of a free market. Indeed, many of them undermine it – creating a closed market, profitable only for a princely few who have the capital

Much of Joe’s thinking is well motivated but he is confused because he advocates root and branch transformation in a long-established socio-economic system, and that isn’t going to happen.

The sheer impracticality of it is breathtaking.

What do several billion people do while the transformation is agreed, let alone undertaken, should the very remote possibility of securing agreement happens?

What will those who believe they may lose from the transformation do about what they see as a bleak prospect? Would the political system remain neutral? Who has got the deepest pockets?

For these reasons I think a reminder of Adam Smith’s philosophical stance – do nothing but observe everything – is in order. Start with the stability of the society and propose practical changes that will slowly and gradually take affect without de-stabilising justice and society’s good order. Try to change your corner of the world oveer time but not the whole world in one go.

Also, avoid sleeping on rich food or strong drink, and don’t take seriously anything you remember about ‘a long night of fevered dreams’, no matter who she or he is.

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Adam Smith's Last Testament

Martin Wolf writes (16 July) in The Financial Times’ “Economists' Forum”: HERE:

If the government of the UK wishes to find a suitable motto, it should adopt the advice of a great Scot. “Great Britain should,” wrote Adam Smith in The Wealth of Nations, “…endeavour to accommodate her future views and designs to the real mediocrity of her circumstances.” Smith offers wise counsel. The country’s circumstances are more mediocre than imagined two years ago. The question is how to respond.”

This quotation, from the very last paragraph of Wealth Of Nations, is quoted regularly on Lost Legacy and I am pleased that it has appeared on another Blog (I hope many more will follow too).

However, bear in mind that the paragraph was first published in 1776 and the long history of Britain since that year has been one of studiously and steadfastly ignoring Adam Smith’s 'last testament'.

Wealth Of Nations came out just after the Declaration of Independence by British colonists in North America, 4 July 1776. The British government, wise in their conceit (as Smith called it on another occasion in Moral Sentiments), advised the King to pursue a contest of arms with the distant rebels, some of whom had been trained in arms by his own army, and their leaders had been nourished on British philosophy, which they took seriously.

The seven years war against France had cost £125 million, no mean sum, as had other wars since the late 17th century. The rebellion was likely to cost a great deal too and the stakes were higher – the loss of the British colonies. Smith, typically, saw this prospective loss as an opportunity – to end dreams of empire and its contingent expenses, and its state-sponsored private mercantile monopolies and their protectionist strategies that curbed progress towards opulence by diverting capital away from its natural evolution (the gist of Book IV of Wealth Of Nations).

Well, King George III, flattered into anger with the colonists by the interested factions of monopolistic-minded mercantile privilege, chose ‘no surrender’ to the impertinence of colonial upstarts; offered nothing, and lost everything.

Out of gross folly, great prospects for progress to opulence were possible, but sadly events conspired to cause those who never learn to repeat their follies on a wider stage. Canada, a prize of war, joined other Caribbean islands, the shoddy spoils of mercantile adventurism in India, and the penal colony of New South Wales to presage the new, and greater British Empire.

Even the combined loss and abdication of that empire in mid-20th century, now a Commonwealth, which provided the opportunity for the narrative of adjusting to the “mediocrity of her circumstances”, was fumbled, missed and messed up.

Inheriting a prominent position at the top table – the UN Security Council – by force of arms against the Nazi-Japanese aggression, bolstered by close ties with the 50-odd Commonwealth countries, and playing beautifully the assumed role as a world leader (albeit in the shadow of the USA), though little of substance lies below the surface, has not (yet) forcedd the truth down the throats of those who manage (using the term loosely) the British state.

They won’t let go! That’s the problem: spare us from those imbued with a mission! Adam Smith advised their predecessors of the truth: divert considerable resources of labour and capital into unproductive ends and you hold back those productive ends that promote progress to opulence (metaphorically paid for by those at the lower end of the distribution of the annual produce of the necessities and convenience of life). Bankrupts can't help the poor; but a richer Britain could, both at home and abroad.

But they didn’t listen in the past, and neither are their descendants, yet.

So, let’s repeat Adam Smith’s last testament: Britain should “…endeavour to accommodate her future views and designs to the real mediocrity of her circumstances.”


Friday, July 17, 2009

Two Professors Argue About the Invisible Hand - And Both Get it Wrong too.

Dan Ariely, a behavioral scientist at MIT and the author of Predictably Irrational: The Hidden Forces that Shape Our Decisions, writes in Psychology Today HERE

“Irrationality is the real invisible hand”

Adam Smith first coined the term "The Invisible Hand" in his important book "The Wealth of Nations

[No he didn’t! Smith first used words, ‘invisible hand” once in his essay on the History of Astronomy, began around 1744 and complete before 1758, and used it once again in Moral Sentiments (1759), and once later in Wealth Of Nations (1776).

Smith didn’t ‘coin’ the phrase at all. It was a well-known phrase going back to classical times (Ovid), and was widely used in the 17th and 18th centuries in both religious tracts, sermons and books, and in literary works (Shakespeare, Defoe, Voltaire and others.]

"With this term he was trying to capture the idea that the marketplace would be self-regulating."

[No he wasn’t. He used the term not in his discussion and analysis of markets (Book I and II of Wealth Of Nations), but in a discussion of the choice of export/importing versus investing in domestic businesses (Book IV of Wealth Of Nations on his critique of mercantile political economy). It had nothing to do with ‘regulating’.]

The basic principle of the invisible hand is that though we may be unaware of it, an unseen hand is constantly prodding us along to act in line with what's best for the whole economy. This means that when this invisible hand exists, when we all pursue our own interest, we end up promoting the public good, and often more effectively than if we had actually and directly intended to do so. This is a beautiful idea, but the question of course is how closely it represents reality.”

