Tuesday, August 30, 2011

Worth a Look, But Beware Too Sloppy Thinking

nemo” writes in the Darwiniana Blog on (HERE) :

“The connection between Darwinism and capitalism is direct: the ideology of markets first proposed by Adam Smith (or, rather, his prededessors) suggested that random processes could generate order of some kind. And this idea became the backdrop to the similar sense that natural selection left to itself would produce biological order. Part of the reason for all this lay in the difficulty of really understanding evolutionary dynamics, and the clutching at straws, via economic ideology, to explain it. The obvious resemblance of jungle conflict and market competition was part of the confusion. 
The catch here is that the real dynamics of evolution is something totally different.”

An interesting thought, though it is not obvious to me what is the nature of a “direct connection” between “Darwinism” and “capitalism”. A lot would depend on what is meant by “Darwinism”, a broad enough idea – is it Darwin’s ideas as written in his several books, or what comes from the broad set of ideas, both right and wrong, associated with Darwin’s name under various guises? Add the numerous actual forms of capitalism practised in the world, the numerous theories of capitalism since the 19th century, including the various contributions of authors before then and before the broad experiences of capitalism as we now know it were written about by several 17th-18th century authors and analysed by 20th-21st century historians?

In so far as natural selection (i.e., what actually happened) is used to explain the natural evolutionary forms of life and the natural evolution of social arrangements across human societies, there is a potential set of imperfectly analogous (not necessarily identical) processes worth studying.

It is right to be wary of “obvious” and misleading ideas of a “resemblance of jungle conflict and market competition”, which smacks of ideology rather than considered thinking. Notions of “Social Darwinism” have always been more a source of avoidable confusion than enlightenment, much like so-called “laissez-faire” has burdened economics.

Natural selection is blind – it does not aim anywhere. It can lead to dead-ends (the extinction of life forms and sick societies among human communities). The fossil record tracks extinctions and the detritus of scattered former stone buildings and earlier stone tools tracks the extinction of past societies.

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Saturday, August 27, 2011

Adam Smith On Bargaining (Again)

Naked Capitalism carries a post (26 August) by David Graeber, Reader in Social Anthropology, at Goldsmith’s University of London (HERE): and author of: ‘Debt: The First 5,000 Years

“What is Debt? – An Interview with Economic Anthropologist David Graeber conducted by Philip Pilkington, a journalist and writer based in Dublin, Ireland.

Philip Pilkington: Let’s begin. Most economists claim that money was invented to replace the barter system. But you’ve found something quite different, am I correct?

David Graeber: Yes there’s a standard story we’re all taught, a ‘once upon a time’ — it’s a fairy tale.

It really deserves no other introduction: according to this theory all transactions were by barter. “Tell you what, I’ll give you twenty chickens for that cow.” Or three arrow-heads for that beaver pelt or what-have-you. This created inconveniences, because maybe your neighbor doesn’t need chickens right now, so you have to invent money.

The story goes back at least to Adam Smith and in its own way it’s the founding myth of economics. Now, I’m an anthropologist and we anthropologists have long known this is a myth simply because if there were places where everyday transactions took the form of: “I’ll give you twenty chickens for that cow,” we’d have found one or two by now. After all people have been looking since 1776, when the Wealth of Nations first came out. But if you think about it for just a second, it’s hardly surprising that we haven’t found anything.

Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one. Quite often people don’t even engage in exchange at all – if they were real Iroquois or other Native Americans, for example, all such things would probably be allocated by women’s councils.

So the real question is not how does barter generate some sort of medium of exchange, that then becomes money, but rather, how does that broad sense of ‘I owe you one’ turn into a precise system of measurement – that is: money as a unit of account?
By the time the curtain goes up on the historical record in ancient Mesopotamia, around 3200 BC, it’s already happened. There’s an elaborate system of money of account and complex credit systems. (Money as medium of exchange or as a standardized circulating units of gold, silver, bronze or whatever, only comes much later.)

So really, rather than the standard story – first there’s barter, then money, then finally credit comes out of that – if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later and then, when you do find “I’ll give you twenty chickens for that cow” type of barter systems, it’s usually when there used to be cash markets, but for some reason – as in Russia, for example, in 1998 – the currency collapses or disappears.

David Graeber develops his argument in his rather folksy way and runs Adam Smith’s concepts together in a misleading manner. And David had the benefit of over 250 of years of field research, not available to Adam Smith, and still seems to get some basics wrong. Plus, David believes in the substantial misrepresentation of Smith invented (not too strong a characterisation as readers of Lost Legacy will recognise) by modern attributions to Adam Smith of ideas he never expressed. Post-1870 neoclassical economists and advocates of so-called theories of Homo economicus of perfect rationality, ignore Smith’s clear stances on moral sentiments and his ‘other-regarding’, not purely ‘self regarding’, views on self-interest. David has had access to the works of the Adam Smith, born in 1723 in Kirkcaldy, and shows no signs of having read them, yet. The Kirkcaldy Adam Smith had a quite different persona to the 20th-century ‘Adam Smith’, invented in Chicago.

Adam Smith centred his historical method on the early propensity for humans to engage in exchange relations which was never limited to mere notions of ‘trade’ in the modern sense (something that Polanyi – author of the Great Transformation, 1941 - sometimes conflated). Smith studied the origin of languages early in his career (first published in 1761). Two or more humans had to engage in exchange relationships to agree to common sounds and meanings, and signs, for understandable communications to commence – and continue. This is probably why Smith linked the origin of languages as "the necessary consequence of the emergence of the “faculties of reason of speech” (WN, 1776). The widespread (and separate) exchange relationships in scattered early human societies had their early origins in human sociability (in the ‘first age of man’).

Building on the human propensity to exchange, and before the complex ‘gift’ propensities noted by Maus, the natural forms of reciprocity, practised by primates and other species, were rooted in that same sociability among con-specifics. Reciprocity can involve a notion of ‘debt’ in the sense implied by David; but it need not, at least for as long as a non-reciprocated act is tolerated (depending on local cultural norms). Reciprocation may not be the sole motive that initiates an exchange transaction, but a failure to ‘close’ the transaction can cause resentment, and a refusal to engage in subsequent transactions can promote avoidance reprisals (including violence) that is still true today – though uncompleted obligations can remain ‘open’ for years (others must be ‘closed’ within hours).

Reciprocation exchanges – its rewards and penalties for non-reciprocation – are well-covered in anthropology and social psychology (as David presumably knows), and by primatologists too (See Dunbar on the social role of gossip). While people can be – and some are - beneficent (an important virtue for Smith) without expecting reciprocation, social life intrudes sometimes to make reciprocation mandatory (severe scarcity). In my research on 'the pre-history of the bargain', I have found that the exchange relation in these cases is in effect a progression, over many generations: ‘If you take the benefit, you ought to contribute in return', albeit later. This becomes, under later social pressures of scarcity or danger: ‘If you take the benefit, you must contribute’ in return, albeit later. The giving and return were originally separated in time; gradually it became an obligatory ‘quasi-bargain’ form of exchange. And this goes on for millennia without the involvement of money. That came much later when ‘kingdoms’ formed (Mesopotamia, and all that). Kings issued coins as payment to their armies as symbols of their awesome power, and travellers exchanged their coins for local currency, via the temple networks across Euro-Asia, close to trade routes).

Bargaining (an instance of an immediate exchange): ‘Give me that which I want, and you shall have this which you want” (Wealth Of Nations) evolved from social quasi-bargains in some places and times, while traditional quasi-bargains continued, as well as pure reciprocation obligations, in remnant societies of the kind that David and his colleagues investigate.

Taking a nursery-level approach to transferring the behaviours of remnant societies across to commercial societies without exploring how one, in some places, but not others, evolved is not valid evidence against Adam Smith’s approach. He dealt with 'nations', not small bands.

Adam Smith did not postulate that exchange in “transactions took the form of: “I’ll give you twenty chickens for that cow” in the first ages of man. Far from such a wild generalisation, Smith's thinking about the central role of exchange in human sociability was far more pointed than that, and of far earlier vintage (the 'necessary consequence of the faculties of reason and speech', Wealth Of Nations) than David’s folksy sounding ‘bunch of Neolithic farmers’ (and therefore long before ‘ancient Mesopotamia’ too). I agree with him – if such represents David’s level of knowledge of Adam Smith and Wealth Of Nations, let alone his apparent ignorance of Smith’s Theory of Moral Sentiments (1759) – “it’s hardly surprising that we haven’t found anything” if that is what they are looking for.

The transactions that Smith mentions were illustrative of the third and ‘fourth ages on man’ – ‘age of farming’, with nearby ports and towns, and ‘age of commerce’. In the famous ‘beaver-deer’ parable, Smith referred to a possible method of finding a common value in the transaction without a common unit of money, primarily to illustrate his first stab at a ‘labour theory of value’, not as a comment on alleged anthropological facts, of which he, like his contemporaries, were bereft of field experience. David’s mocking, 230 years later, of Smith’s non-knowledge of the contents of ‘Anthropology 101’ is a cheap shot.

