Wednesday, March 31, 2010

Somewhat of an Exaggeration

Charles Rowley on his Blog HERE on Laissez-Faire

“Laissez-faire, a French term that translates loosely as ‘let things alone’, originated in the eighteenth century with a school of French economists known as the Physiocrats, who opposed trade restrictions that supported mercantilism. Adam Smith popularized the term and gave it added influence in his 1776 book, The Wealth of Nations. Smith argued that a nation’s well-being and economic progress are assured when individuals are free to apply their capital and labor, without state intervention, in a competitive market economy. He outlined how the self-interested activities of individuals promotes the general welfare under such conditions. The doctrine of laissez-faire thus involves not only a policy implication of non-intervention by the state, but also a positive philosophy that recognizes a natural harmony between individual and social interests.”

Adam Smith did not advocate laissez-faire – he never used the term. This crept into economic discourse not via Adam Smith’s Wealth Of Nations, but in the 19th Century the terms was popularised J. S. Mill, The Economist, the Manchester School, and others.

It may be that “Great Britain epitomized the system of laissez-faire capitalism” by repute, but not in substance. The 19th century also saw a vast extension state-power in burgeoning military budgets for colonialism, some expensive wars, education, municipal local government, and infrastructure.

The narrative of “how the self-interested activities of individuals promotes the general welfare under such conditions” gained traction from modern economists anxious to show the superiority of market economies over socialist planning from the 1950s. Beyond a single example given in Wealth Of Nations (WN IV.ii.9: 456) - which was not a general statement, but about some risk-averse merchants, whether self-interest led to public benefits was an open question. Indeed, Smith gives over 70 examples in Books I, II, and III, of self-interested actions that had the opposite effect on public benefits.

Laissez-faire was an ideology, not found in practice nor connected to any ‘golden age’.

This blog has moved

This blog is now located at
You will be automatically redirected in 30 seconds or you may click here.

For feed subscribers, please update your feed subscriptions to

Could Be a Good Sign

Announcing a book on by Karl Sigmund HERE

l"The Calculus of Selfishness" (Princeton University Press, 2010)

“How does cooperation emerge among selfish individuals? When do people share resources, punish those they consider unfair, and engage in joint enterprises? These questions fascinate philosophers, biologists, and economists alike, for the "invisible hand" that should turn selfish efforts into public benefit is not always at work.

The Calculus of Selfishness looks at social dilemmas where cooperative motivations are subverted and self-interest becomes self-defeating. Karl Sigmund, a pioneer in evolutionary game theory, uses simple and well-known game theory models to examine the foundations of collective action and the effects of reciprocity and reputation. Focusing on some of the best-known social and economic experiments, including games such as the Prisoner's Dilemma, Trust, Ultimatum, Snowdrift, and Public Good, Sigmund explores the conditions leading to cooperative strategies.

His approach is based on evolutionary game dynamics, applied to deterministic and probabilistic models of economic interactions. Exploring basic strategic interactions among individuals guided by self-interest and caught in social traps, The Calculus of Selfishness analyzes to what extent one key facet of human nature--selfishness--can lead to cooperation


Looks interesting. Appears to test the modern economists’ version of the invisible hand’. Grown up too. Doesn’t link the modern notion to Adam Smith. That’s better. Long may they keep it that way.

Why? Because Karl Sigmund has to justify the modern version version of the metaphor on modern terms and is not giving its notions unwarranted credibility by ascribing his ideas to Adam Smith.

Progress Report

Job done, at least the revision part.

I refer to the revised text for my paperback edition of Adam Smith: a moral philosopher and his political economy (Palgrave).

Biggest change is to the invisible hand chapter 12, which brings up to date my critique of the modern consensus among economists which attributes this metaphor to the market (usually associated with adjectives like 'miraculous' or 'mystical', with theological versions attributed to god, and all linked to a supposed idea that it leads 'selfish' individuals to pursue their self-interest/selfish desires that somehow works out to the public benefit.

Following debates with various scholars since 2008 I have revised and added to my case. I presented the gist of the hardback version to the History of Economic Societies conference, first in George Mason University (Fairfax VA) in 2007 and in History of Economic Thought conference in Edinburgh, Scotland, 2008, to luke-warm receptions in the main. Several scholars did give useful comments as well and others remain friendly but sceptical. Some have remained critical ever since of course. The paperback brings the arguments for and against up to date.

To this work for the book, I have added papers, two published in Econ Journal Watch, May and September 2009 (debating with Daniel Klein) and one soon to be sent for publication on the interesting 'centrality hypothesis' by Daniel Klein. My paper on the role of Paul Samuelson in developing the modern consensus on the modern version of the meaning of the invisible hand, unfortunately heavily linked to Adam Smith, is near completion, and I am modestly pleased with it. I shall circulate it to colleagues in April for their comments. I hope to have it published in a journal.

I have gone beyond criticising the misattribution of the metaphor as Smith's 'greatest idea', etc., to exploring a) what it actually meant for Smith, and b) the sloppy (there may be a more polite word for what happened but I cannot honestly think of one) derivation in modern economics of what it allegedly implied and what is taught on campuses to innocent students who are unlikely to check for themselves.

This boils down to my explanation (a) of what Adam Smith taught and contrasting it with (b) what modern economists have imputed, raising the question: 'how did you derive (b) from (a)?.

It's a fair challenge.

Labels: ,

Monday, March 29, 2010

High Quality Letter in the FT

Raymond S. Franklin,
Queens College,
City University of New York writes to the Financial Times (29 March) HERE

"Self-interest motive has won the war"

“There has been a running debate over the years about the relationship between Adam Smith's Moral Sentiments and his Wealth of Nations , the former published before the latter. The debate has been identified as the “Smith Problem”. My conclusion related to this debate – empathy derived from Moral Sentiments versus self-interest derived from the Wealth of Nations – is as follows: Pure empathy, the ability to identify with the “other” – even at the expense of self – is rooted in family, friendship and community, that is, in the social sphere that is outside the commodification of relations that define the market. The economy, cut loose from the social and moral sphere, involves individuals producing, buying and selling for material gain without seeking to imagine the consequences of the individual’s self-interested actions. Such actions may end up being virtuous to the whole society, but the virtue was unintended.

It is possible to hope that the two spheres of Smith, the moral (empathic) and economic (self-interest driven) could co-exist in some form of equilibrium. But, in my view, this was never demonstrated adequately and constitutes the “Smith Problem”.
Jumping forward to the present, it is clear in my judgment that the economic self-interest motive, dominant in the economic sphere of life, won the war. The institutions of the market have overwhelmed and penetrated the social spheres of life. Even the nuclear family, via, is viewed as a production unit with a division of labour and implicit prices in the way husbands, wives and children relate to each other.

Although I wish Mr Rifkin success, the idea of establishing an “empathic civilisation” at this juncture in history is singularly utopian”.

Raymond Franklin’s short letter is of remarkably high quality. The separation of the social from the economic sphere was well stated elsewhere by Karl Polanyi (1944: The Great Transformation), who rooted the separation in ‘capitalism’ and ‘markets’.

Smith did not separate them in this manner. In both sectors (in so far as for the sake of argument, I accept this distinction) the immediate awareness of individuals of others follows a similar pattern. We are closest to our immediate household kin (‘family, friendship and community’ – though Smith put it as family, friends and acquaintances, and the rest as strangers), whereas in markets we are directly involved in direct transactions with sellers/buyers and then with untold numbers of anonymous people in demand-and-supply linked chains. In both cases, we are dependent in many ways with the anonymous strangers, whom we know not, nor need to do so, and because of society we walk amidst strangers without flinching.

Franklin asserts that our social relationships are “outside the commodification of relations that define the market” (a Polanyi-type expression, hinting at a Marxist vocabulary), yet they share similar degrees of anonymity. We do not know nor need to know, from whom our daily, monthly, annual sustenance – material or emotional – comes from, yet each is equally important. Where family, friendly and acquaintances, and economic relationships break down they cause similar crises in personal circumstances.

We are sustained by normality in relationships in 'both' spheres, including the fact that in both the anonymity of distant participants is an essential (and productive) contributory factor in normal life (without it we would back in the wood-age). The market has not changed essentially the empathetic part of personal life – it has existed as long as humans lived in social groupings (in common with other primates). The elevation of the market to a separate entity is an invention of the imagination. It is not unique in history (see Morris Silver’s 1995 rebuttal of Polanyi’s thesis in ‘Economic Structures in Antiquity’).

There were anonymous ‘strangers’ even in a small tribe; more so in nearby tribes, and extremely so when unhappy events unfold from anonymous invading strangers from unknown lands, few of whom sought "to imagine the consequences of the individual’s self-interested actions’ upon those they visited with their ‘rapine and violence’.

The fact that “Nobel Prize-winning Gary Becker” advanced views about the “nuclear family”, while interesting as a scholarly exercise, does not in itself mean that the ‘market’ has in fact invaded the relationships between a husband and wife, and others.

There is no “Adam Smith problem” in English or German.

