Tuesday, February 28, 2012

Is This Another Designed Utopian Society?

Unfortunately, “designed” social systems have a poor record of improving on what their authors consider to be failed social systems, which have arisen without design or intention. In new book, Yochai Benkler makes the case for “prosocial” systems design:

The Penguin and the Leviathan: The Triumph of Cooperation Over Self-Interest (Crown Publishing Group, August 2011),” by Harvard Law Professor Yochai Benkler.

“This “old model” harks back to 1652, when philosopher Thomas Hobbes published “Leviathan,” arguing for rule by absolute sovereignty. Hobbes unleashed a monster, the “iconic image of a controlling state,” says Benkler, which ever since has cast its shadow over social contracts, spreading the dire message that “if left to our own devices, we’ll be at each other’s throats.” Overlaying this Hobbesian model of state control is the market-oriented Invisible Hand metaphor, introduced by economist Adam Smith in “The Wealth of Nations” (1776), which assumes that “by each pursuing self-interest, we make things better for all of us,” not because we care for one another but because it is mutually advantageous.”

The above article, “Escaping the Leviathan’s Shadow,” by Julia Collins, first appeared in the Summer 2011 Harvard Law Bulletin. Benkler’s book was also recently reviewed in The Atlantic, "Can the Internet Bring the Beginning of the End of Selfishness?,” by Walter Frick,

Can the Internet Bring the Beginning of the End of Selfishness?, where

Walter Frick reviews Yochai Benkler HERE

After tracing macroeconomic history from pre-nineteenth century European monarchies through the industrial revolution, the New Deal, and the Washington Consensus, Benkler writes, "If neither the command-control systems dictated by the Leviathan nor the Invisible Hand of the free market can effectively govern society, where shall we turn? Can the Penguin deliver us more robust, working social and economic systems that break us out of this vicious cycle? I believe that he can."

Long, long before Thomas Hobbes introduced ideas about the “Leviathan” state in the 17th century, human social systems had experienced their own millennia-lasting “iconic images of a controlling states”. Professor Yochai Benkler should know about the Roman Republic and Empire (much law theory started way back), as well as the High Egyptian Nile Delta centuries, Babylon, and Imperial China. They did not need to await Hobbes’ endeavours to apply their own versions of tyranny.

Yochai Benkler’s “market-oriented Invisible Hand metaphor, introduced by economist Adam Smith in “The Wealth of Nations” (1776), which assumes that “by each pursuing self-interest, we make things better for all of us,” not because we care for one another but because it is mutually advantageous” is but a parody on Adam Smith, owing much to modern false attributions of his ideas, and, most importantly, an invented version of his use of the “invisible hand” metaphor.

There is no “invisible hand of the market” attributable to Adam Smith. It is a myth that owes more to the Cold War years when US academe confronted the Soviet challenge (an example of another “iconic image of a controlling state”) with its human ‘designed’ social system and with very inhuman consequences for those living within it.

Apart from these observations, I am always very interested in the evolution of co-operation as human behaviour, which Adam Smith credited to the acquisition of the faculties of ‘reason’ and ‘speech’ (Wealth Of Nations, chapter 2). This part of Yochai Benkler’s book might be interesting. If my book budget permits I might buy a copy and see what he says. But if it is merely a utopian blueprint for a designed society, I would prefer to give it a miss.

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Monday, February 27, 2012

The Limits of Self-Interest According to Adam Smith

Adam Smith on valuing ourselves to the detriment of others, so that we hurt or injure them:

When the happiness or misery of others depends in any respect upon our conduct, we dare not, as self–love might suggest to us, prefer the interest of one to that of many. The man within immediately calls to us, that we value ourselves too much and other people too little, and that, by doing so, we render ourselves the proper object of the contempt and indignation of our brethren.l Neither is this sentiment confined to men of extraordinary magnanimity and virtue. It is deeply impressed upon every tolerably good soldier, who feels that he would become the scorn of his companions, if he could be supposed capable of shrinking from danger, or of hesitating, either to expose or to throw away his life, when the good of the service required it.

One individual must never prefer himself so much even to any other individual, as to hurt or injure that other, in order to benefit himself, though the benefit to the one should be much greater than the hurt or injury to the other. The poor man must neither defraud nor steal from the rich, though the acquisition might be much more beneficial to the one than the loss could be hurtful to the other. The man within immediately calls to him, in this case too, that he is no better than his neighbour, and that by this unjust preference he renders himself the proper object of the contempt and indignation of mankind; as well as of the punishment which that contempt and indignation must naturally dispose them to inflict, for having thus violated one of those sacred rules, upon the tolerable observation of which depend the whole security and peace of human society. There is no commonly honest man who does not more dread the inward disgrace of such an action, the indelible stain which it would for ever stamp upon his own mind, than the greatest external calamity which, without any fault of his own, could possibly befal him; and who does not inwardly feel the truth of that great stoical maxim, that for one man to deprive another unjustly of any thing, or unjustly to promote his own advantage by the loss or disadvantage of another, is more contrary to nature, than death, than poverty, than pain, than all the misfortunes which can affect him, either in his body, or in his external circumstances
” (TMS, Part 3, Chapter 3, paragraphs 5 and 6: 137-8).

This and many other instances, show that Smith was not the egoistic bully, indifferent to the welfare of others, as portrayed by such as Ayn Rand, nor Gordon Gekko in Hollywood’s Wall Street. His strictures against such conduct are unrestrained and final.

Interestingly, the bulk of paragraph 5 and all of paragraph 6 were added to the 6th edition of Moral Sentiments in 1789, months before he died, showing that these were his final thoughts of the subject. They deserve wide-spread circulation. Readers are asked to do so when the opportunity arises. (Thank you.)