Hence, David’s image of ‘what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” Indeed, modern observations speak of a native hunter taking his skins to a trading post in which the hunter denigrates his skins and praises the trader’s trade goods to the point of absurdity, and the trader mimics the hunter’s negotiating norms by denigrating his own trade goods, while praising the hunter’s skins, which is often a long prelude to their arriving at a ‘fair’ exchange rate to complete their transaction, with both of them happy. Different forms of such parlaying occur in many societies. So what? Indeed, what has it got to do with the very long pre-history of exchange behaviour, going back to long before the ‘hydraulic societies’ of Egypt, Babylon, India and China, mentioned by David, flourished briefly, leaving their stone detritus across the Eurasian continent.

When Smith does speak of modern bargaining, witnessed in the 18th century, he directed our attention to a crucial aspect of it, melding Moral Sentiments with Wealth Of Nations. This too is often quoted – perhaps his most famous statement – but is seldom understood (again from ignorance of Moral Sentiments, 1759).

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).

Smith makes it clear we operate our self-interest by addressing the self-love (self-interests) of others. In exchange by bargaining we have to be ‘other-directed’ and not ‘self-directed’.

The rest of David’s hypotheses are similarly semi-spurious in content – jumping from Mespotamia to Nixon’s presidency has an appealing “Huffington Post” feel about it. Some parts are interesting, others speculative, or stretched (follow the link).

But I suggest that David first goes back to Adam Smith and gets his thinking right before embarking on these wider issues.

I also note that this is the third article on interviews conducted by Philip Pilkingon of Dublin that I have commented upon critically. He too might wish to reflect that his pre-suppositions about Adam Smith require some attention. Yes, I realise he is only asking the questions, but the answers he elicits suggest he should ask more pointed questions about the knowledge his interviewees have of Adam Smith.


Thursday, August 25, 2011

A Post Commented Upon - and my Reply

Mark Thoma, Professor of Economics, University of Oregon, writes the popular Economist’s View (HERE):

Yesterday Mark Thoma posted my piece (21 August) on the exciting (to me) news about:

“Warren Samuels on the "Invisible Hand" from the Coordinating Problem Blog (18 August) (HERE):

Gavin Kennedy has been trying to extinguish the invisible hand myth for some time now”:
Warren Samuels on the "Invisible Hand," Adam Smith's Lost Legacy: More good news on Warren Samuels new book in the publisher’s blurb, posted in the Coordinating Problem Blog (here):
The post, “Warren Samuels (1933-2011)”, is by Peter Boettke of George Mason University, Fairfax, Virginia, and the academic home of my friendly sparing partner on the “invisible hand”, Daniel Klein. (and etc.,)

To which a reader at Economist’s View commented (24 August):

"Reality Bites said...

So the concept and meaning of "invisible hand" has changed over the years, so what? This is typical of most ideas that are important to societies. In fact, crucial notions HAVE to change in order to remain relevant to the current society while still offering a link to the past.

A friend who is a professor of history wrote his thesis on Civil War re-enactments and how they've changed over time. Both the reasons for re-enactments and how they are perceived has also changed. Another example is the Confederate flag, what it means and the values represented have consistently changed as society has changed.

"that several dozen identities given the invisible hand renders the term ambiguous and inconclusive"

Gee you mean like the terms freedom, liberty, love, and honor?
Many terms are so broad and grand that they have multiple meanings and cannot be pinned to a single definition. I would argue that our most important ideas and concepts fit that description.

We do not live in a static world. Ask any linguist and they'll tell you words and meanings change all the time as long as the language is alive. Why should we be astonished that the concept of the invisible hand has changed? This new book is obviously political commentary posing as some sort of research

And to which I posted a short to reality Bites reply today:
(August 25)

"The point you make is valid about concepts changing, but the fact also remains true that Adam Smith's use of the metaphor did not/cannot change - he died in 1790. What is illegitimate is the attribution to Adam Smith of ideas he never held.

The myth that Adam Smith had a 'concept' or 'theory' of 'an invisible hand' is absolutely untrue. He used it as a metaphor for something else, known in the English language as 'its 'object', in Moral Sentiments (1759) for the actions of feudal landlords and in Wealth Of Nations (1776) for the risk-aversion of some, but not all, merchants in protectionist Britain (remember he taught Rhetoric to his classes from 1748 to 1751 in Edinburgh and from 1752-64 in Glasgow) and and knew the proper role of metaphors, and always used good English grammar, in everything he wrote.

The myth was invented within an oral tradition (what lecturers taught their students in Cambridge in England) and Chicago in the USA) about Adam Smith. Paul Samuelson, a graduate of Chicago, popularised the myth about Adam Smith's 'invisible hand' in his famous textbook from 1948.

It is its attribution to Adam Smith that is the problem, because this gave the myth credibility (now widely believed in economics) and gave the modern policy implications of the myth its traction in government practices and beliefs, with, arguably, negative consequences.

That makes the debate important, not trivial.”

I ignored the last sentence of “Reality Bites”:

"This new book is obviously political commentary posing as some sort of research".

This description by “Reality Bites” of the work of Warren Samuels as "political commentary posing as some sort of research" is only worthy of the following appropriate comment:

When ignorance predominates, vulgarity asserts itself


Preliminary Announcement of New Book by Robert Frank

Robert H. Frank, economics professor at Cornell's Johnson Graduate School of Management, has written a new book, The Darwin Economy:
 Liberty, Competition, and the Common Good
, Princeton University Press, to be published in September by Princeton University Press.

From the publisher’s advance notice, they kindly sent to me, we find this paragraph showing that Professor Frank misreads Adam Smith’s writings on competition and apparently forgets his writings on Moral Sentiments.

Instead he parades the usual, invented myth about the so-called Adam Smith ‘theory of the invisible hand’:

Smith's theory of the invisible hand, which says that competition channels self-interest for the common good, is probably the most widely cited argument today in favor of unbridled competition--and against regulation, taxation, and even government itself. But what if Smith's idea was almost an exception to the general rule of competition? That's what Frank argues, resting his case on Darwin's insight that individual and group interests often diverge sharply. Far from creating a perfect world, economic competition often leads to "arms races," encouraging behaviors that not only cause enormous harm to the group but also provide no lasting advantages for individuals, since any gains tend to be relative and mutually offsetting.”

On the basis that he gets a central core of his argument wrong about Adam Smith, I worry about the other basis of his argument about Charles Darwin on competition in natural selection.

I have not read the book yet but I shall review it on Lost Legacy for a final judgement (publisher’s blurbs are written their staff and are not totally reliable). Though the myth is now ubiquitous and endemic. I think it more likely that the myth will be dispensed with (see Warren Samuel's new book on the Invisible Hand that looks highly promising in this regard).

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Sunday, August 21, 2011


More good news on Warren Samuels new book in the publisher’s blurb, posted in the Coordinating Problem Blog (HERE) :

The post, “Warren Samuels (1933-2011)”, is by Peter Boettke of George Mason University, Fairfax, Virginia, and the academic home of my friendly sparing partner on the “invisible hand”, Daniel Klein.

Regular readers will see immediately why I am so excited to read an outline of its main theme and one of its concluding assertions: that ‘no such thing as an invisible hand exists’. Yes, it was a metaphor.

This conclusion is from a most highly respected source in the history of economic thought.

The scholarly profession will sit up and note what Warren Samuels says, even if it has not responded positively yet to the six-year campaign of Lost Legacy to alert it to the errors of the modern myths about Adam Smith’s use of the invisible hand metaphor.

Erasing the Invisible Hand” (Cambridge, 2011) is described by the publisher as follows:

This book examines the use, principally in economics, of the concept of the invisible hand, centering on Adam Smith. It interprets the concept as ideology, knowledge and a linguistic phenomenon. It shows how the principal Chicago School interpretation misperceives and distorts what Smith believed on the economic role of government. The essays further show how Smith was silent as to his intended meaning, using the term to set minds at rest; how the claim that the invisible hand is the foundational concept of economics is repudiated by numerous leading economic theorists; that several dozen identities given the invisible hand renders the term ambiguous and inconclusive; that no such thing as an invisible hand exists; and that calling something an invisible hand adds nothing to knowledge. Finally, the essays show that the leading doctrines purporting to claim an invisible hand for the case for capitalism cannot invoke the term but that other non-normative invisible hand processes are still useful tools.”

Review copies are circulating - but none has come this way.

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From A Debate Among Historians of Economic Thought

John Womack (a contributor to a debate underway among some historians of economic thought) is closest to revealing the real problem: our graduates do not receive accurate accounts of the history of economic thought (HET), even of its major historical figures, because much of the past is presented through the lens of passing current controversies as addressed and as understood by modern authors.

This is not a new phenomenon. The ideological conflict between rising Soviet power and Western capitalist economies from the 1930s, led to the decades of the Cold War. One such apparently minor struggle in that major global competition had significant side-affects on HET, which are still with us.

