Wednesday, December 29, 2010

Joseph Stiglitz Repudiates the Invisible Hand, but Accepts the Myth of Adam Smith's Culpability in Promoting It

A short video of Joseph Stiglitz declaiming the modern version of Adam Smith’s alleged ‘doctrine’ of the ‘invisible hand’ is available HERE

‘Joseph Stiglitz Against Adam Smith's Invisible Hand’

“Nobel Prize winner Joseph Stiglitz challenges the influential teachings of 18th-century economist Adam Smith, citing flaws with Smith's metaphor of an "invisible hand" guiding the free market. "The reason the invisible hand often seemed invisible was that it wasn't there," he says. Stiglitz claims an uncritical adherence to Smith's ideas is partially to blame for the current financial crisis

Stiglitz’s declamation takes the view that the modern teaching of “almost every graduate school in the country’ is wrong, because the ‘invisible hand’ is ‘not there’, which leaves Adam Smith lumbered with what was a modern invention (see Paul Samuelson, Economics: an introductory analysis, p 36, McGraw-Hill, 1948) that is not supported by the Smith’s texts, not just by a nuance, but by being quire contrary to anything Smith wrote.

Stiglitz argues that the claim that modern markets do not support the modern assertions and the evidence exposes the fallacy that they do, and yet he still lumbers Adam Smith with the authority for the claims made in his name.

The fact is, Adam Smith is wholly innocent. That he was ‘wrong’ in some way is a ludicrous claim; the guilty parties are all those lemming-like economists who repeat the charge of Smith’s “error”, but who have never bothered to read Adam Smith’s use of the metaphor of an invisible hand on the three occasions only that he used it. In none of these uses was he referring to anything remotely related to ‘perfect competition’. The edifice collapses on the evidence, yet very bright minds believe the contrary.

He referred in Astronomy to credulous Romans who believed that the God Jupiter fired thunder bolts in his anger (Smith called it ‘pusillanimous superstition’; In Moral Sentiments he referred to rich warlord/feudal landowners, not markets, and in Wealth Of Nations he referred to some, but not all, merchants in mercantile Britain, who preferred the relative ‘safety’ of a tariff-ridden, outright prohibitionist, mercantile monopoly of Guilds, the Apprentice Statutes, the Settlement Acts, and Chartered-venturer Britain to risking their capital abroad (protected by the Navigation Acts, policed by the Royal Navy) .

If you could ever get further from competitive markets, I cannot think of what it would look like, short of total State communism. And despite all this, modern economists read into Smith the 'First Welfare Theorem' and 'General Equilibrium'!

Not since astrology and alchemy ran through and alongside natural science has a discipline claiming to be science (in this case modern economics) promoted such a crass error and called it scientific.

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Tuesday, December 28, 2010

An 'Historically-Informed Progressive' Distorts Adam Smith

Sasan Fayazmanesh (Professor Emeritus of Economics at California State University, Fresno) posts in Real Economics (promoting itself as ‘Technologically Literate, Historically Informed, Politically Progressive’ (not modest then) HERE:

Waiting for a New Economic Theory

“Economic theories, for the most part, have emerged in response to particular social situations or governmental policies. For example, Francoise Quesnay’s 18th century Tableau Economique came into being in reaction to the plight of the French peasantry, excessive taxation, and government regulation that followed mercantilist teachings. Adam Smith’s “invisible hand” theory similarly appeared as a response to mercantilist restrictions. It also corresponded to the early stages of the Industrial Revolution, when inventions and innovations made England relatively prosperous. Thomas Robert Malthus’s population and glut theories emerged in the midst of the Industrial Revolution, when migration of peasants to the cities, unemployment, and poverty became rampant. Karl Marx’s version of the labor theory of value was a response to the revolutionary movements in 19th century Europe, as exemplified by the 1848 uprising and the 1871 Paris Commune. John Maynard Keynes’s “general theory” was developed in the midst of the Great Depression and was a response to the laissez faire economics and policies that prevailed at the time.”

The problem I have with this 'informed history' is its generalizing to the point that it just fits plausible claims to suit a theme, echoing the off-hand quips of the leftist certainties of 1960s academic coffee-rooms across the land, which when repeated by impressionable students sounded hollow.

Taking Adam Smith’s case, for instance, the ‘mercantilist restrictions’, these restrictions, in the main were present for a long time before Smith developed his ideas. The Navigation Acts went back to the 1660s – over two-hundred years before he gave his Lectures on Jurisprudence (1762-3) and began writing Wealth of Nations in 1764.

Moreover, it was Queen Elizabeth’s ministers a hundred years earlier in the 1500s who introduced the mercantile laws on Apprentices, Settlement, Guilds, and monopolies through patents, licences, and Royal charters.

One might ask if it’s a stretch to assert factor A caused Book B, when the cause is so loosely dated to the critique. Worse, in the 1760s, the so-called ‘Industrial Revolution’ that really become prominently from the 1800s, was hardly noticed by Adam Smith (if at all), or indeed anybody else at the time. By the time that it arrived so prominently, Smith's legacy had been distorted as to be unrecognisable and he was dead. Methinks Professor Sasan Fayazmanesh is stretching causation to suit his convenience.

He really grasps at straws with: "Adam Smith’s “invisible hand” theory similarly appeared as a response to mercantilist restrictions."

What ‘theory’ is this? Smith did not have a theory; he used a popular and rather common metaphor, which is a word or words that refers to an “object”, but in a “more striking and interesting manner”, which I am sure Professor Sasan Fayazmanesh is well aware of, having read Adam Smith’s Lectures on Rhetoric and Belle’s Lettres” ([1763] 1983, p 29, Oxford University Press).

And the metaphor’s “object” on this occasion? It was the insecurity of some, but not all merchant traders in mercantile Britain who were risk averse to sending their capital abroad and, therefore, were led by that very insecurity to invest locally, which had the unintentional consequence of adding to national investment and employment – because the whole is the sum of its parts.

Further, this consequence occurred, not “as a response to mercantilist restrictions”, but under their protection! These particular British merchants, discussed by Smith in Wealth Of Nations, were protected by the British Royal Navy, and by scores of mercantile laws and regulations – and still they felt insecure abroad – but less so when they invested within Britain and felt ‘protected’ by mercantile tariffs and prohibitions, the Navigation Acts and the mercantile regulations.

Professor Sasan Fayazmanesh slips up in being “Historically Informed’ in the Real Economics Blog on this occasion.

He is, however, right in his assessment of modern economics:

“The free market advocates still fall back on the marginalist or “neoclassical” theories that have dominated economic teaching since the end of the 19th century (the term “neoclassical” is a misnomer, but it is widely used). This unreal, a-historical theory started not with analyzing any real economy or human behavior, but with certain concepts in mathematical physics.

With one quibble. Not all ‘neoclassical’ economists are ‘free market advocates’ and not all ‘free market’ advocates are ‘neoclassical’ economists. It’s a lot more complex than that.

Most of us 'free-market economist only claim to be ‘classical economists’, closer to Adam Smith than Ricardo or Marx.

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Monday, December 27, 2010

On Polanyi Again and a New Critic

David Ruccio writes in Occasional Links and Commentary (HERE)

What may be a useful contribution to the debate that I am having with Dan Hirschman on Polanyi’s Theories (see also earlier posts).

David writes:

“…Polanyi’s major contributions, which I think are three: (1) the distinction between markets and the market-system; (2) the argument that a market-system was not the outgrowth of a so-called natural propensity to “truck, barter, and exchange” but, instead, of the activity of the state; and (3) the claim that the market-system, if allowed to develop without controls, would more or less inevitably lead to economic and social crises. Clearly, the three contributions place him at odds with Adam Smith and many others who have celebrated the existence of a market system.

Exchange relations as identified by Smith and practised by feudal/ monarchial/warlord societies, prior to the emergence (‘at last’) of “commerce”, which was the ‘Fourth Age’, in Smith’s progression (Lectures on Jurisprudence, [LJ(A) i.32: 16)]. Incidentally, Smith’s Four Ages of Man (1762) show quite clearly, Smith was well aware of the differences among the ages of Hunting, Shepherding, Agriculture and Commerce, and undermines Polanyi’s narrow views of Smith’s concept of exchange relationships.