Sunday, February 26, 2012

Looney Tunes no. 26


Great personality who upheld Dharma

Sri Lanka’s Daily News
P. P. G. Perera HERE

“He was being granted spiritual initiation by an invisible hand.”


Energy debates need imagination, public interest and honesty
On Line opinion HERE

The 'free market', taken as a given by believers in the invisible hand, seems likely to turn out to be just another fizzer, an expression of the 'cargo cult magic' that I reckon will evaporate at the first real sniff of a market shortage.’


Has Mich. become Santorum country?

The Daily Advertiser HERE

“Instead of doing what Romney wanted and letting the invisible hand slap the auto industry around, Obama stepped in.


Invisible Hand at Work?

Conservatives for America


It is almost as if an invisible hand is a work, pulling the cosmic voting levers so as to keep the race alive for the next round.”


Saturday, February 25, 2012

So Close to Being Nearly Right

Steven Saus, a nuclear medicine technologist living in Dayton, Ohio. Having spent time in both military and civilian medical sectors, he is pursuing further studies in economics and sociology and staying current in the field of nuclear medicine) posts (24 February) on ideastrash HERE

“Have you ever really looked at the Invisible Hand, man? I mean, really looked at it?”

“It's tempting, with any issue about trade and business, to appeal to the "invisible hand" of the marketplace. To simply say "The invisible hand will take care of it" and stop worrying.

The free-trade folks - who you might notice are almost always the people profiting from the business practice being criticized - talk about Adam Smith's quasi-thought-experiment as if it were some kind of magical spell shoving wages, prices, and stock options around. Many pundits (again, those profiting from or paid by those profiting from deregulation) refer to the "invisible hand" as a force inside markets.

Nothing could be further from the truth.

The market's "invisible hand" is actually extremely visible. The "invisible hand" is the sum of every action by every person that impacts buying and selling decisions. Every last one of them.

I remember hearing about a Fortune 500 company's board meeting where one of the board members said "Oh, the invisible hand will take care of that." The CEO replied, "You idiot, we are the invisible hand."

But it goes much deeper than that.

So if you changed any of your purchasing habits because of Occupy Wall Street, that's the invisible hand at work. Stop buying gas at BP during that last big spill in the Gulf? Invisible hand. Decided to buy "fair trade" anything? Invisible hand. Buy a book directly from an author rather than from a big box store? Invisible hand. Switch web browsers for any reason? Invisible hand.

I'd go so far as to say that Occupy Wall Street is itself a product of the "invisible hand". It is a market force, created by market forces. The same goes for any union, any protest, anything that impacts trade. All of those things are part of the invisible hand.

Including you.

So when you hear about something - a business practice (perhaps this one by Amazon will do it for you) that ticks you off, do something about it. Say something. Change a buying habit. Tell others. Complain.

When you act, so can [be] the invisible hand

Steven Saus seems to be an honest student of sociology and economics, so perhaps we can help him sort out where he is right and where he is just, so far, misinformed. He is so close to unraveling the misuse of the IH metaphor, at least as Adam Smith meant it, he could touch it.

Yes, modern economists often parrot lines about the “invisible hand of the marketplace”. Fair enough, if that is what they believe, but such a presentation has absolutely nothing to do with Adam Smith. He never spoke of the ‘invisible hand of the market’. He only mentioned the IH metaphor once each in his two main published books, Moral Sentiments (1759) and Wealth Of Nations (1776), and once only in his posthumously published long essay on the History Of Astronomy (1795). None of his references were about ‘markets’.

And it is true that there are daily references to “Adam Smith's quasi-thought-experiment as if it were some kind of magical spell shoving wages, prices, and stock options around. Many pundits (again, those profiting from or paid by those profiting from deregulation) refer to the "invisible hand" as a force inside markets.” But the attribution to Adam Smith is false. It was popularised in modern post-WW2 economics, largely as a result of the widespread influence of Paul Samuelson, mainly through his own prestige as a brilliant mathematical economist (Noble Prize Winner), but also from his popular textbook, ‘Economics: an introductory analysis’, McGraw-Hill) 1948, through 20 editions to 2010. McGraw-Hill claimed 4.5 million sales, to which we can add about half again from the used-book market, multiple translations, and resulting ubiquitous media references to the IH metaphor.

Steven is nearly right. This is illustrated by his assertion that “The market's "invisible hand" is actually extremely visible”, which can become absolutely right if it is re-written as: “Markets are extremely visible”, and reference to the “invisible hand” is dropped. No market can operate without visible prices! Buyers and seller respond to visible prices – there is nothing invisible to respond to.

For Adam Smith, the IH metaphor was used on the three occasions only that he used it as a metaphor in English grammar. Smith taught rhetoric to university students from 1748-64 and we have a student’s report of what he said regarding the use of metaphors. All metaphors refer to their objects ‘in a more striking and interesting manner”, and in the 17th-18th century the IH metaphor was a popular figure of speech among theologians, authors of poetry, plays, and novels, and politicians. Adam Smith did not ‘coin the invisible hand’ figure of speech’. He used what was common parlance among his contemporaries, and known to his readers. That’s probably why nobody noticed or commented on his use of it while Smith was alive, nor for long afterwards until a few mentions after 1875. Then Paul Samuelson opened the flood gates in 1948.

Today, tales of actual invisible hands running our lives are widespread. Post WW2 academics, battling for ideas in response to the Cold War challenges of Soviet Central Planning and claims for the ‘superiority’ of ‘scientific socialism’ over ‘anarchic capitalism’, clung to the idea of a so-called ‘invisible hand’ of free markets under capitalism, once Samuelson drew it to their attention, and also, they anointed it with miraculous powers. Markets in the democracies were manifestly superior to the very evident dictatorial state controls of a Soviet economy (and still are).