Paul Samuelson wrote his canonical “Economics: an introductory Analysis” (1945-48) before achieving tenure, but felt ‘safe’ to undertake the project because of the numerous outstanding journal articles he had already published and because the invitation came from of his head of department, not the publisher, to undertake the assignment. But his knowledge of the history of economic thought in at least one area was limited to the secondary and misleading garbled (from the ‘Chinese Whispers’ affect*) Chicago oral tradition, not from his own familiarity with the original text. (My article detailing Paul Samuelson's role in these events was published in The History of Economic Ideas, 2010.)

Samuelson initiated a fatal misleading allusion that unintentionally has misled and dominated almost the entire profession since, because his famous textbook (20 editions to 2010, 5 million plus sales, numerous foreign language editions, plus a thriving secondary market) had such a mass side-effect. Readers and tutors believed what they read about this aspect of the Smith's ideas, propelled by Samuelson's deserved reputation in modern economics (Nobel Prize plus other accolades).

I refer to Samuelson’s description of Adam Smith and the “invisible hand” in Wealth Of Nations, both by a paraphrase on page 36 (1st edition), and from his various changing paraphrases of what it, supposedly, meant in the body of the textbook thereafter. These remarks were taken to extremes in associating the IH metaphor with the Welfare Theorem (A. Pigou) and General Equilibrium (Debreu), which ignores Smith's clearly stated moral stances in TMS.

Samuelson's (and presumably his tutors’) erroneous interpretation of Smith’s use of the IH metaphor in TMS and WN have dominated the beliefs of generations of graduates since the 1940s. Those beliefs are now ubiquitous, even among the majority of historians of economic thought of the highest caliber, and presumably will continue to infest the thinking of new generations of our students, current and future legislators, and those who influence them, the media the public, and the history of economic thought generally.

That is why I await publication in September of Warren Samuel’s forthcoming new book “Erasing the Invisible Hand: Essays on an Elusive and Misguided Concept in Economics”, Cambridge University Press, which was brought to completion with the assistance of Marianne Johnson, with great interest - and anticipation.

[* “Chinese Whispers’ – comes from the story of the message from a military commander that is passed on verbally through the numerous ranks to command HQ. What starts out as: “Send reinforcements we are going to advance” duly becomes garbled into “Send three and four pence we’re going to a dance”.]

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Ross Emmett's Tribute Warren Samuelson

Ross Emmett published on the AMHE Blog (HERE):
this tribute to Warren Samuels, who died this week. It is worthy of the widest circulation and our respect as Warren Samuels was justly celebrated as an international scholar of the History of Economic Thought.

"RIP, Warren J. Samuels (1933-2011)"

"Warren Samuels passed away yesterday at his home in Gainesville, Florida. Warren was an eminent historian of economic thought, whose work ranged across the field’s breadth. His first published works in the field were a pair of articles on the physiocratic system (published in the Quarterly Journal of Economics) that served to reshape thinking about the physiocratic view of the economic role of the state. On the other end of the time spectrum, he was a pioneer in doing and encouraging work on the history of post-war economics. This breadth of scholarship is exemplified nicely in the book that he completed not long before his death, Erasing the Invisible Hand: Essays on an Elusive and Misguided Concept in Economics, which was brought to completion with the assistance of Marianne Johnson and will be released by Cambridge University Press in September. We’ve suffered a great loss as an intellectual community in his passing.

Many of you knew Warren well, so there is no need to rehearse at length his publications or his forays into many other areas of economics. Warren was one of the first historians of economics to treat the history of economics as a branch of intellectual history. This was, for him, a part of the larger intellectual conversation about the role of governments and markets in modern society that was his lifelong pursuit. His well-known studies of policy in classical economics (The Classical Theory of Economic Policy) and in Pareto (Pareto on Policy) were major contributions to that discussion. His perspective had a significant effect on the students who studied with him over the years, and on those of us who were the recipients of his comments and advice at conferences and via correspondence.

From the outset of his career, Warren recognized the importance to the intellectual historian of correspondence, course notes, unpublished manuscripts, public lectures, etc. What we now collectively refer to as archival materials. Not only did he promote the use of these materials in historical research, but he also amassed an extensive personal collection of these materials, which he began to publish in 1989 in archival supplements to Research in the History of Economic Thought & Methodology. The very first supplement contained the notes he had obtained from economist Robert L. Hale and Sinologist Homer H. Dubs of John Dewey’s course on Moral and Political Philosophy at Columbia University. The second supplement contains the only authorized publication of Frank Knight’s infamous lecture on “The Case for Communism.” Warren and George Stigler went back and forth for some time regarding the publication of that piece! Dewey and Knight were, perhaps not surprisingly, two of Warren’s intellectual heros. The materials he amassed will continue to be published in the research annual for many years to come. His collection of photographs of economists is already available online from the Center for the History of Political Economy at Duke University.

Warren was also a tireless editor of volumes that touched upon almost any aspect of his wider interests. I have lined up on my bookshelf over 80 volumes that he edited on the history of economics, economic methodology, or recent economic thought. Mine is probably not a complete set! All of these were undertaken to encourage scholarship in areas that interested him (and, by extension, which he thought would interest others). Many of them are also the means by which he encouraged the work of young scholars.

We all experienced his generosity to students, young scholars and anyone else who wanted to join the great conversation. His goal and passion was to broaden and enrich that conversation, and he was as happy to engage a young scholar as he was a Nobel laureate. To that end, he and Sylvia made a substantial contribution to the History of Economics Society to endow its Young Scholars program.

Among the many professional societies to which he belonged, the History of Economics Society was always the one closest to Warren’s heart. He was a founding member of the Society, and served as its 8th President. The Society honored him in 1997 with its Distinguished Fellow award; two years earlier he was the recipient of the Association for Evolutionary Economics Veblen-Commons Award. He was the long-time editor of the Journal of Economic Issues and the founding editor of Research in the History of Economic Thought & Methodology.

[I wish to acknowledge the helpful advice I received from Jeff Biddle, Marianne Johnson and Steve Medema.
Ross Emmett]"

[En Noticias / News el 20/08/2011 por Manuel Bautista]


Saturday, August 20, 2011

Literature Scholars Look at Adam Smith's Philosophy

Leeann Hunter, Marion L. Brittain, Postdoctoral Fellow at the Georgia Institute of Technology, reviews , “The ‘Invisible Hand’ and British Fiction,1818-1860, Adam Smith, and the Genre of Realism”, by Eleanor Courtemanche, Palgrave Macmillan, 2011 (HERE):

This book makes a strong case for the humanities through its interdisciplinary study of political economy in the nineteenth century. Instead of viewing political economy through the lens of literature, Courtemanche writes as a political economist, using realist novels to trace the intricate webs of economic relationships and to illustrate the social and economic thought of the nineteenth century, as inspired by Adam Smith. She thereby shows that compared with economic theory alone, literary irony, tragedy, omniscience, and character can deliver a fuller portrait of political economy. Harriet Martineau, one of the authors featured in this study, made a similar case for the use of narrative--by writing novels to educate her readers in the principles of political economy. While Courtemanche simply writes about novels, she clearly explains how literature can reach across disciplines.

At the center of her inquiry is, after all, a literary-economic figure of speech: the metaphor of the "invisible hand." First used by Adam Smith in the late 18th century, the "invisible hand" has long come to symbolize the supposed benevolence of capitalism as it regulates the self-interest of the individual. When acted upon, this self-interest triggers a series of unseen forces that work together to benefit the larger economic society, but are "only comprehensible as an unstable composite of the mutually exclusive points of view of sovereign and merchant. For centuries, however, according to Courtemanche, economists have narrowed and oversimplified our understanding of Smith's complex ideas about social economic theory. By investigating Smith's use of the "invisible hand" metaphor in his major treatises, Courtemanche offers us a more effective way of analyzing the economic relationships at work in nineteenth-century England. The novel, she argues, with its "dynamic interplay between the 'worm's eye view' of the characters and the 'bird's-eye view' of the narrator," offers suitable ground for the study of political economy under Smith's terms. To show more clearly the complexity of invisible hand theory, she defines the gaps between the perspectives of the individual and the sovereign, and then argues that novels most successfully explore these gaps. …

… Essentially, Courtemanche explores the contradictions of what is known as the "Adam Smith Problem." Appealing respectively to sympathy and to pragmatism, two of Smith's major works--The Theory of Moral Sentiments (1759) and Wealth of Nations (1776)--seem to oppose each other. To reconcile their differences, Courtemanche aims to show how Smith navigates the "perplexing gulf between individual and collective points of view" (9). In The Theory of Moral Sentiments, she notes, Smith explains how we can feel sympathy for others: it is only through our individual experience of pain, he suggests, that we can perceive another human's pain, and transport ourselves "into his body, and become in some measure the same person with him, and thence form some idea of his sensations" (qtd. 58). Similarly, she notes, Wealth of Nations mediates between the limited perspective of the individual citizen and the sovereign's expansive view of the nation's wealth. Smith's "idea of moral action," she concludes, "is thus based not just on the embeddedness of the individual within a complex society, but on the fragmentation of the individual point of view between the feeling of his own passionate interests and the dispassionate consideration of those interests from both a local and an infinitely distant point of view" (59). The gaps between those points of view are what Courtemanche investigates

First, let’s get the modern myth of the IH metaphor out of the way. (on this occasion I shall not deconstruct the metaphor, see Lost Legacy, passim.)