The exchange propensity (Wealth Of Nations) preceded the commercial Age; it was a consequence of human ‘reason’ and ‘language. It was a facet of tribal societies too (in fact, it was and remains a ‘universal’). It is counter-factual to assert that the “market-system was not the outgrowth of a so-called natural propensity to “truck, barter, and exchange”. Polanyi and his disciples focus on their 20th-century notions of “truck, bartering”, confusing these terms with a purely modern commercial role, which swamps the historic role of human “exchange” behaviour.

The earliest Homo sapiens handled exchange transactions even in the daily choice of which direction to set off in their gathering, scavenging, later hunting – they had a 360º multiple-choice decision, for which brutal experience taught teach them that scattering aimlessly in all directions was sometimes dangerous and life-threatening. The decision required mediation through exchange behaviours and eventual agreement.

Smith’s ‘celebration’ of the market system – or the ‘Age of Commerce’ - was conditioned, not by some ideological obsession, but by the simple observation that the meanest of labourers in 18th-century Britain had access domestically to far greater ‘necessities and conveniences’ of life than the most powerful of tribal ‘chiefs’ in Africa and North America. He credited this to the Age of Commerce, rude and crude as it was in his day, and which its subsequent history to the 21st century has magnified those discrepancies in one direction only - upwards.

Now those discrepancies had long historical roots that combined the remarkable fact that the per capita income of the labourers – the majority numerically throughout the millennia remained near subsistence yet population grew slowly, and the rising total “GNP” was appropriated by the elites, who deployed the ‘surplus’ on stone-built civil monuments, churches and palaces, and warfare.

The Age of Commerce developed from the exchange propensity – buying-selling from ‘truck, barter, and exchange – already present from the preceding millennia, first manifested in the evolution of language (agreement on which word sounds meant whatever). See Smith’s 1761 essay on the Origins of Language, part of a major 18th-century debate; and Moral Sentiments (1759) on the mediation amongst early and later humans on acceptable moral conduct. While the exchange propensity was and remains universal, the world produced thousands of different languages and many different moral codes (those since Classical Greek and Roman times were taught by Smith 1751-64). Neither of these phenomenon evolved by human design (the Left's designed 'Esperanto' is dead) .

The ideas of “commodification” have Marxist roots, though that alone does no disqualify them, but they are part of an ideology – no counter-facts can disprove them – as is the myth that exchange behaviours are alien in tribal societies. They are even present in some animal societies (Chimpanzees, for instance) in reciprocation behaviours, and certainly in human societies from the earliest times and to the present. To deny them is ideological. That is why I say Polanyi invented a theory and then sought evidence. Smith observed; he had no plans to change the world. Neither have I. The most dangerous breed on Earth are philosophers who think they can change the world - they only make it worse.

Smith recognized the importance of the Age of Commerce, and noted how it had collapsed after the Fall of Rome, when warlords took over Western Europe, until it re-emerged, slowly and gradually, a thousand years later and it spread and deepened, not because of the State, but despite it. No state invented agriculture 10,000 years ago.

Laissez-faire played no part in Smith’s thinking (he never used such words) – that was a 19th-century invention by propagandists of Mill and Mine owners in Parliament and politics.

I assure David I am an economist who has looked closely at the works of modern anthropologists (and sociologists); I find in them confirmation of Smith’s conjectures, and repudiation of Polanyi’s narrow, political focus. He should have looked beyond Engels and Marx - as should David.

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Sunday, December 26, 2010

Just A thought About Rights Via Don Boudreaux

Don Boudreaux (26 Dec) in Cafe Hayek (HERE): writes to the Boston Globe and discusses which rights are legitimate and which are not.

“The rights that Americans wisely cherish as being essential for a free society require only the refraining from action. Your right to speak freely requires me simply not to stop you from speaking; it does not require me to supply your megaphone.

This is worth thinking about, which I believe is Boudreaux’s intentions in his brilliant, short letters to US media.

In Moral Sentiments Adam Smith, discusses theories of moral sentiments from many predecessors, which often confuses commentators who do not (or cannot) distinguish between what were Smith’s views and what were somebody else’s from the many brilliant philosophers he considered his students should know about.

Remember, his Theory of Moral Sentiments was based on his Glasgow University lectures. Those who forget this sometimes attribute to him ideas that were not necessarily his own. There are many dialogues flowing through TMS.

Here is one of them:

In one sense we are said to do justice to our neighbour when we abstain from doing him positive harm, and do not directly hurt him, either in his person, or in his estate, or in his reputation” (TMS VII.ii.1.9: 269).

The virtue of justice is a negative virtue that is practised by avoiding its breaches, unlike positive virtues, like the behaviours of beneficence and benevolence, which should be practised.

Just a thought.


Friday, December 24, 2010

Polanyi was Wrong on Exchange and Trade

Dan Hirschman's response is well considered, with probing questions that deserve appropriate answers. So here goes, with the covering abvice to think for yourself and accept nothing on mere authority. If students have a patron saint, it surely was ‘doubting Thomas’.

While I would agree with anyone who describes Smith’s use of the metaphor of ‘an invisible hand’ as "exaggerated out of all proportion", if by ‘exaggerated’ is meant its modern interpretations, which are now a cult.

Smith’s use of the metaphor was quite realistic and measured. He said that those merchants who were concerned about the security of their capital if they sent any of it to Continental Europe (or to the colonies) were ‘led by an invisible hand’ to invest it ‘domestically’, and thereby, unintentionally and without forethought, they increased domestic revenue and employment by the amount they invested, which conformed to the modest arithmetical rule that the whole is the sum of its parts - no basis here for the welfare theorem, nor General Equilibrium. I have seen no evidence that Polanyi saw it quite like that. He was more concerned to show that self-interest via an invisible hand did not benefit society as claimed by modern economists.

Polanyi is not excused by his writing in 1944. His was not a researched assertion; it was invented to suit his sociology based on early anthropology, then strongly influenced by Engels and Marxism, not by philosophers such as Smith, nor that of the evidence of historians of classical Greece and Rome who provided much detail to accord with Smith’s conjectures about ‘truck, bargaining and exchange’.

On reading Smith’s Lectures On Jurisprudence partly (LJ(B) available to Polanyi since 1895, edited by Edwin Canaan, or Wealth Of Nations, or Moral Sentiments Smith provided much in support of his thesis. Polanyi developed an alternative ‘theory’ as part of his critique of capitalism and ‘evidence’ was assembled to justify it, I was sceptical of Polanyi’s core assumptions and, later, dismissed them from reading modern anthropology journal literature and some classical works (Maus on The Gift, etc.), plus M. Silver’s work on Classical times.

I mentioned, in passing, the payment of military wages in coinage in Rome as a factor that should have made Polanyi more cautious. There were hundreds of thousands of Roman soldiers all over what became the Empire, many of them stationed among tribal societies, and their money was spent in frontier towns and established cities. It was representative of a fairly developed monetary system, indicative, not decisive. There is much, much more. I only remain surprised when I hear Polanyi’s thesis quoted as an authority of ancient (even tribal societies) today. He has a revered status at some conferences I attend.

Remember, Smith’s remark was about ‘truck, barter, and exchange’ and not about ‘trade’, though the mental skills of the former were easily adapted to later trade behaviour. It followed, claimed Smith, from the faculties of ‘reason and speech’, which unambiguously places it very early in human prehistory – certainly long before the 18th century!

These ‘exchange’ behaviours were evolved from the earliest societies – what James Otteson calls the ‘market place of life’ (think of the evolution of language and all its different forms across the Earth, and the emergence and evolution of local morals).

As for no exchange behaviour in ‘labor and land’, I would point you to the necessary precondition of distributing slaves among a free population – the need for price determination by owners and ‘buyers’ (cash, favours, positions, i.e., ‘prices’) –all several times a year. Or consider the, often prolonged, exchange negotiations, over land in dowries, inheritance, debts, marriages, and alliances, across many generations. Money may not always have come into it, but land, power, and rivalry, even money certainly were definite substitutes .

I can definitely state that for Smith exchange was part of human nature and universal across all known societies in his time and for us in ours.

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Tuesday, December 21, 2010

A Debate About Polanyi and Exchange

Dan Hirschman responds to my invitation to post his comments on my Blog Post (below) and his response is posted in full:

Thank you for your comments and your criticism! I will respond in this comment and think more carefully about those issues I don't address.