Warren Samuels’s book, ‘Erasing the Invisible Hand: essays on an elusive and misused concept in economics’, 2011, Cambridge University Press, should settle arguments about the non-actuality of the IH metaphor (see my review of this important book in this past week on Lost Legacy). Meantime, Lost Legacy will continue its campaign against the nonsense of their being ‘an invisible hand’ of the market.


Thursday, February 23, 2012

Adam Smith on Productive or Unproductive Labour

William Watson writs in the Financial Post

“Obama’s corporate-tax bias in favour of ­manufacturing is outdated”

“Obsessing over the trade deficit and trying to distinguish between productive and unproductive sectors of the economy have been blind alleys for economists since economics began. Early writers thought everything but agriculture was unproductive. Adam Smith improved marginally on that by arguing that what was unproductive is everything that didn’t produce physical output. Modern economists understand, finally, that, yes, even services are productive. Hence our resistance to policies that consciously favour one sector of an economy over another.”

Yes, modern economists are in a muddle about ‘productive’ and ‘service industries’ – remember the Selective Employment Tax of a past Labour Government, which taxed services more than manufacturing, pushed by Nicky Kaldor of Cambridge? It had disastrous consequences from muddle, especially under modern ideas of GNP.

But the mention of Adam Smith repeats a fairly well-known misunderstanding of his writings on productive and unproductive work.

The key difference was output that added to national revenue and what merely consumed it. Activity that produced a net revenue, over costs, was productive; the opposite was a version of prodigality, which may be necessary but not ‘productive’.

Smith’s expression was somewhat ‘slack’ in precision. For instance, expenditure on defence – the ‘first duty of government’ was classed as unproductive. Armies do not realize a revenue; they spend what they cost (and often more). However, there is quite a long supply chain involved and along that supply chain there is quite distinct productive expenditure and activity.

For example, commercial military supplies companies aim to make a profit; otherwise they would not be able to continue, and their costs would merely add to unproductive labour (reducing net growth). In so far as they make a profit from sales to the government, they add to the nation’s revenue and contribute to the ‘great wheel of circulation’ like any other commercial enterprises.

Similarly, expenditure on entertainment, hosteleries, brothels, restaurants, and their supply chains, also can be unproductive or productive according to whether they are commercial or non-commercial enterprises. The producers of wine in France were commercial enterprises that made profits, adding to national revenue; so were the shippers and the distributors.

Economists do not - or ought not to - 'favour one sector over another'. Whether we should build aircraft carriers or salable cars, or whether we should sell physical products or services, is likewise a choice necessity and of which adds more, or as much, to national revenue. Stopping defence expenditure could end all productive activity. These are political decisions, not economic ones.


Wednesday, February 22, 2012

Once More on Adam Smith's Earthquake Teaser

D. S. WRIGHT writes Book Review: "A Conflict Of Visions" (Part 1) in Daily Kos HERE

Here Sowell focuses on the notion of the limitations of human nature or rather a vision that factors in our inherent inability to change certain attributes about ourselves, a natural constraint. Sowell illustrates this in a unique way by highlighting the most cruel application of this vision - he references Adam Smith's Theory On Moral Sentiments in particular the passage claiming that a European man would be more concerned and distressed by the loss of his pinky than if all of China was swallowed by the sea. I have to give style points here, this is a considerably bold reference if not a preemptive strike on the rejoinder to the constrained vision - that if people acted so dispassionate towards their fellow man they would all be selfish bores. If, as King Henri-Quatre claimed, Paris is worth a mass then surely China is worth a pinky.

Sowell trumpets this very eventuality by selecting (or is our busy bee pre-selecting?) an example that discards any care for self-flattery and moves on to make a larger point, principally made by Smith though also buttressed by Burke and Hamilton, that the constrained vision casts man as deeply and irredeemably narcissistic. To Smith, as relayed by Sowell, people are incapable of loving one's neighbor as oneself and only make sacrifices to abstract concepts such as moral principles and personal honor.”

This article caught my eye because it is based in a ‘massage’ of the facts about the alleged views that Adam Smith supposedly expressed in his Moral Sentiments (1759) that “a European man would be more concerned and distressed by the loss of his pinky than if all of China was swallowed by the sea”, which is about a rather too complex presentation of Professor Sowell’s on A Conflict of Visions”.

From the review (follow the link), I confess that I had difficulty following the argument of the point made by D. S. Wright in this review of Thomas Sowell’s book. But in so far as it may be an important contribution to the outer-reaches of philosophy, I think we should clear up what exactly Adam Smith said and what it meant.

Either D. S Wright or Thomas Sowell misrepresents what Adam Smith actually wrote; it is not clear which of them is the main source of the error embedded in ‘quoting’ Smith’s chapter ‘of Duty’ in Moral Sentiments. Smith makes the point that “a man of humanity in Europe”, considering the situation where “the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake” (TMS, Part III, chapter 3, paragraph 4: 136) and discussed the possible reactions of that “man of humanity”. In short, it is a ‘mind experiment’ of the kind that tutors of young university students of moral philosophy, some as young as 14 at that time in Scotland, might happily express to get them thinking morally, and, typically for Smith, he offers some alternative choices for them to think about.

One reaction, is for him to ‘express very strongly his sorrow for the misfortune of that unhappy people’, which would not ruffle anybody’s doubts – would not we all think thus? But Smith goes on to push his mind game further. He suggests that a “man of speculation” would contemplate how the disaster would affect “the commerce of Europe”.

Modern readers need to bear in mind that this is not a 24-hour news channel, with news within minutes of such an event happening. This was 18th-century Britain, with a sea-journey time of over a year for the news of such an earth quake to arrive in Europe. Smith then increases the pressure, no doubt grabbing the close attention of his young listeners, suggesting that when the “fine philosophy was over” and the “human sentiments had been once fairly expressed”, this European man of humanity” would “pursue his business or his pleasure, take his repose of his diversion, with the same ease and tranquility, as if no such accident had happened”. No doubt, the ‘know-alls’ and young cynics among the audience, would smirk knowingly the way the world works.