Instead, I shall draw on the reviewer’s apparent error on when the IH metaphor was “first used” - certainly long before Adam Smith used it.

It was used in classical times (Homer, Horace, etc.,) two millennia before Adam was born (for a list of 17 prior instances see my: “Adam Smith: a moral philosopher and his political economy”, 2010, pp. 151-2, Palgrave Macmillan), and afterwards through the early Christian era, to Shakespeare (MacBeth), and widely, thereafter, in the 17th-18th centuries. Peter Harrison, Journal of the History of Ideas, 2010, provides over 40 other instances of the IH metaphor in theological sermons, literary, and historical novels (including Defoe’s Moll Flanders, 1722, and Voltaire’s Oedipe, 1718, and Walpole, 1764).

In short, the “invisible hand” was a well-known, popular, and almost clichéd, metaphor in regular use before Adam Smith used it, once only, in each of his published books (and on another occasion mentioned once in his posthumous, Essay on the History of Astronomy ([1744-50] 1795). Specialists in English literature should know that fact.

The so-called Adam Smith problem (a pseudo-problem invented by some late 19th century is German philosophers) is a false construct of his meaning in both of this books. Sympathy and self-interest are not counter-poised (nor was his pragmatism at work). Sympathy was a core sentiment fed by an individual’s social contact (society as a mirror) and individual’s learning as the grow up the range appropriate and inappropriate behaviours (‘the great school of self-command’), learned from when the child leaves the protective comforts of the family. His self-love is constrained by the inevitable self-love of others, and social relations are founded on the mediation of his, and their, self-interests.

The individual needs the support of others, and in persuasion, friendship, and exchange, each finds that level of support they seek. Exchange permeates all aspects of personal relations, finding it in the market-place and domestically, and it the act of “bargaining” in which each offers to transact: “Give me this that I want, and you shall have this which you want’ (Wealth Of Nations, Book 1, chapter 2), and in “other-regarding” exchange relations through reciprocal exchange, the elements of what makes society cohere and enables us to inhabit close together in the same space (within the family, near relatives, friends, and strangers), and in the security of justice in wider society (“without justice a man would enter society as in a den of lions”).

Adam Smith was closely interested in literature (from classical times), poetry, the theatre, rhetoric, translations, and letters - (see his Lectures on Rhetoric and Belles Lettres, ([1763] 1983), his longest running lecture series was on all aspect of Rhetoric from 1748-64.

Methinks, on this evidence, that Eleanor Courtemanche (and, perhaps, Marion L. Brittain) have some more reading to do on Adam Smith.


Friday, August 19, 2011

Another Imaginary 'The End is Nigh'

Bob Burnett is a Berkeley writer. “In a previous life he was one of the executive founders of Cisco Systems.” Well in this life he writes about Adam Smith in a rather juvenile way and asserts there is conspiracy, ‘they’re out to get us all’ type of article (HERE):

"Why Did Capitalism Fail?"

“Third, global corporations are modern outlaws, living outside the law. There is no "invisible hand" that regulates multinationals. In 1759 Philosopher Adam Smith argued that while wealthy individuals and corporations were motivated by self interest, an invisible hand was operating in the background ensuring that capitalist activities ultimately benefited society. In modern times this concept became the basis for the pronouncements of the Chicago School of Economics that markets were inherently self-regulating.

However, the last five years have demonstrated that there is no "invisible hand" unregulated markets have spelled disaster for the average person. The "recovery" of 2009-10 ensured that "too big to fail" institutions would survive and the rich would continue to be rich. Meanwhile millions of good jobs were either eliminated or replaced by low-wage jobs with poor or no benefits.

Adam Smith never said there was an actual invisible hand – it is a metaphor for the hidden motive operating in the heads of nasty landlords in centuries long past that compelled them to feed the “thousands whom they employ” in their castles, fields, stables, and, when needed, in their armies, because without food they could not labour (and they would not labour for long without food) (Moral Sentiments (1759); and in 1776, it was a metaphor for what those merchants who preferred to invest in “domestick industry”, rather than abroad, because they perceived in their heads that this was less risky than sending capital abroad, while others (the majority) were willing to take the greater risks of foreign trade.

The metaphor worked well. The motives of individuals are private and, well, invisible! But using a metaphor, it describes its object in a “striking and more interesting manner”.

The problem is that modern standards of literacy being somewhat less sophisticated than those of 18th-century students and professors, and it became widely believed by graduates and their professors in the 20th century, that Smith’s metaphor (used once each in Moral Sentiments, 1759, and Wealth Of Nations, 1776) was something that actually existed! It doesn’t.

Smith mentioned nothing – absolutely nothing – about “capitalist activities”. He didn’t even know of the word ‘capitalism’ – it was not invented in English until 1854 in Thackeray’s novel, The Newcomes – and modern world capitalism is far different from Smith's world of “the age of commerce’.

As for eliminating “millions” of jobs, employment worldwide is increasing. Of course, jobs disappear – otherwise we would still be using horses or human porters, with living standards and weekly hours of labour to match. That’s the power of creativity – the old is continually being replaced by the new. Stop that process and living standards for everybody would stagnate.

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A Sad Loss to the History of Economic Thought

Warren Samuels, possibly the best post-war historian on economic thought, has died, leaving behind a formidable reputation as an original thinker and a great teacher and motivator for generations of students and tutors. Everybody I have met among US Academe who knew him always spoke highly of him.

Many colleagues across the world who knew him well also consider him as being an unchallenged giant of scholarship and a warm-hearted professor, as is evident from the warm testimonials now appearing across the world from the profession.

I met him briefly in a meeting on the history of economic thought in Fairfax, Virginia in 2008, and heard him speak on the work he was conducting on the “invisible hand”, of all things that was closest to my own interests (as it still is). He made it clear that he was not discussing its origins in the work of Adam Smith but what it had come to meaning in post-war economics.

I spoke briefly at the session – these were early days in what became my own private work on the subject of Adam Smith’s use of the metaphor of the invisible hand. I also spoke with him one-to-one in a lift!

He was kind and courteous, and friendly to a stranger, and recognised me and my name from his session. He was accompanied by his wife and she subsequently spoke to me on another occasion, when our paths crossed during the conference, and she too was friendly and welcoming.

Later I heard several people say that his book on the invisible hand was nearing completion and would soon be published.

Today, I noted that Cambridge University Press, is to publish it in September: “Erasing the Invisible Hand: Essays on an Elusive and Misguided Concept in Economics”. Warren’s reputation guarantees it will become a best seller among historians of economics, and, hopefully, among modern economists too. I shall review it here too.


Thursday, August 18, 2011

Context is Needed to Properly Understand Adam Smith's Views

Jerry Bowyer, a columnist on Forbes (HERE):
writes (17 August):

‘God and the Economists”

"Some time ago I was asked by my friend Larry Kudlow to appear as a guest on his show to debate libertarian economist Don Luskin on the subject of Ayn Rand’s atheism. Luskin made the mistake of opening the debate by quoting Adam Smith’s famous statement about “the invisible hand.”

The problem there is that although Smith was indeed an advocate of the idea (which Rand also embraced) that self-interest can promote public good, Smith believed that this unexpected relationship is the result of divine design, not of random occurrence. Smith also rejected the idea that selfishness is a virtue and strongly endorsed the idea of altruistic empathy, in fact writing an entire book, The Theory of Moral Sentiments, to defend virtues such as altruism.

About 4 minutes into the exchange, Luskin went off the wheels. “That is not what [Adam Smith] said, Jerry. Jerry, you are a religious man and you will try to make this case. But that is not what he was talking about. The Invisible Hand Adam Smith was talking about was a metaphor. It was that entrepreneurs and capitalists and laborers produce goods ‘as if’ an invisible hand were guiding them to do so. ’As if,’ quote unquote–go back and read it. That invisible hand in Adam Smith was not God’s hand. You may be a religious man, you may not, but let’s not distort the record.”

I agree, let’s not distort the record, but unfortunately Luskin was so flummoxed by that argument that he falsified a quote from Smith, adding the words ‘as if’ to Smith’s quote to imply that Smith did not believe in Divine Providence and was using the idea as a mere metaphor. That quote is false. Here’s what Smith actually said:

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention… By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

… So whose invisible hand was Adam Smith talking about? Smith mentioned God frequently in The Wealth of Nations and in the book for which he was already justly famous, The Theory of Moral Sentiments. In good 18th century style, Smith refers to God as “the Deity” or as “Providence,” but make no mistake about it: God was an extremely important idea in the origins of classical economics, and Mr. Luskin’s ignorance of history need not be our own.


[I wrote this first part as a potential comment in Forbes, but despite my repeated efforts, I could not get in to register.]

Jerry, you are right – Adam Smith never used “as if by an invisible hand” – however, I think you are wrong to deny that Adam Smith used “an invisible hand” as a metaphor.

