Wednesday, January 26, 2011

What Is The Professor Teaching His Students About Adam Smith?

‘Jberg’ (?), a professor of political science, writes for the Politics at Suffolk University web site (‘a Political commentary from a political science professor at Suffolk’ (HERE):

“Where Adam Smith Was Wrong” (in the “Economic policy & US politics & class struggle”}

“Smith pointed that in an ideal market transaction, both sides are made better off by the result. That’s a tautology - without coercion, you wouldn’t enter into a transaction unless it would make you better off in some way. Thus, in a society where everything is done by ideal market transactions, everyone should become better off continually, day by day, with the sole (but important) exception of market failure. The latter occurs when you want to make an exchange, but can’t find anyone willing to make that exchange with you

Adam Smith wrote some of the earliest thinking on the practice of exchange behaviour (which is fundamental to all of Smith’s Works) in particular in Wealth Of Nations in relation to bargaining. His analysis of the bargaining relationship still stands today (though not always recognised).

In the bargain, one party makes offers to the other: "Give me this which I want, and you shall have this which you want” (WN, chapter 2, p 26-7). It was on this basis that Smith regarded exchange by bargaining a positive force, compared to compulsion and slavery, of which there was plenty in evidence in 18th-century Britain.

‘jberg’ (hereafter, ‘The Professor’) drains Smith’s rich ideas of their content. There is no evidence that ‘The Professor’ has read Adam Smith (and we should note, not for the first, or last, time on Lost Legacy, that modern economists, including Milton Friedman, are not the most reliable guide sto Adam Smith’s Works).

So if the market makes everyone better off, it follows that government intervention makes someone worse off, right? This, too, is a tautology. The essence of government is force, and you wouldn’t need force (except for basic security functions, i.e. preventing theft) unless someone did not want to do what is required.”

This was never an absolute assertion by Smith. True, he had plenty of criticism of the practice of governments in the economic management of the Mercantile society of his time (and earlier) but he had clear ideas on the need for, and the appropriate roles (note the plural) of government.

He was not so naïve as to assert ‘that [the] market makes everyone better off, nor, for the record, that ‘government intervention makes someone worse off’. A monopolist faced with competition loses sales. The Professor’s argument is like the half-serious banter found in a pub. Smith saw many positive roles for government (see the details spread throughout Wealth Of Nations – I’ve posted them on Lost Legacy more than once).

The notion that Smith somewhere said that markets always produced positive results is an assertion associated with post-War modern economists under mathematical theories of General Equilibrium by Arrow and Debreau, and popularised by Paul Samuelson, wrapped around the invention of the myth of ‘an invisible hand’.

The problem is, Smith’s argument (like any argument) is derived from some assumptions, several of which are incorrect: the assumption of uncoerced exchange, the assumption of basic morality, and the assumption of the commensurability of values. Each of these is fundamentally wrong; let me explain!

If exchange is ‘coerced’ it is no longer exchange, it is one party deciding the terms of the exchange instead of both parties.

Smith’s Moral Sentiments is far richer that to impute that everybody behaves with “basic morality” at all times and towards everyone else (has The Professor read Smith’s Moral Sentiments?); and “the commensurability of values”, which is unrecognizable to me as a Smithian idea (I am not sure what The Professor means by his assertion).

Coerced exchanges. The essence of capitalism is not the market, but the wage relationship. The capitalist is different from the feudal lord or the slaveowner because he or she (or more likely it, since the capitalist is likely to be a corporation) buys labor for a wage rather than exchanging it for the right to use land or compelling it by brute force.”

Adam Smith did not write about “capitalism” – he neither used the word and nor did anybody else until 1854 in English literature – William Makepeace Thackeray, in his novel, The Newcomes. Moreover, Smith’s views of the ‘joint-stock company structure, a predecessor of 19th-century corporation, were highly critical (Wealth Of Nations, Book V).