To force his apparent point, Smith goes on to claim of the "man of humanity" that ‘The most frivilous disaster which could befall himself would occasion a more real disturbance”, and twists the knife deeper by further asserting that “If he was to lose his little finger tomorrow, he would not sleep tonight; but provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting, than the paltry misfortune of his own”.

Smith probably had the wrapt attention of his audience at this point. But he is not finished yet. He poses the likely consequence, that if this “man of humanity” was offered the chance to “prevent this paltry misfortune to himself” (by the loss of his little finger”) to avert the hundred million victims of the distant earthquake, would he be willing to sacrifice his “little finger” instead? By now, his audience is of the mind that this was a no contest: the “man of humanity” would not sacrifice his finger avert the distant disaster.

But was this Smith’s point? It certainly is taken that way, judging by the number of times this is what most readers continue to think every time there is a distant earthquake in the news, today, and Smith’s first part of the quotation is reproduced as if that is what he said.

This is what Adam Smith actually wrote here:

Human nature startles with horror at the thought, and the world, in its greatest depravity and corruption, never produced such a villain as could be capable of entertaining it. But what makes this difference? When our passive feelings are almost always so sordid and so selfish, how comes it that our active principles should often be so generous and so noble? When we are always so much more deeply affected by whatever concerns ourselves, than by whatever concerns other men; what is it which prompts the generous, upon all occasions, and the mean upon many, to sacrifice their own interests to the greater interests of others? It is not the soft power of humanity, it is not that feeble spark of benevolence which Nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self–love. It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration.

It is quite a different Smithian conclusion! Hence, I am disappointed that either Thomas Sowell or his reviewer, butchered the quotation from Adam Smith, and gave spurious credence to whatever point they were making.

I hope readers from now will correct false quotations from Smith on “distant earthquakes” and how a “man of humanity” would react in practice.

[I am grateful to Sandra Peart (University of Richmond, Virginia) for pointing out to me the pitfalls from misreading Adam Smith.]


Short Comment on Dr Graeber's Theory

John Quiggin (22 Feb( in Crooked Timber HERE writes:

“The unmourned death of the double coincidence”

‘Jumping in first, I want to recommend Debt: The First 5000 Years as a book that ought to interest just about everyone interested in the way societies are organized. I learned a lot from it, well beyond the core point about the centrality of debt. I haven’t managed to collect my thoughts into a coherent response, so I’m just going to put one or two of them up for discussion, and read the other posts with interest

My first observation is that while economists are the target of quite a few well-armed barbs in Graeber’s book, his message is one that will actually make economics a bit easier to do, by ridding us of the need to treat money as a medium of exchange, designed to overcome the problem that barter requires “a double coincidence of wants”.

That much of the impetus to introduce coinage (often gold coins) was initiated by powerful rules to pay their troops (often mercenaries, or at least unreliable - garrison duty can be boring), it was a means of a) keeping unruly troops on side; and b) enabling local transactions with suppliers and residents when soldiers could use used their coin as money to acquire subsistence goods, local alcohol, trinkets, entertainment, gambling, and sex.

That coinage was a visible extension of a ruler’s power is seen in the stamping of the coins with his name or image and the imposing of the absolute requirement that the ruler’s coins were to be accepted in exchange transactions by all subjects on pain of punishment. In fact, claimants to the Emperor’s throne in ancient Rome also issued their own coins in a challenge to the existing Emperor, suggesting coinage could also be an instrument of their power struggle.

It is not clear to me that the so-called ‘double coincidence of wants story is any more than an explanation for why gold coin money (or whatever else was used as crude money, such as marked sticks, nails, cigarettes, shells, notes in a ledger, and so on) was an improvement on whatever else preceded it. Other debt obligations required long cultural habits to form to regulate the means of repayment through servitude obligations, as well as being an incentive to invent oppressive debts in the first place.

Complex alternative power plays were quite brutal. Dr Graeber calls them part of a ‘human economy’, though the humanitarian content of such ‘human economies’ is nigh non-existent including as they did – detailed by David Graeber – custom sanctioned rape, the prostitution of mothers and children, and life-long slavery for every victim.

Prior to coinage, personal relations were guided by naked, usually male, power, with ill-defined notions of what constituted an equitable exchange (that is of benefit, but not necessarily of equal benefit, strange notion that seems to attract Graeber) to both parties. Barter may have been back-projected onto past social relations in the 18th century, which may never have existed in stable forms, but coinage, once invented (4th century BCE?), most certainly facilitated exchange, transactions, irrespective of the downsides of monetary systems, of which history is replete with examples.

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Book Review of Warren Samuels' New (and last) book

I have written (21 Feb) a review of Warren Samuels’ new (and last book) for EH.Net for SHOE (the Society of History of Economics) HERE

“Erasing the Invisible Hand: Essays on an Elusive and Misused Concept in Economics”
Samuels, Warren J.; Reviewer: Gavin Kennedy

“Warren J. Samuels (assisted by Marianne F. Johnson and William H. Perry), Erasing the Invisible Hand: Essays on an Elusive and Misused Concept in Economics. New York: Cambridge University Press, 2011. xxviii + 329 pp. $95 (hardcover) ISBN: 978-0-521-51725-6.

Reviewed for EH.Net by Gavin Kennedy, Edinburgh Business School, Heriot-Watt University, Edinburgh (Professor Emeritus).

