Tuesday, May 31, 2011

Adam Smith on Bargaining

Amol Agrawal posts in Mostly Economics HERE

How Vernon Smith has helped us understand Adam Smith better…

Maria Pia Paganelli of Yeshiva University has this nice paper on the topic.

She says most economics bases itself on self-interest. However, this is not always the case as we see humans valuing cooperation and fairness as well. Adam Smith’s The Theory of Moral Sentiments was based on these ideas. AS said humans value other things as well- sympathy, and innate desire to be both praised and praiseworthy.

Vernonm Smith extended Adam Smith’s ideas and showed via experiments that indeed people valued cooperation and fairplay and were sympathetic to others. This led to people monitoring and giving punishment for non-cooperative behaviors or by following internalized rules of conduct that promote fair and cooperative behaviors.

In experimental results in industrialized countries, cooperation and fairness are routinely observed. Cooperation and fairness may vary with the degree of anonymity, because subjects do respond to incentives. Nevertheless, even with complete anonymity, a relevant amount of cooperation and fairness is observed. For example, using undergraduate subjects from the University of Arizona, even with double blind procedures, 29% of second movers choose $25 for self and $15 for other, over $40 for self and $0 for other, after the first movers have forgone $10 for self and $10 for other (Cox and Deck 2005). Additionally, cooperation and fairness are also observable in many foraging societies across the globe, although in different forms from the ones observed in industrialized countries.

Fairness seems to be universally present among humans, even if it varies with different incentives and across cultures (Henrich et al. 2004). Interestingly, similar experiments done with non-human primates also show some level of cooperation and “fairness.” Non-human primates help each other in getting food and reciprocate the help received. They get upset if one gets an “unfair” share: if one primate undeservedly gets a larger portion or tastier food, the other primate screams in protest (de Waal 1996 and 2003 de Waal and Berger 2000, de Waal and Luttrell 1988, Brosnan and de Waal 2003, Jansen, Hare, Call and Tomasello 2006).

The paper looks at this linkage of Adam Smith thoughts to Vernos Smith’s experiments:

This paper develops as follows. The first section describes some of the hypotheses used to explain cooperative behaviors in the existing literature. It is followed by the explanation of how Adam Smith may help us understand the mechanism through which we may be able to move from personal to impersonal exchange, namely the internalization of rules of cooperation achieved through sympathy, reducing the transaction costs present in complex anonymous societies. The Smithian explanation is subdivided in three sections: the generation and internalization of cooperation at the individual level, at the social level, the institutionalization of the rules of cooperation which may be seen as a feedback mechanism caused by and causing increasing cooperation. The final section of the paper briefly examines some limitations for developing cooperation.

I had the privilege of hearing an early version of Maria Pia Paganelli’s paper in 2009 at the Summer School on the History of Economic Thought at Richmond University, Virginia and commenting on her paper. Maria is a rising – probably by now, a risen – star of Adam Smith scholarship. (Apologies if the above link to it does not work; it failed to do so on my Apple Macbook Pro).
I shall cover briefly the gist of my thoughts on Professor Veron Smith’s work, as I understand it.

Modern economists have lumbered Adam Smith with ideas he did nto have, at least in the form as it is commonly presented. Smith was not a singular theorist who boiled everything down to pure self-interest, often eliding into ‘selfish self interest’. This is so far from Adam Smith’s presentation that I am often provoked into critiquing it on Lost Legacy and elsewhere when it is invoked, usually in reference to the famous (and misunderstood) paragraph on the ‘butcher, brewer, and baker’ example in Wealth Of Nations. First check out the preceding lines:

But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them. 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’ (WN I.ii.2: 26).

Clearly, Adam Smith is emphasizing the important point (crucial to understanding his approach) that relying on someone else’s benevolence is not enough (nobody, be they benevolent in the extreme, has sufficient of anything, to donate it to everybody else who might need it). That is the limitation of benevolence, our admiration of it as a virtue, notwithstanding. He goes to on make his point even clearer:

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own 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.2: 26-7).

As clearly, Adam Smith did not counter the evident limitations of the virtue of absolute benevolence with a reliance on self-interest alone. That might justifiably be termed selfish. But he didn’t draw that conclusion at all. Instead, he said that one’s self-interest is best served by addressing the self-interests/ ‘self-love’ of the other party (butcher/brewer/baker or whomsoever. In sum, Adam Smith, asserted that self-interests are realized in our bargaining transactions with others by serving their (not our!) self-interests.

So, when Maria Paganelli says that ‘most economics bases itself on self-interest” she is reporting how modern economists (not Adam Smith) have reduced economics to this single assumption and build its neo-classical Homo economicus upon it (it suits the maths much better to arrive at its claimed determinate conclusions).

No wonder on this inaccurate interpretation that modern economics is under siege from practical attempts to model actual behaviours in the fascinating games that Professor Vernon Smith and others have devised in what has become known as the school of behavioural economics. The modern assertions of Adam Smith’s view are exposed convincingly by the numerous experiments conducted across the world, but Adam Smith never made such narrow assertions about self-interest in the first place.

The ingenious experiments designed by Professor Vernon and others for their observations of the behaviours of graduate students have produced many remarkably consistent results exposing the near fallacy of the pure self-directed, self-interest thesis as proclaimed by most modern economists (rational behaviourists). And in the main, I applaud their work with the provisio that they recognize their fundamental error of attributing the limited concept of self-interest to Adam Smith.

My own experience, where from 1970-72, I observed live negotiations at a Shell Refinery for my MSc degree in 'Productivity Bargaining', and since 1972 through Strathclyde Business School to 1983, and then through Edinburgh Business School to 2005, where I was involved in observing thousands of real world bargainers at real work for real stakes, felt by them to be important to the welfare of their businesses or countries and, ultimately, to themselves and their families, all of which invariably showed Adam Smith’s insight in Book 1 of WN was confirmed time and time again.

People learn, one way or another, that demanding the other party give them all of what they want without in some measure offering some of what they want in return, seldom works and that mostly it doesn’t. Self-centred egoists refusing to move, more often than not find it leads to ‘no deal’; but formulating their offers in some version of: ‘Give me that which I want, and you shall have this which you want’, as Adam Smith advised, more often than not leads to a mutually acceptable agreements.

Selfish, or narrow-minded would-be bargainers, who insist on their self-interests alone, seldom succeed, especially when they act as if they conform to the behaviour of the so-called ‘rational egoist’ beloved by so-called ‘scientific’ micro-economics taught across modern campuses.

In bargaining, where conversation is present, we can see what happens in the Vernon Smith game where the ‘so-called ‘rational egoist’ offers the other party 1 unit while demanding 99 for him/her self. By not accepting the offer, the idea that 1 unit is better than none (an heroic assumption that he/she would accept only 1 rather than nothing) the frustrated bargainer, says in effect, ‘then you shall have none too’ – a perfectly reasonable reaction, consisting of no surprises, in my experience of real-world bargainers. These games confirm Adam Smith’s insight; they do not revise it in any way. That the players in the games have single choices, without conversations, strongly confirms Adam Smith.

My message to the behaviourists is that they are not ‘extending’ Adam Smith, nor revising him. He is completely innocent on this subject. It is the so-called ‘rational’ school that is in the frame for revision, not Adam Smith. I suggest to everybody that they study Paragraph 2 in Book I of WN and understand the exact words of Adam Smith.


'Price Gouging' Is Never Invisible

Stanley Robinson of
 Princeton, Mo. writes to Kansas City.Com HERE:

“Price gouge warning counter to principles”

“Once again, Missouri Attorney General, Chris Koster, stymies the workings of free market capitalism. According to a statement on his official website, he and all the government forces he can rally will be on guard “against price-gouging following the devastating tornado in Joplin.”

Evidently, Koster is unfamiliar with the central tenet of Adam Smith’s “invisible hand” theory of commerce. A shortage of goods or service in one location will cause a rapid rise in its price, and the result will be an inflow to rebalance the market. Disruptions in a free market will self-correct — or so it is said. Only an advocate of wet-nurse government would approve of such socialistic restraint undertaken by our attorney general. I thought unfettered capitalism and small, unobtrusive government is the default position of the Republican Party.”

A fairly typical response to the surge in prices for repairs and comforts after an act of nature, is for prices per unit of things to rise, which is commonly called (in the USA) ‘price gouging’, meaning exploitation of those in need (including sometimes of those desperate for tickets to an event).