[If Dan Ariely believes that “The basic principle of the invisible hand” represents reality he is totally mistaken. It was a metaphor Smith used only three times and he never said “that when this invisible hand exists, when we all pursue our own interest, we end up promoting the public good, and often more effectively than if we had actually and directly intended to do so.” That is a modern construction placed on the metaphor and has next to nothing to do Adam Smith].

We are now paying a terrible price for our unblinking faith in the power of the invisible hand.”

[The only ‘terrible price’ is that of embarrassment among those economists who preached the above nonsense about the invisible hand, and, worse, believed that their invented roles for the metaphor were actually written by Adam Smith; they weren’t; and because professors of economics seldom read Adam Smith, except in clipped quotations, they did not realize what they were doing.]

In my mind this experience has taught us that Adam Smith ‘s version of invisible hand does not exist …”

[Simply reading what Adam Smith wrote would have helped Dan and many others from making the mistake of believing what their tutors told them.]

In Adam Smith's world the invisible hand was a wonderful force, and the fact it was invisible made no difference whatsoever.”

[The invisible hand was never in Adam Smith’s world in the form invented in mid-20th century by some economists who created the Chicago version of Adam Smith, while ignoring the Adam Smith born in Kirkcaldy, Scotland in 1723.]

The irrational invisible hand is a different story altogether - here we must identify the ways in which irrationality plays tricks on us and make the invisible hand visible!”

[Yes, Dan has invented yet another version of Adam Smith – utterly ridiculous too – and talks nonsense.]

In the following issue of Psychology Today (HERE)

David Hirshleifer, who holds the Merage Chair in Business Growth and a professor of finance and economics at the Merage School of Business at UC Irvine responds to Dan Airely with this blast (equally wrong but for different reasons):

To Dan Ariely, the invisible hand---the market force that gets people to help others, even when that is no part of their intention---is a pleasant fantasy.”

[Yes it is, but David suffers from the same condition]

The most elegant statement of the idea he's whacking comes from Adam Smith himself:

“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 self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages

[This quotation comes from Book I (chapter 2) of Wealth Of Nations and is often quoted as being about the invisible hand, and usually is mistaken in their interpretation of what it is about. It is really about the bargaining that occurs throughout commercial market economies.

Smith advises you to barter for your dinner by addressing not your own needs, but by addressing the needs of the sellers.]

You can read the rest of Dan’s and David’s articles by following the links. However, you won't learn much about Adam Smith's use of The Metaphor.


Wednesday, July 15, 2009

Another Inaccurate Claim About Adam Smith and Charles Darwin

W.C. Hayward, Editor of the Blog, Undismalization (‘towards a rational, constructive, non-ideological dialogue on economics and pubic policy') HERE
writes (14 July):

The Flaws of Quasi-Darwinist Arguments for a Pure Laissez-Faire System”

“Adam Smith, having published The Theory of Moral Sentiments, in which the theory of “the invisible hand” first appears, precisely a century before Darwin’s Origin of the Species, created a model involving a “selection process” in the realm of commerce that could be said, from an analogous perspective, to anticipate Darwin’s theory of natural selection in the realm of biology.”

“Since Darwin, however, links between laissez-faire and Darwinist thinking have appeared frequently, at least in popular parlance, with the survival-of-the-fittest concept supporting the premise that a pure laissez-faire system is more efficient because it is more natural

Adam Smith did not have a ‘theory of an invisible hand’ in his Moral Sentiments (nor anywhere else). Whether such a non-existent theory by analogy ‘anticipated’ Charles Darwin’s theory of ‘natural selection in the realm of biology’ is also suspect.

As is ‘at least in popular parlance, with the survival-of-the-fittest concept supporting the premise that a pure laissez-faire system is more efficient because it is more natural.”

Natural selection is by definition ‘natural’, but ‘laissez-faire’ is certainly not, at least in the common understanding of being ‘natural’. Laissez-faire is anything but ‘natural’. Like Hobbes’s ‘state of war’ of ‘all against all’, laissez faire has never existed, anywhere on the planet throughout the history of the human race, at least as far as we can judge, even deep into pre-history; it certainly left no traces found by anthropology, so far.

Adam Smith was quite critical of Dr Quesnay , the French economiste, whom he admired so much, on the subject of what is often taken to be about laissez-faire (though Smith, familiar with the term laissez-faire never used the term at all):

Some speculative physicians seem to have imagined that the health of the human body could be preserved only by a certain precise regimen of diet and exercise, of which every, the smallest, violation necessarily occasioned some degree of disease or disorder proportioned to the degree of the violation. Experience, however, would seem to show that the human body frequently preserves, to all appearances at least, the most perfect state of health under a vast variety of different regimens; even under some which are generally believed to be very far from being perfectly wholesome. But the healthful state of the human body, it would seem, contains in itself some unknown principle of preservation, capable either of preventing or of correcting, in many respects, the bad effects even of a very faulty regimen. 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 œconomy, in some degree, both partial and oppressive. Such a political œconomy, 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: 674-5)

What Smith is saying is that an economy can tolerate quite severe distortions in its purity of function without collapsing into disaster and that if a society, as most were and are, was supposed not to prosper unless if enjoyed ‘perfect liberty and perfect justice’ the evidence of the history human societies contradicts the assertion because ‘there is not a nation in the world which could ever have prospered’.

In short, perfect liberty and perfect justice – about as close as we can get to what now passes for laissez-faire – does not support “the premise that a pure laissez-faire system is more efficient because it is more natural”. It isn’t natural; indeed it would be most unusual, even unnatural, should laissez faire be established anywhere and anytime.