"Warren Samuels was an American historian of economic thought located at the top of its first division. He started work for this book in 1983 and took 28 years to complete. This was no rushed job and it shows in his meticulous and, therefore, authoritative scholarly account of the now widely quoted “invisible hand” (pp. 20-26). Smith did not “coin” the phrase. It was prevalent in classical times from Aeschylus through to St Augustine, and later, in numerous seventeenth- and eighteenth-century theological texts, sermons, plays (Shakespeare), poems, and novels (Defoe, Walpole), and in political rhetoric (George Washington). 
Adam Smith used it only twice as a metaphor in his Theory of Moral Sentiments (1759) and Wealth of Nations (1776), and once in his History of Astronomy (1795, posthumous). After Smith, there was an absence of mentions of the invisible hand metaphor among economists to 1875 and near silence thereafter until it was rediscovered and re-invented into the “founding concept” of modern economics from the 1940s.

Samuels reports Amazon listing 33,888 books discussing the invisible hand (2009). The annual rate of mentions rose from “very low” (1816-1938), but the decade (1990-1999) recorded eight times the level of mentions between 1942-1974 and nearly 20 percent higher than for 1980-89 (p.18-19). In consequence, the invisible hand is now widely believed to be significant, and it has spread to other disciplines. Samuels dissects forensically this phenomenon of belief, though he understates the unique role of Paul Samuelson (from 1948) in popularizing modern notions of Adam Smith’s “invisible hand.”

Samuels discusses Adam Smith’s supposed use of the invisible hand in his political economy. Essay 3 examines the numerous modern identities of the invisible hand and Essay 4 discusses Smith’s argument that philosophical ideas help to “soothe the imagination.” Essay 5 examines conceptual problems associated with “naturalism” and “supernaturalism” in philosophy. Essay 6 examines the invisible hand as a “figure of speech,” which for me is Samuels’ most disappointing essay. Samuels continues with his examination of the invisible hand as “Knowledge’ (Essay 7) within the economic role of government, while Essay 8 addresses misconceptions that Smith was a doctrinaire advocate of “laissez-faire.” Samuels continues in Essay 9 on claims that Smith’s ideas led to the welfare theorem. Samuels’ conclusions in Essay 10 are best summarized by his question: “what is left of the invisible hand” (p. 293) and by his answer: “There is no invisible hand as that term is used in economics. Its continued use must at its base constitute an embarrassment. Almost all uses of the term add nothing to substantive knowledge” (pp. 290-91).
There are two parts to the enigma of “an invisible hand.” There was Adam Smith’s use of the invisible hand metaphor (what did Smith mean?) and second, there is how modern economists use the same figure of speech (what do they mean?). Samuels’ otherwise excellent and thorough account produces an ambiguous answer. He says that his “account clearly does not conclude the conventional view(s) of the invisible hand is (are) wrong, in whole or in part” (p. 295). However, “Conventional views” may well be true, if judged strictly as beliefs. Simultaneously and separately, beliefs in attributions to Adam Smith that assert his complicity in those conventional views are false.

Samuels’ problem is sourced in Essay 6 on “uncertain language.” He identifies “one dozen major responses” to the question of “what is the invisible hand?” plus “some four dozen identities” (p 135). However, his analysis of the role of metaphors is particularly disappointing because, while he provides an authoritative survey of the modern use of metaphors and associated figures of speech, he does not acknowledge Adam Smith’s own teaching on metaphors. Instead, Samuels sources his “conclusions” from eight twentieth-century linguistic authorities (from 1979 and 1993) and Samuel Johnson’s Dictionary (1755), of which Smith published a scathing critical review. Samuels makes no mention in the text nor in the bibliography of surely the prime witness as to what Smith meant by “an invisible hand,” that is, Adam Smith himself!

Smith discussed the role of metaphors clearly in his “Lectures on Rhetoric and Belles Lettres” ([1762] 1983): “Now it is evident that none of these metaphors can have any beauty unless it be so adapted that it gives the due strength of expression to the object to be described and at the same time does this in a more striking and interesting manner” (Smith, LRBL, Lecture 6, p. 29; see also Oxford English Dictionary, 1983).

Smith used the metaphor of “an invisible hand” to “describe in a more striking and interesting manner” their particular objects: it was the absolute mutual dependence of the “unfeeling landlord” on his serfs, servants, and tenants (‘no food, no labour’), and their mutual dependence on him (‘no labour, no food’), which mutual dependence led him to share his crops with them, unintentionally benefiting humanity through the “propagation of the species” (Theory Moral Sentiments, 1759, p. 185); and it was the insecurity felt by some, but not all, merchant traders, that led them to prefer to invest in “domestick industry” (mentioned four times), rather than risk the “foreign trade of consumption” (Wealth Of Nations, 1776, p. 456), also unintentionally benefiting society by adding to domestic revenue and employment. Smith’s use (History of Astronomy, 1795, p. 49) of the “invisible hand of Jupiter” simply states the pagan beliefs of Romans about their god, Jupiter, whom they believed (but never witnessed) cast his lightning bolts at humans. In all three cases, it is evident that for Smith the “invisible hand” does not exist; it is an imaginary figure of speech and an imagined pagan belief. We cannot see, but we can imagine; we may choose to believe or not to believe. The “invisible hand” “corresponds to nothing in reality,” it “contributes nothing to knowledge,” and is a “distraction and a diversion, (Samuels, p. 146).

Samuels simultaneously announces that “designating something – for example, the market, the price-mechanism, an entrepreneur, or anything else” – as the function ostensibly performed by something called “the invisible hand” literally adds nothing.

Warren Samuels has written an authoritative, detailed and mainly original contribution to scholarship, ably assisted by his collaborators, Marianne Johnson and William Perry."

Gavin Kennedy, professor emeritus, Heriot-Watt University, Edinburgh (gavinK9@gmail.com), is the author of Adam Smith: A Moral Philosopher and His Political Economy, second edition, (Palgrave, 2010) and www.adamsmithslostlegacy.blogspot.com/

Copyright (c) 2012 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (February 2012). All EH.Net reviews are archived at http://www.eh.net/BookReview.”