Modern economists, and those influenced by them, can try to explain what is happening by referring to supply an demand analysis. So far so good. But then sometimes, the basic economics of supply and demand attracts the kind of mysticism shown by Stanley Robinson in his letter.

Not satisfied with explaining how markets work through very visible prices (try to think of a market working where prices are invisible!), Stanley Robinson, like too many others, introduces what he asserts is ‘the central tenet of Adam Smith’s “invisible hand” theory of commerce’ which he suggest is ‘unfamiliar’ to the Missouri Attorney General, Chris Koster.

I do not know about what the Missouri Attorney General, Chris Koster is familiar with or not (I am certainly not familiar with the politics of his tribe, Republicans or Democrats, nor am I interested, as I do not vote in Missouri). But I can say that I too am unfamiliar with what Stanley Robinson calls ‘the central tenet of Adam Smith’s “invisible hand” theory of commerce’.

It certainly is not discussed as such by Adam Smith in his Theory of Moral Sentiments (1759) or in his ‘Wealth Of Nations (1776), or, in fact, in anything else he wrote in his lifetime. In short, Adam Smith had no central tenet of commerce involving anything other than visible prices in his ‘theory of commerce’.

So why does Stanley Robinson claim, incorrectly that Adam Smith had such a ‘central tenet’?

Because, of course, Stanley Robinson has picked up the association from an invented assertion by modern economists (Paul Samuelson, among others) in the post war years as an answer to the then claims of the Soviet Union that their national state planning was superior to the anarchy of the ‘free markets’ of the West. Having a so called ‘invisible hand’ on its side supposedly helped Western markets outperform Soviet Planning, but it was the market system that achieved this result decade after decade, and it did so without Soviet- style tyranny and without an 'invisible hand'!

And ‘price gouging’ is fully explained without resort to ‘miracles’ and ‘invisible hands’ and any other mumbo jumbo. ‘Price gouging’ is very visible, as are its alternatives, such a rationing (the 'rules' for rationing are published - of the enforcers that implement the rules are very visible.

The end result is always the same – shortages, with some people going without – we can’t all go to the same concert, or all get the same tarpaulin, or whatever. That’s life. If you prefer rationing, get to the back of the queue.

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Sunday, May 29, 2011

A Sad Case

‘Steve M’ writes (or rants on) (28 May) the 'No more Mr Nice Guy Blog’ HERE


‘At best, Ryan and the Ryanettes believe that Ryancare will provide satisfactory coverage of seniors' health care needs, at an appropriate cost to both government and seniors themselves, because the omniscient, omnipotent Invisible Hand will provide -- it is God, therefore it must provide. It is good and beneficent; it can do no wrong.

… Either way, the Republicans will never negotiate in good faith. You can't show them numbers demonstrating that their assumptions are wrong, because their numbers can't be wrong -- the God of the Free Market would not forsake her people. Either that or the God of the Free Market would not forsake anyone who did not deserve to be forsaken. They don't negotiate from our reality -- the one we think of as everyone's common reality. They're completely faith-based

This not a typical reference to the so-called ‘invisible hand of the market’ (there is no such thing – markets are very visible through the very visible prices that are necessary for them to work) but it is, however, as wrong as the other rubbish posing as an economic theory, usually ascribed erroneously to Adam Smith, of which the internet is overfull of others who make similar assertions across numerous fields.

I would not normally refer to specific items – most of the daily output on such lines, I delete as not worth a blog post – and of the example above I have no idea to whom ‘Steve M’ refers as “Ryan’. The ‘ideology’/ ‘theology’ angle is new, but I suspect ‘Steve M’ of the rant is using the distinction to make an ideological case against what he calls Ryan’s ideology and which he believes in as adamantly, not to say, ‘theologically’, himself about as rigidly as Ryan believes in his ideology.

Merchants and manufacturers in Smith’s day were not known widely as supporters of free enterprise and markets, any more than their successors to day. Consumers are not in favour of tariffs to keep them away from cheaper products; it’s the merchants and manufacturers of both times who lobby for tariffs, prohibitions, and, yes, barriers of higher costs in foreign wages, to disqualify foreign products from domestic markets, which are anything but free.

Look at any ‘trade association’ that funds lobbyists and count the demands they make on governments and their agencies that all businesses in their trade of interest be of minimum size and minimal regulation standards to be legal and eligible for government contracts, and that they comply with certain expensive requirements to remain in business at all. Only the really big firms can bid effectively for big contracts. I am familiar with this situation in the UK and I have no reason to suppose it is any different in the USA (I suspect it is even worse in the capitalist country with the largest government spend in the world).

So, ‘Steve M’ and ‘Ryan” fight a phoney war, using the common misperception of the ‘invisible hand’ – ‘Steve M’ believes his own propaganda and ‘Ryan’ spouts the myth that there is such an entity. Neither has actually read Adam Smith. Both traduce Adam Smith’s work. Sad.

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Saturday, May 28, 2011

A Gaia Economist Slips into Error

Molly Scott Cato writes (28 May) on ‘Gaian Economics HERE

‘All other green campaigns become futile without tackling the economic system and its ideological defenders. Economics is only dismal because there are not enough of us making it our own. Read on and become empowered!’

‘Less Osborne More Hobsbawm’

Advocates of a market view of the economy and proponents of further and faster globalisation both tend to seek inspiration from the work of Adam Smith, who is taken to be the founding father of market economics. Smith's work The Wealth of Nations, was published in 1776, only on the cusp of the industrial revolution and before its technological advance had had the chance to impact widely on social and economic structures.

The economist who better represents the theory that has come to dominate our modern world is rather David Ricardo, whose most famous work Principles of Political Economy and Taxation was published in 1817, some 40 years after that of Smith, and whose work set the parameters for the world of laissez-faire capitalism and export-led growth that we inhabit today. Ricardo was attempting to theorise the economic reality of a world where labour and land were made subject to market forces, as they had been to only a limited extent in Smith's day.

In an excellent article in the New Statesman back in March, Robert Skidelsky made clear George Osborne's debt to Ricardo, whose economic theories he rather brutally summarised in the following phrase: 'It goes like this: the private sector creates wealth and the government squanders it. The smaller the government – the less it taxes and spends – the more the economy will thrive.' Moreover to a Ricardian there is no fundamental distinction between taxation and government borrowing: borrowing is merely deferred taxation.

This is an article of faith, unsupported by empirical evidence. …

… Economics is a complex system, where numerous variables interact in ways that can never be predictable. This is why jokes about one-armed economists are just foolish: there will always be a multitude of answers to every question and predicting the future is a mug's game. Hence the wise economist leaves his options open, and makes sure that the politicians he is advising do the same.’

A preliminary observation: Molly (the name by which she writes, so I am not being patronising) adopts the label of economics as the ‘dismal science, and “everyone knows that economics is the dismal science [and] almost everyone knows that it was given this description by Thomas Carlyle, who was inspired to coin the phrase by T. R. Malthus's gloomy prediction that population would always grow faster than food, dooming mankind to unending poverty and hardship.”

However, the facts are different and Molly ought to know the truth about the use of ‘the dismal science’ label, and I assume she does not know, otherwise if she did know she would be ashamed:

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."

“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.
" Quoted from: David M. Levy and Sandra J. Peart , 22 JANUARY 2001: “The Secret History of the Dismal Science. Part I. Economics, Religion and Race in the 19th Century” HERE:

Carlyle’s bitter attack on Mill came from disgraceful and scurrilous pamphlet entitled: "An Occasional discourse on the Negro Question" 1849 (which is the polite version – it was originally called ‘on the N----- Question’), and was written by the 'great' Thomas Carlyle.

This episode shows that liberal-minded people do not have a monopoly of the social virtues, which is also clear from today’s representatives, such as Molly, or, indeed, the distinguished historian, Professor Eric Hobsbawm in her title.

On the substance of Molly’s article, I am not in total support of her side-blast at David Ricardo, or more pointedly, I have more fundamental disagreements over Ricardo’s influence on economics than an alleged error of George Osborne, the British Chancellor.

Smith’s criticized the consequences of the discovery by government that it could add to its capacity for extracting revenue from taxation from some of its citizens (always unpopular) by borrowing, which was less painful politically, governments soon realized. In fact, because they often needed to borrow to fund their dynastic wars, governments displaced loan repayments and their interest costs to the future, which caused yet more borrowing and interest burdens to future taxpayers.