Attempts to link laissez-faire to Darwin’s natural selection, of which there has been a spate of them recently, falls at the first essential hurdle of empirical evidence.

The rest of W.C. Hayward’s piece makes an interesting case about the current condition in the USA (follow the link to see how much of it you agree with), but that is separate from his assertions about Darwin’s and Smith’s ideas.

Darwin’s books and notes form a formidable body of evidence for natural selection (he didn’t get everything quite right, but he took major steps forward before the world knew anything about inheritance, genetics and the genome).

Attempts to forge a link with Darwin and Adam Smith on the grounds quoted above ultimately fail because they create so-called analogies with their ideas, mostly fanciful.

There is a connection however; both took an evolutionary approach to change and in a future post I shall discuss the forms that they took.

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Tuesday, July 14, 2009

Too Clever By Half on Smith and Darwin

Nitish Grover (FCA, AICPA Intl Associate) writes (13 July) in the Blog of the Gersham, Lehrman Group (‘Intelligently connecting institutions and expertise’) HERE, a piece on “The Invisible Hand, Trumped by Darwin” in the New York Times (discussed on Lost Legacy yesterday):

Nitish Grover writes a witty (speaking loosely) piece to the theme: “Charles Darwin, Adam Smith, Accounting and Financial Rules”. He gives an 8-step analysis, which is more than tendentious in my view.

1.The invisible hand has always been there in accounting and in the development of financial products.”

Nitish does not explain how ‘an invisible hand’ manifests itself in accountancy (but then Adam Smith only mentioned it once in Wealth Of Nations where it is clearly a metaphor not an actual entity.]

“2. Natural selection (Darwin) speaks of adaptability and change. The invisible hand refers to a population of businessmen doing the right thing for a selfish motive.”

[Hold it! Where does Adam Smith speak of ‘selfish motives’ having anything to do with The Metaphor of ‘an invisible hand’? He does no such thing, which leads me to ask if Nitish has read Wealth Of Nations or has relied merely on a summary of modern interpretations, plus a couple of Hollywood films (‘Wall Street’, ‘Beautiful Mind’, and perhaps those scriptwriters influenced by Ayn Rand).

The traders mentioned in connection with The Metaphor were those who were risk averse to sending their capital across to the British colonies in North America (the Atlantic was dangerous to small ships, the people they dealt with in the colonies were not known to them, the local courts were an unknown element, though based on British Law, and their goods were out of their sight). Consequently, they preferred to invest locally, which on the arithmetic of the whole is the sum of its parts, each risk averse trade increased local investment larger than it would be if these traders joined the non-risk averse traders who did business in the colonies. How is risk-averse behaviour ‘selfish’?]

3. While the invisible hand and the selfish motive are driven by greed the process of natural selection is slower and driven by the environment.”

[It gets worse! Now they are driven by ‘greed’. Nitish confuses Adam Smith with Bernard Mandeville (1724) and the ‘Fable of the Bees’, a common enough misattribution to Smith who regarded Mandeville as ‘licentious) (see his Moral Sentiments, 1759). Nobody who reads Wealth Of Nations would make that elementary mistake.]

4. While the invisible hand has a short term perspective the natural selection is more strategy driven.”

[The Metaphor has no perspective at all – it's imaginary, not real. Darwin did not instill ‘strategy’ into natural selection; individual adaptations can develop to a series of short-term events – a regular food declines, alternatives are tried by some individuals, some new habits become more regular, which may solve one problem – survival – but may induce others that become terminal. Natural selection works on the individual and does not have foresight, nor does it always and inevitably ‘progress’ (former sea creatures can evolve into land creatures, and much later return to the sea).

Hominids that failed to adapt to the growing nutrition needs of a growing brain, remained with smaller brains, lived for a million years or more as a species and then died out as the environment changed or bigger brained hominids out competed them. Has Nitish actually read Darwin? Does he understand Darwin’s theory of natural selection? He hasn’t read Smith and I suspect he hasn’t read Darwin either.]

5. Accounting standards have evolved more over a period of natural selection and due process (Darwin).

[Economic behaviour has also evolved over long periods. Exchange behaviours did not suddenly turn into bargaining behaviour. They went through a series of changes from ‘gift behaviour’, through voluntary reciprocation (the ‘quasi-bargain’), reciprocation enforced by sanctions, to bargaining proper (‘If you give me X then I will give you ‘Y’ – or the simultaneous exchange). This process is no different than that of ‘accounting standards’, except that the evolution of bargaining took much longer, measured in millions of years, not just millennia – has Nitish ever read any anthropology?]

Nitish's items 6 thru 7 and 8 are meaningless. I said his article was ‘witty’ but perhaps it was more ‘clever’ than witty, but its cleverness was more entertaining than instructive.

[Disclaimer: the Gersham, Lehrman Group disclaim any responsibility for the contents of its authors' articles]

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Monday, July 13, 2009

Was Adam Smith Trumped by Charles Darwin?

Thomas McQuade writes (12 July) in Think Markets (‘A blog of the NYU Colloquium on Market Institutions and Economic Processes’) HERE:

Frank and Stein

In a recent opinion piece in The New York Times (“The Invisible Hand, Trumped by Darwin?”), Robert H. Frank proposes that Charles Darwin, not Adam Smith, should be seen as the real intellectual founder of the discipline of economics. He claims that Smith’s most famous idea – that the competitive pursuit of individual self-interest can redound to social good – is but a special case of Darwin’s more general picture of competition in which individual benefit sometimes does, but often does not, benefit the larger group. The sort of competition for which the invisible hand does not work well is, he says, where the competition is for relative gain, i.e., when the rewards depend on relative performance, and people gain by bettering each other rather than by bettering nature.