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Sunday, February 19, 2012

“The triumph of global capitalism”

Jacob Lundberg (17 February) HERE

“The rise of global capitalism since 1980 has been the central factor in the massive rise in global quality of life. In this article, Jacob Lundberg explains why more liberalized global markets have meant richer and freer people.

Follow the link to the article in the Adam Smith Society’s (London) ‘Pin Factory Blog’ HERE This is the best antidote to the daily – nay, hourly – pessimism put out by “activists” that the Earth is going to hell on every dimension. It isn’t and won’t. Unless, of course, the obsessive pessimists manage to convince enough legislators to adopt their proclaimed remedies and they undo what progress has been made and, in the absence of resistance to activism, continues to make. Despite the congenital pessimists, the world has already made great strides in the right direction, well illustrated by the facts summarized on Jacob Lundberg’s article.

Adam Smith wrote at a time when many ideas were exchanged on what was happening in the world in his day and we can trace his nascent ideas of the prize awaiting any country that learned the lessons of history and moved closer to the philosophical ideas of ‘natural liberty’ and away from mercantile political economy. The ideas of Adam Smith should be discussed widely in the Academy because they deserve a wider audience, but only if participants cut through so much of the nonsense written about Adam Smith by all sides of the political spectrum, including “Left’ activists and ‘Right’ ideologues, and, sadly those senior academics who should know much better having read (supposedly) Adam Smith’s Works.

Smith wrote just before debates about income distribution began to shift from passive acceptance of the existing stations of people towards an interest in legislating in favour of some level of redistribution. In the 19th century these new ideas changed the millennia-long restrictive view of ‘distributive justice’ towards the newer ideas of people’s ‘rights’ to direct access to minimum levels of subsistence. This formed a central plank in what became the social-democratic platform, linked with pressure for a wider electoral franchise, and eventually in 20th-century notions of a Welfare State.

Meanwhile, from mid-19th century, Marxist theories of communist states spread, culminating in the 20th-century experiments in socialism in Russia, Eastern Europe, and China. Advocates of one-party state socialism believed their experiments would prove the superiority of state socialism over enfranchised capitalism. Well, events showed the fallacy of socialist superiority over market forms of sate-capitalism. The poor in communist states remained poor and disenfranchised.

Adam Smith took a radical stance towards the condition of the rural and urban poor and he articulated the view that the continuing division, and sub-division, of labour with the ever extending complexity of markets, would raise living standards to at least unprecedented subsistence levels in the first instance and, then through economic growth, make available to labouring people and their families, access to the ‘conveniences’ of life. This process would continue argued Smith provided that erroneous political economy could be curbed and replaced with markets where possible and state investment where necessary. This required a resolute policy in favour of market competition and an end to Elizabethan mercantile privileges favoured by a merchant order of men whose interests conflicted with the interests of consumers.

A similar reform to the habits of the rural landowners was called for, and Smith recommended an end to primogenitures and entails. The relative absence of these legal impediments to modernization in North America, showed what might be achieved in the consequential rapid rise in labourer’s wages and in the growth of agricultural production, and, therefore, consumption among labourer’s and the middle-class. The great diversion and entrenchment of landed interests from the slave traded held back North America from benefitting from the full affects of these desirable changes.

Nevertheless, in contrast to the Iberian dominance of Central and South America that held back this vast southern European continent, North America, even with its slave-economy, showed the possibilities of rapid economic progress compared to Europe as a whole.

Smith’s relied on the progress of markets towards opulence from their stimulus through applied technological innovation on a scale not seen anywhere before in human history. Those waves of innovation continue to this day, and now spread far afield, led now by North American state capitalism. Smith’s approach to the poverty of the labouring poor was pragmatic, not activist or political. Which arrangements would raise employment and living standards more surely than mere redistribution of some income by localized charity, which at best only ameliorated poverty (welcome as that was)? His answer to problems of mindless sub-division of labour was not to try to stop complex supply chains in markets, nor the sub-division of labour (a futile and reactionary quest), but to persuade legislators to part-fund the education of children from age 6 years onwards in literacy and numeracy (WN V.i.f: 758-88) to make them suitable for working lives and careers in the innovation-led sectors. Fortunately the Luddites lost.

He favoured higher proportional rates of taxation on the rich because they could afford them much easier than the poor, assuming government expenditures were requuired. He railed against useless wars in Europe, in which the poor fought on behalf of the dynastic interests of sovereigns or for futile reasons of ‘jealousy of trade’, a wholly reactionary interest inimical to the general population of consumers. The very last sentence in Wealth Of Nations advises governments of Great Britain to restrain their expenditures ‘in time of war ‘ and in ‘supporting any part of their civil or military establishments in times of peace’ by accommodating ‘her future views and designs to the real mediocrity of her circumstances’ (WN V.iii.92: 947). Instead, of course, governments, having learned nothing from losing the American war of independence, embarked onover a century-and-a-half of Empire building, with military establishments and world wars to match.

Yet despite this waste, the spread of opulence continued unabated at unprecedented historical rates of growth of ‘employment and revenue’ benefitting the formerly poorer segments of the population, well beyond ‘necessaries’ and deep into ‘conveniences’ on an unimaginable scale. Lundberg shows the consequence of these trends for the poorest in the so-called Third World.

It is a remarkable performance. And the activists claim that market capitalism is a threat to the future! They sit in tents talking among themselves, or join violence in the streets, smashing and burning buildings, as if that is going to put food on any poor person’s table. They make fantasy promises that capitalism is the problem, not the solution.

We’ve seen the socialist and activist alternatives and we have no reason to be impressed.


Looney Tunes no. 25


One fool's progress in the Colorado boondocks

The Durango Herald HERE

It felt like an invisible hand gave the truck a shove.”