Smith was very clear as to the role of metaphors: they are a figure of speech that, in Smith’s own words: “describe in a striking and more interesting manner” their “object”; see his Lectures On Rhetoric and Belles Letters”, [1763] 1983, p 29, and see the definition of metaphors in the Oxford English Dictionary.

The “object” in this case in Wealth Of Nations was the behaviour of some, but not all, merchants, concerned with the “security” of their capital, to prefer to invest in the home trade (“domestic industry”), and not risk it in the “foreign trade”. It was their “insecurity” that “led them” to invest locally, and this added to the “revenue and employment” of “domestick industry” (a public benefit), for which the metaphor Smith used was “led by an invisible hand”, describing “in a striking and more interesting manner” that which could not be seen by others, because their “insecurity” was in their operating heads.

You should read the whole of the first nine paragraphs of Chapter 2, Book IV, pages 452-456, which sets out Smith’s argument, and not just jump on a few lines from them.

I could make out a similar case for your misreading of Smith’s use of the metaphor in Moral Sentiments, including the mention of ‘Providence”, but space precludes my trespassing on the editor’s patience.

[This second part is a very brief quote also from Jerry's article.]

… It’s well neigh impossible for a serious student to deny the existence of God in the writings of Adam Smith. Serious thinkers who want to deny Smith’s theism assert that Smith just didn’t mean it. Perhaps, but that leaves us wondering why he mentioned God so often. There were plenty of anti-Christian thinkers writing at the time: this was, after all, the eve of the French Revolution.

Smith’s friend and colleague, David Hume, published openly atheistic books. There was obviously not some overwhelming social pressure to add theistic language to one’s works, and even if there were, Smith’s stance for economic freedom against the contemporary policies of the Crown showed him to be a man willing to say what he really thought. And if somehow he became suddenly cowardly and felt the need to mention a God in whom he did not believe, he could have put a nice little piece of pious gush into the front matter of the book and been done with it. Instead he laces his works throughout with theistic references. It seems clear that Smith really believed what he wrote”

Jerry is forgetting Adam Smith's circumstances over most of his life. Unlike David Hume, who had a private income from the capital he accumulated from his literary work and therefore, immune from loss of preferments, Smith had no independent income after university, but that which he generated from official appointments that his friendly sponsors helped him to obtain in his appointments: his professorship at Glasgow University (£100 a year, 1751-64), to his tutorship of the young Duke of Buccleuch (£300 a year, 1764-67) and life-pension of £300 a year, 1768-90), and to his post as a Commissioner of Scottish Customs and the Salt Duty (£600 a year, 1778-90). His sponsors were active members of the Church of Scotland or the Church of England, and his professorship required him to sign the Calvinist Confession of Faith (1752). He was baptised, by his mother's wishes (June 1723), and later confirmed, aged around 12 (1735).

However, at Oxford (1740-46), it appears, from written evidence in his posthumously published 'History of Astronomy' ([1744-50] 1795), that had he lost his faith in revealed religion, and students at Glasgow, reported years later, that his Lectures on Natural Religion tended to be irreligious, by his praising human intelligence at the expense of Christianity, and he sought to be excused from opening his lectures with a (Calvinist) prayer.

He was always strongly attached to his very religious mother, Margaret Douglas Smith, and protected her from any gossip or scandal from his private views (shared with close friends only) on religious beliefs. After his mother died in 1784 (aged 90), Smith edited the 6th and last edition of Moral Sentiments (1790 - just before a died a few weeks later), diluting to a very obvious degree its religious sentiments, including the removal of the Christian atonement passage, and much else.

Age and infirmity probably prevented a full excision of everything religious. What he did dilute and remove were hardly the acts of a Christian person, who knowing he was dying, was about to face "his maker". I discuss these events in my article "The Hidden Adam Smith in His Theology" (Journal of the History of Economic Thought, September, 2011). His essay on Astronomy was written in 1744-50 and he kept in hidden in his Bureau in his bedroom, not even showing it to David Hume until 1773 - 21 years after they first met and formed their close friendship!

It is also significant that while he ordered the burning of all of his notebooks, unpublished manuscripts, correspondence and other papers, a few days before he died, he singled out the Astronomy essay for posthumous publication by his friends, and executors, Joseph Black (Chemistry) and James Huttonm (Geology), which they arranged in 1795.

I consider Jerry's attempt to portray Adam Smith as a believer in Christianity neglects the biographical evidence. As for Providence - of the 13 mentions of providence in Moral Sentiments, almost all of them are references to Stoic theories of providence (a heathen, not a Christian source, and a necessary part of his lectures on Moral Philosophy to his students, and two are purely literary usage, common to 18th-century writing. They were not signs of his personal beliefs. In his Lectures on Jurisprudence ([1762-3] 1978), he explicitly states that the land was divided by violence by warlords and feudal lords, and noted that Roman attempts to divide the land equally all failed by the effects of inheritance, marriage alliances, and family rivalries through the generations.

Deism, originally a hostile schism in Christianity (for which professed adherents were cruelly killed), until Rome and Calvinists saw the benefits of absorbing it into the mainstream, became the only safe means by which science about the origins of the earth (James Hutton, the geologist, etc.,) and the intricacies of life could be portrayed safely in public. As the power of the institutions of Christianity declined in the 19th century, Deists tended to water down the 'intelligent design elements' of their findings.

I think Jerry, is less well informed about the history of philosophy, natural science, and Adam Smith's life and work.

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Tuesday, August 16, 2011

Sense on Murray Rothbard, But Not on the IH Metaphor

Adrián Ravier, a professor of economics at Francisco Marroquin University in Guatemala and the National University of La Pampa in Argentina, posted in the MSkousen.com Blog (HERE):

A part of the question and answers session by Professor Ravier with Mark Scousen about Adam Smith.

This is most interesting, especially concerning Murray Rothbard’s savage criticism of Adam Smith, both as he was (which some would say were Rothbard’s scurrilous judgements of Adam Smith’s life and work), and as Smith was presented by some of Rothbard's contemporary economists in the 1930s (‘invisible hands’ and all that guff about ‘founder of capitalist economics). I criticized some of Rothbard’s remarks about Smith on Lost Legacy in various posts in 2006-7. This post relates to Mark Scousen’s account of his role in influencing Rothbard’s publications.

“Major Interview with Mark Skousen on “His Life and Works in Economics, Finance and the Freedom Movement” (15 August) by
Adrián Ravier, a professor of economics at Francisco Marroquin University in Guatemala and the National University of La Pampa in Argentina.

“AR: By the way, what do you think of Rothbard´s criticism to Adam Smith?”

“MS: When I first started writing ‘The Making of Modern Economics’ in the late 1990s, I was still quite infatuated with everything Rothbardian, including his surprising critique of Adam Smith. According to Rothbard, Smith was a plagiarist who ‘originated nothing that was true, and whatever he originated was wrong.’ That’s quite an indictment of
 the Scottish philosopher celebrated by almost all free-market economists, including Rothbard’s teacher Ludwig von Mises [who] wrote a glowing introduction to ‘The Wealth of Nations’ edition published by Regnery, calling it a ‘marvelous’ and ‘great’ book that brought together ‘the ideology of freedom, individualism, and prosperity, with
admirable logical clarity and in an impeccable literary form.’
Who was right, Rothbard or Mises? There was only one way to find out. I decided to read the entire 1,000-page ‘Wealth of Nations,’ page by page and cover to cover, and come to my own conclusion. Two months later, I put the book down and said to myself: ‘Murray Rothbard is wrong and Mises is right.’ Adam Smith has written a grand defense of the invisible hand and economic liberalism.

My change of heart completely transformed my history. Suddenly, ‘The Making of Modern Economics’ had a plot, an heroic figure, and a bold storyline. Adam Smith and his system of natural liberty became the focal point from which all economists could be judged, either adding to or distracting from his system of natural liberty. …

Granted, Smith made numerous mistakes in his classic work, such as his crude labor theory of value, his attack on landlords, and his failure to recognize marginal subjective values, but French, British, Austrian and Chicago economists have done a great job improving upon the House that Adam Smith Built without destroying his fundamental system of natural liberty, and his policy prescriptions, which were largely libertarian (the
 classical model of limited government, free trade, balanced budgets, and sound money).’

I am always pleased to see somebody standing up to Murray Rothbard – as a polemicist he did not take prisoners, nor indulge criticism.

I am, however, somewhat perplexed with this sentence: “Adam Smith has written [in Wealth Of Natopms] a grand defense of the invisible hand and economic liberalism.”

It’s not bad for a single instance of the use of a metaphor in nearly 900 pages to be described as a “grand defense”!
What Mark means by his high-blown rhetoric is not clear. How does a single metaphor of “an invisible hand” come to constitue a “grand defence”? Perhaps Mark could enlighten us?

I can see a separate case for “economic liberalism” being worthy of such an accolade, but a metaphor, which discusses an instance in anything but a ‘free market liberal economy’?

Surely not the case, unless Mark wraps the entire case of “economic liberalism” (as per David Friedman, a couple of years back) into the metaphor, which is, on grounds of the English language meaning of a metaphor, an absurdity to call it a "grand defence' of liberalism.