The problem with Frank’s argument is his careless deployment of the analogy between human beings interacting in a highly structured social environment and animals in general interacting in an environment of considerably less social complexity. He is ignoring the effects of human institutions in constraining self-interested behavior. And compounding the error, he appears unable to distinguish between those institutions which provide constraining feedback and those which undermine and deflect such feedback.

The economic problem at hand is not, as Frank characterizes it, competition based on relative performance versus competition based on absolute performance. It is competition constrained by negative feedback versus competition freed from normal constraints. Successful social institutions, as well as providing positive incentives for personal gain, incorporate negative incentives for straying very far from conventional expectations. The interplay between these opposing forces can make for stable growth of the societal activity in question. It is the reason why science has been such a spectacularly successful social enterprise, and why markets, despite being set about by all sorts of monetary and regulatory interventions which weaken the feedback, have greatly increased human wellbeing.

Frank points to “the recent economic wreckage”, an instance of what can happen when “greedy people trade for their own advantage in unfettered private markets”, as evidence for his contention. Unfettered markets, if they existed, could certainly display greed, herding behavior and other “inefficiencies.

Adam Smith’s contention was that the pursuit of self-interest, constrained by appropriate social institutions, would be much more effective at producing societal wellbeing than actions which purported to aim at that wellbeing directly. And “appropriate” does not involve the overriding of constraining incentives. That is why so much of The Wealth of Nations is taken up with analysis and criticism of the social institutions of Smith’s day. Frank predicts that, 100 years from now, economists will point to Darwin as the owner of the shoulders they are standing on, not Smith. Let me make a competing prediction: that 100 years from now economists will look back and wonder how so many of their predecessors could have been so superficial in their appreciation of Adam Smith and, as a result, could have so completely misunderstood the economic events they lived through

I think Thomas McQuade is closer to the truth than Robert H. Frank. In this month of celebration of Charles Darwin’s Origin of Species (1859), it is natural that writers look for new angles on both Adam Smith and Charles Darwin would compare with the banking crisis uppermost in our minds.

Robert Frank chooses to pit Darwin against Smith (albeit that Frank’s is a version of the Chicago Adam Smith rather than the Adam Smith born in Kirkcaldy in 1723). Even Frank’s contest for the supposed title of ‘the real intellectual founder of the discipline of economics’ is quite spurious (Smith was awarded the title today by others and with the supposed prestige of ‘inventing capitalism’ and or of being the ‘high priest of capitalism’, or similar hierarchical nonsense).

Frank writes: “Smith is celebrated for his “invisible hand” theory, which holds that when greedy people trade for their own advantage in unfettered private markets, they will often be led, as if by an invisible hand, to produce the greatest good for all. The invisible hand remains a powerful narrative, but after the recent economic wreckage, skepticism about it has grown. My prediction is that it will eventually be supplanted by a version of Darwin’s more general narrative — one that grants the invisible hand its due, but also strips it of the sweeping powers that many now ascribe to it.” (New York Times: HERE)

Smith is ‘celebrated’ by Frank for the invented reasons of modern economists (post-war in the late 1940s), not for what Smith actually wrote in Wealth Of Nations or Moral Sentiments. Smith never alluded to ‘selfish reasons’ and ‘greed’ (that was Bernard Mandeville, whom Smith described as ‘licentious’ in Moral Sentiments. Smith was made into a cartoon image by Hollywood script writers (‘Wall Street’ and ‘Beautiful Mind’). He certainly never claimed that “greedy people” will “often be led, as if by an invisible hand, to produce the greatest good for all” and it belittles Frank's credibility for him to claim that he did.

With such glaring errors about Smith, Frank's claims for Darwin are immediately suspect.

The central theme of Darwin’s narrative was that competition favors traits and behavior according to how they affect the success of individuals, not species or other groups. As in Smith’s account, traits that enhance individual fitness sometimes promote group interests. For example, a mutation for keener eyesight in hawks benefits not only any individual hawk that bears it, but also makes hawks more likely to prosper as a species.”

At least Frank gets Darwin right. Of elks, Frank writes: “For instance, a mutation for larger antlers served the reproductive interests of an individual male elk, because it helped him prevail in battles with other males for access to mates. But as this mutation spread, it started an arms race that made life more hazardous for male elk over all. The antlers of male elk can now span five feet or more. And despite their utility in battle, they often become a fatal handicap when predators pursue males into dense woods.”

But is this not the same with Smithian competition? An individual exploits a handy source of raw materials, disregards the environmental damage, and enjoys prosperity for a while. He runs out of the resource, or the owners of the resource site impose heavy taxes, or take the resource over and run it themselves. Local maxima need not be higher than competitive maxima.

Frank: “Ideas have consequences. The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all. If, as Darwin suggested, many important aspects of life are graded on the curve, his insights may help us avoid stumbling down that grim path once again.

The competitive forces that mold business behavior are like the forces of natural selection that molded elk. In each case, we see instances of socially benign conduct. But in neither can we safely presume that individual and social interests coincide

Frank notes that the “uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts”, but which ‘disciples’ is he talking about? (Note the religious overtones of ‘disciples’).

The Kirkcaldy Adam Smith was quite clear on the need for regulations (or ‘police’ as they were called then) where ‘merchants and manufacturers’ misbehaved (see Smith’s discussion on regulating banks to curb the behaviours of ‘bold projectors’, WN II.ii.56-7: 304).