Toward a Catholic economy founded on equality, justice

Catholic San Francisco HERE

'As one commentator noted: “Adam Smith, in the spirit of the Presbyterian skepticism of the Scottish Enlightenment, stated that when some individual engaged in business purely to make a profit for himself, he would, by the action of ‘an invisible hand’ (the hand of God), provide a benefit to society.


State Capitalism

Yves Pernet HERE

“The world was opening up and would soon become nothing more than a large hamlet, filled to the brim with opportunities and freedom for all, driven forth by economic prosperity where the invisible hand would from then on steer the ship of history.”


Interstellar Overdrive

Maize n Brew

"As Michigan reeled in commitment after commitment on Saturday, it was difficult not to watch the game without a vague belief in an invisible hand of cosmic beneficence pushing us forward on the day."


Friday, February 17, 2012

Mark Skousen and the Invisible-Hand Metaphor

Mark Skousen posts his talk to Hillsdale College, ‘Will The Real Adam Smith Please Stand Up?’ HERE In yesterday’s post, I commented on some remarks made by Mark and today I shall comment on matters of substance. It is a rather long post, but it raises important issues of scholarly conduct.

Mark Skousen writes:

“Invisible Hand: Marginal or Central Concept?”

“Could the detractors be correct in their assessment of Adam Smith’s sentiments? Is the invisible hand metaphor central or marginal to Adam Smith’s “system of natural liberty”?

… Gavin Kennedy contended in earlier writings that the invisible hand is nothing more than an after-thought, a “casual metaphor” with limited value. Emma Rothschild even goes so far as to declare, “… the invisible hand…[is] un-Smithian and unimportant to his theory” and was nothing more than a “mildly ironic joke.”]

Adam Smith Reveals His Invisible Hand

A fascinating discovery uncovered by Daniel Klein, professor of economics at George Mason University, may shed light on this debate. Based on a brief remark by Peter Minowitz that the “invisible hand” phrase lies roughly in the middle of both The Wealth of Nations and The Theory of Moral Sentiments, Klein made preliminary investigations that led him to suggest deliberate centrality. Klein then recruited Brandon Lucas … to investigate further. Klein and Lucas found considerable evidence that Smith “deliberately placed ‘led by an invisible hand’ at the centre of his tomes” and that the concept “holds special and positive significance in Smith’s thought.”

Klein and Lucas base their conjecture on two major points. First, the physical location of the metaphor: The single expression “led by an invisible hand” occurs almost dead center in the first and second editions of The Wealth of Nations. (It moves slightly away from the middle after an index and additions were added to later editions.)

Moreover, it appears again “well-nigh dead centre” in the final edition of The Theory of Moral Sentiments. Klein and Lucas admit that it was not in the middle of the first edition in 1759, speculating that “physical centrality was not initially a part of his intentions…[but that] by 1776, Smith had become intent on centrality.” Indeed, Smith moved the phrase “invisible hand” closer to the center of the book, first by appending an important essay on the origin of language and finally by making substantial revisions in the final edition.

Second, Klein and Lucas note that as an historian and moral philosopher, Adam Smith commented frequently on the importance of middleness in architecture, literature, science, and philosophy. For example:

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

– Klein discovered that Smith, in his lectures on rhetoric, admired the poetry of the Greek poet Thycydides, who “often expresses all that he labours so much in a word or two, sometimes placed in the middle of the narration.”

In sum, according to Klein and Lucas, the invisible hand represents the climatic centrality of Smith’s “system of natural liberty,” and is appropriately found in the middle of his works. By this discovery, if true, one goes from one extreme to the other — from seeing the invisible hand as a marginal concept to accepting it as the touchstone of his philosophy.

Klein and Lucas’s list of evidence is what a lawyer might call circumstantial, or “impressionistic,” to use Klein and Lucas’s own adjective. Taken as a whole, the documentation is either an ingenious breakthrough or a “remarkable coincidence,” to quote Gavin Kennedy.

A few Smithian experts have warmed up to Klein and Lucas’s claim. Gavin Kennedy, who previously considered the invisible hand a “casual” metaphor, now sees a “high probability” in their thesis of deliberate centrality. Others are more skeptical. “We have no direct evidence for the conjecture,” states Craig Smith, an expert on Adam Smith at the University of St. Andrews. The idea that Adam Smith deliberately hid his favorite symbol of his philosophy “strikes me…as very un-Smithian,” he states, and runs contrary to his policy of expressing thoughts in a “neat, plain and clever manner.” Placing the shorthand phrase “invisible hand” in the middle of his works may not be plain, but is it not neat and clever?

I have long practiced the scholar’s duty of always submitting to the evidence of facts; a trait not found among ideologues of left or right, or among those of religious persuasion, and those with a ‘theory’ about how the world works. When Daniel Klein kindly sent to me his findings on “centrality” before publication, I responded as a scholar must. He gave me the choice of denying the evidence he and Brandon had found in measurements of copies of Smith’s early original editions of TMS and WN in the US Library of Congress, or of taking the less scholarly route of denying the evidence, or the lamer (agnostic) excuse of “remaining unconvinced”. I chose to accept the evidence of physical centrality in Smith’s two books (obviously, I completely accepted their reported measurements) and I said so to Daniel. It was the right thing to do. In private correspondence he admitted to being “surprised” by my response.

I did not, and do not, accept that the fact of physical centrality altered the general substance of my view that Smith used the IH metaphor precisely as a metaphor, and nothing written since by Daniel has changed that view – if anything the further that Klein moves away from Smith’s clear meaning in his texts in favour of modern commentaries (let alone the very ancient Talmud), the weaker Daniel makes his case for some higher significance of the IH metaphor. Whether Smith’s use of the metaphor was somehow more significant than I claimed it to be, remains an entirely separate subject from physical centrality, and in subsequent publication of my views, I have remained critical of Daniel Klein’s asserted conclusions that Smith’s use of the IH metaphor was “the touchstone of his philosophy”. [See: Gavin Kennedy, “Adam Smith and the Invisible Hand: From Metaphor to Myth,” Econ Journal Watch 6:2 (2009); and “Adam Smith and the Role of the Metaphor of an Invisible Hand,” Economic Affairs (March 2011), and on Lost Legacy passim.]