It is not clear to me the significance of Professor Skidelski’s or Rucardo’s point about Taxation and Borrowing. I do know that the habit of medieval Kings who simply expropriated their lenders when it was expedient to do so is not available to modern governments under the rule of law and that defaulting on debts likewise has downsides, including morally too.

However, Ricardo’s main malign error concerned his analytical devices, which when taken up by the neo-classical economists from the 1870s, especially the mathematically obsessed, has been quite damaging. In order to get determinate ‘solutions’ the assumption of decreasing returns from agricultural examples lead to uni-dimensional economics, which produced fine equations, wonderful graphs, and, eventually, an absence of people from economics, perhaps the most significant loss to unreality, yet attempted by its practitioners. In the extreme, the triumph of ‘general equilibrium’, seen as the pinnacle of economics as a science, is actually a minor triumph of analysis that does not conform (i.e., explain) social reality.

Disequilibrium rules. Equilibrium is at best partial – never general as the persistence of temporary relapses into recessions and depressions, followed by temporary booms, shows. Whether this is ‘good’ or ‘bad’ thing is less important than the recognition that it happens. The question is whether societies can live with these events, with the subsequent question of whether- and more particularly ‘which’ - political interventions to ‘correct’ these events makes things ‘better’ or ‘worse’.

Adam Smith made (very) few predictions. His almost entire approach was historical – how did we get to where we are – and not predictive. If anything he remained sceptical of predictions and of the likelihood that political elites would choose the appropriate policies to remove existing anomalies –they were, more often, the cause, not the cure, of errors in economic management (mercantile political economy). I confess, not to having much faith in ‘gaia economics’, or other would be salvation (New Economics Foundation, etc.,).

But I mean no malice. I will read what Molly writes, and wait and see.

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Tuesday, May 24, 2011

Progress Yes, Equilibrium No!

Tim Harford (the undercover economist), writes, 21 May, (HERE):

‘A font of wisom on economies of scale’

‘Annoyingly, economies of scale are analytically inconvenient – if you want to build a textbook model of an industry with scale economies, the mathematics are messy – and yet Adam Smith’s famous example of the pin factory simply illustrated how fundamental economies of scale are to economic progress.’

Comment (not a criticism)
In practice, what actually happened in pin-making illustrates what happened across manufacturing in the nineteenth to twentieth centuries through the introduction of power-driven machinery which enabled fewer, not more, individual workers to complete the work of many men, and increase output substantially. In 1820, there were 11 pin factories in Gloucester employing 1,500 people, but by 1870, the pin industry in Gloucester was gone. By 1939, the number of pin manufacturers in the United Kingdom had shrunk to about 12, and by 1978 there were only 2, as a result of mergers, take-overs and firms leaving the trade (HERE).

Smith’s example of the constituent elements in the manufacture of the common labourer’s coat (WN I.i.11, 22–23) is probably significant than his more famous pin factory, but most readers do not turn the few extra pages to get to the more significant (for the 21st century) labourer’s coat example. The multiple instances of manufacturers simultaneously and serially improving the productivity of their production processes in response to the possibilities of the growing extent of their own markets constantly changes their supply chains forwards and backwards and increases the productivity of the entire set of producers along their supply chains. This happens among their customers and among their customers’ customers, most of whom have limited or no connections with each other.

Improvements in hand tools from an improved division of labour not only reduces the unit costs of making shears, say, for sheep shearing, but might also improve hammers for carpenters, and all manner of other metal tools for others to meet rising demand in their and ever more complex extended markets. As output rises in response to a growth in the extent of all the sub-markets, it separates the operations into more roundabout processes, adding to productivity across more than one industry (inputs into one industry may also be inputs into others).

The division of labour is not limited to one pin factory; it affects cumulatively all processes that use pins and nails, and, later, affects the productivity of nails and other attachments, plus changes in technology, materials, and processes. Thus, the ‘enlarging of the market for any one commodity, produced under conditions of increasing returns, generally has the net effect . . . of enlarging the market for other commodities’ (Young, Allyn (1928) (HERE).

Young gave interesting examples of the cumulative effect of these processes in the early printing industry that promoted producers of wood pulp, inks and their ingredients, metal type, technologies for producing illustrations, and the manufacturer of specialised tools and printing machines, plus suppliers to the printing trades and other industries (Young, 1928, 537).

He also advised that increasing returns are not ‘discerned adequately by observing the effects of variations in the size of an individual firm or of a particular industry’ because ‘the progressive division and specialisation of industries is an essential part of the process by which increasing returns are realised’ across ‘all industrial operations’ when ‘seen as an interrelated whole’. He identified increasing returns as dependent ‘upon the progressive division of labour, and the principal economies of the division of labour’, which cumulatively arise from ‘using labour in round-about or indirect ways’. Lastly, while Smith said ‘the division of labour depends upon the extent of the market’, the extent of the market ‘also depends upon the division of labour’, and in this ‘circumstance lay the possibility of economic progress, apart from the progress which comes as a result of the new knowledge’ (Young, 1928, 538; see also: Roger Sandilands HERE).

Smithian growth is an open, not closed, process driven by increasing, not diminishing, returns (Ricardo's error). The economy is not in a state of equilibrium (as 'proven' mathematically but nowhere has it applied; the mathematics are not just 'messy' - they are futile) because (in relatively free capitalist economies) many millions of individuals participate in it, normally without central control, quite independently of each other, with (for ‘better’ outcomes) few imposed constraints on imitation, innovation or invention, and without regulated setting of prices or costs and supervision of the process of their bargaining exchanges (attempts to impose such constraints normally have not been successful). Disequilibrium in an economy is endemic because there is plenty of scope for human error, for mistaken readings of market conditions, and for failures to innovate or adapt when maybe they should have, or possibly when they shouldn’t (as Adam Smith showed in relation to mercantile Britain). Interventions are also fraught with error for the same human proclivities to meddle to ‘improve’ outcomes.

It may be better to abandon theories of equilibrium in economics and the search for it, with the expectation of Nobel prizes for ‘proving’ it in theory (General Equilibrium), though clearly never finding it anywhere in practice.

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Monday, May 23, 2011


I connected an hour or so ago, so I hope to recommence blog tomorrow, Tuesday.

Aso, sent off my first draft of Adam Smith On Religion to the editor. It was a tight fit to present my case at the limit of 12,250 words - still 41 words over!

More tomorrow.

Saturday, May 21, 2011

In transit

Gavin is in transit to France so will be unable to blog for a few days. He'll be back early next week though, so stay tuned.

Florence (Gavin's daughter)

Friday, May 20, 2011

Professor Boettke: what Exactly Do Invisible Hands Do?

Peter Boettke in Coordination Problem writes HERE

‘What Does the Market Process Do?’

Dick Cornuelle was a student of Mises before Rothbard, before Sennholz, before Kirzner. He also devoted his work to a wider audience, and to a field not traditionally studied by economists. But he was a market process theorist and he did emphasize the adaptive efficiency of the market economy.

Consider the following from Dick Cornuelle's De-Managing America (1975):

‘The economic process is usually explained in terms of profit motivation and competitive discipline, so we get the impression that the process communicates instructions like "Work hard and don't waste anything." But Adam Smith's invisible hand does much more than stimulate effort and penalize waste. It works as a master arranger or harmonizer of diverse human effort and it works without control. The invisible hand that coordinates the economic process holds neither a carrot nor a stick. It is a signaling hand, important mainly for the kind of directions it provides and the way it communicates them.’

The free economic process shows each participant how to find his own way into a useful position in the larger mosaic. ... The way this happens in practice is illuminated by the concept of feedback ... (pp. 85-86)’

I have read Peter Boettk’s Blog for many years, so my critical remarks of his praise for Dick Cornuelle's ‘De-Managing America’ are not intentionally derisory on what I regard as sheer mysticism by Dick Cornuelle's attempt to explain either or both, the process or the outcomes of markets at work. ‘Adam Smith's invisible hand’ (IH) supposedly explains everything, yet it explains nothing. It certainly was not given this role by Adam Smith himself. He used the invisible hand metaphor for much more limited purposes and his use did not obviously have anything much to do with markets.

If the IH really works as ‘a master arranger or harmonizer of diverse human effort and without control’, how or what did ‘it’ do exactly?