Labels: , ,

Sunday, March 28, 2010

Questioning the Myth of the Invisible Hand

Dave Cohen writes (27 March) for Decline of the Empire HERE

“Invisible Hand Goes Missing”

“For most of the last 3 decades, many influential economists embraced a theory that justified wholesale theft by the Finance industry because the magical powers of Adam Smith's Invisible Hand would always result in greater "efficiency" in the economy. It's as if Homo sapiens had suddenly stumbled upon a miraculous potion— this was framed as the efficient market hypothesis. Drinking this cleansing kool-aid would enable us to see clearly that Gordon Gekko was right, unfettered greed is good. Hundreds of years of economic history, and thousands of years of human history, could simply be tossed out the window. Move on, nothing to learn there

Yes, that just about sums up where the myth of the invisible hand has taken modern economics and Adam Smith’s good name with it.

Of course, Adam Smith did not say any of the things about the metaphor of ‘an invisible hand’ that is attributed to him, as pointed out on Lost Legacy scores of times.

Smith had no connection to allusions to ‘Homo Economicus’, Gordon Gekko’s ‘greed is good’, ‘efficient markets hypotheses’, or notions of ‘equilibrium’. In fact, the invention of Adam Smith from Chicago has hardly any connections with the Adam Smith from Kirkcaldy.

If more people came to realise this it would be much better for the practice of economic management and understanding.

It would be a start of Dave Cohen was to get up to speed on the derivation of the myth of the invisible hand, which has nothing to do with Adam Smith's use of the popular 17th-18th-century metaphor on two occasions only in his books, once in Moral Sentiments, 1759, and once in Wealth Of Nations, 1776 and neither case was about markets - I exclude his singular use of the metaphor in a student essay written when he was a student at Oxford on 'pusillanimous superstition' about Astronomy, 1744-50.


Friday, March 26, 2010

First Hurdle Cleared

The Edinburgh City Council planning committee has approved by an unopposed vote the plans of Edinburgh Business School, Heriot-Watt University for the renovation of Panmure House (1690), Adam Smith's home in Edinburgh from 1788 until he died in 1790.

This is a welcome move, though one of many necessary before work can begin, on the actual renovation, which may cost up to several millions of pounds to complete. The architect's plans, include the construction of a glass atrium across the front of the 'L'-shaped building, and it looks great too. This will provide access to both floors, including for those disabled, in keeping with sensible public policy.

As each step occurs, I shall keep Lost Legacy informed of progress.


New Smithian Classic Published

I have just received a newly published copy of the Theory of Moral Sentiments by Adam Smith, 6th edition, 1990.

What you may ask is so remarkable about that?

This edition is published by Penguin Classics ($17 US and £10.99 UK) well within most student budgets. It is introduced by Amartya Sen in a typically erudite and relevant manner (for 'old hands' and beginners) and it edited by Ryan Hanley, as good as it gets in a modern Smithian scholar, who know Moral Sentiments inside-out and back-to-front.

I've heard Ryan twice now at seminars on Moral Sentiments and came away from both both educated and astonished at his insight (his End Note are a treasure chest in their own right.

Whoever thought of giving cameo/bio notes on everybody mentioned in Smith's text is a publishing genius. They bring the text to life.

I recommend readers to purchase a copy - I have absolutely no personal interest to declare! - because it lifts Smithian scholarship, and old and new readers, to a new level.

The Penguin edition 2-volume of Wealth Of Nations, edited and introduced by Andrew Skinner is also exceptionally good quality.

Labels: , ,

Wednesday, March 24, 2010

On Misleading Humanities Students

“Mr. Smith” writes (23 March) for the Humanities course at Huron High School in Ann Arbor Michigan HERE:

The Invisible hand”

Adam Smith's complex and influential writings on philosophy, politics, and economics contain, among other concepts, his metaphor of an "invisible hand," the natural process by which an equilibrium or homeostasis is reached in everything from chemistry to economic, from biology to politics. This force directs human activity without the knowledge or consent of individuals, and thus merely self-centered actions are finally seen as part of the cosmic harmony

[He then summarises the quote from Adam Smith on the ‘rich and unfeeling landlord’ eating well and being ‘led by an invisible hand’ to feed the ‘thousands whom they employ’ and thereby advancing ‘the interest of the society, and afford means to the multiplication of the species’ [Moral Sentiments IV.ii.10: 183]. Next he adds his commentary by way of an illustration of a rich man in a restaurant, concluding:

‘The rich man's excess expenditures will have furnished the wages by which several poor people will have purchased their food.

‘Thus, even if an individual were purely selfish, and had no desire to aid others, his economic activity will, in fact, provide wages which effectively distribute wealth among his countryme

[This leads him to the invisible hand’s role in leading individuals to enhance aggregate output and its related employment (I know these are counting the same thing)]

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.’ [Wealth Of Nations, IV.ii.9: 456]

Finally asserting: ‘attempts at economic altruism do not nudge the society toward equilibrium points, but it is precisely at those points that benefit and utility for every person in that society is maximized.’

‘Mr Smith’ (NOT Adam Smith!) is woefully wrong on both of his presentation of Adam Smith’s use of the metaphor of ‘an invisible hand’. He advances his own idea that the ‘invisible hand’ is ‘an equilibrium or homeostasis [that] is reached in everything from chemistry to economic, from biology to politics’. Fair enough, providing ‘Mr Smith’ is clear to his students that this is his own assignment of meaning to the metaphor of ‘an invisible hand’ and NOT Adam Smith’s.

The rich farming landlord in Adam Smith’s parable in Moral Sentiments (7159) had nothing to do with a rich man in a restaurant in a market society where the circulation of revenue affects all involved.

Adam Smith’s point was that the rich landlord was ‘led by an invisible hand’ to feed the ‘thousands he employed’; the invisible hand was a metaphor for the absolute necessity that he did so, otherwise they would not last the winter to repeat their tasks next season, and the rich landlord would lose cease to be rich. He had no choice but to act in this manner, whatever his state of selfishness or vileness of his behaviour. That the poor were fed (at least to survivable subsistence) was a consequence of necessity forcing rich landlords to deliver some of their output back to the toilers.

Turning to the merchants who add to an economy’s total output, the context is quite clear: all merchants face a choice of investing their capital abroad (export-imports and acquiring foreign assets) for profit, or investing their locally for profitable purposes. It’s a crucial difference. Some merchants (but NOT all) feel that foreign trade and investment involves greater risks above the normal ones of investing at home, and the degrees of risk-avoidance vary among individual merchants. Hence, some invest only at home for ‘their own security’.

Adam Smith’s point is that the home investors, feeling more secure than their colleagues trading or investing abroad, by investing locally they add to the total of local investment, making the WHOLE greater than it would be if they had sent their capital abroad. This simple consequence follows the arithmetic rule that: the WHOLE is the SUM of its PARTS.

Adam Smith used the metaphor of ‘an invisible hand’ to make this point in what he called (from his Lectures in Rhetoric an Belles Lettres’ [1763], 23 November 1762, Lecture 6.66; 29) ‘a more interesting and striking manner’. That is what metaphors are used for: ‘to give the due strength expression to the object to be described’. In short: the ‘invisible hand’ is not its own object; it gives due strength to its object.

In Moral Sentiments, the object of the metaphor of ‘an invisible hand’ is the absolute necessity, whatever the ‘unfeeling’ landlord’s lack of concern for his ‘brethren’, for him to provide subsistence for his ‘toilers’.

In Wealth Of Nations the object of the metaphor of ‘an invisible hand’ is the absolute unavoidable consequence of those merchants who invest at home, for whatever reason, including their risk-avoidance, of their adding to aggregate national output (and thereby employment of labour), which in terms of ‘spreading opulence’ is a public benefit.

Only the lazy reading of these two instances, mainly from isolated quotations, torn our of their contexts, leads to spurious conclusions about Adam Smith’s use of a well-known 17-18th-century metaphor.

[My forthcoming paper on the ‘Origins of the Modern Misconceptions of the Invisible Hand Metaphor’, for presentation at the Summer Institute on the History of Economics, Richmond University, Virginia, in June 2010, addresses these issues.]


Sunday, March 21, 2010

A Lady Doth Impress Not at All

Francesca Sidoti writing in

When it rains you should read up on finances”

“I’m not quite delusional enough to believe I would sit down and read Adam Smith, though I suspect it would be very impressive at dinner parties to reel off quotes about the invisible hand.”

Francesca is a kidder. She wants to impress people with her knowledge of financial economics and gives an impressive list of names she wants to read: Skidelski’s biography of Keynes to which is added Amartya Sen, Karl Marx, and Paul Krugman. Impressive? Yes.

But she gives her game away by opening with Adam Smith and being able “to reel off quotes about the invisible hand”. Oh, dear.

There is only one reference to the invisible hand in Adam Smith’s Wealth Of Nations and another one in Moral Sentiments. There no multiple quotes about the invisible hand in Smith.

Francesca didn’t know that – apparently – and fails to impress Lost Legacy. Presumably the editors of ‘Savings Guide” didn’t know either. Shame.


Saturday, March 20, 2010

Ubiquitous Invisible Hand References

Another week-end and another long list of 'invisible-hand' alerts to read through.

I thought readers may like to know just how many mentions of the invisible hand there are in a week (I would put it in the high 90s, often more).