First, I want to assert (to make sure I am correct) that you are not criticizing Polanyi's reading of the hidden/invisible hand. You and Polanyi agree that this metaphor was "exaggerated out of all proportion". You and Polanyi and Emma Rothchild also all agree that "Adam Smith wished to discourage the idea that the self-interest of the merchant naturally benefited the community." Am I correct in both those assertions?

Second, I am in no position to evaluate Polanyi's claims about primitive and archaic societies. I will note that Polanyi was writing primarily in the 1940s and 1950s, and the text you cited was from the 1990s. So, are you criticizing Polanyi for being wrong now or saying that he should have known even 50 years ago that he was wrong? Perhaps this difference does not matter, but I would like to clarify.

Third, while I am not in a position to evaluate the secondary literature on Polanyi's claims about primitive and archaic economies, I will point to one source that attempts to do just that and comes out much more sympathetic to Polanyi than your quick dismissal here. Gareth Dale has just published a highly-regarded book on Polanyi and his legacy, Karl Polanyi: The Limits of the Market. In Chapter 4, on "Trade, markets and money in archaic societies" (esp. 185-187), Dale tackels this question directly. I have not read the section thoroughly, but the conclusion presents a much more balanced take on Polanyi's insights into archaic societies noting that many of his critics misread his position. For example, you cite the existence of money in ancient Rome as evidence of the existence of markets. Polanyi asserted that markets existed and played a substantial role in archaic (though not tribal, I believe) economies, but they were not the primary form of integration. The mere existence of markets is part of Polanyi's understanding, not a datapoint in counter to it. The question is, what sort of markets were they? Fixed price, or supply-demand-price markets? Markets for land and labor and food or luxuries? Etc. Again, I cannot speak to the recent historical work on ancient civilizations, but I want to note that it is easy to read Polanyi's claims as being more absolute than they are.

Fourth, following from point three, Polanyi asserts that Smith is wrong about "TBE", that most people in most times and places have not engaged in much trucking, bartering and exchanging, and especially not over the most important goods (labor and land). Again, I am no expert in the history of markets and exchange! But, for Polanyi's theoretical claim about human nature (or the lack thereof) to hold, whether or not "TBE" exists in Rome is not entirely crucial. The important thing is that there exist some substantial number of societies in which these activities are not found. I think the case for the absence of truck, barter and exchange is more compelling for "tribal" rather than "archaic" societies (to use Polanyi's terms). For an interesting take on the history of the encounter between economic and anthropological thought, I recommend Heath Pearson's (2000) "Homo Economicus Goes Native" in History of Political Economy. I would be very curious as to your take on whether or not Smith believed that "truck, barter, and exchange" was part of human nature, and if so what that meant for Smith (since you assert, and I am readily willing to accept, that Smith's understanding of exchange was complex).

Fifth, I believe I agree with you that Smith was much more interested in saving the Indians from the horrors of the EIC than Polanyi notes in that brief (and, to reiterate, not intended for publication) passage. Beyond that, I do not have a strong sense of the whole of Smith's take on the EIC, and I very much defer to your reading!

Sixth, and last, I am curious as to your thoughts on Rothschild's work on the invisible hand. Here you suggest that she "still misreads" the role of the metaphor. Which "more striking and interesting" metaphor are you referring to? Overall, what is your take on Rothschild's Economic Sentiments, and her assertions re: how Smith's legacy was perverted into the employer's creed?

Many thanks Dan for your comments and questions. You address the issues clearly and I shall attempt later today to explain my criticism of Polanyi and where I agree/disagree with Emma Rothschild (her Economic Sentiments is a brilliant book). Meanwhile, I am grading MSc exams at present (a relic of my old day job) and must finish before Christmas. Some hope ...
Best regards, Gavin

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Monday, December 20, 2010

What's Wrong With Polanyi?

Dan Hirschman writes in his Blog, A Budding Sociologist ()HERE:

“Polanyi Was Right About Adam Smith and the Invisible Hand”

Polanyi argues that Smith was wrong about the nautralness of the motivation to “truck, barter, and exchange” and that for most of human history, trucking, bartering and exchanging are nowhere to be found. Polanyi then memorably says of Smith, “In retrospect it can be said that no misreading of the past ever proved more prophetic of the future.” (GT 45) So, Smith was utterly wrong about the 18th century and before, but prescient about the 19th century. …

Polanyi’s reading of Smith is equally helpful. Writing here in 1947 according to the footnotes, Polanyi is in some sense anticipating the dramatic rise of Paul Samuelson and his famous economics textbooks which claimed that Adam Smith emphasized the power of the invisible hand of the market to produce socially optimal outcomes.

.. Given Gavin Kennedy’s recent work on the history of the invisible hand metaphor, and my own reading of the passage, I couldn’t agree more with Polanyi. In some ways, I’m coming to appreciate more Emma Rothschild’s reading of the invisible hand as a “mildly ironic joke”. In particular, Smith devoted several extensive passages to showing how merchants (and others) often colluded to act in their own interests and against that of the public … And Smith’s hatred of corporations was evident, as noted by Polanyi. In the famous invisible hand passage, Smith notes that some merchants prefer to safeguard their capital and thus invest locally rather than abroad, in spite of the higher possible returns in foreign trade …

So, his point is that most merchants are most of the time out for themselves and do all sorts of terrible things that are not at all in the public interest to get their way. But, some merchants, those that out of fear (and not civic-mindedness) support domestic over foreign industry, end up promoting the interests of society by accident. Hence the irony of the joke.

Dan Hirschman is a regular reader of Lost Leacy and has contributed to discussions with comments much appreciated by myself.

However, I have some comments that are mainly critical of Polanyi and some that are my suggestions for Dan’s further study of the these important issues.

1. “Polanyi argues that Smith was wrong about the naturalness of the motivation to “truck, barter, and exchange” and that for most of human history, trucking, bartering and exchanging are nowhere to be found.”

This statement by Polanyi is the most irresponsible statement, which denies almost every document on ancient history that has been published by scores of historians working on the available data from earlier civilisations. Simple indicator: Roman soldiers were paid in gold coins – where money circulates on such a scale, the presence of rudimentary markets are indicated (see M. Silver’s considerable research on Greek, biblical and Roman societies).

2. Smith’s statements on ‘truck, barter, and exchange’ are often presented as ‘trade’, not the much broader idea of exchange, is central to Smith’s historical (and pre-historic) methodology in the history and evolution of human societies, including in the origins of varied subjects like language, morals, jurisprudence, political economy. It is not confined to commercial societies. (See my chapter extending Jim Otteson’s ideas in his Market Place of Life (2002). In short, exchange and its associated persuasion, compromise, fusion of commitment and reciprocation was a far richer idea of Smith’s than Polanyi seemed to understand.

Polanyi’s tried to create a new sociological approach to political economy (1944) and an ideological criticism of 20th-century capitalism. He misunderstood exchange.

3. “He demanded, e.g., that the British government should rule India, not the merchants of the East India Company, whose interests, he asserted, were contrary to those of the population.

Smiith’s comments on the EIC were directed at saving the powerless Indians from the rapacity of the merchants and not a declaration of confidence in the British government (not all that separable from the corruption of the EIC). Polanyi presents this to support his critique of merchants and praise his alternative of government.

But, some merchants, those that out of fear (and not civic-mindedness) support domestic over foreign industry, end up promoting the interests of society by accident. Hence the irony of the joke.”

While interesting about Emma Rothschild’s neglected (by neoclassical and rightist economists) phrase of the IH metaphor as Smith’s “ironic joke”, she also still misreads the role of a metaphor by Smith. Those “insecure” merchants were the object of his use of a “more striking and interesting” metaphor.

I could make other comments but the above few are repesentative of the main ones. Naturally, Dan is invited to respond with a full post.

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Wednesday, December 15, 2010

An Austrian on An Invisible Hand

Adrian Ravier (Economista) Blog in a interview with Richard M. Ebeling, professor of economics at Northwood University in Midland, (HERE):

“Austrian Economics versus the Mainstream”

Professor R. Ebeling;

As the same time, I found fascinating how the Austrians took up Adam Smith’s idea of the “invisible hand” and applied it to demonstrate the origin and evolution of social and market institutions that are often the unintended consequences of human action. This reinforced the argument against those who arrogantly wished to socially engineer human society. There is far more knowledge and experience at work in social processes, over years and over generations of people, than any planners could ever master and successfully manipulate to any good end.