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Monday, August 15, 2011

New Interesting Seminar Course from Jeff Weintraub

Jeff Weintraub, a social & political theorist, political sociologist, and democratic socialist who currently teaches at the University of Pennsylvania, has appeared on Lost Legacy while we discussed, amicably and productively (as is proper and appropriate for scholars), matters related to Adam Smith’s thinking. He put on his blog (25 January) most interesting details of a course he ran recently (oh, to be a student once again!).

What is striking about Jeff’s course outline is the centrality of the question he has set for his students to examine. This centres on a theme often discussed on Lost Legacy (though not necessarily subscribed to by Jeff):

to what extent can modern economists attribute to Adam Smith proto-general equilibrium notions (from Arrow an Hahn in General Competitive Analysis (1971) “that a decentralized economy motivated by self-interest and guided by price signals would be compatible with a coherent disposition of economic resources that could be regarded, in a well-defined sense, as superior to a large class of possible alternative dispositions”.

Further, Arrow and Hahn ask: "What will an economy motivated by individual greed and controlled by a very large number of different agents look like?", and students were expected to attempt to address it.

Jeff writes:
“Kenneth Arrow & Frank Hahn put Smith’s theory of the market in perspective”

“This was sent to the students in a seminar on the history of modern economic thought, "Economic Liberalism and Its Critics", that I'm teaching this semester. Right now we're reading & discussing (portions of) Adam Smith's Wealth of Nations. This little item is relevant to that, and it may also be of more general interest. —Jeff Weintraub:

“Nowadays, more than two centuries after Adam Smith published The Wealth of Nations and after so many of his ideas have been absorbed and elaborated by academic disciplines, ideologies, and everyday public discourse, it can sometimes be too easy to take his theory of the market for granted. And doing that can have at least two different kinds of effects, both unfortunate. On the one hand, it may incline people to swallow these ideas too easily and uncritically, as though they were simply common sense, without realizing how controversial and paradoxical many of them are. And on the other hand, it may lead people to underestimate the powerful and startling originality of Smith’s theoretical achievement in WN.”

“The following passage from the Preface to Kenneth Arrow & Frank Hahn’s General Competitive Analysis (1971), which was long one of the most prominent texts in general equilibrium theory, captures something important about the point and significance of Smith’s theory of the market and makes it clear why the central thrust of his theory should remain startling, as well as illuminating, to anyone who takes it seriously.”

“There is by now a long and fairly imposing line of economists from Adam Smith to the present who have sought to show that a decentralized economy motivated by self-interest and guided by price signals would be compatible with a coherent disposition of economic resources that could be regarded, in a well-defined sense, as superior to a large class of possible alternative dispositions. Moreover, the price signals would operate in a way to establish this degree of coherence. It is important to understand how surprising this claim must be to anyone not exposed to the tradition. The immediate "common sense" answer to the question "What will an economy motivated by individual greed and controlled by a very large number of different agents look like?" is probably: There will be chaos. That quite a different answer has long been claimed true and has indeed permeated the economic thinking of a large number of people who are in no way economists is itself sufficient ground for investigating it seriously. The proposition having been put forward and very seriously entertained, it is important to know not only whether it is true, but whether it could be true. A good deal of what follows is concerned with this last question, which seems to us to have considerable claims on the attention of economists
” (pp. vi-vii).”

There are no details to hand available of what was written by the students.

While open to other ideas, I am not happy either with the notion that “general equilibrium” operates at all in real world economies, nor that mathematical models of a general equilibrium have anything to do with the real world. That markets are the least worst of all possible forms for creating, producing and distributing the “necessaries, convenience, and amusements of life”, is not controversial, except with utopian would-be designers of unrealisible perfection. That is why Jeff’s second question (and his student’s answers) is of considerable interest to me.


Sunday, August 14, 2011

A Slip About the Division of Labour's Origins

"Andrew" contributes to a debate (13 August) in Swift Economics (HERE):

It is true, as Adam Smith noted back in 1776, the division of labor is recent, but that doesn’t mean there was no specialization whatsoever (see artisan guilds) or that nobody traded with each other and everyone lived self sufficient lives or in some sort of co-op. Pogroms were launched against Jews for charging interest on loans while Christians found ways to cheat the system and charge interest anyways. The silk road flourished. Venice and Florence became hotspots of commerce. Double entry accounting started in the 12th century and in the 16th century, the School of Salamanca came out with a theory of prices and interest. Hell, even chimpanzees have been shown to exchange reciprocal services.”


But did Adam Smith note “back in 1776, the division of labor is recent”? I think I can see why Andrew might conclude thus, given that the first instance of the division of labour in Wealth Of Nations is the famous pin factory example. If Andrew reads on a few pages he will find the less famous (but as important) example of the day labourer’s woolen coat which involves the divided labour of many dozens of people, including some in other continents.

Indeed, Smith’s description of the possessions of the conveniences of day labourers (at the bottom of the social pile) show quite a few items beyond the basic minimal subsistence and which were made elsewhere by other labourers.

Moreover, his description of the emergence of the division of labour were all of earlier ages (arrows for hunters in the first age of mankind (hunting) in distant pre-history and his other examples of early trade between the countryside and traders in foreign goods were deep in feudal times (in fact, diverting agricultural products to pay for them eventually undermined the local power of the feudal barons).

Andrew makes up for his slip about Smith with recognition of some of these earlier examples of the division of labour. Smith also acknowledged that he did not discover the division of labour, though every now and again someone reports that he was the first (alongside nonsense claims that he “invented” capitalism, though it was a word he did not use and did not know – it was first used in English in 1854).

Such slips come from not reading Adam Smith for yourself.


Saturday, August 13, 2011

Don Boudreaux Writes Good Sense As Usual

DON BOUDREAUX, whose blogging at Café Hayek (HERE) and his constant letter writing to US papers, I often admire, writes (11 August) of a problem he has with an urge to reply to every absurdity on economics he sees or is reported to him by a reader. He reports of an instance of this recently:

I confess to suffer occasionally the urge to address every such absurdity that crosses my path. And I sincerely appreciate the Cafe patron sending to me the above link. But some such ravings – such as the above – are simply too ridiculous. Just as every verbal ejaculation by every New Age therapist professing the healing powers of crystals and stones need not be addressed by serious physicians, every shriek by pundits on the economy who know absolutely nothing about the economy need not be addressed by serious economists.”

I completely understand what he is writing about because I get the same feelings in my daily dose (20 to 50 items) of “Google Alerts” on mentions of Adam Smith and also the same from a separate list of Alerts on mentions of the “invisible hand”.

The absurdities I regularly note are often beyond parody. And just as regular are those that are apparently written by commentators claiming familiarity with economics and with Adam Smith and “invisible hand” (though it obvious many have not read either of Smith’s books, or their memories are failing).

Mostly, I rise above the temptation to respond the every one of the fantasies sent to me in my attempt to maintain the serious integrity of Lost Legacy and the serious attention of my serious readers.

I am glad that Professor Boudreaux suffers from the same problem of editorial selection, and the measures he takes to deal with the wilder shores of absolute nonsense about economics, while in no way belittling the seriousness of those correspondents who send clips to him.

Here is my version of Don’s typically clear statement of his personal editorial policy:

“I confess to suffer occasionally an urge to address every absurdity about Adam Smith and/or the misuse of the metaphor of “an invisible hand” that crosses my path. And I sincerely appreciate Google’s daily listings and the occasional readers who send to me links to items they have read (many of which, fortunately are absolutely relevant to Lost Legacy's mission). But many such pieces are simply too ridiculous to warrant a comment on a serious Blog. Just as every verbal ejaculation by every New Age therapist professing the healing powers of crystals and stones need not be addressed by serious physicians, every shriek by pundits on Adam Smith who know absolutely nothing about him or his use of the invisible hand metaphor need not be addressed by Lost Legacy.

I confess that when serious senior economists, or serious affiliates of other social sciences, write about either Adam Smith or the IH metaphor, while sailing close to the wind of absurdity (er, a metaphoric expression!) when misrepresenting Adam Smith, I sometimes wonder whether I should take their assertions seriously or respond. Well, I confess, I often do respond while struggling to keep my comments well within the (invisible!) bounds appropriate for members of the Republic of Letters.

(Thanks, Don, you have made me feel better already.)

Friday, August 12, 2011

Incredibly Condensed Wealth Of Nations

Eamonn Butler, Director of the Adam Smith Institute in London has produced "The Condensed Wealth of Nations" (inclusive of "The Incredibly Condensed Theory of Moral Sentiments"), which I commend to all readers of Lost Legacy. Its 80 pages are freely available for download as a PDF (HERE).

Eamonn's associated explanatory outline is worth reading below:

"The world is full of people who wish they had read The Wealth of Nations, though it is a sprawling, elephantine book that few people find themselves able to stick with beyond the first chapters, which fewer still actually finish, and which even fewer, probably, understand.