Now these alerts vary from direct quotations or discussion on economics, through to scores of unrelated subjects bounded only by the limitations of their authors' imaginations, as some of those included in my short extracts below show. Normally, I am selective and dump most of them.

But the point I am making is that the metaphor of 'an invisible hand' is as widely used today as it was among literate people in the 17th and 18th centuries, many of them before Adam Smith used it in twice in his two published books, Moral Sentiments (1759) and Wealth Of Nations (1776), plus once in his 'juvenile essay', published posthumously in 1795.

It was only with the new of interest in Adam Smith's use of the popular invisible hand metaphor in the late 1940s, that what became a proliferation gathered pace from the 1950s. It is now ubiquitous among modern economists and has spread out as the millions of readers of Samuelson's very successful textbook, Economics: an introductoy analysis, published in 1948 and now in its 19th edition, remembered the story of the invisible hand even if they forgot the economics, no matter where their career paths took them.

A selection from the first page of his morning's haul of invisible-hand references in the world's press:

1 Dianne Hardistry writes in HERE:

Carlson came to the Treasury Department job with an MBA from Stanford University and years of experience in the banking industry. In between, she was a lobbyist in Washington, D.C., founded the business writing firm Invisible Hand LLC, served as the executive vice president of global government affairs for the Motion Picture Association of America and was a member of California Gov. Arnold Schwarzenegger's senior Washington staff.”

2 Damien Hoffman writes in Wall Street Cheat Sheet HERE:

Michael Jackson's Invisible Gloved Hand Strikes Biggest Record Deal in History”

3 Alissa j. Rubin writes in The New York Times (19 March) HERE:

“In the shifting shadows of this often invisible war, where no one is sure who is lying and who is telling the truth, it seemed a reasonable way to resolve ..”

4 Daily Mail online, UK, 20 March here

Joseph chief executive Sara Ferrero said:' 'He has been an invisible magic hand guiding me in this last two years. He will always be in my thoughts.'”

5 sikhsubculture writes in SikhNet (18 March) HERE:

The future of Sikhism is threatened by Adam Smith's infamous invisible hand. Furthermore, attempts at regulating the vast and far flung patka market have failed as huge black markets in the backs of unscrupulous langar halls have taken ...”

6 John Langford writes (20 March) in Yahoo Research HERE:

The Invisible Hand of Machine Learning

7 Shubha (19 March) in Live Lounge HERE:

“The invisible hand of audio engineers,”

8 Yair Ettinger writes (18 March) The invisible hand - Haaretz - Israel News HERE:

9 Monika Mitchell writes The Invisible Hand in Good Business International

Yet man is a funny beast Adam knew, and in case of a lapse in reason a guiding hand, “the Invisible Hand,” existed to override his less intelligent and ...

10 Wonkette DC gossip (20 March) HERE

GOP Congressmen Start Throwing Civil War References Around

“Also, if only there were no government interference with the marketplace, the miraculous workings of the invisible hand will ensure that virtue and hard work are rewarded, and dishonesty and laziness punished, and the markets will

11 Chicago Breaking Business News (2o March) HERE:

Fine, than the invisible hand will lead employees to look for better places to work and job seekers will not want to work for you. It's not all about keeping investors happy. You also need to keep employees happy or the ones you have ...”

12 The Last Psychiatrist: The Source Of Society's Ills writes (20 March) HERE:

“There's no "invisible hand" at work here. Wilkinson is not just another academic social policy theorist who references Marx; he is also the editor of the 2003 version of the WHO report on social justice. ..

13 Victoria Yates writes on Jeremy Rifkin writes Writing From The Cafe HERE

'Empathy is the invisible hand – to empathize is to civilize, to civilize is to empathize' Rifkin

I have another 7 pages to read too, with more to come during Saturday.


Friday, March 19, 2010

A Clear Understanding of Adam Smith in Huffington Post

Klunk posed in Can.politics an article written by David Sloan Wilson HERE

The original article is from Huffington Post HERE

The Invisible Hand is Dead. Long Live (Smart) Regulation

The invisible hand metaphor originates with Adam Smith in The Wealth of 
Nations (1776). Bernard Mandeville made a similar point with his Fable of 
the Bees (1705), which fancifully describes human society as a wondrously 
productive bee hive, even though each bee is as selfish as can be.

Smith was critical of Mandeville and presented a more nuanced view of human 
nature in his Theory of Moral Sentiments (1759), but modern economic and 
political discourse is not about nuance. Rational choice theory takes the 
invisible hand metaphor literally by trying to explain the length and 
breadth of human behavior on the basis of individual utility maximization, 
which is fancy talk for the narrow pursuit of self-interest. For the general 
public, unfettered competition has been turned into a moral virtue and 
"regulation" has become a sin.

…. For those who wish to learn more about how economics is going beyond rational choice theory, I recommend a book titled Moral Sentiments and Material Interests: The Foundations of Cooperation in Economic Life (2006), edited by Herbert Gintis, Samuel Bowles, Robert T. Boyd, and Ernst Fehr. Gintis, Bowles, and Fehr are eminent economists while Boyd is an eminent evolutionary anthropologist, illustrating how integrative the new economic theory has become. I have also written an essay titled "The New Fable of the Bees" that explores the theme of this blog in more detail.”

There is much more as well. David Sloan Wilson (professor of biology and anthropology at Binghamton University, part of the State University of New York) is pretty-well informed about Adam Smith and his actual writings (and Bernard Mandeville’s too; plus recent work by behavioural economsts) and I highly recommend that you follow the link. It’s a short lesson in Adam Smith’s legacy.

If I have a criticism, it is that David Sloan Wilson accepts the modern invention of the invisible hand by default but criticizes it on its phony merits. But what is a small blemish in a fine article?

NB. The Huffington Post appears to be pretty consistent recently in its appreciation of Adam Smith from Kirkcaldy, compared to the usual North American version of Adam Smith, ‘alive and well and living in Chicago’ (George Stigler, 1976).

Long may it continue!

Labels: , ,

Adam Smith Bargaining

Leslie Budd, Reader in social enterprise at The Open University Business School, writes (18 March) in Open.2 Net HERE

Lap dancing around the regulations”

Like difficult customers, businesses frequently complain about regulation, and point to apparently nonsensical examples. Yet one of the paradoxes is that not only does regulation often sustain the competitive environment, but also allows businesses to follow their own self-interest.

The notion of self-interest is most frequently associated with Adam Smith’s The Wealth of Nations, perhaps one of the most misinterpreted books in history. In his previous work The Theory of Moral Sentiments, he pointed out that if individuals do not have a ‘moral sentiment’ with counterparts in economic exchange then their self-interest will not be realised and just prices will not ensue. Regulation frequently substitutes for moral sentiment in market economies

Adam Smith famously advised those who sought to acquire the ingredients for the menu for their dinners – from the “butcher, the brewer, and the baker” (an 18th-century diet?) – that they should address the self-interests of said “butcher, brewer, and baker” and not their own (WN I.ii). Readers of isolated quotations normally miss this advice.

Leslie Budd puts this well by drawing attention to Smith’s work, Moral Sentiments (1759), which he paraphrases. I offer my own assessment of Smith’s Moral Sentiments on bargaining from my Adam Smith: a moral philosopher and his political economy (Palgrave Macmillan 2008):

“In negotiation, both of us transact not because we like or love each other (though that is not precluded), but because we want something from each other. The negotiated decision settles the terms of exchange. The transaction transforms selfishness into a mutually wilful exchange. Each of us, in the content of our offers, exhibits our unselfish sides.
Even in the many negotiations where a degree of ‘sweetness and light’ is present, different solutions necessarily lie on the table. We bargain because we favour different solutions. We start with our different valuations and we reach for ‘an agreed valuation’ by bargaining towards a different solution. The process highlighted in Moral Sentiments corresponds to what bargainers do.

An ‘agreed valuation’ requires co-operation. Enmity hinders, but does not necessarily preclude, agreement. One-way compromises are seldom acceptable. The movement from their original solutions becomes each party’s contribution to the joint agreement. My approval of your modified opinions is to adopt them; to disapprove is to reject them (TMS17).
Walkouts, denigrating rhetoric and angry threats cloud the air if bargainers let loose their passions which, in the absence of empathy, distort their perceptions. [The bargainer becomes aware that only by ‘lowering his passion to that pitch’ which the other party ‘is capable of going along with’ can he hope for a ‘concord of the affections’ as a prelude to the harmony flowing agreement (TMS22). And that is true for both parties. Smith says that each ‘must flatten the sharpness of his natural tone, in order to reduce it to the harmony and concord with the emotions of those who are about him’. What each feels is never exactly the same because they both view their own interests from different vantages, but by lowering expressions of their self-interests to make them more acceptable and to meet the other side’s movement, both sides review their passionate (often extreme) stances, looking at them in some measure with the eyes of the other party.”

Think BA strike talks these past months. Of course, add political opportunism by the Union leaders – in the past big strikes just before a General Election tend to be ‘settled’ on their perceived affect on the polls.