Austrians certainly have taken up what they call Adam Smith’s idea of the “invisible hand” and, in my view, have joined neo-classical economists, whom they normally criticize, in distorting Smith’s use of the metaphor – transforming it into an ‘idea’, a ‘theory’, a ‘principle’, even a ‘paradigm’.

They add strength to the false notion, common among modern economists, that Adam Smith subscribed to a view that he was anticipating modern theories of general equilibrium. In fact, he only expressed the view that each domestic trader by participating in the national economy, they added to annual ‘domestic revenue and employment’, which simply expresses the every-day arithmetic statement that the ‘whole is the sum of its parts’ – more parts add to a larger total. This is hardly high mathematics.

Where the Austrians are right is in the statement that there are often “unintended consequences” of human motivations and actions. Smith certainly understood that view and expressed it. Where he would be more cautious is in concluding that the actions of individuals are ‘led by an invisible hand’ to ‘always’ result in harmonious or ‘best good’ outcomes (cf. Samuelson, Economics, 1948, p 36).

Smith’s use of the metaphor of an invisible hand had nothing to do with such benign consequences. We should, instead, focus on the ‘unintended outcomes’ of actions. These are truly significant and was one of points that Smith made in Wealth Of Nations.

I have along had reservations about the use of ‘spontaneous’ in association with these ideas. It’s simply the wrong word. Individuals act by choosing from among the possible options that are available, not necessarily on a rational basis – choice can be random, uninformed, wildly ill-advised, fortunate, inspired, lucky, fortunate, unfortunate, and so on. That a change leads to unforeseen outcomes (as in, for example, evolutionary change) is not best described as spontaneous, even if we cannot explain why a change occurred, particularly if it turns out, retrospectively, to be fortuitous. Change can take place after long periods of no change.

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Monday, December 13, 2010

A Shanghai-ed Column on Free Trade

Donald Boudreaux posts (12 December) on the ever entertaining and educational Blog, Café Hayek (where “Orders Emerge”) HERE

I strongly recommend that you (especially if you are a student or recent graduate – or even if you are senior economist) bookmark Café Hayek and dip into it regularly.

Don Boudreaux specialises in short, snappy and, oh! so brilliant, ‘letters’ to US papers and tv news channels that are bitingly witty and to the point on pronouncements on the eternal (so it seems) nonsense spouted on public policy, especially on tariffs and trade, which preach the same nonsense that was spouted in Adam Smith’s day by mercantile-minded lobbyists in and around parliament. (An example of how Don Boudreaux would never compose a sentence for publication.)

Contrary to popular credulity, these tariff mongers never went away in the 19th century and are still with us since GATT and WTO slipped into the headlines, wrongly implying that the free-trade campaign could sit back and exclaim “job-done”.

Here is Don’s latest blast at the still-with-us past:

“My buddy Bruce McLane alerted me to Maureen Callahan’s article in today’s New York Post – in response to which I sent this letter:

The arguments that Maureen Callahan lobs as grenades against technological change and trade are duds (“Not made in the USA,” Dec. 12). The reason is that each of these arguments would have been equally applicable to 19th-century America, with the only difference being that the fear back then would have been the decline of agricultural employment rather than of manufacturing and low-skill service-sector employment.

In 1820, 79 percent of Americans worked in agriculture. This number, however, was progressively reduced by improvements in technology. Chemical fertilizers and pesticides; mechanized planting and harvesting equipment; refrigeration; improved veterinary medicine; better irrigation; faster transportation; and improved packaging for produce – along with more food imports made possible, in part, by motorized sea and air travel – all “destroyed” millions of agricultural jobs.

Would the proper policy in the 19th century have been to stymie these changes because many workers who knew nothing but farming lost their agricultural jobs? If you agree that the answer is “no,” then it’s senseless to draw policy conclusions from Ms. Callahan’s lament for “the 45-year-old toll taker replaced by the E-ZPass” and “the 50-something cashier replaced by a self-service scanner.” These jobs, and the others whose demise Ms. Callahan mourns, were themselves made possible only because technology and trade had earlier eliminated the need to have so many people toil on farms and ranches.

Contrary to Ms. Callahan’s claim, the trend of technology and trade changing the contours and contents of economic opportunity did not begin 30 years ago: it began in earnest in the 18th century. And contrary to M[s]. Callahan’s suggestion, this trend is utterly essential to continued economic prosperity.

Donald J. Boudreaux”

Surely a delightful response, that is both polite and educational?

Bookmark Café Hayek now HERE and enjoy!

[Apologies to Don if I have invaded his copyright …]

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Sunday, December 12, 2010

A Blogger is Perplexed

“Dave” posts on Flatland Rescue Blog (HERE) and writes the following. He seems to be a nice guy, modest too (he’s probably a computer genius). He raises some interesting questions:

‘The Invisible Hand.

No discussion about Adam Smith would be complete without a reference to his famous phrase, “the invisible hand”. I was surprised that the term did not figure more prominently in the book. I only found it once:

'As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value: every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. 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. (Smith, 1776)

To me, this concept makes sense, but there is plenty of evidence to the contrary in recent history. I would like to think that, despite the seemingly irrational behavior of people, their general tendency to look out for their own best interest will work for the best in society at large. Then I see an event like the sub-prime loan disaster that almost takes down the country’s economy. The people who took out those loans knew that they could not pay the bills. The lenders who made the loans knew that the default rate would be sky high. Somehow, actions taken in self-interest did not benefit the society at large. Perhaps it is a case of the old adage, “If something sounds too good to be true, it probably isn’t.” Adam Smith was a professor of moral philosophy and a Scotsman. As such, he was likely accustomed to ordinary folk with the sense to know what was in their best interest.’

See what I mean?

Now let’s treat his questions (asked or implied) helpfully. He deserves answers, which in the normal case he would not get from a modern economist, who would waffle to hide the gaps in their story-book fiction of the so-called “invisible hand’. “Dave” deserves better.

I would ask all users of this paragraph who genuinely want to establish what Smith means by this statement, to consider what lies behind the words ‘every individyal”. Most jump from there to assume that “every individual” means just that; that he is about to make a general statement in the paragraph respecting every single person all the time and link it to his use of the metaphor of “an invisible hand”. But was he?

Now, in a sense he was, but only in the context of the paragraph, and the eight proceeding it, Smith is speaking about those individuals who are the subject of the first nine paragraphs of chapter 2, in Book IV, in which the subject is the behaviour of a specific group of individuals, namely those who prefer to invest in “domestick industry” (Smith’s spelling) rather than in “foreign trade”. Clearly, the paragraph is not about every individual in the whole set of possible individuals.

The distinction is not a mere quibble. There are at least two sets of individuals beside the subject of the paragraph (those who specifically prefer to avoid foreign trade), namely those individuals who prefer to invest abroad (in Europe or the colonies) of which there was a high number, and those individuals who invest at home in “domestick industry” (another high number) for other reasons, besides those (an unspecified number) who are concerned about the security of their capital (many investors of capital at home do so for reasons of habit, scale, and opportunity, and such like, who do not think of sending their capital abroad (local tradesmen, butchers, bakers, and candlestick-makers, and such like). For them too, each “individual necessarily labors to render the annual revenue of the society as great as he can”. This is an inevitable consequence of their actions, whatever their motives besides their “insecurity”.

Generally, too, for them “indeed”, each of such individuals “neither intends to promote the public interest, nor knows how much he is promoting it.” But for the third group – those whose “insecurity’ about investing abroad, that is, THE SUBJECT OF THE EIGHT PARAGRAPHS, which specifically prefer “the support of domestic to that of foreign industry”, which is specifically mentioned eleven times (WN IV ii.1: 452; ii.2: 453; ii.5: 454; ii.6: 454 and 455: 5 times; ii.7: 455; ii.9: 456: twice).

In short this sub-group, within the three sub-groups of merchants, unambiguously, is the subject and the object of the “invisible hand” metaphor.

Modern economists, conveniently for their invented meaning of Adam Smith’s use of the metaphor of an invisible hand, have leapt from Smith’s subject – the actual object of Smith’s use of the metaphor (and remember: according to Adam Smith’s teaching in his Lectures On Rhetoric and Belles Lettres, , Monday, November 29, 1762, p 29, [Oxford University Press, 1983]: “of what is called the tropes and figures of speech”:

In every metaphor there must be an allusion betwixt on object and an other… it is evident that none of these metaphors can have any beauty unless it can be so adapted that it gives the due strength of expression to the object to be described and at the same time does this in a more striking and interesting manner” (p 29).