His reputation as a believer in ‘laissez-faire’ ideology is undeserved (he never used the words ‘laissez-faire’). Smith was no extreme ‘libertarian’, but he believed firnly in Liberty, tempered by the negative virtue of Justice, without which society would ‘crumble to atoms’; TMS II.3.4: 86).

How much of Adam Smith has Robert Frank actually read recently? He is, after all, an economist at Cornell, and a visiting faculty member at the Stern School of Business at New York University.

Frank adds: “The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all.

I would agree, but the ‘invisible hand’ celebrated by modern economists, many of them proud to wear the title of ‘disciple’ of the Chicago Adam Smith, is actually a crown of thorns: he never had a ‘theory’, a ‘concept’, a ‘doctrine, or a ‘paradigm’ of ‘an invisible hand’ (fir him it was a mere metaphor), and while such people, and the people they influence (for good money), parade their version of it to limit some regulations, they also have used their influence to continue the mercantile regulations, which Smith railed against in the 18th century, and which blight modern economies through various forms of protectionism and tariff policies, and they lower world living standards both at home and abroad, particularly in poorer countries.

Thomas McQuade ends his review of Frank’s article with a a comment on Frank's prediction that:

100 years from now, economists will point to Darwin as the owner of the shoulders they are standing on, not Smith. Let me [Thomas McQuade] make a competing prediction: that 100 years from now economists will look back and wonder how so many of their predecessors could have been so superficial in their appreciation of Adam Smith and, as a result, could have so completely misunderstood the economic events they lived through.”

I completely agree with Thomas McQuade and give a thumbs down for Robert Frank.

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Saturday, July 11, 2009

A Bit of 'Calvinist' Nonsense - Surely Not Serious?

Peter Thompson writes in Comment is Free, The Guardian, UK HERE:

Calvin, Weber and the vanishing mediator - The question: Why won't Calvin die?

The purposeful order of the world in natural law is the religious equivalent of Adam Smith's doctrine of the invisible hand.”

Now we have: “Adam Smith's doctrine of the invisible hand”! What doctrine?
Where is it spelled out as a ‘doctrine’?

Should we take Peter Thompson seriously?

He finds a Calvinist explanation among the Chinese Communist Part leaders who ordered the Tiananmen Square massacre, and writes: “The future of British capitalism was made safe by Cromwellism and its defeat of Catholicism …”.

Perhaps there is an affinity between Thompson and the interpretation of a metaphor as a Panglossian explantion of everything resulting from all behaviours (odious as well as sublime) that result in the best of all possible worlds whatever evil has caused them. This is truly extreme neoclassical exculpation of all and any behaviours of states or businesses.

Monopolists, protectionists, slave drivers, polluters, ands their ilk are part of a Calvinist providential plan to create God's heaven on Earth! Is there no end to superstitious credulity?

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Adam Smith Did Not Make Predictions

The Daily Reckoning HERE: carries an post, “Bubble Deniers”, by Bill Bonner, co-author of three New York Times best-selling books, Financial Reckoning Day, Empire of Debt, and Mobs, Messiahs and Markets:

Long gone are the days when economists thought deeply about how life actually works. Adam Smith, Adam Ferguson, Anne-Robert Turgot - the great “moral philosophers” - all died hundreds of years ago. Since then, the trade has gone bad. They’re all numbers guys now. An economist, of the modern variety, is a statistician…an extrapolator…and a mountebank.* If numbers go up two months in a row, he predicts they will go up another one. He rarely stops to ask whether his numbers really make any sense. Instead, he merely adds them up and rolls them out. Thus - at the bubbly top in 2006 - he was he able to describe the likelihood of default on a certain derivative instrument as a “Six Sigma event” without laughing. A Six Sigma event happens once every 2,500,000 days. Then again, when the Bubble of 2002-2007 popped, they happened once a week.

The blogs are full of chatter on the subject. What good is the economics profession, asks Paul Samuelson, if it cannot foresee the biggest single economic event in at least a quarter-century?

I agree with the broad sentiments of Bill Bonner with a few caveats.

There are an enormous number of economists working today and it is more than likely that some of them did warn about the pending bubbles before ‘sub-prime’ entered financial discourse. Popular books of the pending stock market crash, like a stopped clock are likely to be right at sometime.

Paul Samuelson, characteristically, hits the nail on the head: why did the economics profession fail to “foresee the biggest single economic event in at least a quarter-century?”

Partly, the answer is that large as it is, economists are not members of a unified science. Many economists focus solely upon in-doors experiments, with real people, or imaginary experiments with equations.

Some do not look out of their windows at all and in fact have been carefully groomed not to do so; most do not look over-the-fence at what closely aligned disciplines are doing or have done (think of sociology, psychology, anthropology and, above all, history), and they suffer promotion-withholding disdain from colleagues if they do so, and are disregarded by the sniffy-nosed severity of those who form tenure committees that pass over anyone showing evidence of a lack of disciplinary-defined gravitas.

For those who master the black arts of econometrics, only as good as the data they sometimes painfully collect, or the harder tests of stratospherically higher mathematics and their fateful misunderstandings of the real world, despite their mastery of their imaginary worlds without humans in them, the result is largely the same - neither the colourful future they arrogantly believe they see (with pay-cheques to match) nor the black-and-white past they virtually invent are connected to the real world.

Prediction in modern economics is the Holy Grail (more like the Devil’s Jest). Adam Smith avoided making predictions; he observed, as was the rightful duty of a moral philosopher, and reported to all who would read his books. He stuck to the humble arts of an influencer; he was not a man hawking a career-winning system.

He held on to humble hopes that legislators and those who influenced them would think about his observations and, slowly and gradually, they might adopt measures to change some of their and their predecessors’ behaviours a step at a time.