In Moral Sentiments, the context in which Smith applied the IH metaphor referred to the behaviour of ‘proud and unfeeling’ landlords when they allocated part of the harvests produced on their land by and to, variously, serfs, slaves, villains, labourers (and later tenants). This covers a very long period of history, since whenever ‘Providence divided the earth among a few lordly masters’ (TMS, IV.1.10:184), which, in Smith’s stadial sequence, was long before commercial society and even nascent markets.

The object of the IH metaphor on this occasion in TMS was identified by Smith as the cause of them feeding their dependents – the plain fact that they had no choice but to do so – labourers and their families had to be fed, otherwise the labourers could not work the fields that secured the ‘greatness’ of their lordly masters, and this was ensured only because of the mutual dependence of the labourers on their lordly masters and the dependence of the lordly masters on their labourers. It had nothing to do with markets – in fact their mutual dependence was based on the very real likelihood of violence, fuelled by the ‘natural selfishness and rapacity’ of ‘the rich’ (Moral Sentiments, IV.1.10: 184-5).

The second example of Smith’s use of the IH metaphor in Wealth Of Nations, which Cornuelle directly, and Boettke indirectly, claim: ‘coordinates the economic process’, holding ‘neither a carrot nor a stick’, but it is ‘a signalling hand, important mainly for the kind of directions it provides and the way it communicates them’. This use is also far from what Adam Smith wrote in Wealth Of Nations as its role. Pointedly, its ‘object’, is also far from a ‘market decision’, as opposed to a decision in a market environment – 18th-century protectionist Britain.

On this occasion, the IH metaphor was applied by Smith to a particular sub-set of merchants in protection-ridden Britain. One subset of merchants traded exclusively and ‘domestickly’ in Britain, and another sub-set traded exclusively in the ‘foreign trade of consumption’. Another sub-set, while inclined to join in foreign trade, recoiled from it because of their concerns for the security of their capital. Smith discusses the causes of the security concerns of these merchants from paragraphs 1 to 8 in pages 452-55) before he uses the IH metaphor (WN IV.ii.9:456). He comments: ‘In the home trade' [the domestic-only merchant] knows better ‘the character and situation of the persons whom he trusts, and if he should be deceived, he knows better the laws of the country from which he must seek redress' (WM IV.ii.6: 454), and Smith observes, correctly, that ‘a capital employed in the home trade ... necessarily puts into motion a greater quantity of domestic industry and gives revenue to a greater number of inhabitants of the country, than an equal capital employed in the foreign trade of consumption’ [which is not exactly high-level maths!].

Smith goes on, (mentioning the impact on ‘domestick industry 3 times more), to make his famous observation on the role of an invisible hand:

By preferring the support of domestick to that of foreign industry, he intends only his own security and by directing that industry 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 and end which was no part of his intention’ (IV.ii.10: 456).

Now, all metaphors have specific objects, which they describe ‘in a more striking and interesting manner’ (see Adam Smith, Lectures in Rhetoric and Belles Lettres, [1763] 1983, page 29), and the object of the IH metaphor in Wealth Of Nations is not that it ‘coordinates the economic process’, holding ‘neither a carrot nor a stick’, nor that it is ‘a signalling hand, important mainly for the kind of directions it provides and the way it communicates them’.

That is wholly an invention from the 20th century, albeit plausible if a 20th-century author wishes to invent that role for it (with of course a clear identification of the intended object by the 20th-century author) - but it is not what Adam Smith wrote in Wealth Of Nations and should not be applied to his use in the 18th century. Smith, on both occasions, in TMS and WN, identified the objects of the IH metaphor and they are eminently plausible, and help us understand the role of their objects in the process in which they operated.

But that cannot be said of the 20th-century inventions; nobody bothers to explain how the use of the IH metaphors helps us understand the working of markets. In fact, they obfuscate our understanding, creating allusions to something mysterious, indeed, ‘miraculous’, about markets (yes, even ‘the hand of God’ is sometimes applied).

Smith knew how markets worked (he showed how in Books I and II of Wealth Of Nations – without mentioning anything about ‘invisible hands’ - , but nobody, to my knowledge has explained what the modern version of ‘an invisible hand’ actually does, yet the profession, including the followers of Mises, seem to apply it in a mystical form, making modern pretentions to being a science somewhat laughable.

It was necessity that led ‘proud and unfeeling lordly masters’ to feed their dependent labourers – that necessity was the IH; it was what economists call their risk-aversion from what Smith called ‘their insecurity’ that led some, but not, all merchant traders to invest their capital locally, thus unintentionally adding to local ‘domestick’ revenue and employment – their insecurity was the invisible hand (you cannot see 'necessity' or 'insecurity' but you can see market signals at work through very visible prices, as we teach from Economic 101 to Doctorates.

I urge Peter Boettke to consider an ‘Emporer is naked’ moment on the modern use of the IH metaphor and answer the question: what does the Market Process do?’ - without using a 20th-century empty metaphor of its required object.

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Thursday, May 19, 2011

Adam Smith on Natural Religion

[I found these notes from my manuscript papers written at various times and related to my current project ' Adam Smith On Religion', now nearing a close, as my first draft is completed (and some 600 words over my allotment from the editor.]

A former student, John Ramsay, who described Smith as a friend of ‘Hume the atheist’, claims that Smith ‘petitioned the Senatus … to be relieved of the duty of opening his class with a prayer’, but that his “petition”, was rejected (Ramsay 1888, 462-63) John Rae comments that: “no record of the alleged petition ... and its refusal remains in the College minutes” and speculates that it was “but a morsel of idle gossip” and indicative of “the atmosphere of jealous and censorious theological vigilance in which Smith and his brother professors were then obliged to do their work” (Rae 1895, p 60). The alleged petition is indicative of Smith’s attitude to Christian worship, and the alleged petition was more likely an expression of his opinion at a Senate meeting, of which he was a member.

Either way, Smith continued with the opening prayers, the content of which was left to him, causing Ramsay to assert that ‘[Smith’s] opening prayers’ (compulsory for the day's lectures) were always thought to ‘savour strongly of natural religion’, that ‘his lectures on natural theology were too flattering to human pride’ because they induced his students to ‘draw an unwarranted conclusion, viz. that the great truths of theology, together with the duties which man owes to God and his neighbours, may be discovered in the light of nature without any special revelation”.

Smith’s Moral Philosophy series of lectures which opened with Natural Religion (Stewart [1793] 1980, I.17.: 274), are now lost, so we cannot assess Ramsay’s veracity; however, his assertions accord with the implicit conflicts in doctrinal theological tensions between the works of God in Nature, as understood by individual practitioners of natural philosophy (science) and the Word of God in the Scriptures, as interpreted by the fundamentalist Christians zealots who dominated the Church. In these disputes, John Calvin, approved of the study of the physical world; he positively commended the study of astronomy and medicine, because they showed ‘evidence of the orderliness of the creation and the wisdom of the creator’ (McGrath, 2005, 259).

Smith was among those who took up the challenge, first signified by the time to research and to write his History of Astronomy (published posthumously in 1795), and then kept it safe and from the fire that he ordered for all of his other papers, when he died in 1790 (ESP, 1744 - c.50). Like many others, especially in the more secular times of the Scottish Enlightenment, when he began his drift away from Revealed Religion to Natural Philosophy, while an undergraduate student at Oxford (1740-46).

Ramsay’s brief comments claims that ‘[Smith’s] opening prayers’ were always thought to ‘savour strongly of natural religion’, that ‘his lectures on natural theology were too flattering to human pride’ and that they induced his students to ‘draw an unwarranted conclusion, viz. that the great truths of theology, together with the duties which man owes to God and his neighbours, may be discovered in the light of nature without any special revelation”.

From John Ramsay’s critical memoirs of the themes with which Smith addressed his students on Natural Theology and on the content of his opening prayers, Smith stepped beyond the narrow confirmatory proofs of the existence of God in nature and showed that biblical revelation was not necessary to discover ‘the great truths of theology’ or of ‘man’s duties to God’, as Calvin had intended. But the theology of revealed religion was a core belief of the Scottish Protestant Church to which Natural Theology was definitely subordinate, and yet Smith essentially denied the necessary primacy of the core belief – and one of his students remembered it years later when writing his memoirs, but, fortunately for Smith, the Glasgow Presbytery did not hear of it, otherwise young Adam Smith could have been in serious trouble. In these circumstances, there may be little mystery about the non-survival of his lecture notes on Natural Religion. Also, possibly, Smith confined his most irreligious remarks to his morning prayers, delivered in his extemporaneous style, and deliberately left no firm evidence of his heresies that could be used against him. The zealots had charged three successive Professors of Divinity (Simson, Hutcheson, and Leechman) with 'heresy', and were ever vigilant of those they regarded as too liberal or too modern.