Wednesday, March 17, 2010

Review Commentary No. 6: Milgate and Stimson's "After Adam Smith"

Murray Milgate and Shannon C. Stimson's "After Adam Smith; a century of transformation in politics and political economy”, Princeton, Princeton University Press 2009

[My series of review commentaries has been delayed unavoidably due to domestic upheavals mentioned in recent announcements. I am now almost back to normal, though my library appears to be missing several volumes.]

Chapter 7 is on Thomas Malthus (1766-1834), whose name is immortalized. He intervened with a polemic in the 1790s on the revolutionary fervour of the likes of Britain’s William Godwin (1756-1836) and France’s Condorcet (1743–1794). The latter admired Adam Smith, whose Enlightenment association with the radical Frenchman, however, caused judicial enquires to be made in 1793 about Smith’s possible role in spreading unrest among British labourers in the shadow of the French Terror.

Malthus raised the issue of population exceeding the capacity of an economy to sustain living standards and Milgate and Stimson take us through the issues clearly for the most part. However, I sensed an orthodox treatment of the so-called ‘Malthusian’ vision as representative of economics as the ‘dismal science’, crowned with the ‘classic statement that this came from Carlyle’ (122), without their explanatory comment, as if it referred to Malthus.

The origins of the ‘dismal science’ accolade, regularly awarded to economics, classical and modern, had little to do with Malthus, and Milgate and Stimson should have taken the opportunity to say so. I refer readers to a paper by David M. Levy and Sandra J. Peart: “The Secret History of the Dismal Science. Part I. Economics, Religion and Race in the 19th Century” HERE which sets out the real story of economics becoming known as the ‘dismal science', wich they show had nothing to do with a description of Thomas Malthus:

While this story is well-known, it is also wrong, so wrong that it is hard to imagine a story that is farther from the truth. At the most trivial level, Carlyle's target was not Malthus, but economists such as John Stuart Mill, who argued that it was institutions, not race, that explained why some nations were rich and others poor. Carlyle attacked Mill, not for supporting Malthus's predictions about the dire consequences of population growth, but for supporting the emancipation of slaves. It was this fact—that economics assumed that people were basically all the same, and thus all entitled to liberty—that led Carlyle to label economics "the dismal science." ‘

Given the status of Carlyle, I think no opportunity should be taken to refrain from repeating the canard of the ‘dismal science’ in relation to Malthus, or, if it cannot be resisted, then at least economists should mention from whom – and WHY - the label originated. Carlyle’s ‘dismal science’ article was called ‘The N-----‘ Question, in one edition and in others, the less offensive title of ‘The Negro Question’ (though the contents are equally offensive).

Milgate and Stimson make a clear presentation of the evolution of the population ideas of Malthus in the various editions, without getting bogged down in the intricacies of Malthus’s argument.

I noted one interesting gem among these pages, namely that Malthus in the Quarterly Review for 1824 ‘maintained, like Smith, that in the presence of positive profits, exchangeable value was no longer determined by the quantity of labour employed to obtain them’ (132). This is a view I have expressed for some years. Smith did not have a labour theory of value except in ‘rude’ society, before the emergence of property and capital – but I have been unable to convince many others, so far.

What I also found fascinating was the Milgate and Shannon’s discussion of Malthus on ‘unintended consequences’ (133-35) and the distinction between ‘unintended’ and ‘unforeseen’.

They write that people are not relieved “of moral authority for their actions for “ignorance and inattention” and add that “Smith has also placed accountability ‘to God and his fellow creatures’ at the centre of an individual’s character as a moral being’ (giving the reference as ‘(1976 -85, 6:52) (134), which I could not find. However, I am familiar with an alternative reference, from which paragraphs were moved and some dropped for the 6th edition (1790), including the following:

[3] A moral being in an accountable being but an accountable being, as the word expressed, is a being who must give an account of his actions to some other, and that consequently must regulate them according to the good liking of this other. Man is accountable to God and his fellow creatures. But tho’ he is, no doubt, principally accountable to God, in the order of time, he must necessarily conceive of himself as accountable to his fellow creatures before he can form any idea pf the Deity, or of the rules by which the Divine Being will judge of his conduct.”) (TMS III.3: page 135, footnote 1).

This was withdrawn for the 6th edition, as part of extensive revisions Smith undertook to Moral Sentiments that had the effect of diluting many of the religious passages to make TMS more secular and less religious. Malthus was quoting from earlier editions of TMS [See my “The Hidden Adam Smith in his Alleged Theology”, January 2010). HERE:

Milgate and Shannon fail to discuss, what ought to be perhaps, a mystery of the absence in Malthus of mentions of Adam Smith’s use of the “invisible hand”, if modern economists are correct in their assertion that this was Smith’s great idea, concept, or paradigm. The absence of discussion of the metaphor in Malthus, who had read Wealth of Nations closely, is worthy of discussion. They refer instead to references to the metaphor appearing in the works of evangelical Christian economists, such as Thomas Chalmers (136).

To date, I have not looked closely at these references (they cite Chalmers, 1832, On Political Economy, in connexion with the moral state and moral prospects of Society, Glasgow: Collins). In this context, Milgate and Stimson introduced me A. M. C. Waterman (1991) Revolution, Economics, and Religion, Christian political economy, Cambridge University Press). A sign of a great book is when it prompts readers follow lines of enquiry on issues of interest; I am sure that historians of economic thought will also find many prompts in this book of a similar kind.

They give some explanation for Malthus not mentioning the invisible hand: ‘Malthus could not longer make use of the invisible hand (nor indeed any other classical economist) as Smith had done – a felicitous metaphor for informing ordinary people’s perceptions of market society’ (137). They suggest it was because Malthus, ‘writing nearly a quarter of a century after Smith, and from within a more fractious political and economic context, Malthus could not make use of the invisible hand’ (137). Extraordinary is one word for the validity of this proposition. Waterman is quoted as saying that “Malthus “formulated an ‘invisible hand theorem’ in regard of ‘moral restraint’ as a form of an ‘unintended consequence’. Highly imaginative springs to mind! And nothing to do with Adam Smith’s use of the metaphor in my considered view.

I liked the reference to Malthus (1803) wishing to amend Smith’s syllabi for the parish schools to include ‘the simplest principles of political economy’ to ‘reading, writing and account’ (138).

In summary, Milgate and Stimson will enlighten readers who are currently confined to the mechanics of the population problem and, perhaps, will draw them into wider reading – it has me!

If I may recommend to those interested in the deeper significance of the population debate, I would suggest reading Greg Clarke’s, A Farewell to Alms: A Brief Economic History of the World (Princeton Economic History of the Western World) (Princeton University Press, 2007).

[I shall next report on Chapter 8 Utility, Property, and Political Participation next.]

Labels: ,

Adam Smith Did Not Invent Capitialism

Stephen Collins, co-owner of Organic Business Strategies, writes (16 March) in Bloggertone (‘talking about business’) HERE

adamsmith RT @JohnNash Love the game. Let’s play it together. BFF”

“Adam Smith, Father of Capitalism, set forth in the world the greatest experiment man has ever encountered.

Smith brilliant in his understanding of true human nature. With this understanding, devised a system by which he focused the fallibility of man’s own nature to the betterment of society. This system allows for the human needs to be met while using this same nature as a mechanism for self-regulation and management.

With this said, there was an American in the 1950s who challenged the concept of “every man for himself”. John Nash, an economist and mathematician, is considered to be the “Father of Game Theory”.

Nash understood how a person would react given a certain set of circumstances. He theorized a person will always make a choice that gives him either the least pain or the greatest gain given the circumstances. By understanding this, the game can be manipulated for the betterment of all of the participants. This is somewhat esoteric, so enough of the history lessons…

… The combination of the greed of Adam Smith’s man with the sophistication of John Nash’s games (competition) will bring a synergy to your business that is un-deniable.

A harmless piece of editing?

Stephen Collins gets to the point later about his recommended business strategy for local business which would be hard to fault in practice and of which I would approve in general (in business schools itS called ‘co-opetition’, or at least was when I taught ‘strategic negotiation’). So, good luck to Stephen in his business ventures.

However, the paragraphs quoted above are historically and factually in error. They draw on popular myths about Adam Smith.

Smith did not “set forth in the world the greatest experiment man has ever encountered”. He observed the nature of the revival of commerce in mid-18th-century Britain and analysed what had happened in Western Europe, from the fall of 5th-century Rome, through to Europe’s recovery, approximately from the 15th century.

He did not invent ‘capitalism’ (or commerce). Smith, who died in 1790, did not know of the word ‘capitalism’; William Makepeace Thackeray used the word ‘capitalism’ first in English in a novel (The Newcomes) in 1854.

No single person, and certainly not a moral philosopher, invented or ‘set forth’ the ‘experiment’ of capitalism; such notions are quite ridiculous, if you think about what is suggested. Attempts to design social-economic systems almost always fail, as the more recent attempt at socialist planning in Russia and elsewhere have shown.

Therefore, Smith did not “devise a system’, fallible or otherwise.

As for John Nash, he did not invent “prisoner’s dilemma’ games; by whom is he ‘considered the father of game theory’.

Nash was a brilliant contributor to ‘games’ and suggested what people ‘ought’ to do in resolving their choices; but the whole point about Prisoner’s Dilemma is that it is a dilemma.