His sense of history (surely the great laboratory of human experience), based on a remarkable understanding of the whole range of human behaviours across and at all levels of society throughout history and the present, lowered his expectations as to what was tolerable by ‘so weak and imperfect a creature as man’, contrasted with what was possible if the world perfectly conformed to utopian imaginations, where the people in it behaved impeccably as ‘rational maximisers’ in the manner the out-of-touch theorists believed they would (give-or-take a few heroic, not to say fool-hardy, assumptions). Ironically, Smith is described today as such a philosoper in the image of today's 'rational maximisers!

Readers perplexed by the crisis should consult ‘The Recession: causes and cures’ (2009) by David Simpson, a classical economist. It is available from the Adam Smith Institute:

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Friday, July 10, 2009

New Book On Smith by Ryan Hanley

James Otteson, professor of philosophy and economics at Yeshiva University in New York, writes (9 July) in his personal Blog, James R. Otteson, PHD HERE:

This Just In: An Excellent New Book on Adam Smith”

"I just received my advance copy of Ryan Patrick Hanley's excellent new Adam Smith and the Character of Virtue . I know it's excellent because I had an opportunity to read it in manuscript. In fact, the back cover of the dust jacket leads off with a blurb from me, which reads, in part, that Hanley's book is "one of the most important books on Smith in more than a decade

Believe me, praise like that does not come easily from me. Everyone interested in Smith scholarship should read the book.”

I have had the pleasure of listening to a couple of lectures by Ryan Hanley on themes from Smith's Moral Sentiments. He is an authority and a very clear one at that. And Jim Otteson is a good judge of Smithian scholarship too.

Some people obfuscate Smith’s remarkably clear Moral Sentiments behind a veil of deep philosophical jargon, but Ryan is not one of them. He speaks at a brisk, but clear, pace, adding in short quotes from Moral Sentiments or pithy references, always with a page number attached from his memory. It is a performance to watch and listen to and audience members to whom I have spoken all remark on his high quality and authority which is a pleasure to listen to and learn from.

My order for his book will be in the post as soon as an address is available. I recommend that yours is too.

NB: I do not agree with all of Ryan’s conclusions about all aspects of his presentation of Smith’s ideas. Heaven forbid – we are good-natured scholars and I recognise polished talent when I come across it – so read and learn!

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Interesting Reading List and a Surprising Exclusion

Mark Blyth, Professor of International Political Economy
at Brown University writes in Chicobilly and Other Stories HERE:


Summary -- An annotated Foreign Affairs syllabus on states and markets.

“As governments around the world have responded to the global economic crisis, questions about the appropriate relationships between states and markets are once again a matter of intense public and policy debate. As the discussion proceeds, the subject's long history is worth bearing in mind. The canonical authors one might think to start with --Adam Smith and Karl Marx -- are not actually all that helpful. Smith's writings on the state should be read against his indictment of the mercantilist system, not in relation to the modern world, and Marx's writings on the state, despite some notable epigrams, are also not particularly relevant to the contemporary era

Smith's writings on the state should be read against his indictment of the mercantilist system, not in relation to the modern world” is almost correct in so far as it rises beyond the modern (pathetic) assertion that because Adam Smith was severely critical of how 16-18th century government interventions that imposed mercantile policies on behalf of small private monopolies (originally with the best of intentions but soon corrupted by their anti-competitive behaviours), it followed, argued the epigones, that all state interventions were bad, for which they claimed Adam Smith said so. He didn't.

Hence, the myth of the ‘night-watchman state’ became a shibboleth of modern proponents of modern laissez-faire economics.

Ironically, the actual phrase, ‘night watchman state’, indulged in by some over-enthusiastic propagandists of what they call laissez-faire, was a popular utterance of the 19th-century firebrand socialist, Ferdinand Lasselle, when mocking market-minded politicians for not establishing the strongest possible (socialist) state imaginable.

A reading of Wealth Of Nations (Books II, IV and V) shows that Smith's, often biting, criticisms of mercantile state policies did not preclude appropriate roles for a state (predicated on Liberty and Justice), or, as we might put it, ‘markets where possible, state interventions where necessary’).

Follow the link to read Mark Blyth’s recommended reading list – not quite what I would have selected. Also, given that the mercantile state is still with us in many respects, I would think Wealth Of Nations would be an admirable choice too.


Thursday, July 09, 2009

Deception About Adam Smith

Marivic Butod writes in Thinking Made Easy (it seems to be an essay supplier for Asian students) HERE: “International Business”

“The market economy seems a very effective type of economy as it offers economic freedom, and limited government intervention in terms of trade. It has been reported that it follows theory of Adam Smith, that of the free market economy, where the allocation of resources is determined by the ‘invisible hand’ of the price mechanism, and is commonly associated with capitalism

If this is typical of the quality of Thinking Made Easy essays, I despair for the thousands of Asian students who are indoctrinated with extravagant myths that Adam Smith said anything like “the allocation of resources is determined by the ‘invisible hand’ of the price mechanism”.

I offer Marivic Butod a thousand dollars if he can cite from Smith’s Wealth Of Nations 1976, or Moral Sentiments 1982, any sentence that Smith wrote in the Glasgow Edition (published by Oxford University Press), where Smith makes such a statement as the ‘invisible hand of the price mechanism’.

That, of course, excludes secondary sources by modern economists who make similar assertions about Smith to Marvic Butod's. Like Marivic Butod, they haven’t read either Wealth Of Nations or Moral Sentiments.

Of course, thinking is made easy if you can just make it up, charge for it, and nobody is the wiser among innocent customers. Caveat Emptor.