Could Smith be clearer? Why then did modern economists disregard his clear meaning and smother the “beauty” of his use of the IH metaphor, with nonsense about “social harmony”, “magical” properties, and ultimately, with the “historical travesty” (Blaug) that Smith was an early founder of what became the mathematics of the fundamental welfare theorem? (See my paper: “Paul Samuelson and the Modern Invention of the Invisible Hand”, Journal of the History of Economic Ideas, 2010, no. 3).

“Dave” is right to be perplexed: “To me, this concept makes sense, but there is plenty of evidence to the contrary in recent history.” It has been plausible since Samuelson’s presentation of it in his text, Economics: an introductory analysis, 1948 (McGraw-Hill) and it has spread widely in the last 50 years (whereas it was hardly commented on in the previous 150 year!). It has been and is lauded by top economists, including Nobel prize-winners.

Events, however, hoisted them on their own petards, as “Dave” suspects. The sooner they accept their embarrassment and go back to the actual text in Wealth Of Nations, the better they will feel.

Moreover, read Smith's passage carefully, and note what he was asserting: not that this unintentional outcome was a 'miraculous' general harmony of the 'best good of society', nor even about market, but that the necessary consequence that the larger each individual's output, the larger was society's 'annual revenue and employment' - in short, the whole is the sum of its parts (hardly worthy of it being a truly great mathematical innovation: the ancient Greeks and Arabs knew this millennia ago). Smith regarded the quantitative total of revenue and employment as a 'public good', particular for labouring people, which said nothing about the actual distribution between the orders of society.

I hope “Dave” continues his search for sense in what economists' assert, including why Smith only mentions it once in Wealth Of Nations, though modern economists claim it is his most important idea. It certainly is a beautiful metaphor for its object - the insecurity felt by some, but not all merchants.

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Saturday, December 11, 2010

Question From a Reader

A reader asks a question:

"I have started reading The Wealth of Nations. I read on your website that you do not subscribe to Stiger's idea of an invisible hand theory. That appealed to me.

What of Smith's call for Public Education and his call to tax lands?

I'd like Ireland to tax land rents as Smith says "Both ground- rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land are, therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them." Book5 Ch2 On taxes

Do you agree that ground rent should be taxed and is this a good way of funding education?"


Smith's attitudes to landlords was based on its historical origins in Feudalism and before that in war lords after the fall of Rome in the 5th century. From the spread of primogeniture - inheritance of all by the eldest male heir - and the spread of entail - no part of an estate can be sold except as an integral part of the whole estate - this led to locked-in lands, in time beyond the capacity of the heirs to farm and manage productively (each generation's land acquisitios automatically were entailed. Capital in land was wasted if the lands were not productive, and capital was diverted into land ownership and the prestige accorded to it in 18th-century society (Ireland and Britain has much experience of absentee landlords).

Hence, to raise revenue - there was no income tax in his day - he looked for other sources, and he recognised, with regret, that customs duties were inevitable, and with them tariffs, which prevented free trade (he called it 'utopian' to expect free trade to be instituted in Britain on such a narrow tax base).

His stance on taxes must be understood in that context.

Thank you for your question and your interest in Lost Legacy.


On the use of such land-based taxes for education, I make two observations.

1 The range of taxes has spread widely either side of land taxes, which plus borrowing is quite a different (much larger) burden on a national economy, as both Ireland and Britain now know to our cost.

2 On what or whether any new sources of taxation should be spent on any particular heading is a political choice and choice is a (divisive) problem of priorities.

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Monopolists Do not Like Competition

A regular reader sends me this:

"More broadly, the events of that week are likely to redefine the debate over the role of markets in a democracy, and even the nature of capitalism. At least since the Reagan revolution of the early nineteen-eighties, free-market ideology has been ascendant, with even Democratic Administrations following its precepts of market discipline, limited regulation, and unfettered rewards. George W. Bush was only its latest exponent, governing on a platform of economic growth and lower taxes. Yet it was Bush, and his Republican appointees Paulson and Bernanke, who orchestrated the virtual nationalization of the U.S. financial system. Although a vocal minority continues to argue that the system should have been left to the forces of creative destruction, the overwhelming consensus is that free-market principles failed to address a global financial panic. In an intellectual debate that has been going on since the Depression, Lehman's failure may mark a victory of John Maynard Keynes over Adam Smith--the government interventionists over laissez-faire capitalists."

James B. Stewart, A Reporter at Large, “Eight Days:the battle to save the American financial system,” The New Yorker, September 21, 2009, p. 59. HERE
and Here

James B. Stewart: "In an intellectual debate that has been going on
since the Depression, Lehman's failure may mark a victory of John
Maynard Keynes over Adam Smith--the government interventionists over
laissez-faire capitalists."

That is the contentious simplification I would object to. In Smith's
day "laissez-faire capitalists" did not exist - he did not advocate
'laissez-faire (a Physiocratic doctrine favouring freedom for
merchants, not consumers) and 'capitalists' had not yet attracted the
title in English. They were a 19th-century phenomenon (post-1854).

"The forces of creative destruction" (using Schumpeter's phrase -
shortened from 'the creative gale of creative destruction') was the
force on innovation, not of capital per se. Monopoly can stagnate
technologically; competition lets loose the forces of change. Keynes
advocated government funding of projects, not necessarily that they
were managed by the state.

Monopolists do not like competition. That has been true since the 18th century.

If we do not understand these differences, we risk repeating the same errors.


Friday, December 10, 2010

On Regulation

Johann Hari a columnist writing in the Independent (UK) HERE
this article:

The Banks Have Not Been Reregulated by Our Corrupt Politicians. So Get Ready for the Next Crash”

“Many people predicted that the invisible hand of the market would push the economy over a cliff

I’d call it selective memory syndrome. However, of what this so-called ‘invisible hand of the market’ consists remains a mystery.

Long since Cantillon described how markets work (1755) and Adam Smith came to similar conclusions in while writing Books I and II of Wealth Of Nations in Kirkcaldy I1767-73), which was published in 1776, the way markets worked was widely known.

At no time did Adam Smith write about, or apply, the invisible-hand metaphor to markets, as discussed many times - and relentlessly- on Lost Legacy, but no apologies for that).

That he did is pure invention, as is the related invention that Smith opposed all regulations. Ironically, he specifically suggested that banks should be regulated in the face value of the promissory notes they issued (Wealth Of Nationa, Book II.ii.94: 324) though he admitted this would be a “gross violation of natural liberty”.

[Given what we may call the “iron law” of regulation – ‘one regulation is always followed by another’, I do not doubt if circumstances caught the attention of Adam Smith, his life-long pragmatic tendency would have addressed them, perhaps in favour of necessary regulation.]t

It is to be hoped that Johann Hari would acknowledge this.

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A Tale of Two Professors of Rhetoric

The National Communication Association (NCA) has named University of Wisconsin-Madison associate professor Robert Asen as the 2010 recipient of the Winans-Wichelns Memorial Award for Distinguished Scholarship in Rhetoric and Public Address reports theUniversity of Wisconsin- Madison News (HERE)

The National Communication Association (NCA) has named University of Wisconsin-Madison associate professor Robert Asen as the 2010 recipient of the Winans-Wichelns Memorial Award for Distinguished Scholarship in Rhetoric and Public Address.

Asen, who teaches rhetoric, received the award based on the research he compiled for his book "Invoking the Invisible Hand: Social Security and the Privatization Debates," a study of how debates have changed surrounding the topic of Social Security.
The book explores the idea that public policy and discourse cannot exist without one another.

"The primary way of policy is communication. Members of Congress use communication as a fundamental base to look at policy itself, especially at the federal level when men and women are not doing administrative work that implements this policy," says Asen.

Asen was selected by his peers within the NCA to receive the award, highlighting his commitment to exploring the ways that language is used to recognize and find solutions to public-policy problems and give policy an appeal to the general public.

I am sure that Professor Asen deserves his award and I congratulate him for receiving it.

I also note that Asen is a professor, “who teaches rhetoric”. as did Professor Adam Smith, so they share subject expertise in common.

They also share the fact that they are celebrated today for "Invoking the Invisible Hand”; Smith for his use of the metaphor in a discussion on the consequences of an unintentional choice to avoid risks, and Asen for applying it in a commentary on “how debates have changed surrounding the topic of Social Security”.