See: Ramsay, J. 1888. ‘Scotland and Scotsmen’ in the Eighteenth Century from the Mss of John Ramsay, Esq. of Ochtertyre, ed. Alexander Allardice, Vol 1 (of 2), Edinburgh: William Blackwood.


Monday, May 16, 2011

Some Problems When Writing About Adam Smith On Religion

As I have reported these last few weeks, I have been writing my draft chapter for the forthcoming Adam Smith’s Handbook (edited by Chris Berry, Maria Paganelli, and Craig Smith, for Oxford University Press). The main writing phase was concluded this weekend, hence, fewer postings on Lost Legacy, you may have noticed. Many thanks for the majority of readers who have been both loyal and patient.

The next phase is to shape the first draft for the editors. I thought it would be interesting to readers for me briefly to go over some of the problems when writing on this subject, ranging from the actual vagueness of Adam Smith on theology and organised religion (with occasional and tantalising hints of his personal views), through to his following his personal agenda of never upsetting his beloved and very religious mother, Margaret Douglas Smith (1694-1784).

In short, Smith deliberately wrote opaquely, and many scholars over the years, including Dugald Stewart and John Rae, his first and second biographers, and many since in the 20th century, have been less than specific about Smith’s religious commitments.

My chapter (literature references removed) opens with:

Some scholars discuss Adam Smith’s views on religion by judging them purely by their apparent theological content without reference to the context in which he wrote. In my view, a more accurate assessment derives his apparent theology from relevant biographical evidence that reveals their context and clarifies Smith’s opaque, because contradictory, writings, and thereby corrects imputations drawn from too narrow a purely exegetical approach.’

From the perspective of the central place of his very religious Mother in his life, plus his biographical details, reveal a lot about his scholarly behaviour at Glasgow and Oxford Universities, where he went from being a talented and traditional student, with a moderate but strict Calvinist upbringing, with the intentions of graduating from Oxford (1740-46) as an ordained priest in the Church of England, committed under the terms of his Snell Exhibition to return to Scotland to practise as a Minister in the Episcopalian Church, to suffering a personal crisis around 1744, in which, I suggest he experienced some sort of a mild-depressive illness from his realisation that he was no longer convinced of the truths of the revealed Christian God. This incident, and a few brief letters to his mother, and other hardly noticed surviving letters about him, add credence to my relatively new interpretation of his biographical details and their overriding influence on how he wrote about religion while his mother was alive (she died in 1784 before he revised the 6th and last editions of both his major works, Moral Sentiments and Wealth of Nations in 1789-90 (he died a few months later).

We have Smith’s essay, ‘History of Astronomy’, which he began in 1744 and completed around 1750, and then kept hidden in his bureau, showing it only to a few very close friends – he showed it to David Hume, of whom he was an ‘intimate friend’ in 1773, 23 years after meeting him in 1750. It was published posthumously at his instruction in 1795.

If his History of Astronomy is read as Smith’s careful testament from this religious crisis from 1744, in which he is fairly brutal about the ‘supercilious superstition’ of ignorant ‘savages’, as hiding a personal distaste for modern versions of the same ignorant superstitions of ‘invisible beings’ that tormented the beliefs of people in the practices of revealed religion in the doctrines of Catholic, Protestant and the various sects, Smith’s ‘juvenile’ torments become clearer.

That Smith kept his ‘juvenile essay’ is significant. It was his evidence of his secular epiphany and held strong emotional ties for him. He ordered explicitly that all of his other unpublished works be burnt by his executors (Joseph Black and James Hutton) – all 18 paper-volumes of manuscripts, including his long-promised major work on Jurisprudence, which they did reluctantly. He also ordered explicitly that his History of Astronomy be saved and published after he died.

One text, which did not change much after its first edition in 1776, was in Book V of Wealth Of Nations, ‘Of the Expence of the Institution for the Instruction of People of All Ages’. Most commentators step round this 26-page chapter, on grounds of its questionable relevance to their notion of what should be in an economics text (especially one that is supposed, in modern mythology, to be about the economics of a ‘capitalist economy’).

This chapter, about ‘institutions for the instruction of people of all ages … chiefly … for religious instruction’ is largely ignored, yet for understanding what Smith was about theologically, it is an essential read. He made minor changes to it from 1776-90, and for good reason – it underlines his public, though restrained, changes in his presentation of his alleged religious beliefs, heralded subtly and cleverly in his opening paragraph that religious instruction ‘of which the object is not so much to render the people good citizens of this world, as to prepare them for another and a better life to come’ (WN V.i.g.1: 788). His light sarcasm is developed into a fairly damning critique of all Christian institutions in history, with the sole exception of the administrators - though not the doctrines – of the Presbyterian Church of Scotland (he had many friends who were Ministers in the Church – though even Hugh Blair protested at his over-indulging the Church with such overly-generous thoughts).

It is when I turn to his religious thinking in Moral Sentiments that my case is developed by comparing the evident changes in his revisions for the 6th edition that clearly illustrate how he felt freer, after the death of his Mother in 1764, to reveal his private scepticism about all matters of religious belief. And he does this in abundance.

I certainly am not the first person to draw attention to his dilutions and omissions, nor will the inevitable rebuttals (and dismissals) from some scholars be the less for my efforts. But by linking Smith’s known biographical details to his changing text as he got older (with his significant unchanged ‘juvenile’ safely essay hidden away in his bureau drawer), I think the rebuttals will have less force than they had when the sole focus was on his texts alone. Though to be frank, many of the ‘Smith was a Deist if not a Christian’ (or a believer in Providence, or Stoicism, God as a final cause, etc.,), still have to show understanding of the limited options open to Adam Smith and others in social and religious environment of 18th-Century Scotland, as captured in my closing quotation:

No doubt many of the religious ways and habits, the old-world theology, have long ago vanished, leaving only memories, humorous, pathetic, or bitter, behind them; curious convictions that once were charged with dangerous force in sectarian polemics are now cold and harmless, like exploded shells on an old battlefield. But it is impossible to understand the character and conduct of the Scottish people without knowing those bygone customs and beliefs which were once full of intense vitality. Nowhere were Church spirit so keen, Church influence so far reaching, and Church affairs so intimate, as in Scotland.’ (Graham, 1899, preface, viii.)


Thursday, May 12, 2011

Adam Smith's Much Wider Role for Exchange

[Apologies to readers who tried to visit Lost Legacy on Friday for the apparent break in service. This was due to Blogger Admin who stood down the Blogger system for several hours while they 'fixed' something technical.]

Dani Rodrik is quoted by Mark Thoma on the admirable Economist’s View Blog HERE:

'Success Requires More Than Individual Initiative'

Economists and Democracy, by Dani Rodrik, Project Syndicate’

Raised on textbooks that obscure the role of institutions, economists often imagine that markets arise on their own, with no help from purposeful, collective action. Adam Smith may have been right that “the propensity to truck, barter, and exchange” is innate to humans, but a panoply of non-market institutions is needed to realize this propensity.

I see the importance of ‘a panoply of non-market institutions’, but cannot without comment let Dani Rodrik re-write a most important aspect of Adam Smith’s observation of “the propensity to truck, barter, and exchange” (WN I.ii.2: 25). First he did not say it was ‘innate’:

(‘whether this propensity be one of those original principles in human nature, of which no further account can be given’)

he went on to say: 'or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to enquire’.

There are good reasons to show that Smith believed the propensity to exchange’ was from the latter, not the former.

His observations of the origins of language show how he thought language evolved – by early humans struggling to find and agree on matching sounds for common objects in nature and to agree on the rules for their derivation, first in simple names and then in their grammatical relations - see his Lectures on Rhetoric and Belles Letters ([1761] 1980. ‘Considerations Concerning the First Formation of Languages &&&’ in LRBL, 203-26).

Smith places the evolution of language from humans struggling to agree settled ideas about language early on in societies of speaking humans, and significantly, why numerous languages were present in different areas of the earth. Exchange, unlike sight, say, was not ‘innate’ – it was the outcome of ‘reason and speech’ driving social interactions that developed exchange propensities over time to meet the multifarious needs for co-ordination in all aspects of living in developing societies - where to hunt, where to sleep - and long, long - and even longer - before commercial trade was ever a notion in human minds.