Having observed literally thousands of players engaged in PD games, I found that close to 90 per cent did not “always make a choice that gives him either the least pain or the greatest gain given the circumstances”. Quite the reverse!

Finally Adam Smith never, ever, endorsed ‘greed’ as a positive feature of ‘human fallibility’ – that suggestion belonged to Bernard Mandeville (“Fable of the Bees”, 1724) – nor did Smith see ‘greed’ as instrumental in the pursuit of self-interest.

Apart from this, I wish Stephen Collins well in his business ventures.

Labels: ,

Monday, March 15, 2010

Popularity Parade Counts for Not Much

Justin Wolfers writes in Freakonomics (15 March) HERE

“Hayek Propped Up by Government Intervention”

“… the Texas Board of Education [wants] to rewrite the high school curriculum in accordance with its conservative values.”
How do they plan to rewrite high school economics?

In economics, the revisions add Milton Friedman and Friedrich von Hayek, two champions of free-market economic theory, to the usual list of economists to be studied – economists like Adam Smith, Karl Marx and John Maynard Keynes
… There’s no doubt about the influence of Smith, Marx and Keynes; Friedman also belongs. But does Hayek belong on this list?

Let’s use data to inform this debate. I counted the number of references to each economist in the scholarly literature indexed by JSTOR, finding 30,708 articles mentioning “Adam Smith”; 25,626 articles mentioning “Karl Marx”; and 4,945 mentioning “John Maynard Keynes”. “Milton Friedman” sits easily with this group, and was mentioned in 8,924 articles.

But searching for “Friedrich von Hayek” only … 1561.

By the way, “Lawrence Summers” was mentioned … 2064.

This exercise suggests that Larry Summers is more influential than Hayek, and so I’m led to conclude that teaching “insights from Larry Summers” involves less of an ideological subsidy than teaching “insights from Hayek.

I’m not suggesting we do either, only that we set the bar for teaching economic ideas at a uniformly high level. If this cuts out Summers, it cuts out Hayek.

These data suggests that Hayek just doesn’t belong with Smith, Marx, Keynes, or Friedman. In fact, it seems that despite having enjoyed a much longer period to accumulate citations, he is still much less widely cited than Larry Summers. Sure, Hayek was an insightful economist. But insisting that high schools teach Hayek is a clear statement of ideology, not of economic science.

The message from the Texas Board of Education seems to be: If you can’t win in the marketplace of ideas, turn to government institutions to prop you up. I don’t think Hayek would approve.

A fair point but hardly ideological.

If you checked JSTOR for the metaphor of an ‘invisible hand’ I wonder how many mentions it would get?

I’d check myself but I do not access…

Adam Smith is Innocent

Michael Tilley writes (14 February) for The City Wire HERE

"Anger management"

“The last gasps of the near-dead out-of-touch traditional media want us to believe greedy corporate bastards are the root cause for whatever ails us, but down deep we all rightly suspect that too many bureaucrats have perverted the movements of Adam Smith’s unseen hand.”

Michael Tilley writes fluently about the anger of people caught the financial crisis and uses his large stick to implicate Adam Smith and his ‘hidden hand’, which, presumably, he believes exists and operates as modern economists told us since the 1950s (precious few had heard of it before then, though Smith mentioned it once in Wealth Of Nations in 1776).

Tilley’s story line is that ‘too many bureaucrats have perverted’ Smith’s hidden hand, presumably by acting as if it didn’t exist or somehow preventing it working.

Well, story time over folks.

The people who first ‘perverted’ (a bit strong, but I’m quoting Tilley’s angry expression) ‘Adam Smith’s unseen hand’ were the very same modern economists who gave it to us 60 years ago, including our Nobel prize winners, though one, Joe Stiglitz recanted last December.

You see, Michael, Adam Smith never made the claims for ‘his’ hidden hand that were attributed to him 174 years later. He used a well known literary metaphor from the 17th-18th century to illustrate “in a more striking manner” what he had just described about the consequences of risk-aversion in some, but not all, merchants choosing between investing their capital in trading ventures abroad to Europe or the British colonies in the America’s and investing at home.

The more merchants who chose not to take the extra-risks of foreign trade and invested at home instead, the greater would be domestic capital investment and, in consequence, the larger would be domestic output on the well-known arithmetic rule that the whole is the sum of its parts.

Saying they were led by ‘an invisible hand’ to set off these consequences is far more ‘striking’ than explaining it accurately as he did before he used the metaphor. And that, Michael Tilley, is what a metaphor does (though I am sure you know that already being such a clear writer).

In short, Adam Smith is innocent; the financial traders and bureaucrats who caused the crisis did it all by their lonesome selves.


Saturday, March 13, 2010

James Otteson on Karl Marx v. Adam Smith

James Otteson conducts a lesson for students on Adam Smith and Karl Marx HERE

James Otteson's lecture/tutorial was at the 2010 FEE Home School Debate Tournament on "Karl Marx v. Adam Smith"

Follow the link and watch the video for a lively seminar for students.

It's not meant to be deep and authoritative and links explicit details of the experiences of Soviet socialism and the dreadful crimes against humanity practised in the former and current socialist/marxist states, a methodology with which I am not too comfortable intellectually. As a first pass it's OK, but the ideas of Marx and Engels are not linked directly to ideas as interpreted by people decades after the founders of Marxism had died, anymore than the ideas ascribed to 'Jesus' are represented by the pageantry and wealth of the main Christian Churches centuries later. However, that's a quibble.

Otteson's account of Smith's ideas is fair enough (except for the his nuanced mythology of the "invisible hand'!) and his listeners appear enthusiastic in response to his enthusiasm (always a necessary aspect of lecturing).

Jim Otteson is an original contributor to Adam Smith studies: see his Adam Smith’s Market Place of Life, 2002, Cambridge University press.

Labels: , ,

Against Stupidity Even the Gods Battle in Vain

Robert Vienneau writes the authoritative blog, Thoughts on Economics

"Anti-Intellectualism Among Mainstream Economists"

I find these comments to be anti-intellectual:

John Quiggin rejects the Austrian school of economics on the ground that partisans of that school discuss political philosophy and the epistemology and methodology of economics.

Roberto Perotti critizes Post Keynesians and neo-Ricardians on the grounds that they don't spend their time exclusively constructing formal models and estimating correlations. (I used Google's translation feature. Sergio Cesaratto answers from a Sraffian perspective.)

Commentators at Mark Thoma reject discussions about what Adam Smith wrote.

I thought the point of scholarship was to attempt to make true statements. If somebody makes an untrue statement about what Keynes or Adam Smith said, one should correct them. This is not to say that that the fact that Keynes or Smith advocated something or other is a justification for policy. I think a historically accurate representation of an old text entails quite a bit of contextualization in terms of its time. To apply policy conclusions to our time would require recontextualization in contemporary terms, as well as empirical work.

I would think different scholars, even within a discipline, would find different questions of interest. Some economists argue for a supposed freedom to choose. Shouldn't some then be legitimately allowed to explore old texts or methodology or whatever? If Thomas Kuhn was somewhat correct, wouldn't one expect more discussion about methodology when the defining paradigm in a field has so obviously broken down, as today among mainstream economists?”

A timely reminder from Robert Vienneau of the duty of care of academics for the way they treat ideas of other people.

Along with the absolute right – of every person - to create, deduce, or induce – even invent – ideas, moral rights to not include the absolute or relative right of anybody to assert or ascribe to anyone else that they hold this or that set of ideas. That is a sign when embedded politically (and often associated with) a totalitarian state or of theological tyranny.

In my case above, quoted from Mark Thoma’s excellent Blog, many of the comments made about my article by his readers were certainly “anti-intellectual”, and where these were from graduates or well- informed, self-learners my reaction was one of incredulity at their displays of ignorance. Nothing to do with Mark Thoma, of course.


Wednesday, March 10, 2010

A Perspective of State Interventions

Gary Lipow writes in Grist (‘a beacon in the smog”) HERE

Historically U.S. infrastructure, the basis on which this nation developed, was never some magical response to supply and demand.”

The Erie Canal would not have been built without rights of way given away to the builders. Land given to homesteaders and farmers made us one of the world's great farming nations. Railroads were built because the great railway companies were granted land a mile out from their tracks to compensate for construction costs. Or think of the telegraph, one of the first types of public infrastructure to receive not only grants of rights of way, but massive direct public cash subsidies. And it is worth remembering that none of this was built on empty land; American Indians were slaughtered or driven away for every one of these things. Much of the work on that stolen land was done by slaves. I can't imagine a "green tax" that could have compensated for that. …

Adam Smith, the inventor of the term "the invisible hand" favored fire regulations, free public education, building safety codes, and (in emergencies) wage and price controls. As someone concerned with supporting an infant capitalism, and overthrowing the remnants of feudalism, he would have laughed at the idea of capitalism without a strong state. And yes, Adam Smith was overoptimistic about the ability of such regulation to contain the dark side of capitalism. But, given when he wrote, he may be excused his errors, especially since even then he was a far clearer thinker than the fuzzy headed right wing libertarians who consider themselves his true heirs today.