What I have tried to do in The Condensed Wealth of Nations (full PDF) is to boil down the 900-odd pages of Adam Smith's original into just 80 pages. I have not tried to use Adam Smith's own words, and simply abridge them, firstly because Smith's language is very eighteenth-century and flowery, and secondly because he uses terms that have changed their meaning today, or which do not match up with our modern language of economics. Rather, I have put his thoughts into my own words. I have tried to capture some of the flavour of the original, however, using some of the contemporary examples he uses, for example, and just the occasional word or phrase that reminds us of the man and his time. Unlike an abridgement, that has allowed me to encapsulate Smith's principal thoughts in straightforward language and in a short space.

The work is intended to read as if a modern Smith is giving a précis of his own arguments. And I have tried to follow the outline of the book and the outline of those arguments closely, so that you get a complete picture of what Smith actually said in The Wealth of Nations. But from time to time some explanation or commentary is needed, and these I have put clearly in a different typeface. I have also included some of the well known quotations from the book, to further place the piece in its eighteenth century context and to give us a taste of Smith's own words.

I hope The Condensed Wealth of Nations will allow modern readers to trace Smith's actual arguments, and get a feeling of the shape of his original and what he says – and indeed to understand his point of view – and to do so objectively, without my own views and interpretations clouding the original reality

[Disclosure: I am a Fellow of the Adam Smith Institute.]

How to Misquote Adam Smith

Don Arthur is a splendid example of someone who clearly understands Adam Smith’s work. He contributes (12 August) to “Club Troppo“ (HERE): an Australian e-journal, with his highly relevant set of observations on a misquotation from Smith by our own Mary Riddell in The Daily Telegraph “London riots: the underclass lashes out” (8 August) (HERE): more correctly described as the criminal disorders in England, fortunately, not (yet) in Scotland.

Don Arthur’s article in Club Troppo (a publication mentioned on Lost Legacy only last week, and several times since 2005 for its excellent writing) dissects what Adam Smith actually wrote on the manifest inequalities suffered, not by the “underclass” – of which little was expected - but what he did write about the working poor.

Their low wages from their long hours of profitable work (for their employers) were enforced by the biased decisions of the local Magistrates, who set wage rates in their districts. Local employers maintained the law by informal (not illegal) “combinations” acting collectively to prevent wages increases or to enforce reductions. During these decades the Magistrates and the employers lauded it over a passive workforce – punished for acting, or attempting act, collectively to resist their employers through their own “combinations”, which were strictly illegal under parliamentary laws (and some were transported to Australia from the 1790s for these offences).

Don Arthur undoes Riddel’s thesis that Adam Smith spoke of the “underclass” by correctly quoting what he actually wrote from his “Lectures in Jurisprudence” ([1763] 1978), and from an earlier version, Lectures on justice, police, revenue and arms ([1763] 1895) in his post: “Invasion of the quote snatchers – Adam Smith, Google and the London riots

Adam Smith recognised that a well-ordered society can never develop "when a sizeable number of its members are miserable and, as a consequence, dangerous", writes Mary Riddell in the Telegraph. She argues that "social democracy, with its safety nets, costly education and healthcare" is the only solution to the recent disorders in London."

"Those who oppose the welfare state might also quote Smith. For example, here’s something I found with Google Books:"

"… it is not so much the police that prevents the commission of crimes as the having as few persons as possible to live upon others. Nothing tends so much to corrupt mankind as dependency, while independency still increases the honesty of the people.
With tools like Google Books, it’s easier than ever to find and lift quotes from classic works by great thinkers. And with social media like Twitter, it’s never been easier to share them. But it’s just as difficult as ever to understand these quotes in context.
Riddell is drawing on a favourite quote from Smith’s Wealth of Nations: "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable." But on its own and in context this isn’t exactly an argument for social democracy. Here’s a slightly longer version:

No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged

Follow the link to Club Troppo (HERE): and read Don Arthur’s piece. (My thanks to Nick Gruen for posting it to me).

He shows what a proper familiarity and understanding of Adam Smith – not a truncated and misapplied quotation as per Mary Riddell – can do to illuminate more accurately a current situation that Mary Riddell starting with her metro conclusion first and then engaging in a “quote hunt” to give her piece the spurious authority and an “historical glow” she does not earn nor deserve.


Wednesday, August 10, 2011

Well Meaning But Probably Hopeless Aims

Terry Bell, a South Africa-based journalist commentator and author specialising in political and economic analysis and labour matters,.writes on Terry Bell Writes (HERE):

Nothing wrong with Terry’s ambitious project of changing almost everything in the world capitalist system and the political states that operate in it, but he should get some basic facts correct. He drags in Adam Smith into his robust critique of finance capital but he uses modern myths about Smith and the IH metaphor to do so.

Time to slay the market monster”

“The world has obviously long outgrown the small, village-based enterprises that existed when the economist Adam Smith wrote his seminal The Wealth of Nations in which he postulated the existence of an “invisible hand” that would moderate supply and demand, prices and profits, to the benefit of all. Only the “invisible hand” came to be — and still is — claimed to be “the markets”. That these are far from invisible and essentially anarchic is simply ignored.

Terry claims that Smith “postulated” in Wealth Of Nations that an ‘invisible hand’ moderated “supply and demand, prices and profits, to the benefit of all. “ As I have explained regularly on Lost Legacy Smith most certainly did not “postulate” any such things - I challenge Terry to find such a “postulate” anywhere in Wealth Of Nations associated with his single use of the metaphor of “an invisible hand’ (it’s on page 456 of the Oxford University Press 1976 edition – and in Book IV, chapter 2 of every other edition ever published since the original first edition in 1776).

Where this leaves Terry’s ambitious critique I shall leave to him to explain. Readers can make their own minds up by following the link and reading the substance of Terry's post.


Tuesday, August 09, 2011

Adam Smith on Bargaining and My Experience Applying His Theory

I wish to elaborate on my post over the weekend Philip Pilkington On Rational Expectations Theory because it contained a comment on the most important thought of Adam Smith’s, often misunderstood and as often used (wrongly) to come to the wrong, even opposite, conclusion to that which Smith made. I refer to the famous reference by Smith to the “butcher, brewer, and baker” as the source of our dinner. Here is my last paragraph from my comments on Philip Pilkington’s post:

“In Moral Sentiments, Adam Smith did not restrict behaviour to “self interest” self-regarding only, but also wrote about the necessity for being “other-regarding” too. In Wealth Of Nations he did this very clearly in the oft-quoted passage about persuading the famous “butcher, brewer and baker” to provide our dinners, where he specifically advises us not to “talk of our own necessities” but to address their “self-love”. In short, we serve our self-interests by serving the self-interests of others - in contrast to that nasty libel of Smith’s legacy by Gekko of ‘Wall Street’ fame.”

But first, I want you to look up John Paul Rollert, a doctoral student at the Committee on Social Thought at the University of Chicago, who has posted a remarkably good article, “What Republicans get wrong about capitalism” (HERE) (how encouraging it is to read two articles that show their authors have at least read and understood Smith (which does not mean I endorse Paul’s political assertions about ‘top heavy’ sole beneficiaries of capitalist markets in today’s USA). Here are John Paul Rollert’s opening paragraphs that cover some of the ground of my earlier article:

Near the beginning of "The Wealth of Nations", Smith calls our attention to what, for him, is one of the fundamental qualities of human experience: helplessness. "[M]an has almost constant need for the help of his brethren," he says, for unlike animals, we cannot tend to even our most basic needs on our own. How exactly do we gain the help of others? The answer, says Smith, lies somewhere between the fawning cocker spaniel and the commands of an all-powerful king.

Let's hold the king aside for a moment. When a cocker spaniel wants to be fed, Smith says, "it has no other means of persuasion but to gain the favor of those whose service it requires." It wags its tails, licks its master's hand, and appeals to him with puppy dog eyes. The cocker spaniel will occasionally succeed, and so too will the fawning beggar, but such an approach is obviously not an optimal way to get what you want. Indeed, most times people will simply pass by you, leaving you hat in hand.
Thankfully, says Smith, human beings have a natural propensity to negotiate or, as he describes it, to truck, barter, and exchange. "Give me that which I want, and you shall have this which you want" is not only the manner in which we acquire most things in this world, but it is the building block for an economically advanced society. Thus, Smith declares in his most famous passage: “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.”

People who read this passage and nothing else of Smith tend to regard it as an affirmation of the virtue and efficacy of selfishness over and against the relative impotence of altruism. But that isn't its significance for Smith. Yes, our personal interests act as a sharper spur to action than the interests of others, but the same may be said for the cocker spaniel. The difference is not that we have selfish interests, but that only by understanding the interests of others are we able to fulfill our own. Indeed, the passage attests to the human capacity for empathy, the focus of Smith's other great work, "The Theory of Moral Sentiments". It is because of our natural tendency to stand in the shoes of others and see the world through their eyes that we can appeal to their interests. The commercial effect of this practice is that we individually learn how to make the kinds of exchanges that, in the aggregate, lead to the wealth of a nation.”