And that is why the point I am making in respect of Rodrik (and Polanyi before him – with many others) is to highlight how he (and they) manage to elide Smith’s concept of exchange (riddled as it is throughout Moral Sentiments) into a mere synonym of commercial ‘trade’ when in fact Smith saw the 'exchange propensity' as the foundation of human social life. If Smith had meant ‘exchange’ only to apply to commercial trade he would have written it as the ‘propensity to trade’, but he did not write that nor did he restrict it in such a narrow manner (as some scholars are apt to do).

Smith had the propensity to exchange as a common theme running throughout all of his works and he reported instances of the exchange theme in his History of Astronomy – the exchange of explanations for the irregular phenomena of nature among primitive ‘savages’, terrified by what they experienced and inventing and sharing their pusillanimous religious superstitions; in Moral Sentiments in the role of conversation among people as they work through their behaviours and experiences of each other – each becoming like a ‘merchant’ (a simile), and, through the impartial spectator mechanism, moderate their expressions and their behaviours in consequence; in Lectures on Jurisprudence – the exchange of obligations in respect of the recognition of their natural liberties, the establishment of property, and the evolution of laws and justice; and in Wealth Of Nations - in exchanging one thing for another in trade from the division of labour (see his definition of the ‘bargain, WN I.ii: 26).

James Otteson traced the commonality of the exchange propensity in his ’Adam Smith’s market place of life’. 2003. Cambridge University Press – in my view a surprisingly under-mentioned work amongst historians of economic thought.

Smith then, did not ignore the ‘panoply of non-market institutions [that] is needed to realize this propensity’.

Those institutions were occasioned precisely by the same propensity to exchange that dominates most relations between humans. This was Smith’s main point in all of that which he wrote. Smith never had a crude neoclassical view of exchange, confined as it is, to the relationship between two or more mathematical variables open to determinate solutions, widely divorced from real humans in societies. Rodrik assaults an imaginary ‘homo economicus’ bereft of even the substance of its straw relatives.

Institutions are formed by people, not equations, and people have a ‘propensity for exchange’ that shapes the institutions they form. Less than perfect economies, with people in less than perfect liberty have formed working societies well short of perfection. Neither perfect competition nor perfect natural liberty (and we can add not even perfect institutions) are necessary or sufficient for progress towards opulence (Smith rebuked Dr Quesnay on this very issue: WN IV.ix.28.674).

Rodrik should direct his remarks about narrow vision to those modern scholars who have a limited knowledge of what Adam Smith actually said, and either they make it up from insufficient grasp of Smith’s ‘market place of life’, or they repeat the insufficient grasp of others.

Monday, May 09, 2011

Always Remember Context When Citing Adam Smith

Paul Sugar writes in Bad Conscience (HERE)

I thought I might do a post drawing on some of the finer thinkers of the 18th century. Specifically David Hume, Adam Smith, Edmund Burke, and the problem of political “enthusiasm”. Or as we would now call it, fanaticism.”

For David Hume and Adam Smith ‘enthusiasm’ referred to religious fanatical passions, not politics, which in their view was by far a more disruptive danger to social peace than politics. The mass of people was excluded from politics in the 17th-18th centuries, but they had easily enter into religious enthusiasm.

The results of religious enthusiasm were often extreme disruption as seen, for example, in the public behaviour of the zealots in the battles between the Episcopalians and the Church of Scotland at the time (and formerly against Roman Catholics before them), who prevented Hume from academic appointments and intimidated Smith into silence on religious matters until the later months of his life. They had in mind the ‘enthusiastic’ mobs of religious fanatics in parts of Asia and the Middle East, which we see today, and in terrorist incidents in Western cities also, by ‘enthusiastic’ individuals, in Hume and Smith’s meaning of the word.


Saturday, May 07, 2011

David Hume's 300th Birthday

Morgan Meis 27 April) in The Smart Set (from Drexel University) a short, but formidable essay on David Hume (HERE):
David Hume's Dialogues Concerning Natural Religion.

“David Hume turns 300 on May 7. It is fitting, I suppose, that a man so resolutely mortal should be enjoying such immortality. Most of Hume's contemporaries are long forgotten. Hume, somehow, endures. His old pal Adam Smith (author of The Wealth of Nations), relates that in Hume's dying days he told his friends, "I have done every thing of consequence which I ever meant to do, and I could at no time expect to leave my relations and friends in a better situation than that in which I am likely to leave them: I therefore have all reason to die contented." ...

… For all the light we shine upon ourselves and our surroundings, we remain deeply and fundamentally in the dark. Hume makes this point eloquently in one of his least read works. It is called Dialogues Concerning Natural Religion and was only published after Hume's death. The purpose of the dialogue is to express opinions that are inherently uncertain and yet relentlessly interesting. "Opposite sentiments," writes Hume, "even without any decision, afford an agreeable amusement; and if the subject be curious and interesting, the book carries us, in a manner, into company; and unites the two greatest and purest pleasures of human life, study and society."

Hume always found himself astraddle those two great pleasures, study and society. When he spent too much time studying, the mechanisms of human reason would take flight, leading him into seemingly logical conclusions that defied his actual experience of the world. Thinking hard in his study, Hume would reach the conclusion, for instance, that there is no such thing as causality. Then he would step outside and go about the business of daily life in the full assurance that cause and effect operates just as we've always experienced it. Everyday experience would do its work, grounding him again in reality. That contrast between reason and experience never failed to amuse, trouble, and delight Hume.

Dialogues Concerning Natural Religion is a discussion between an all-around skeptic, Philo; a religious dogmatist and believer in abstract reason named Demea; and a moderate empiricist, Cleanthes. The three characters debate the existence of God and other light topics. Scholars have long debated the question as to which of the interlocutors represents Hume's true position. The answer is that none of them do, and all of them do. Hume was fully reconciled to being bifurcated, trifurcated even, if we can put it that way. He tried to love the war that was always raging inside. In this, he was an honest philosopher, and an honest man.

[In the interest of protecting the author’s copyright – it’s well worth reading, especially on Hume’s Dialogue on Natural Religion - please follow this Link HERE:

[For a risible attempt at ‘criticism’ of David Hume by a ‘John Knox’, see this other piece from today’s Caledonian Mercury (HERE)]


Friday, May 06, 2011

More Essays on Journal Talk

The lively discussion Blog on Journal Talk carries two comments (by postgraduate students? – I say that because of the earlier reference to Daniel Klein, the formidable educator on all matters related to Adam Smith at George Mason University, Fairfax, Virginia) (HERE):

"The Two Faces of Adam Smith"
(in The Southern Economic Journal 1998 vol. 65, no. 1, 1-19).

Vernon Smith seeks to solve the Adam Smith problem and reconcile what seem to be two inconsistent views of human nature in Wealth of Nations and The Theory of Moral Sentiments. In Wealth of Nations, Smith’s invisible hand theorem proposes that it is not from benevolence, but rather “the propensity to truck, barter, and exchange one thing for another” which drives our behavior (1776; 1909: 19-20). In The Theory of Moral Sentiments, Smith declares that there are “some principles in… [human] nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it” (1759; 1976: 9). Vernon Smith asserts that these two views are consistent if we recognize a “universal propensity for social exchange” (3). He proposes the following behavioral axiom: ““the propensity to truck, barter, and exchange one thing for another,” where the objects of trade I will interpret to include not only goods, but also gifts, assistance, and favors out of sympathy, that is, “generosity, humanity, kindness, compassion, mutual friendship and esteem” (Smith 1759; 1976, p. 38)” (3). Vernon Smith then proceeds through historical, psychological, and experimental evidence to support this theory. Vernon Smith offers a very convincing and creative solution to the supposed Adam Smith problem. He makes crucial distinctions between reciprocated and non-reciprocated exchange. However, Vernon Smith seems to neglect the importance of non-reciprocated ethical behavior in Adam Smith’s work. Hanley (2010) elaborates on the distinctions between Adam Smith and Vernon Smith. He also points to divergences in opinion on intended beneficence and social vs. unsocial behavior. Vernon Smith asserts that Adam Smith’s explanation of beneficence is “utilitarian” and argues that it arises “from the expectation of reciprocal benefits” (17). This egoistic view of man may not fit neatly into Adam Smith’s conception which encompasses broader views on ethics and virtue”.
Echo Keif

“Echo’s critique is insightful, and touches on Hanley’s recent appraisal of the article. I would like to suggest that while Vernon Smith’s experiments are very interesting, that his jumping off point misses a better way to reconcile Adam Smith’s two works.
 Although Adam Smith does attribute the propensity to truck, barter, and exchange to man as one of his most innate qualities, it is not the most obvious bridge between the two books. As a method of operation in the world, the propensity is important; as an explanation of the origin of our behavior, less so. The Adam Smith of the Theory of Moral Sentiments proposes a picture of man who receives input from the world around him about how he ought to behave. The man wants to be loved and to be loveable out of a concern for his self-interest. Both works address the content of self-interested behavior. The content which makes up self-interest in each book is explained differently, but they both amount to an exploration of self-interest in different frames. Paganelli (2008) even suggests that self-interest is judged with a more friendly result in the Theory of Moral Sentiments than in The Wealth of Nations.
Self-interest, rather than the propensity to truck and barter, is perhaps the real tie between the two works. In the Theory of Moral Sentiments Smith addresses humanity in the full context of human interactions, while in the Wealth of Nations he addresses that part of society most affected by the virtue of prudence. The method of approach is therefore different, but the starting point for each is not so far apart as is often assumed.
John Robinson

Brief for now. There is some understatement of “the propensity to truck, barter, and exchange one thing for another”.