I think he did invent (or at least promote) a fundamental error that explains why the role price can play in replacing other forms of regulation is often overlooked. He thought of price as reflecting a balance between supply and demand. To some extent price does reflect those things. But price also reflects power. In Adam Smith's time, price often reflected the ability to kill people, seize their land by force, and then work that land with slaves. Today the price of a pound of rice reflects in part the Haitian market for that rice developed by applying financial pressure to a series of Haitian governments, and forcing them to destroy their domestic capacity to produce their own rice.

I shall ignore on this occasion the error about “Adam Smith” being “the inventor of the term "the invisible hand" ‘ (see Lost Legacy posts passim) and focus on his articulate charges about the roles of the state in development.

Gary Lipow is correct to balance the over enthusiasm for the ideals in the US Constitution, its defects in its application shrinking in significance compared with the history of the European states, including Britain at the time. To a significant extent, the evolution of the basis of liberty, as noted by Smith, within Britain, was a contributory factor to the ideals manifested in the US Constitution; they were not invented by Congress.

Lipow adds more to the theme of the paragraph I have quoted and it is worth considering in the light of this week’s debate on the relative size of the state in practice. Aside from Lipow’s presentation of the politics of state regulation, he does make some powerful points about the role that the state – any modern state – plays in everyday matters like urban development, roads (parking!) and the infra-structure that Smith outlined as the proper role of state (Wealth Of Nations, Book V).

It makes quite a list and I urge you to follow the link. If you are put off by Lipow’s political partiality, don’t be; in the kernal of what he says there is a general truth, worth considering when debates about the size of the state commence.


Tuesday, March 09, 2010

A Good Idea for a Celebration, But...

College of Charleston holds an annual ‘Adam Smith Week’ (8 March), which, normally, I would welcome handsomely for its educational mission (details HERE) .

John Stossel , the talented free markets’ advocate, is to speak during it, so it will do some good.

But, wait, what’s this?

Adam Smith is one of the most recognizable figures in economics, and his contributions to the fields of philosophy and economics are still relevant today,” says Pete Calcagno, associate professor of economics and Director of the IPCM. “His concept of the invisible hand is considered the classic statement on laissez faire capitalism.”

Oh dear! Pete Calcango manages to perpetuate two myths which are slurs on Adam Smith’s life work, simultaneously in a single sentence.

By whom is the “concept” (sic) of an “invisible hand” considered ‘the classic statement on laissez-faire capitalism”?

Not by Adam Smith, whose works show the metaphor (not a concept) to refer to feudal (not capitalist) landlords feeding the “thousands whom they employ” (they had no real choice but to do so); see Moral Sentiments (1759) TMS IV.ii.10: 184; and to some, but not all merchants who were risk-averse and concerned for the security of their capital and in consequence preferred to invest locally rather than abroad, which, on the arithmetic rule that the whole is the sum of its parts, added to national output; see Wealth Of Nations (1776) WN IV.ii.9: 456.

Lost Legacy urges students (and, clearly, staff tutors too!) to look up the only two references to “an invisible hand” that Smith makes in his two main books.

They do not amount to a “concept” and had nothing to do with “laissez-faire” (words that Smith never used), nor to “capitalism” ( a word invented in English in 1854 by Thackeray; Smith died in 1790).

Labels: ,

Monday, March 08, 2010

Absolute Nonsense About Adam Smith and the Invisible Hand

The Zippy Cart team write in their Blog the following nonsense HERE:

“The InvisibleHand name comes from economist Adam Smith’s theory, that suggests people will make rational economic decisions when they have perfect information available to review. This is true today,”


Where do they get such nonsensical inventions from? Certainly not in anything Adam Smith wrote.


Modern Inventions About an Invisible Hand Have Nothing to do with Adam Smith

Robert Dysell writes (7 March) in the Planner Fed Blog (HERE)

”Generation 1: the fallacy of individuality”

Even hard nosed economists have woken up to the fact that the overly simplistic Adam Smith’ principals of the ‘invisible hand’ in business have led to a collective failure of financial systems commonly known now as the ‘the recession’.”

The so-called “the overly simplistic Adam Smith’ principals [sic] of the ‘invisible hand’ in business” do not appear in anything written by Adam Smith.

The elevation of the metaphor of ‘an invisible hand’ to that of a ‘principle’ is a wholly invented notion, which became popular – even ubiquitous – among modern economists from the 1950s in the USA and is now pandemic across economic departments around the world.

Ironically, since the recession, the whole notion of an invisible hand guiding markets has been challenged as if it had anything to do with Adam Smith.

Smith’s two mentions of an invisible hand in Moral Sentiments (1759) and in Wealth Of Nations (1776) had nothing to do with markets at all – that it was his part of the myth.

In Moral Sentiments, Smith referred to feudal landlords’ absolute necessity of feeding their servants, retainers, and peasants (they wouldn’t last the winter without food), which had nothing to do with (non-existent) markets.

In Wealth Of Nations, Smith referred to some, but not all, merchant traders preferring to invest locally where they felt more secure rather than invest abroad where they did not know the people they dealt with as well, and nor were they as familiar with the probity and impartiality of the legal system in foreign countries (apart from the risks of sea travel and the reliability of shipping). Risk-avoidance drove most of them to invest locally. Again, this had nothing to do with how markets work.

Modern economists made the metaphor of an invisible hand into its own object, whereas metaphors refer not to themselves but to their object. Yet, in both cases in Smith’s usage, described above, the metaphor was about necessity and the avoidance of risk.

With the apparent failures of economists in the current recession, Adam Smith is blamed for the misuses of a metaphor, not be him, but by leading modern economists.


'Joe Stiglitz Slaps the Invisible Hand'

Tyler Durden quote Joseph Stiglitz in City Index (‘The next way to trade’)

“Joe Stiglitz Slaps The Invisible Hand”

"The theories that said that markets work perfectly were all based on very simplistic models of perfect competition and perfect information. My own work we show that the reason that when there is asymmetric information, the reason that the invisible hand often seemed invisible, was that it wasn't there. And I don't think today anybody would claim that the pursuit of self-interest by bankers, which is sometimes called greed [don't tell the screenplay writer for Wall Street] has led to the wellbeing of all of society. And yet this was the central notion taught in almost every graduate school in the country."

At last the myth of the ‘invisible hand’ is under challenge from a much wider range of sources than Lost Legacy, which since 2005 has been ploughing a lonely furrow.

The consequences of the invention of the modern role for the metaphor on ‘an invisible hand’ were not trivial.

As thousands of graduate economists acted on the belief of the
beneficial role of ‘an invisible hand’, no mater what the motives of the individuals – from a false sense of altruism through to pride in their greed – modern economists taught that it was all for the good of the community.

Pollution, protectionism, graft, fraud or exploitation of children are not necessary processes for a commercial society to thrive. It does matter when wrong ideas are invented and falsely justified by linking them to the name of Adam Smith who taught quite the opposite.

Labels: ,

Adam Smith and Laissez-faire Debate at Economists' View

Since Mark Thoma published on Economists' View my post of Adam Smith and Laissez-Faire last week, there has been quite number of comments from his readers.

Lost Legacy followed up that post with a discussion around my second post, which Mark Thoma also published. I think the contributors to the second post were more informed in their posts - by no means did they all agree with Lost Legacy's take.

You can follow the debate on Economists View by linking HERE:


Enjoy some good contributions by readers of Economists' View:

Sunday, March 07, 2010

More of Adam Smith's Views of State Actiity

Scott Sumner, who taught economics at Bentley University for the past 27 years, earned a BA in economics at Wisconsin and a PhD at Chicago. His research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. He also writes a lively Blog, The Money Illusion (“A slightly off-center perspective on monetary problems”) HERE

Adam Smith did favor laissez-faire”

Mark Thoma recently linked to a Gavin Kennedy post that argued Adam Smith did not favor laissez-faire. I don’t agree. The evidence cited was a one page list of government interventions that Smith favored. The US, by contrast, has enough government interventions to fill a New York City phone book, if not a small library. And the US is regarded by the Europeans as “unbridled capitalism.” Even Hong Kong intervenes in far more ways than Adam Smith contemplated. Of course Smith was not an anarchist, he did favor some government intervention in the economy. But relative to any real world economy, his policies views were extremely laissez-faire.”

“I see this as a common cognitive bias. The Gavin Kennedy list posted by Thoma certainly looks impressive, but when you think more deeply about the issue it is a trivial set of policies. I’m reminded of what happens when I discuss Singapore, which usually ranks number two in the world in lists of economic freedom. People will often respond by telling me about all the ways the Singapore government intervenes. My response is “so what?” They could intervene in a 1000 different ways and still be vastly more laissez-faire than the US government. Laissez-faire is a relative concept, and always has been. I’ve read The Wealth of Nations, and Adam Smith is clearly a pragmatic libertarian.

“The evidence cited was a one-page list of government interventions that Smith favored.”

Yes, that’s why Viner listed the numerous examples of government interventions. They amount to a lot more than can be summarised a single page and the compromise notions that Smith was laissez-faire in the meaning of the term.