Adam Smith on the Role of Labour

John Michael Greer writes the Archdruid Report HERE: on ‘The Wealth of Nature’ (8 July):

Adam Smith, who set the whole ball rolling with his The Wealth of Nations, started that book with the following sentence: “The annual labor of every nation is the fund which originally supplies it with all the necessities and conveniences of life.” It does not seem to have occurred to Smith that the annual labor of a nation would be utterly useless without the natural raw materials, goods, and services – in the language suggested in last week’s post, the primary goods – that enable labor to be done at all, by making human life possible in the first place and by providing all that labor with something to labor on. Certainly it has occurred to very few of his successors.”

As is not uncommon, John has only quoted part of Smith’s sentence from Wealth Of Nations, which gives a misleading impression of Smith’s meaning; Here are the full sentences:

The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.
According therefore, as this produce, or what is purchased with it, bears a greater or smaller proportion to the number of those who are to consume it, the nation will be better or worse supplied with all the necessaries and conveniencies for which it has occasion
.” (WN introduction, 1-2: 12)

John’s zeal to promote his environmental theory to his readers distorts Adam Smith’s legacy to help John to make his case that nature is the true wealth of nations. I shall not argue with John over his theory; I shall explain Smith’s meaning in his full sentences.

In ‘rude’ society – wandering bands of gatherer–scavengers (long before big-game hunting was practised) – with all of nature in its ‘pristine’ condition, hominines and humans still had to labour to acquire the bounties of nature. Apples did not just fall of trees into the mouths of indolent humans, nor did berries and plants make their way to the stomachs of those dependent on what they could find the eat by walking to, searching around, and the plucking of food, which even among the most abundant of sources, still required effort.

As always, labour was divided unequally even in the egalitarian societies of these small (in number) wandering human bands: females fed themselves and their children; males fed themselves. This longstanding arrangement (shared by our primates cousins) gradually faded as habits changed from the growing importance of brain changes (in both sexes) and opportunist scavenging gave way to determined searching for scavenged leftovers and, millennia later, to deliberate hunting of bigger game.

All this labour was aimed at acquiring the ‘necessaries and conveniences of life’. These very necessities and conveniences were products of nature, and rightly revered by John, but none of them would be of significance to human beings (or, indeed, to animals and living things generally) without the intervention of some forms of energy by agents wishing to utilize them.

Directed energy to some end is embodied in Smith’s use of the term, ‘labour’. By the mid-18th century, Britain was fairly well institutionalised to procure and distribute not only the bounties of nature, but also the fruits of human labour, which by then was hardly a relatively passive stroll in Eden’s mythical garden (which, if you read Genesis carefully, you will find God insisted Adam and Eve worked in the Garden before the ‘fall').

Moreover, in the 18th century there were now many millions (tens of millions including China) of humans on the planet, engaged in various forms of labour from, gathering-hunting tribes across large swathes of the Earth, through shepherding societies in central Asia, and farming societies across Europe, India, China, and Central America, until (‘at last’) the appearance of commercial societies in Western Europe.

Hence, Adam Smith’s introductory two paragraphs graphically illustrate the human differences in their societies, across all the ranges of their organisations, technologies, technical cultures and life-styles, characterised by their labour applied to their environments.

John asserts that it “does not seem to have occurred to Smith that the annual labor of a nation would be utterly useless without the natural raw materials, goods, and service … that enable labor to be done at all, by making human life possible in the first place and by providing all that labor with something to labor on.” Nature was left completely alone through billions of years without human labour manifesting itself. It will no doubt go on for billions of years after humankind is extinct.

To say that Adam Smith ‘set the whole ball rolling’ with Wealth Of Nations is absurd. If he had never lived, or had been lost in obscurity, the impact of human labour on the environment, for good or ill, would have continued to happen in Smith’s times, as had happened in past millennia, and will continue in future millennia.

Adam Smith was a moral philosopher, who observed from whence human society had emerged (‘rude society’) and the significance of its recent history, especially from the Fall of Rome. He prescribed no bold plans (he was not ‘a man of system’), and nor was he an ideologue. He reported on what he observed for readers to make what they wanted of his books.

Which of course, is what John has done, though it would be better if he reflected first on what Smith actually said rather than assert about what did or did “not seem to have occurred to Smith”.


Tuesday, July 07, 2009

From the Department of Thinking Aloud.

Sitting on 1,950 posts since Lost Legacy started in February 2005, I wonder sometimes where the Blog is going.

Is it a one-way street? On occasion we attract comments from some readers; mostly we don't, though, to be fair, I often get comments direct to my address, almost all of which are interesting and constructive, or asking for copies my papers.

I am about to start on my third book on Adam Smith, but I haven't started looking for a publisher, or even done more than sketched out a few themes, though what is there looks solid and worthwhile.

My paper on 'The Hidden Adam Smith in his Alleged Religiosity', presented in the University of Richmond (Virginia) and the University of Colorado in Denver in June, appears to have been well received (OK, a few colleagues had reservations), and I have been encouraged to write it as a possible journal article.

I am also about the complete my response to Dan Kline's critique of my paper on 'Adam Smith and the Invisible Hand: from metaphor to myth', which appeared in the May 2009 issue of Econ Journal Watch (for the Sepember issue).

This is quite a lot of academic, rather than merely polemical, work, which is prominent presently in Lost Legacy.

Which should get most of my attention? That's my dilemma.

I don't need to focus more on more serious academic work on Adam Smith for career reasons - I am retired and therefore don't need recognition for promotion or 'tenure' reasons, the latter of which I regard as a pernicious job-protection scheme, though it started in the UK to protect non-conformist academics from the prejudices of the dominating established Churches of England and Scotland, but which long ago lost its way as well as it original reason.