Capitalism was only able to get going because a lot of people who had lived on the land were driven off it by the enclosure movement. Once they had no other way to support themselves, they became available as full-time wage laborers.”

The Professor now steps into economic history without watching where he is treading. Enclosures were not the cause of the drift of the landless from the land – though widespread as a belief by the uninformed. They were only one factor.

Agriculture was inefficient; it was riddled with the deadweight of primogeniture and entails, in which the wretched serfs, retainers and slaves did not live in ‘a land of milk and honey’, dancing merrily round May Poles. The professor paints a naïve picture of labourers’ lives.

The drift to the villages and towns began centuries earlier (even in Roman times), both of skilled artisans servicing several areas, and of ‘runaways’ from Feudal oppression.

The great 19th-century growth of town populations was also part of migration (from Ireland and Scotland) into England, and of Europe into the new USA, and was sustained mainly by population growth from rising real incomes and survival rates of more children of the mass of labourers.

If you have no other way to live you have to get a job, whether you think the wages are enough or not. Workers can try to force up the wage level through collective bargaining - but if they are in the job market as individuals, it is not a free exchange; one side, the employer, can dictate the terms.”

The reality was not one of free bargaining. Laws against combinations of labour operated ruthlessly, though not against employers. There were also long-standing laws of Settlement, Apprentices Statutes, Wages set by Magistrates,
Town Guilds and their monopolies, ensuring that “free exchange” did not exist. However, despite all this (and more) real wages began to grow post- 1800 and continued since.

Common labourers’ incomes rose above biological subsistence for the first time in all history (blips like the Black Death rise in real wages excepting) and the Malthusian trap in what became the Capitalist West was sprung. The rest of the world is now catching up and those countries adopting some form of capitalism are catching up faster; conversely, those that are not doing so (deliberately or institutionally), are not.

These facts challenge The Professor’s theories of the “class struggle”.

Failure of moral limits. Adam Smith thought that abuses of the market would be prevented by the basic humanity of morality. Of course he was right to think that people are moral beings, and the vast majority of us try to do what is right, at least as we see it. Unfortunately, however, “the vast majority” is not enough. Immorality gives a competitive advantage, so the people whose behavior is not limited by moral principles - in other words, those willing to lie, cheat, and steal - tend to rise to the top. One very important reason we need government is to keep immorality from prevailing.


Adam Smith thought “abuses of the market would be prevented by the basic humanity of morality.”
Not quite: where ‘abuses’ were politically sanctioned (mercantile political economy, the subject of Book IV of Wealth Of Nations - what he called his “very violent attack” on the prevailing “system”) and voted by legislators in Britain since the 16th century; they were the proper business of government to repeal. Basic morality is a thin reed to deal with “abuses of the market”. The Professor of “political science” has got it wrong again.

The Professor writes that “people whose behavior is not limited by moral principles - in other words, those willing to lie, cheat, and steal - tend to rise to the top.”

As a generalization, it is probably true, though this progression is not confined to corporate swindlers – it also applies to leaders and apparatchiks of revolutionary parties, communist, fascist/Nazis, Mullahs, military coups run by generals (Left or Right), corrupt trade union bosses, environmental extremists (they get more extreme), and theological fanatics of all religions. Smith’s answer to extremism was education and strict application of the laws of justice.

Money can’t buy happiness. Finally, it’s simply not true that values are commensurable (i.e., that they can be measured by a common unit, which we call “money.”)

I am still not sure what The Professor means by this. He may not be aware that Smith had clear views of money as a medium of exchange. He did not consider money was wealth. He firmly argued that wealth was the annual output of ‘necessaries, conveniences, and amusements of life’ (Wealth Of Nations).

The Professor’s students deserve to know all this, but they may wait in vain for him to introduce his students to the Adam Smith, who was born in Kirkcaldy, Scotland in 1723, instead of the fantasy Adam Smith invented in Suffolk in the 21st century.

Labels: ,


Post a Comment

<< Home