Smith never used the phrase ‘laissez-faire’. His association with the idea was an invention in the 19th century and was widely promoted by modern economists from the mid-1950s. About this time Smith was also widely promoted as the author of the notion of there being “an invisible hand” in the market. Both inventions are false.

We can agree that Smith was pragmatic about policies but whether he was a pragmatic libertarian remains problematical.

It’s not clear why the items in the list from Smith’s Wealth Of Nations and hi Lectures on Jurisprudence are “trivial” in Ron Sumner’s opinion, other than when he looks around the incomparably richer 21st-century United States than were the 13 British colonies in 1776 when Smith was writing.

There were hundreds of miles of inter-city roads in need of construction and repair; scores of harbours that needed to be built and dredged; thousands of bridges in need of construction; hundreds of towns that need to be paved and have street lighting in place; thousands of ‘little school’ constructed and staffed with state-registered teachers; scores of palliative care hospitals established for those afflicted with ‘loathsome diseases’; scores of depots for stamping clothes with government quality marks; a network of post-offices established and organised; and likewise for all the other activities that Smith envisaged should be funded and managed by the state.

In practice this took near on a century to be introduced in Britain. Set against the size of commercial society in 18th-century Britain, the state sector was not ‘trivial’ in any meaningful sense. Nor is it today. On one thing we surely can agree: neither 18th-century Britain with its colonies in North America was not a laissez-faire economy nor are the 21st-century territories that descended from them.

Adam Smith was not a laissez-faire ideologue.


Thursday, March 04, 2010

Another False Attribution to Adam Smith

The Rev. Darcey Laine (Religious Task Force for a Living Wage) in Star Gazette HERE

“Adam Smith wrote about the "invisible hand of the market," which guides the free market to produce an optimal result for all. Today it often seems that the market has become the only guide to morality for our society.”

Where – anybody – did Adam Smith write about the “invisible hand of the market”?

Modern economists in the 1950s began writing about the “invisible hand of the market”, but Adam Smith decidedly did not.

Does anybody know which economist first asserted that he did?


What Adam Smith Actually Identified as the Appropriate Roles for 18-century Governments

Andrew B. Busch writes (3 March) in the CNBC Guest Blog HERE

“Busch: Following The Father of Modern Economics”

The father of modern economics supported a limited role for government. Mark Skousen writes in "The Making of Modern Economics", Adam Smith believed that, "Government should limit its activities to administer justice, enforcing private property rights, and defending the nation against aggression." The point is that the farther a government gets away from this limited role, the more that government strays from the ideal path that will ensure the fastest path towards the creation of "universal opulence" or wealth for workers.

How this issue is handled will decide whether the country can more closely follow Adam Smith's prescription for growth and wealth creation or move farther away from it

Jacob Viner addressed the laissez-faire attribution to Adam Smith in 1928 in his “Adam Smith and Laissez-Faire” in the collection of essays published to commemorate the Sesquicentennial of the Publication of the Wealth Of Nations, reproduced by Augustus M. Kelly, Fairfield, New Jersey in 1968.

Here is a list of appropriate activities for government, which goes way, way beyond Mark Skousen’s extremely limited – and vague – 'ideal' government. That in itself is fair enough, if it is issued under Skousen’s name (everybody has a right to express an opinion), but he goes on to attribute his ‘ideal’ list to Adam Smith, which is not alright.

In fact, its downright deceitful, for which there is no excuse of ignorance (before attributing the limited ideal to Adam Smith we assume, as scholars must, that Skousen read Wealth Of Nations and noted what Smith actually identified as the appropriate roles of government in the mid-18th century.

But even if Skousen was in a hurry and without time to check through Smith’s two-volume tome (or the massive one-volume tome if he consulted the 1937 edition of Wealth Of Nations from Random House, New York, edited by Edwin Canaan), he, surely, was familiar with Viner’s 1928 essay, conveniently reprinted and widely available from Augustus Kelly from 1968?

No? Shame.

Here is a list extracted from Wealth Of Nations:

• the Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’ (WN464);
• Sterling marks on plate and stamps on linen and woollen cloth (WN138–9);
• enforcement of contracts by a system of justice (WN720);
• wages to be paid in money, not goods;
• regulations of paper money in banking (WN437);
• obligations to build party walls to prevent the spread of fire (WN324);
• rights of farmers to send farm produce to the best market (except ‘only in the most urgent necessity’) (WN539);
• ‘Premiums and other encouragements to advance the linen and woollen industries’ (TMS185);
• ‘Police’, or preservation of the ‘cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances’;
• ensuring the ‘cheapness or plenty [of provisions]’ (LJ6; 331);
• patrols by town guards and fire fighters to watch for hazardous accidents (LJ331–2);
• erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours) (WN723);
• coinage and the mint (WN478; 1724);
• post office (WN724);
• regulation of institutions, such as company structures (joint- stock companies, co-partneries, regulated companies and so on) (WN731–58);
• temporary monopolies, including copyright and patents, of fixed duration (WN754);
• education of youth (‘village schools’, curriculum design and so on) (WN758–89);
• education of people of all ages (tythes or land tax) (WN788);
• encouragement of ‘the frequency and gaiety of publick diversions’(WN796);
• the prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population (WN787–88);
• encouragement of martial exercises (WN786);
• registration of mortgages for land, houses and boats over two tons (WN861, 863);
• government restrictions on interest for borrowing (usury laws) to overcome investor ‘stupidity’ (WN356–7);
• laws against banks issuing low-denomination promissory notes (WN324);
• natural liberty may be breached if individuals ‘endanger the security of the whole society’ (WN324);
• limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’) (WN539); and
• moderate export taxes on wool exports for government revenue (WN879).

"Viner concluded, unsurprisingly, that ‘Adam Smith was not a doctrinaire advocate of laissez-faire’.

That [Viner] needed to write this 150 years after Wealth of Nations to remind 20th-century readers conclusively that it contained detailed and specific evidence of advocacy of breaches of laissez-faire, popularly attributed to him, suggests that a substantial drift away from important elements of Smith’s legacy had taken place among early-20th-century economists.

How could Smith be so closely linked with laissez-faire policies when he so clearly and explicitly was not?”

[The list and the comment is reproduced from my “Adam Smith: a moral philosopher and his political economy”, 2008, Palgrave-Macmillan.]

Labels: , ,

Wednesday, March 03, 2010

More on Smith and Market Morals

From Beezer Notes HERE

[Originally published and written by by Maxine Udall (“girl economist”) HERE

“The Market For Morals"

Markets are places of reciprocity, of fair exchange, of a sort of equalizing justice. Without money or markets, there would be “no exchange or association.” The demand for services that are mutually beneficial is part of what holds society together. In Aristotle’s time, markets drew people out of their homes and into the marketplace to interact with their neighbors and townsmen and women; to observe the behavior of merchants over time; to develop sympathy for the individuals that they traded with; and to become invested in the welfare of their community. Markets were the warp upon which was woven the social fabric that binds us into community.

In Adam Smith’s time, markets had expanded beyond the Agora and the village square, but the social by-products of market transactions were not much different. The oft-repeated transactions of market exchange and trade provided opportunities for the development of individual virtues such as temperance and prudence as well as the social glue of mutual sympathy, trust, loyalty, and justice. Unfortunately, Smith’s thoughts (in Theory of Moral Sentiments) on the moral glue that binds us have been largely ignored, while a very few passages from Smith’s Inquiry into the Nature and Causes of the Wealth of Nations have become the scaffolding in support of extremely dysfunctional markets and the rhetoric that promotes them.

Here’s Smith saying something similar, but more nuanced than Aristotle:

Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard for their own 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.” [WN I.ii.26-7]

Of course, Smith’s conceptualization of “self-love” was much broader than the narrow “self-interest” that is often confused with it. Self-love hearkens back to Smith’s Impartial Spectator in TMS, the moral arbiter within:

“It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct…who calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration. It is from him only that we learn the real littleness of ourselves. It is this impartial spectator . . . who shows us the propriety of generosity and the deformity of injustice; the propriety of reining the greatest interests of our own, for the yet greater interests of others . . . in order to obtain the greatest benefit to ourselves. It is not the love of our neighbor, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, the love of what is honorable and noble, the grandeur, and dignity, and superiority of our own character

[TMS III.3.4: 137: from the Man of Humanity and the Earthquake in China]

Read the whole article - follow either link -it's well worth your time to read a concise exposition of the morality embedded in Smith's moral theory of markets and a timely reminder that there was much more to Adam Smith's analysis of how markets work most effectively in a moral environment.

Maxine Udall's Blog is well worth your regular visits (HERE)


Smith on Laissez-Faire, Markets and Morals

Edward A. Fallone writes in the Marquette University Law School Faculty Blog

“As R. Kent Newmyer succinctly summarized it, in his book “John Marshall and the Heroic Age of the Supreme Court,” Marshall understood the rights of property ownership to include an individual’s right “to acquire property and deploy it creatively as he saw fit and to enjoy its fruits without hindrance.” (Newmyer p. 264) But this does not mean that Marshall embraced Adam Smith’s theory of completely free markets, where private business enterprises act completely free from government regulation. First of all, not even Adam Smith advocated for markets that were sealed off from all government regulation. Second of all, while the Framers of the Constitution were aware of Adam Smith, there is little evidence that Smith’s economic theories influenced the Constitution.”