Many modern economists consider in this passage about the “butcher, brewer, and baker” sanctifies Smith’s praises of self-interest (and among leftish academics, it is “proof” that Smith saw “self-interest” as essentially, and decidedly, as a necessary selfish behaviour that drove what they call, but he did not, capitalism). Others see it has evidence of a contradictory fissure in the thrust of his two books, Moral Sentiments (1759) and Wealth Of Nations (1776). It is nothing of the kind. The so-called “Adam Smith Problem” is another myth, created by a lackadaisical reading of quotations from both books.

Contrast the “butcher, brewer, and baker” passage with the opening paragraph in Moral Sentiments:

However selfish man maybe supposed, there is evidently some principle in his nature, which interest in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. … The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it” (TMS 9).

This propensity or capacity for concern for the “fortune of others” kind, captured in Smith’s first book, is surely the antithesis of pure self-interest, especially of the hyper-calculating kind represented by the rational, utility-maximising kind that is still popular among many neo-classical economists.

Our moral sentiments drive us to be concerned for others, in modern jargon, our ‘other-centred’ natures, is counter-poised by other ‘natural propensities’ that drive our self-interests to be supremely ‘self-centred’ and not ‘other-centred’. But is this supposed dichotomy a true representation of Adam Smith’s two books?

I don’t think so. Maybe I am almost alone in seeing something deeper in Smith’s “butcher, brewer, baker” than commonly found in the meaning he placed on bargaining. Remember, Smith’s characterisation of what happens when people bargain came in Book I, chapter 2, of Wealth Of Nations. There is good reason to acknowledge that these ideas were of older vintage than 1776 among his writings. His Lectures on Jurisprudence were taken down by students in 1763-4 (prior to France and his meetings with the Physiocrats) and were probably developed in his earlier years at Glasgow (from 1751), if not in Edinburgh 1748-51. They follow his presentation of “The division of Labour” in Chapter 1. They are the key-stone of his historical approach, which showed the division of labour as the “very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another”, which was probably “the necessary consequence of the faculties of reason and speech”. In short, from the very beginning of the formation of the proto-human bands hunting in the forests, long, long before self-interest in anything like markets had emerged.

My own interests in the evolution of bargaining in pre-history (“The PreHistory of Bargaining", unpublished ms) has continually brought me back to Smith’s chapter II, partly fed by a long period in Business Schools teaching and consulting on negotiation skills with business enterprises across Europe, North America, Asia, South Africa and Australia. I raise this bit of biography only to claim considerable practical experience with negotiators in the real modern world.

That is why I read chapter II with reference to what negotiators do in practice, not with preconceived theories about what they would do if the mathematical certainties of utility maximisation applied outside neoclassical classrooms and neoclassical imaginations. Smith didn’t make it up; he saw and heard traders and customers bargaining their exchanges using persuasion and sales patter in the market stalls and shops along Kirkcaldy High Street where he grew up, and in busy Edinburgh, Glasgow, and London (and almost certainly in French market fairs too, of which there were thousands all over France (there still are hundreds in many small towns and centres, including around where I live, part of the year).

Smith didn’t see much of the self-centred stubbornness implied in most modern theories of bargaining – aggressive concession convergence, modulated by threats and sanctions, and so on.

… 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. 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).

A simple game that I included in every negotiation workshop that I ran from 1972-2005 (when I retired) was the ‘red-blue’ (prisoner’s Dilemma) game, in which I used to introduce beginner (and 'old hand') negotiators to the consequences of pure self-interested bargaining, and it showed clearly the folly of only considering one’s own interests in transacting with others. Over the years it revealed some interesting data about those consequences.

The game is played in pairs, randomly sorted. It is played first thing on the first day. They are given two coloured disks, one red and one blue. They are told the rules (no talking with partners), and given absolutely no advice on how to play or what they will learn, or what was the point of the exercise. They scores are simply shown on flip charts for the four possible outcomes of each play, and told to commence playing with a partner anywhere in the room, standing or sitting.

The scores were for each play: Both play ‘Blue-Blue’ = +4 points each; both play ‘Red-Red’ = -4 points each; one plays ‘Red’ and the other plays ‘Blue’, then the Red player = +8 points and Blue player = -8 points; or, one plays ‘Blue’ and the other plays ‘Red’, then the Blue player = -8 points and the Red player = +8 points.

They choose the colour they intend to play behind their backs for each round and each revels their plays simultaneously on a common signal. They note their score for each round according the score sheet. They play the next round without talking. After the first four rounds they pause for a 5-minute conversation, perhaps recriminating on the other’s plays or defending their own, and perhaps agreeing on how to play the next four rounds, under the same rules and scores. Again, after round 8, they stop for a 5-minute conversation, perhaps again recriminating if one or both defected on their agreement from the previous 5-minute break. The last two rounds are played with all scores doubling, to give paired-blue play = +16 points each; paired red play = -16 each; one plays blue and one plays red = +16 points to the red player = -16 points to the blue player.

Then we discussed the resulting total scores over the 10 rounds from each pair. Over the years the pattern of plays across all levels of management, experience, countries of origin and domicility, moral (religious) labels, ages (from youngest school children to retired), education levels, private and public sector employees, caring professions, hard-nosed financial traders, all nationalities, mixed groups, both sexes, politicians, health staff (from porters to surgeons), and beginning and experienced sales and buying staffs, showed relative stability.

Now the maximum score from total cooperation (no defections) was 48 points each. I found that over the years this score was achieved by only 8 per cent of the players. A competing (but friendly, as you would expect from two teachers of negotiation) consultant, John Carlyle, reported achieving maximum scores among 17 per cent of his attendees, but I do not know if, or how much, he briefed his players before they commenced playing. I gave absolutely no pre-game briefing other that described above. The 8 per cent was too stable to be influenced by prior briefings. Despite almost always being asked to identify the objects of the exercise, I said nothing other than ‘maximise your individual scores’.

Players could suffer from the other’s early red play and subsequent defections (no sanctions were suggested nor imposed on defectors, other than the almost predictable retaliatory Red play defections of former Blue players, some fairly drastic red play from Round 5 onwards to round 10 (and almost certainly from round 9). Counter-defectors from broken promises by red players could reduce the early defector’s scores, even though they also ended with a high minus score. No red player with early counter defections reached +48 (the Blue-Blue score) or better. On two occasions only in 33 years did a Red player reach +96 - because the other player played Blue every round and they were unconcerned at their constant losses to -96.

In a large minority (sometimes a majority) of plays of the game, early defection was followed by unbroken promises to pay blue in every round, which though the total positive score was less than +48 (perfect no-defections), it was at least +32 each and sometimes better.

In brief, players could learn that playing a co-operative blue each round after early defections could result in a better score than defecting to gain at their partner’s expense, who would retaliate. It was not a perfect exchange, but zero-sum bargaining never was better than non-zero bargaining as identified by Smithian bargaining:

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.”

The rest of our workshops showed how to achieve non-zero sum bargaining in the real world.

[Please note you can read my book on negotiation teaching in “Kennedy On Negotiation”, Gower, 1995 (apologies: the publishers chose the title!]


Good Article on Adam Smith's Actual Views on Defence

Shikha Dalmia writes in Reason (HERE): and reproduced in Bastian Institute (HERE) (Ignore the remark about John Bolton's mustache!):

“Sorry Neocons, Adam Smith Was Not One of You”

“Defense hawks seem to be hitting Adam Smith’s Wealth of Nations like sophomores cramming for an exam. In the last few days, three separate hawks have invoked Smith three separate times to excoriate the potential defense cuts in the phony debt deal.

John Bolton, the Bush-era neocon whose mustache makes everything he says more menacing, pulled a passage from the book that says that “the first duty of the sovereign” is “protecting the society from the violence and invasion” to warn darkly about all the bad things that would befall America if it doesn’t keep pumping about $700 billion a year that it doesn’t have into the Pentagon (even if it just goes down the $700 toilet, presumably). Meanwhile, Brian Stewart of National Review Online and David Frum no longer of the American Enterprise Institute paraded Smith’s statement that “defense is superior to opulence” to suggest that anyone who questioned why America needs to spend more on defense than the rest of the world combined obviously has zero regard for national security.

Sadly, their interpretation of the great political economist’s magnum opus is a bit sophomoric
[Follow either link for the rest of the excellent article.]

This is a mainly excellent account of Adam Smith’s approach to defence outlays and conduct. You could also add his trenchant opposition (and implicit apology for) the Spanish and Portuguese depredations against defenceless local peoples in Central and South America, while seeking gold under the cover of exporting their version of (Catholic) Christianity.

Moreover, the very last line of Wealth Of Nations was indicative of his real advice to the British Government and the King’s Ministers, written in early 1776 before the Declaration of Independence of the British Colonies in North America:

“If any provinces of the British Empire cannot be made to contribute towards the support of the whole empire, it is surely time that Great Britain should free herself from the expense of defending these provinces in time of war, and of supporting any part of the civil and military establishments in time of peace, and endeavour to accommodate he future views and designs to the real mediocrity of her circumstances” (WIN.V.iii.92: 947).

Unfortunately, Smith’s advice was ignored and Britain went on to the expense and wasted capital in forming a second empire in Canada, Caribbean, Africa, India, South-west Asia, Australia, and New Zealand.

Is the USA following a similar folly?