However, it is not reported whether Professor Asen, as a subject specialist in rhetoric, had noted the rhetorical significance of the use of metaphors, in particular that of the “invisible hand” as a metaphor.

What exactly is the role of an invisible hand metaphor in changing the debates about ‘social security’? Smith taught that metaphors are applied to their “objects” and express them in a “more striking and interesting manner” (A. Smith, Lectures On Rhetoric and Belles Lettres” [1762-63] 1983, p 29, Liberty Fund).

What is the “object” of Professors Asen’s use of this metaphor? Or has he bought into the modern attribution of the IH metaphor as the object of itself? Surely not.

Asen, who teaches rhetoric, received the award based on the research he compiled for his book "Invoking the Invisible Hand: Social Security and the Privatization Debates," a study of how debates have changed surrounding the topic of Social Security.

The book explores the idea that public policy and discourse cannot exist without one another.

"The primary way of policy is communication. Members of Congress use communication as a fundamental base to look at policy itself, especially at the federal level when men and women are not doing administrative work that implements this policy," says Asen.

Asen was selected by his peers within the NCA to receive the award, highlighting his commitment to exploring the ways that language is used to recognize and find solutions to public-policy problems and give policy an appeal to the general public.

I am sure that Professor Asen deserves his award and I congratulate him for receiving it. Recognition by one's peers is a truly prized recognition.

I also note that Asen is a professor, “who teaches rhetoric”. as did Professor Adam Smith, so they share subject expertise in common. Smith taught rhetoric from 1748-64, though he is better known for his moral philosophy and political economy.

They also share the fact that they are celebrated today for "Invoking the Invisible Hand”; Smith for his use of the metaphor in a discussion on the consequences of an unintentional choice to avoid risks (Wealth Of Nations), and Asen for applying it in a commentary on “how debates have changed surrounding the topic of Social Security”.

However, it is not reported whether Professor Asen, as a subject specialist in rhetoric, had noted the rhetorical significance of the use of metaphors, in particular that of the “invisible hand” as a metaphor.

What exactly is the role of an invisible hand metaphor in changing the debates about ‘social security’?

Smith taught that metaphors are applied to their “objects” and express them in a “more striking and interesting manner” (A. Smith, Lectures On Rhetoric and Belles Lettres” [1762-63] 1983, p 29, Liberty Fund).

What is the “object” of Professors Asen’s use of this metaphor? Or has he bought into the modern attribution of the IH metaphor as the object of itself? Surely not. That would be disappointing in a professor of Rhetoric.


Wednesday, December 08, 2010

An Australian Accurate on Adam Smith

Lost Legacy regularly receives communications every month, a few of them attaching an essay on matters related to Adam Smith. Most of them I file (having thanked their authors). One such struck me this month as particularly good at presenting the authentic Adam Smith, albeit on a ‘risky’ theme (i.e., anything political – I prefer to discuss contemporary politics only in the country – Scotland - in which I vote, where I ‘know’ what I am talking about) in this case on the causes of war – but one I think worth the risk in asking scholars to read it.

The Author, Ian Buckley, an Australian reader, of whom I know nothing, writes by way of introduction:

Having grown up through WW2 and ever since been concerned about the origins of wars (with a view to their prevention) I've more and more become convinced as to the relevance of Adam Smith's down to earth wisdom. For not only does he indicate wars' root causes in unjust trading practices (via monopolies, colonial exploitation, etc, etc.) but by clear implication he points to the obvious routes to prevention. Yet, as you are well aware, Smith's potentially valuable message to the world continues to be distorted, often into its very opposite.

To encourage students and others to go to the source, I've written an essay focusing on Smith's Wealth of Nations in such a way as to convey his views on a range of topics, - by including quoted sections of it. To make it easy to validate each, as well as to encourage further reading of the original text, quotes are taken from (”

I can vouch for the selection of quotations from Wealth Of Nations for their veracity and accuracy. I am not sure whether everybody will agree with his application to the events preceding World War I, but they do echo Adam Smith’s concerns about the events and inter-state political forces leading to the ill-fated attempts to prevent the British colonies in North America from resisting British taxation to pay towards the mother-country’s expenses in wars with European rivals, some parts, but not all, of which arose in the interests of the defence of the same colonies.

Smith lamented on the waste from war expenditures in the 18th century and he pointedly lamented in the very last paragraph of Wealth Of Nations the lost opportunities presented by the American defeat, which in retrospect, if he had been heeded, could have staved off what became the 19th-century continuation of imperial expansion.

I sent to Ian Buckley these comments:

“I have two suggestions, both highly relevant to your theme and both relatively unknown (or not noticed) even by Smithian scholars.

The first notes the unequal struggle of the indigenous peoples when at
the mercy of European adventurers and, later, those immigrants following behind them. [This charge applies to all European contacts - including, I should note to some degree to those from Britain, including Ireland, who arrived in Australia from 1788 onwards.]

In WN IV.vii.c. 80: 626, Smith writes:

"At the particular time when these discoveries were made, the superiority of force happened to be so great on the side of the
Europeans that they were enabled to commit with impunity every sort of injustice in these remote countries. Hereafter, perhaps, the natives of those countries may grow stronger, or those of Europe may grow weaker, and the inhabitants of all the different quarters of the world may arrive at that equality of courage and force, which by inspiring mutual fear, can alone overawe the injustice of independent nations into some sort of respect for the rights of one another

A prescient warning in 1776. All nations may take note, including former colonies and their treatment of minorities, as well as the usual suspects, Europeans in the Americas, Africa, Asia; Russia in Siberia; China in Tibet and its north-eastern neighbours; Japan in China, Manchuria, Korea, and Pacific South-Asia. This read as apposite in view of the colonial wars from India onwards.

Smith had something worthwhile to say in last paragraph of WN V.viii.92: 947 about Britain "accommodating her future views and designs to 'the real mediocrity of her circumstances'.

If only Britain had followed this advice and, having lost its 'empire' in North America, had not continued to found its new one in Africa, India and Australia ...

You can find Ian Buckley’s paper HERE: and I commend it to you.

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Fraser Nelson on Liberty and the Scottish Enlightenment

Fraser Nelson, editor of the Spectator UK, writes a lovely piece on Adam Smith HERE which I have had to cut (not that it is long – far from it – but I have no wish to trespass on the editor’s sense of copyright, though I have murdered its lovely flow in consequence.

Please follow the link for Fraser Nelson’s full, short, article – it’s well worth it.

“Why we must remember the lessons of the Anglo-Scottish Enlightenment”

“…Edinburgh is, with Prague and Stockholm, among the most beautiful cities in Europe; itself a monument to the Enlightenment. And how tragic that students – even Scottish ones – are taught about the E word only in the context of the French Enlightenment. The likes of Rousseau, Voltaire, Diderot wrote of grandiose ambitions and recasting society using state power. Smith, Hume, Ferguson etc were far more modest – advocates of letting go of power. These two competing intellectual traditions have, for me, marked the difference between left and right…
On Bastille Day 2004, I wrote a piece for The Scotsman saying how the French have the best parties. But the Anglo-Scottish revolution ('Anglo,' as I would throw in Locke) has delivered the best results. The French Revolution was a disaster, leading to mass murder and the restoration of the monarchy – quite why it is so enthusiastically celebrated, I don't know. Except I do: it is the glorious intentions of the revolution that stir the heart. Liberty, Fraternity, Equality. Here was the classic leftist paradox: noble intentions, disastrous results.
The French Enlightenment has soaked up so much attention because involves grand, charismatic figures such as Voltaire, Rousseau and the priapic Diderot. .... It is now taken to mean the overthrow of aristocracy, and radical plans for equality. It was, fundamentally, about kicking ass. The Scots were more dull. Smith, Adam Ferguson and Francis Hutcheson were academics primarily concerned with economic growth who preached tolerance and moderation…

… Crucially, many figures in the French Enlightenment had little faith in the masses. They feared that humans pursuing their self-interest become corrupt - and that, left alone, selfish instincts would prevail. It followed that strong government was vital for a strong country. The only question was who should hold power. That so many people still believe this to be true (government virtuous, masses selfish) is testimony to the allure of the French Enlightenment. It is been the basis for socialist governments worldwide. 
The Scots, by contrast, took a radically dramatic world view. They believed that people, if left alone, are essentially virtuous - and, if given the tools, would slowly work out what is best for themselves and their families. This would happen by evolution, not revolution. … The best way to improve a country is for government to uphold a few laws, then get out of the way and let the people do the rest. The Scottish position is, effectively, a faith in mankind.
The Scottish model flourished in the United States. But in post-war Europe, it flopped, as elites and planned economies sprang up everywhere… Britain … has ended up lumbered with the French solution. Quite simply, it doesn't fit. … the French have the best slogans: Liberty, Fraternity, Equality. But it's the principles of the Scottish Enlightenment that make them real.”