Adam Smith did not have a “theory of completely free markets” – he did not subscribe to the laissez-faire views of some of the French Physiocrats and did not use the phrase at all. All of the beliefs that he did have such a theory are attributions from the 19th century; at best they were careless exaggerations that missed the nuances of Smith’s political economy; at worst they were the self-interested preferences of merchants and manufacturers in the industrialization of Britain (see: The Economist, the parliamentary spokesmen for mill owners, The Anti-Corn Law League, the Manchester School, J. S. Mill, and non-readers of Wealth Of Nations).

The whole tenor of Wealth Of Nations was about how unfree markets were in 18th century Britain, characterised by the deliberate actions of ‘merchants and manufacturers’ and of mercantile policies favoured by legislators and those special interests that influenced them.

In proposing that these interventions in markets should be swept away, Smith carefully acknowledged that markets should be operated under the rule of law and under the moral guidance of participants.

To ensure compliance, Smith indicated that regulations may be necessary on a case-by-case basis (example: banking, assaying, indicating the quality of certain manufacturers; buildings posing fire risks; and public cleanliness and safety). It was also essential that government intervene in the procurement of certain public works to facilitate commerce and certain public institutions to facilitate education, healthy minds and treatment of obnoxious diseases.

Edward A. Fallone’s assessment is correct broadly.

[NB: Edward Fallone, Associate Professor at Marquette, carries the following in his faculty biography:

When I was a law student, my Corporate Law professor treated the study of insider trading, hostile takeovers and corporate crimes as the dry recitation of legal rules to be memorized. My approach to teaching is different. I teach these cases as human tragedies (and sometimes comedies) involving greed, betrayal and corruption. In my view, the law in this area serves the classic end of all laws: to protect ourselves from our own worst impulses.”

This about as close to a genuine moral ‘Smithian’ approach to people in markets as you can get.]

Labels: , ,

Tuesday, March 02, 2010

What Adam Smith Actually Said

Gary Clausheide writes in The Energy Bulletin HERE

Yes, It’s yet another example of a ‘plan’ to change the world by design, based on an account of history from earliest times written to derive the author’s assertions about what’s wrong with the world, including the unsurprising assertion/assumption that ‘them’ (the men with the power, however defined) consciously did what they did and the rest of ‘us’, or at least our ancestors, put up with whatever ‘they’ inflicted and inflict upon ‘us’. In short, the history of the human species has been a conspiracy of the few against the many.

But worry not, Gary Clausheide, has investigated the past and derived the ‘solution’ in something he calls ‘community’. Hence, his post:

The Importance of envisioning ‘community” (part 3)

I shall take two examples of his ‘history”, regarding the views of Adam Smith (read his long post at the link for much, much more):

Adam Smith said that the purpose of government was to protect property. Apparently the property of the wealthy is much more important than the homes, farms, and jobs of ordinary people.”

Adam Smith did indeed include in his lectures on jurisprudence, of which we have two sets of students’ notes (published in 1978 by Oxford University Press and later in a cheap edition by Liberty Press in 1982 – see Amazon) a discussion on the origins of civil governments, in which he summarized their role to protect the rich from the poor.

In those first ages of the new means of subsistence as some human groups left the old mode of subsistence, derived from the forest and the open plains (scavenging, hunting and gathering) to new modes, such as shepherding and more recently, farming, Smith identified an inescapable necessity, that of protecting the product of the labours of some people (but not those who persisted in the older ways) from the inevitable depredations of people wandering into the feeding areas of the herds and the planted fields of the farmers.

Those families who laboured to catch, coral, and consume from their herds had to prevent their herds wandering away, or being taken away by other families. The first property was that which belonged to the labourer. When a group of families enacted that idea they asserted the first acts of civil government – to protect those with from those without.

Those families who cleared the land of trees, plants, stones, and debris, to plant seeds, to tend them, and to harvest them, had to prevent animals and humans wandering across their lands and eating or destroying growing plants. In less than a day, either trespass could wipe out months of hard labour, from which those dependent on future food stock could starve.

The parable of Cain and Abel in Genesis is a tale of a clash between a farmer and a shepherd that echoes down the ages.

Group-approved conduct and group disapproved breaches of such agreed conduct also bound the members of a hunter-gatherer group. The new forms of subsistence that appeared along today’s Turkey/Syria boarder area 11,000 years ago, which spread from 8,000 years ago into Europe, gradually formed more complex civil codes and the associated apparatus of civil government.

Those families that had adopted the new subsistence modes became wealthier than those that had stayed as hunter-gatherers and those who occupied the fringes of the new modes as occasional labourers, supplementing their reliance and access to both old and new modes (I take account of Diamond's critique. He missed the point that for those early herders and farmers, living at the end of the Ice-Age. it was adapt to new modes or die).

By wealth, Smith, as always, meant the “annual output of the necessaries, conveniences, and amusements of life”. It had nothing to do with today’s meanings of wealth; in those days of which Smith speaks, wealth was what was created by the labour of those who undertook the work to make the new modes viable.

Gary Clausheide appears not to have understood these points in his assertions. Of course, from these early starts, the spread of the new modes took on different forms and moved away from the original right of labourers to the fruits of their labour to tribal, later national, forms of ‘kingship’, represented by the agrarian societies of Egypt, Babylon, Greece and Rome. But that is another story. And covers the role of civil government to protect the rich from rival rich claimants to another’s property as well as the poorest claimants to the wealth created by others.

A lot of writers in the “collapse” movement disparage trying to plan out a society in advance. Capitalist economists certainly hate the idea of a “planned society”, believing as they do in Adam Smith’s theory that everyone naturally operates in their own self-interest, and that doing so leads inevitably to social harmony – with the help of an invisible hand. It was and is a pretty wild theory, but it has served the merchant class well these past 230 years.”

I do not recognize this as a “theory” enunciated by Adam Smith. It is certainly a theory attributed to Adam Smith by modern economists and Gary Clausheide, of which I comment critically upon regularly on Lost Legacy. Briefly, Smith was not naïve about the “rulers of mankind”. His critical approach to feudal lords (and the allodial lords before them), to princes, sovereigns, and legislators, and, above all, to the “merchants and manufacturers” of his day (of whom he scarcely had a word of praise) is well known by all who have read more than a few tit-bit quotations, torn out of context, from his books, Moral Sentiments (1759) and Wealth of Nations (1776).

Gary Clausheide appears to be among the quotation seekers and not among the readers of the works of Adam Smith (a feature, I am sad to say, that is prevalent among too many modern economists, and not just “capitalist” economists).

Labels: ,

Monday, March 01, 2010

Adam Smith On Banking Regulation

Paul Krugman writes in the New York Times HERE

Financial Reform End Game

For one thing, governments always, when push comes to shove, end up rescuing key financial institutions in a crisis. And more broadly, relying on the magic of the market to keep banks safe has always been a path to disaster. Even Adam Smith knew that: he may have been the father of free-market economics, but he argued that bank regulation was as necessary as fire codes on urban buildings, and called for a ban on high-risk, high-interest lending, the 18th-century version of subprime. And the lesson has been confirmed again and again, from the Panic of 1873 to Iceland today.”

Krugman is correct about the details – Adam Smith did advise that government regulation of elements of banking practice justifiably could be legitimised by the consequences to innocent others from failures in certain specific activities, notably the issue by banks of low denomination promissory notes, such as for 6 pence, even though customers and their customers were prepared to accept them, and certain high risk lending (WN II.ii.94: 324).

He acknowledged that such regulations are “a manifest violation of that natural liberty which it is the proper business of law, not to infringe but to accept” (no prevarication there then), but set against the “security of the whole society” the “natural liberty of a few individuals” which “might endanger” that “security”, should and “ought to be restrained by the laws of all governments; the most free, as well as the most despotical” (no lack of clarity either).

He went further too: not only must bankers be “restrained from issuing” low value bank notes (the central bank had not monopoly at the time in circulating paper currency), they must also be required to make “an immediate and unconditional payment of such bank notes as soon as presented”. The consequence of this last regulation would be that “their trade, may with safety, be rendered in all other respects perfectly free” (WN II.ii.106: 329).

The purpose of banking regulations was to oblige “all of them to be more circumspect in their conduct, and by not extending their currency beyond its due proportion to their cash [in Smith’s day, gold and silver], to guard themselves against the ruinous runs, which the rivalship of so many competitors is always ready to bring upon them”.

He added that by “dividing the whole circulation into a greater number of parts, the failure of any one company, an accident which, in the course of things, must sometimes happen, becomes of less consequence to the publick” (WM II.ii.106: 329).

This chapter on banking in Wealth Of Nations should be a highly advised read set by tutors to their students in any course on banking and finance.

Some so-called “free-market” ideologues, who oppose all regulation whatsoever, should recognize, as Smith did (he was no ideologue), that the freedom of the market works best, when protected by laws of justice and when its participants exercise a high degree of prudence in their conduct before they can ruin it for everybody else.

Labels: ,