For Smith this was about more than exchange in connection with trade (indeed, I have read many misquotes of this phrase as saying ‘and trade (sic) one thing for another’. Jim Otteson linked it to all of Smith’s work, from his essay on the History of Astronomy, Moral Sentiments, his essay on the Formation of Language, and Wealth Of Nations (I also cover it in the first edition of “Adam Smith: a moral philosopher and his political economy” (Palgrave, 2008).

It is the propensity to exchange, ideas as well as things, that drives humans to co-operate in societies at all stages of human development. From that propensity, humans used speech to develop techniques like persuasion, reciprocation (the quasi- bargain - delayed), and the full (simultaneous) bargain, and relationship implied in friendship, politeness, manners and grief.

'Scots Wha Hae': The Scottish Election Results

Regular readers of Lost Legacy will know that I apply a strict policy of not commenting on the politics of events in other countries other than the country I live in, which is Scotland, currently within the United Kingdom of Great Britain. (Please don't refer to England if you really mean Britain - or the 'Queen of England' - there is no such title since 1707 - she is the Queen of the United Kingdom of Great Britain and Northern Ireland).

Well, today, the result of the elections to the Scottish Parliament have been announced. The headline result is that the Scottish National Party (in favour of Scottish independence) has won 69 seats, Labour has won 37 seats (Unionist party opposed to Scottish independence), the Conservative Party won 15 seats (Unionist party opposed to Scottish independence), and the Liberal Democrats 5 seats (Unionist party opposed to Scottish independence).

These 69 seats give the SNP an overall majority (65 seats needed) to the Scottish National Party. This the first time since the Scottish Parliament was set up in 1999 that any party has achieved an overall majority (up to now the governing parties have been coalitions of two or more parties).

Note: I voted SNP, as I have done since 1974.

Disclosure: Adam Smith was an adamant Unionist, who supported the parliamentary Union of Scotland with England.

[As Adam Smith was so right on so much, his stance on this one issue is excused ….]

Tuesday, May 03, 2011

Clarification on "Centrality" As a Physical Fact, Not As Altering Adam Smith's Meaning

In Freeman online from the Foundation for Economics Education (HERE)

Mark Skousen writes:

Why Is the “Invisible Hand” in the Middle of Smith’s Works?

"Coincidence or subtle statement?

... On the other hand, economist Gavin Kennedy contended in earlier writings that the invisible hand is nothing more than an after-thought, a “casual metaphor” with limited value. Rothschild, the Harvard University economic historian, even goes so far as to declare, “What I will suggest is that Smith did not especially esteem the invisible hand. . . . It is un-Smithian and unimportant to his theory” and was nothing more than a “mildly ironic joke.”

Smith wrote sympathetically about the Aristotelian golden mean, the idea that virtue exists “between two opposite vices.” For instance, between the two extremes of cowardice and recklessness lies the central virtue of courage.

In his essays on astronomy and ancient physics, he was captivated by Newtonian central forces and periodical revolutions.
Klein discovered that in his lectures on rhetoric Smith admired the poetry of Thucydides, who “often expresses all that he labours so much in a word or two, sometimes placed in the middle of the narration.”

Klein and Lucas’s list of evidence is what a lawyer might call circumstantial, or “impressionistic,” to use their own adjective. Taken as a whole, the documentation is either an ingenious breakthrough or a “remarkable coincidence,” to quote Kennedy.
A few Smithian experts have warmed up to Klein and Lucas’s claim. Kennedy, who previously considered the invisible hand a “casual” metaphor, now sees a “high probability” in their thesis of deliberate centrality. Others are more skeptical

My Comment on the Freeman online Blog today:

I should make it clear that when Daniel Klein kindly sent to me a prepublication version of his ‘centrality’ paper he asked for my comment. Reviewing the evidence assembled by Klein and Lucas I applied the scholar’s principle that we should always submit to the facts. On the narrow question of the physical centrality of the IH metaphor in Moral Sentiments (from the 3rd edition) and Wealth Of Nations (all six editions), the facts are clear it appears in the physical centre of each book. Therefore I expressed the view that this was more likely to be deliberate than coincidental (the latter of ‘vanishingly small probability’).

That is the extent of my comment.

I continue to reject politely and respectfully the enormous superstructure that Daniel Klein builds on the fact of centrality.

He ignores Adam Smith’s teaching on metaphors (page 29 in the same lecture series in which he comments on Thucydides in contrast to Polybius) that metaphors describe ‘in a more striking and interesting manner’ their objects and in both of his mentions of the IH metaphor in his two books he also identifies their ‘objects’, and they had nothing to do with ‘markets’, ‘supply and demand’, ‘harmony’, ‘equilibrium,’ or the rest of its supposed meanings invented from the 1940s by modern economists as part of the necessary Cold War against communist expansionism. Bringing the 2,000 years-old Talmud into the discussion is a distraction from Smith’s meaning.

The IH metaphor was popular and in wide use in 17th and 18th century literary discourse, mainly among theologians, but also among play writers, poets, and novelists. It was hardly mentioned among ‘economists’ until Paul Samuelson gave it widespread publicity from 1948.

[The "Aristotelian golden mean" was a necessary part of Smith's Moral Philosophy degree course - and of all courses in "Moral Phil" at Scottish Universities from the early 1700s (if not before) through to the 1960s (and probably still is), when I mixed with "Moral Phil" students as a young economics student, and we talked about the "Golden Mean" - as you do. What Smith taught did, not imply special enthusiasm, it was his job as professor to so so.]

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Scholars of English Apparently Not Clear on Metaphors

This review article is posted in the Illinois Department of English Blog (HERE):
By Curtis Perry head of the department (2 May)

The 'Invisible Hand' and British Fiction, 1818-1860

I am delighted to announce here the publication of Eleanor Courtemanche's new book, The 'Invisible Hand and British Fiction, 1818-1860: Adam Smith, Political Economy, and the Genre of Realism. Actually, the book been in print in Great Britain since April 12, but I learned this morning that Professor Courtemanche's advance copies have now arrived in the mail. This is my cue to post. Because, like I always say, nothing can be real until it arrives in central Illinois.

Published as part of Palgrave's impressive "Palgrave Studies in Nineteenth-Century Writing and Culture" series, The Invisible Hand and British Fiction argues that 19th-century realist novels, with their large-canvas portraiture of individuals within complex social systems, represent the best and most sophisticated response we have to the baffling experience of living in a world of global capitalism. This is a historical argument, about fiction and economic theory in the 19th century, but one that also makes 19th-century fiction speak to experiences that are our own. I admire this book for its powerful argument, but also for its lively and accessible prose. I think it has the potential, therefore, to be of interest to readers beyond its main, obvious audience of scholarly specialists: if only the invisible hand of the marketplace could somehow bring it to a wider audience's attention!

Here is the book description, pasted in from the press' website: "Some economic ideas are too interesting to be left to economists. This book argues that Adam Smith's metaphor of the 'invisible hand' – in which selfish economic actions are mysteriously transformed into aggregate social benefits in a capitalist economy – implies an entire spatial and temporal system in which the morality of any particular action can only be understood in the context of society as a whole. The 'Invisible Hand' and British Fiction argues that while political economists focused only on the optimistic outcomes of capitalist moral activity, Smith's model of ironic morality also influenced the work of novelists including Austen, Dickens, Martineau, Thackeray, Gaskell, and Eliot. Their realist novels represent the reconciliation between individual ignorance and systemic overview as much less stable than the economic synthesis, using omniscient narrative voices, multiple perspectives, and humor to depict a wide variety of possible outcomes. Smith shares with the realists a vision of modern society that is structured around a fragile trust in the benefits of unintended consequences."