How true, much like mercantile political economy started in England as a crude form of commerical development and soon degenerated into the creation of monopolies and protection schemes against the interests of unimpowered consumers.

I want to continue researching but with no particular purpose in mind, other than it interests me; I want to continue Lost Legacy because I feel the injustice of our discipline to Adam Smith's legacy and angry that many colleagues just look the other way, though they do, as they should, know better.

I would be grateful for any advice from readers, either as comments on Lost Legacy or in correspondence to the address on the Blog's mast head.

Monday, July 06, 2009

Amartya Sen: Exponent of Adam Smith's True Legacy

An editorial in the Times of India is worth reading in full ">HERE:

“In an article, 'Capitalism beyond the Crisis', Amartya Sen has argued that the present economic crisis demands a new understanding of older ideas, such as those of Adam Smith and Arthur Cecil Pigou. He draws attention to the fact that, while Smith showed the market economy's usefulness, his analysis went beyond leaving everything to the market's invisible hand. He viewed the usefulness of capital and markets within their own sphere and at the same time saw, contrary to the popular perception, the need for other institutions, such as sound mechanisms for financial regulations. He was aware, for example, of the need for state regulation to protect citizens from what he called "prodigals and projectors" who took excessive risks in their pursuit of profit.”

Amartya Sen is always worth reading and I recommend that you follow the link and see how Sen develops his argument by bringing Max Weber into play:

In the last pages of The Protestant Ethic, he notes: "The idea of duty in one's calling prowls about in our lives like the ghost of dead religious beliefs." He adds: "In the field of its highest development, in the United States, the pursuit of wealth, stripped of its religious and ethical meaning, tends to become associated with truly mundane passions, which often actually gives it the character of sport."

Sen writes with surprising agility and deep commitment to social changes within markets where possible and with public funding where necessary.

There is no call to protect Adam Smith’s legacy from economists like Amartya Sen. He embodies Smith’s true legacy in everything he writes.


Saturday, July 04, 2009

Mythical Basis for a Theory

Linda Naiman writes at the Creativity at Work Blog HERE:

Taking Responsibility for the Whole

Built into the concept of capitalism and free enterprise from the beginning was the assumption that the actions of many units of individual enterprise, responding to market forces and guided by the ‘invisible hand’ of Adam Smith, would somehow add up to desirable outcomes.

“But in the last decade of the twentieth century, It has become clear that the ‘invisible hand’ is faltering. It depended upon a consensus of overarching meanings and values that is no longer present. So business has to adopt a tradition it has never had throughout the entire history of capitalism: to share responsibility for the whole. Every decision that is made, every action that is taken, must be viewed in the light of that kind of responsibility

The “assumption” that market forces were “guided by the ‘invisible hand’ of Adam Smith” add up “to desirable outcomes” was not “built into the concept of capitalism and free enterprise from the beginning”.

That is a modern myth spread widely and repeatedly from the 1950s by modern economists (though it was earlier taught in the Chicago oral tradition from the 1930s). It was backdated to Adam Smith to give the myth high-level approval, as if he had made the metaphor of ‘an invisible hand’ a central theorem of his analysis of 18th century commercial markets (he never knew of ‘capitalism’, a word invented in English for the first time in 1854 – see Oxford English Dictionary).

Smith used the metaphor of ‘an invisible hand’ only three times in nearly a million words: once only in his Essay on Astronomy, written from 1744 to 1758, unpublished in his lifetime and published posthumously in 1795; once in Moral Sentiments, 1759; and once in Wealth Of Nations, 1776.

In no sense was the metaphor about “responding to market forces and guided by the ‘invisible hand”. In fact Smith discussed how markets worked in Books I and II in Wealth Of Nations without any mention of ‘an invisible hand’. That he is alleged to have done so is a myth – a sort of ‘academic campus myth’ like those ‘urban myths’ we hear so much about.

Modern economists blessed their mathematical models of general equilibrium with quasi-miraculous foundations and it was used also to proclaim the self-evident superiority of capitalist institutions and markets over the then prevailing counter-claims of the centralized planned economies of communist rivals.

Modern economists ‘over egged the pudding’, as we say in English. Markets are superior in most cases to non-market institutions and do not need the imaginary aid of so-called invisible hands, and certainly not associated with Adam Smith's isolated use of the metaphor, a wholly innocent victim of the purloining of his legacy.

That there may be a role for regulation, made on a case-by-case basis and not as a catch-all cop out, is quite consistent with Adam Smith’s moral philosophy and political economy.

Smith was NOT opposed on principle to intervention in some markets; his outright opposition to the forms of government inspired interventions from the 16th century in Britain through policies which he described as ‘mercantile political economy’ (many features of which remain active today) should not be taken as evidence for his general views on the levels of government promoted interventions.

Smith in Wealth Of Nations identified several important areas for government intervention – such as in banking regulations (even if it was contrary to his principles of ‘natural liberty’ when the security of people was at stake) - and in weights, measures, quality of cloths, gold and silver, the Mint, and post offices. He advocated public funding of in ‘public works’ (roads, bridges, canals, harbours, town cleanliness, and pavements) and in public institutions (education and aspects of health). He also advocated the separation of church and state.

His general policy is best summed as ‘markets where possible’ (operating under the justice system - an independent judiciary, Habeas Corpus, and trial by juries) and ‘public works where necessary’. Which is a far cry from the so-called ‘night watchman state’ (actually an idea of Ferdinand Lassell’s, the firebrand 19th century socialist, not Adam Smith’s).

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