One quibble. Liberty of the individual is at the heart of Smith’s thinking. Not in the distorted frame of laissez-faire (which was the cry of the French shopkeepers, 19th-century British mill and mine owners and today’s giant corporations).

Natural Liberty was the standard by which Smith judged all forms of government and all degrees of competition. His jurisprudence was based on it, but, as ever, he was also the great realist.

Perfect liberty didn’t exist in practice and such progress as was made in moves towards opulence had been made in the past, and likely in the future, despite the absence of perfect liberty (as he reminded Dr Quesnay, a leader of the Physiocrats in France, who regarded perfect liberty as a pre-condition for opulence, Wealth Of Nations [IV.ix.29: 674)]), and as I would remind Daniel Klein, who sees liberty running through Smith’s so-called ‘invisible hand principle, which was a metaphor not a principle.

Fraser Nelson was speaking at a recent meeting in London of the Adam Smith Institute (of which I am a fellow). He offers an original thought and I think it worthy of your attention (follow the link).

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Monday, December 06, 2010

Both Blurb and Book in Error

From the Publisher's publicity blurb"

Beyond the Invisible Hand
Groundwork for a New Economics
 by Kaushik Basu

“One of the central tenets of mainstream economics is Adam Smith's proposition that, given certain conditions, self-interested behavior by individuals leads them to the social good, almost as if orchestrated by an invisible hand. This deep insight has, over the past two centuries, been taken out of context, contorted, and used as the cornerstone of free-market orthodoxy. In Beyond the Invisible Hand, Kaushik Basu argues that mainstream economics and its conservative popularizers have misrepresented Smith's insight and hampered our understanding of how economies function, why some economies fail and some succeed, and what the nature and role of state intervention might be.”

A reader sent this notice to me with the publisher’s blurb for Kaushik Basu’s new book (which I am reading just now and posting about on Lost Legacy).

The blurb sums up the book neatly and also why I am so critical of what could have been a greater book. Kaushik Basu writes as if he is certain that his central error is absolutely – no questions about it – the historical truth. It isn’t; it is a myth crafted by those who wanted to give their remarkable constructions (in the sense of mathematical beauty) a pedigree going back to what they made out to be the hallowed memory of Adam Smith. But unintentionally traducing it.

Their genius in formulating the mathematics of general equilibrium (worthy of Nobel memorial prizes) was indeed an achievement, which nobody can deny, but was sullied (in my humble view) by melding GE with Pareto optimality and then blessing it, unnecessarily, with the innocent use by Adam Smith of a popular 17th – 18th century metaphor of ‘an invisible hand’.

That Smith referred to an entirely different subject, which has not yet occurred to Kaushik Basu, who makes the classic mistake of taking the statements in the literature on trust, though they are in Smith’s case, checkable - his books are widely available but not read. There are no prizes for being right on Adam Smith; however, there are prizes for accepting a paradigm in our peer-reviewed journal publications, i.e. (where N[p-rjp] = tenure, etc.).

To be brief: Adam Smith’s example in Wealth Of Nations refers to ‘every individual’ who prefers “domestick industry” to that of “foreign industry”, “render[s] the annual revenue of the society as great as he can”, which is a quantative measure that says nothing at all about “harmony”, “perfect competition”, “distribution”, “matching demand with supplies”, “equilibrium”, poetical or general, or any other condition remotely akin to Pareto optima or the Welfare theorem.

Smith’s example of the “invisible hand” (in his case, the “insecurity” felt by traders for foreign trade) adds to what we call GNP – the whole is the sum of its parts, that’s all. On the grounds that growing GNP promotes opulence and, of necessity, because growth increases the labour that is employed, growth achieves a “public benefit’ in Smith’s lexicon.

It was a post-war invention that Smith’s “self-interested behavior by individuals leads them to the social good, almost as if orchestrated by an invisible hand”, especially that it is formulated by Kaushik Basu (and Samuelson, et al) as “selfish” behaviour , which is an idea antipathetic to Smith’s moral sentiments.

For these reasons Kaushik Basu is not that much different from the “conservative popularizers” he complains about who “have misrepresented Smith's insight and hampered our understanding of how economies function, why some economies fail and some succeed, and what the nature and role of state intervention might be”.

If Basu had left Smith out, or better still if he had used the authentic Adam Smith to good effect in support of his justified criticism of the modern paradigm, his “Beyond the Invisible Hand” would be a better book.


Sunday, December 05, 2010

New Critique of the Modern Invisible Hand Theory Part 3

Beyond the Invisible Hand: groundwork for a new economics by Kaushik Basu, 2010, Princeton University Press Part 3

Moving on from the first two chapters, which deal with the modern myth of the invisible hand without critical questions. Basu compounds his offence against Adam Smith’s legacy by re-naming the welfare theorem (Pareto Optimality) as the ‘invisible hand Theorem’. This theorem had no connection to Adam Smith, with the real world. Basu admits this. The so-called theorem is “ actually a mathematical truism and … has no normative content” (p 24).

This introduces the more positive aspects of Basu’s book: “the limits to orthodoxy”, though he slips back momentarily to describe the “theorem” as “a celebration of individual selfishness”, a perverse statement about Smithian self-interest.

Moving on, Basu’s real target is the “adulatory periphery of the “completely free market”, which Smith did not advocate anyway – he was never a so-called “laissez-faire” theorist. Basu is fighting against a phantom created in his imagination and as the chapter unfolds he covers many themes from modern economic theory worth reading by working economists who are immersed in mathematical dogma about the imaginary world of neoclassical theory.

Smith never showed that ‘”if human beings were completely selfish, society would achieve optimality” p.27), nor did Smith “promise” that by being selfish “we are actually being good to our fellow human beings” (says Duncan Foley [2002, 2]).

Have these people read Moral Sentiments – Smith on the unacceptability of the “justle” – or understood Wealth Of Nations, (p 25-6) on the mediation of self-interest by bargaining?

Quite rightly Basu bemoans the relative scantiness among economists of knowledge about subjects like the influence of ‘norms’ on behaviours which their standard neoclassical training ignores. However, if they had read Adam Smith’s Lectures On Jurisprudence and, of course, Wealth Of Nations carefully beyond a compendium of selected quotations (or had read anything recently by Amartya Sen), they would not suffer from such a deficiency of knowledge about “the role of law and culture” (p. 37).

Basu’s section in Chapter 3 on “Methodological Individualism” is worth reading by all neo-classically-trained economists. Individual utility functions do not simply aggregate across the society, which facilitates the mathematics but not an understanding of the real world. However, the reader should ignore the gratuitous linking of Adam Smith to the theories Basu justly criticises.


Saturday, December 04, 2010

The Invisible Hand Myth is No Answer to Sarcasm About 'Stamp Collecting'

I have regular correspondence on Adam Smith with readers across the world. When I do not post on Lost Legacy it does not mean that the campaign to recover his legacy is stopped. Far rom it. My correspondence continues also when I am posting here. What follows is from an email to a correspondent (the salutations at the beginning and end are deleted).

Smith’s prestige carries his use of the IH metaphor to its identification with unintended consequences, but what exactly does the IH do and how does it do it? Silence.

Hence, its supposed roles as the ‘IH of the market’, ‘self-interest’, ‘price mechanisms’, ‘supply and demand’, even something described as ‘magical’, deprive it of content.

If the consequential outcome of something is caused by everything, I fear for a ‘science’ that says so. It reduces or raises economics to theology. It denudes Adam Smith’s rhetoric to folk-lore. Science is supposed to be lot more specific.

It is the widespread ignorance of the long gap between Smith’s use of a popular 17th-18th century metaphor and its promotion to his ‘greatest idea’ in the 20th century that might explain why so many scientific names adopted the modern myth so wantonly and might explain why they endorsed these unwarranted claims without checking for themselves how the IH metaphor was promoted so successfully after Samuelson gave it such a boost in his Economics text (1948-2010).