Congratulations, Eleanor!

It is not my intention to impugn the scholarly standards of a fellow-Palgrave author, but Eleanor Courtemanche is quite wrong in associating Adam Smith with her standard repetition of the modern meaning (not Adam Smith’s) of the “invisible hand metaphor.

Adam Smith did not assert that “selfish economic actions are mysteriously transformed into aggregate social benefits in a capitalist economy” anywhere on the two (only) occasions in which he used the IH metaphor in his Moral Sentiments (1759) and Wealth Of Nations (1776). If that is her theme for her otherwise no doubt excellent book, then she starts from a disadvantage.

In that sense I agree that “Some economic ideas are too interesting to be left to economists” and would extend that to scholars who pick up ideas from other disciplines which they have not investigated independently. Especially since, the disputed metaphor is directly related to the modern misreading of the role of metaphors in the English language as understood and taught by, a subject I expect Eleanor Courtemanche (and Curtis Perry) would know more about than economists.

I refer them both to Adam Smith’s Lectures on “Rhetoric and Belles Lettres” [1763] 1980, a regular part of the Scottish University courses in Moral Philosophy in the 18th century, and which Smith gave to students in Edinburgh from 1748-51, and to Glasgow University students from 1751-64 (and which remained a part of moral philosophy degrees in Scotland through to the early 20th century).

In his lectures, Smith discussed the role of metaphors (page 29) and made the strong point that metaphors describe their ‘object’ “in a more striking and interesting manner". His two uses did just that, but neither had anything to do with “selfish economic actions (that) are mysteriously transformed into aggregate social benefits in a capitalist economy”.

In Moral Sentiments the IH metaphor refers to rich feudal landlords having to feed their labourers from the produce of food on their lands (i.e., they could not consume it all themselves and not feed their labourers – otherwise who would live long enough to labour on the landlord’s land? Moreover, the labourers could not labour without receiving food from the landlord. They were mutually dependent – no labour, no food; no food no labour. The IH metaphor explained the relationship that bound both sides of their dependency in a ‘more striking and interesting manner’.

In Wealth Of Nations, in Book IV, the IH metaphor explained that consequence of some, but not all merchants, who feared for the security of their capital if they sent it abroad, and how their insecurity led them to invest in the home market instead. By doing so, they added to domestic “revenue and employment” – the whole being the sum of its parts. This unintended benefit was the direct consequence of their insecurity and this insecurity was the object of the IH metaphor.

In short there is no actual “invisible hand”. It is a metaphor, but not a metaphor for “selfish economic actions [that] are mysteriously transformed into aggregate social benefits in a capitalist economy”. Smith devoted two books (285 pages) in Wealth Of Nations to how markets in commercial economies (not “capitalist” – they came later in mid-19th century) worked in detail and he never used the IH metaphor while doing so.

Moreover, by describing the object of the IH metaphor (i.e. identifying it) on both occasions that he used it, there is nothing ”miraculous” nor mysterious about how these unintended outcomes came about. Nor is there, for completion, nothing mysterious about how markets work – they work through very visible prices as shown in Books I and II.

But the IH metaphor is not about prices – its about the specific "objects" that Smith’s examples referred to: mutual dependence and insecurity. Now these are not visible, they operate within people’s heads, that cause them – leads them – to behave in the way they do.

Why modern myths were invented using the IH metaphor in the 1950s onwards by modern economists is a question of ideology born (metaphor) in the post-second world war decades in competition with Soviet military expansion in Eastern Europe and the rise of anti-market communist parties in Asia and perceived subversion in capitalist Western economies.

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Sunday, May 01, 2011

Jacob Viner's Theological Gloss to his Error on Adam Smith's Use of the Invisible-Hand Metaphor

Among other items I have been reading this week, I came across this item:
Jacob Viner on the invisible hand in Smith in (1972) ‘The Role of Providence in the Social Order: an Essay in Intellectual History’, New Jersey, Princeton University Press.

Adam Smith’s system of thought, including his economics, is not intelligible if one disregards the role he assigns in i tto teleological elements, to the “invisible hand”.’ (p 82)

‘In his economic analysis Smith operates from the categorical premise that the economic relations between man are on effect fundamentally impersonal, anonymous, infinitely “distant” so that the sentiments with the one exception of “justice”, remain dormant, are not aroused into action’ (82).

Viner goes on to consider ‘commercial transactions carried out by professional merchants of whom, one say, is resident in England and the other in Turkey, and the only communication between them is through equally anonymous intermediaries, or by mail. Smith, however, in his general treatment of the market, although often not when he is dealing with particular cases, writes as if he accepts as realistic the same psychological assumptions when he is considering the relationships of master and servant, landlord and tenant-farmer, employer and employee, as when he is discussing foreign trade

What struck me as I read Jabob Viner’s take on the invisible hand was how different it was from my own take on Smith’s idea of the ‘anonymity’ of the links in the supply chain, even when fairly simple, let alone when more complex. The products that a merchant purchased, from home suppliers of goods as agents from those merchants residing abroad, one or two links from the merchant either before and after his own face-to-face contact with his suppliers and his buyers, none of whom need be final seller or buyers (because merchants in the supply chain may be subject to many suppler and buyer links before or after those he deals with directly) would not be anonymous.

A merchant buyer in England buys through agents - he has to know those whom he deals with if only to view the merchandise or to judge the visible prices quoted. He does not address a letter, let alone his money, to ‘anybody in Turkey’. The seller in Turkey may buy his produce from other local Turkish sub-merchants, original manufacturers, and perhaps through their agents along the supply chain. The goods purchased are carried as cargo in the ships of merchant traders and offloaded to port-agents in England, and then carried forward to our merchant. In short, each link in the chain is in contact with the next link, and for that transaction the traders are very real and known, and not ‘anonymous’.

Smith’s point was that there is no need for the merchant in England to know the people in the links in a supply chain two or more steps before in the links. Indeed, in complex markets, that anonymity is productive, but it is not a mystery. In the first instance, he only needs to know the ones he buys from and sells to directly.

However, if a merchant suspects (because he does not know) that the character and probity of the persons in the links he deals with face-to-face, because of possible fraud or unreliability, this can inhibit his participation in trade, especially of foreign trade, where recourse to reliable justice may be difficult. He might very well try to go 'behind' the person he deals with in England, to make contact with his foreign suppliers and try to ‘cut out’ that person in the supply chain (perhaps be visiting the foreign country himself or through a trusted agent). If the risks are too high (he is risk averse) and if he has other options, such as access to domestic trade supply chains, he could exercise the virtue of prudence and only trade domestically.

Now that was the precise point that Adam Smith was making in his use of the ‘invisible-hand’ metaphor in Wealth Of Nations (IV.ii.1-9:452-56) to show how some, but not all, merchants, concerned for the security of their capital when applied to the foreign trades, preferred to invest at lower risks domestically, which unintentionally added to domestic ‘annual revenue and employment’ (the whole is the sum of its parts). It was their risk aversion that Smith referred to by the IH metaphor (their 'security' was the metaphor's object) . What is in someone's head as a motivation is 'invisible' - we cannot see into their heads; we can only feel, like the wind, it's affects. They can decide (privately, without fuss) to either trade foreign or domestically, or undertake a bit of both. A some merchants, but not all, initiate and continue with foreign trade, which in Britain's case in Smith's time and afterwards amounted to a significant part of what today we call the GNP.

The sentiment affecting their behaviour was the sentiment that Deidre McClosky rightly called the bourgeois virtue of prudence. This virtue is not, as Jacob Viner suggested, ‘infinitely “distant”’ from all sentiments, except ‘justice’. Viner made that claim to give ‘teleological' elements, to the “invisible hand”’, which is a theological gloss covering his incorrect appraisal of Adam Smith’s use of the IH metaphor.

[Note to Regular Readers: I am occupied at present in the first draft of my Essay on 'Adam Smith On Religion' and posts just now are less frequent than normal. Please have patience. I shall try to post more frequently after the 'holidays'.]

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