None of the advocates of the IH myth have checked Smith’s writing on metaphors in Lectures On Rhetoric and Belles Lettres (1983 [1762-3], none so far have answered my observations on these points, none explain the long silence of Smith’s 18th-century contemporaries and his 19th-century critics (up to the 1870s), and none explain why very few early 20th-century economists (to the 1940s) raised the subject at all.

Poor David Hume’s fate of his great ‘Treatise…’, as he put it, ‘falling still born from the press’ in 1739-40, and Adam Smith’s fate to become, in the late 20th-century, world famous c.200 years after he died in 1790, not for a mass readership of his magnum opus, Wealth Of Nations, nor his Moral Sentiments (which he considered his ‘better’ book), but fame for the IH metaphor, without any recognition of his clear identification of the metaphor's ‘objects’, specifically, in Moral Sentiments, the mutual and absolute dependence of feudal landlords and their peasant serfs on the absolute necessity of labour for subsistence and subsistence for labour, and in Wealth Of Nations, the consequence of insecurity for their capital felt by some, but not all merchants, who preferred to invest locally rather than abroad. One led to the 'propagation of the species' (TMS) and the other (WN) to the increase in aggregate 'domestick revenue and employment' (not to general equilibrium).

Only because leading scholars among economists (Nobel prizewinners included) endorsed the misleading assertions about Adam Smith's view, which constitutes the IH myth, was it accepted by co-scholars in other disciplines without question. This was a breach of normal scientific caution, which would search for the documentary evidence to support what their economist colleagues claimed. The interpretations leading from the IH myth are convenient for advocates of mathematics in economics as a basis for claims to be a 'hard science' compared to other social sciences, but still dismissed by top physicists as akin to 'stamp collecting'.


Friday, December 03, 2010

On The Take has Nothing to do with Smith's Use of the Invisible Hand Metaphor

Kirsten Swinth posts about “Cabritismo”, a malpractice common in Mozambique petty markets on the Fordham American Studies Blog HERE:

Coincidentally, the next morning over coffee, I read this passage, from a piece by Adam Gopnik in The New Yorker, on Adam Smith's archetypal idea, the invisible hand:

‘…one can't grasp the idea of the invisible hand without the balancing idea of the imaginary inner witness. All those [inner] moral judges are what let the invisible hand work….The narrow animal instinct is not to trade and exchange and invest; it is to hoard and guard and pillage. The acquired human trait is the market trait, and it depends on trust, sympathy. To see what happens in the absence of trust, one need only consider the recent history of the developing world; if there is not civic capital, a network of trust, already in place, "privatization" just produces kleptocracy.’

So, here is Adam Smith in 1776 understanding perfectly the cabristmo that markets, without sympathy and trust, produce. My wariness of neoliberal American ideas about unregulated markets is rather unexpectedly confirmed by looking west from Mozambique

If you are curious as to why Adam Smith’s use of the metaphor of “ is an invisible hand” linked by Kirsten Swinth to Mozambique business skimming practices, you should follow the links to a Blog from a Jesuit University in New York.

I am allowing for the fact that Kirsten quotes from Adam Gopnik in the New Yorker. And hence my remarks are directed mainly at him, not Kirsten.

From the text of the post, the author seems to believe that the invisible hand actually exists, if not physically, then certainly in effect. This a long way for a metaphor to travel in a couple of centuries, from a rhetorical device that refers to its object and describes in a “more striking and interesting manner” (Adam Smith: Lectures on Rhetoric and Belles Lettres, [1763] 1983, p 29, Oxford University Press).

What’s that you say? No. I am not joking. It was not another phrase for the magical manner in which markets operate , at least not in anything Adam Smith said about it.

The quoted passage from the New Yorker suggest that Adam Gopnik leans on Smith’s idea from his ‘Theory of Moral Sentiments (1759) of the impartial spectator to give credence to his assertion that “moral judges are what let[s] the invisible hand work”. Good try, but no cigar.

Smith in all his discussions on the role of the impartial spectator did not link it to his single use of the metaphor of “an invisible hand” in TMS. That use was about the behaviour of a “rich and unfeeling” landlord who provided his serfs and house servants with their subsistence out of his land’s produce. Why did he do this? Not because of his compassion (excluded by Smith).

We can uncover the object of the “invisible-hand” metaphor (as explained by Smith as the role of all metaphors) by asking what led the landlord to feed those who worked for them? Well, what choice did they have? Actually none. Without food, the labourers could not work, moreover, they would not last a winter. The power and self-imagined greatness rested on the productivity of their workforce. No food, no work.

Feeding their workforce, at least to a low subsistence level (and it was a bare subsistence, we know), therefore, was an absolute necessity. And necessity was the object that was expressed by the metaphor of an “invisible hand” by the 18th-century master of rhetoric, Adam Smith.

The invisible hand was not Smith’s “archetypal idea”. It was a metaphor, and one that was not original to Adam Smith. It was fairly common in the 17th-18th centuries in literature, sermons, fiction and discourse. I offer a list of examples in Adam Smith: a moral philosopher and his political economy, 2nd edition, paperback, from Palgrave, 2010, £18.99 (price check at Amazon’s). Recently, I have seen even long lists of earlier users before Smith.

It had nothing to do with the impartial spectator, nor was it connected to markets, even small markets as found in Mozambique, nor with trust and sympathy (qualities that were not common among feudal landlords!).

Lastly, Adam Smith was well aware of a capacity for cheating, fraud and other malpractices in and around markets and widely in society, and had much to say about morality in behaviour in both his Moral Sentiments and Wealth Of Nations. But its also an irrefutable fact that these observations had nothing to do with his use of the metaphor of ‘an invisible hand’ (oly used three times in all of his writings put together.


Wednesday, December 01, 2010

Phillipson's Good Work Continues

Britannica Blog (HERE) contains a most interesting and authoritative, because thoughtful, Q & A with Nicholas Phillipson on Adam Smith:

Rediscovering Adam Smith: 5 Questions for Biographer Nicholas Phillipson

"Britannica: Why do you suppose it is that Adam Smith, though renowned in his day for breadth of scope and moral philosophizing, is today remembered only for ideas such as the invisible hand and the importance of self-interest in the economy?"

"Phillipson: History hasn’t been kind to Smith. Contemporaries knew him for his moral philosophy as well as his political economy, and his Scottish friends knew him for major university courses on jurisprudence and rhetoric which he would have published if time and health hadn’t run out on him. After his death, memory of his lectures faded—and has only recently been revived by the discovery of sets of student notes. His moral philosophy went out of fashion, and Smith became known simply as the author of The Wealth of Nations, a one-book man. Even that became increasingly selectively read by successive generations of economists who were more anxious to distill scientific laws out of his economic principles than to attend to his concerns with the role of governments in managing economies."

"Britannica: What do you regard as Smith’s most important idea—or, perhaps better, the one, to use the overworked term, that remains most relevant to us today?

Phillipson: If Smith’s philosophy is read as a whole and seen as an extraordinary attempt to develop a Science of Man, his most enduring insights are into the business of social exchange. He saw that exchanging goods, services, and sentiments is the activity that shapes and socializes our lives and makes it possible for us to acquire characters and identities. It’s an activity that has profound unintended consequences, too. For the effect of these individual actions will be to shape the customs, conventions, and culture of the societies to which we belong. It’s an idea that involves seeing economic activity as part of a civilizing process, and Smith’s enduring message is that economic life will work for the betterment of society only when citizens and their rulers treat the pursuit of wealth as a means of seeking that feeling of happiness which comes when we feel at ease with society and with ourselves."

Plus three more questions and answers of similar value (respect for copyright precludes me offering them all.

These exchanges are among the gradual rise in presentations of the authentic Adam Smith that encourages Lost Legacy to keep plugging away at the usual rather sad renditions of Adam Smith's thinking that passes for normal in today's media and economic commentary.

Later today I shall add some comments on a recent professional article on Adam Smith that has been sent to me by its author that makes the effort to be accurate as well as instructive.

The more that the profession takes not of the authentic Adam Smith, the greater the assistance of his ideas to current policy discussions. Recently, the epigones have divided into those recanting their earlier beliefs (not yet realising they were in error to start with) and those brazenly carryon on as if nothing has happened in the real world to their epigonic, not accurate, beliefs about Adam Smith).

So, follow the link and enjoy.