Daniel’s “asserted conclusions” rely heavily on a blend of the “Aristotelian golden mean” (well-known to all students of Philosophy 101; and to Adam Smith), and on modern commentaries about the IH metaphor (following Paul Samuelson’s inventions, 1948). Incidentally, the “golden mean” is always presented in philosophy as a mean between two associated extreme behaviours (‘vices’), from which the said “centrality” is postulated philosophically. Symmetry is important in artistic beauty, perspective and design. That Klein and Lucas (from an hint by Peter Minowitz) “discovered” centrality in Smith’s books over 200 years later, is remarkable, but not earth shattering.

I refer to Adam Smith’s “Lectures on Rhetoric and Belles Lettres” [1762] 1983, pp 25-32, which he gave in Edinburgh, 1748-51, and in Glasgow, 1752-63. In his lectures he discussed the role of metaphors. Neither Klein nor Skousen refer to this lecture – in fact, Daniel dismissed my reference to metaphors in this lecture as “simplistic”; a common debater’s put-down, implying my naivety in referring to what is surely the most important source for the elucidation of Adam Smith’s meaning in his use of a commonly known 17th-18th-century metaphor, well known to his contemporary, if not to his modern, readers. In short, Adam Smith did not “coin the phrase”; it applied it as a metaphor.

That he used the IH metaphor according to its standard usage in English grammar, and which was read as such for decades from 1759 (hence absolutely no contemporary references to other, more complex, explanations of it; see below), is exemplified in the important fact that nobody claimed the far greater significance of the expression, as read into it generations later from a few mentions from 1875-1900 (hardly any from 1790 to 1875). This period was followed by a very few from 1900-1940, and then, first a trickle, then dozens, then scores, and then thousands from the 1970s. Warren Samuelson, who tracked the mentions of the IH metaphor in reference to Adam Smith writes:

“between 1816 and 1938, the average annual level of writings in which the invisible appeared was very low”, thereafter from “1942 through 1974, the average annual levels doubled, from 1975 through 1979, it roughly doubled again, and between 1980 and 1989 it was approximately 6.5 times higher than during 1942 though 1974. Between 1990 and 1999, the average level was little more than eight times that of 1942-74 and slightly less 20 per cent higher than the 1980-89 level. During the period 2000-2006, the average annual level seems to have receded to a level slightly more than 60 per cent of the 1990-199 level.
” (Samuels, W. 2022. Erasing the Invisible Hand: essays on an elusive and misused concept in economics, pp. 18-19. Cambridge University Press). The rest of his 329-page volume details the modern IH phenomenon, largely at variance with Klein and Skousen’s assertions.

I have found a total unwillingness among modern believers in the invisible-hand’s actual existence, and among those believing that the IH metaphor supposedly had special significance for Adam Smith, to them becoming acquainted with how Adam Smith taught his students on the role and use of metaphors. Of course, the device of disclaiming my (undefined) ‘simplicity’ is pure rhetoric, but it does not answer my, and more importantly, Smith’s point in his Rhetoric Lectures:

In every metaphor, it is evident there must be an allusion betwixt one object and an other. … Now it is evident that none of these metaphors can have beauty unless it be so adapted that it gives the due strength of expression of the object described and at the same time does this in a more striking and interesting manner” (LRBL, i.66. p 29).

We should note also how Hugh Blair, who 'took over Smith's Lectures on Rhetoric and had a distinguished career at the University of Edinburgh, shortly after Smith left for Glasgow in 1751, described the use of metaphors:

“this is a figure founded entirely on the resemblance which one object bears to another … it is no other than a comparison expressed in an abridged form … When I say of some great minister, “he upholds the state, like a pillar which supports the weight of the whole edifice, I fairly make a comparison; but when I say of such a minister “that he is the pillar of the state”, it has now become a metaphor” (Hugh Blair, DD. FRSE, Lectures on Rhetoric and Belles Letters”, pp 342-33. 3 vols. London, 1827).

Every metaphor Smith used in his works is in the standard format of English grammar. And in applying Smith’s role of metaphors to the “invisible hand” on the three (only) occasions in which he used it, we see this clearly.

In his Lectures on the History of Astronomy [posthumous, 1795; written from 1744] Smith referred to the beliefs of pagan Romans that their god, Jupiter, fired thunderbolts at errant Romans (that is what they believed). For them Jupiter’s invisible hand was very real, and very terrifying. They regarded it not as a metaphor but as a noun (as are most theological users).

In Moral Sentiments (1759-90), Smith describes how a “proud and unfeeling landlord”, viewed the crops in his “extensive fields … without a thought for the wants of his brethren” and “in imagination consumes himself the whole harvest that grows upon them”. But “in spite of their natural and selfish rapacity, though they mean only their own conveniency, the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements”.

That sentence states the object of the metaphor that follows. Smith writes: “they are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of society, and afford a means to the multiplication of the species” (TMS Part IV, chapter 1, paragraph 10: 184-5). This links the metaphor’s to its object. In short, the IH metaphor “describes in a more striking and interesting manner” its object.

Now, what is so difficult for undoubted and talented scholars, such as Daniel Klein and Mark Skousen, to accept Smith’s standard use of a metaphor in English? (see the definitive Oxford English Dictionary re: metaphors). The haughty landlord was totally dependent upon the “thousands he employs” in his fields, as they were upon him. He did what he did “without a thought for his brethren” – he had to do so because he (and they) had no option to do otherwise (‘no labour, no food’; ‘no food no labour’). It was the absolute necessity of their mutual dependence that led him and them to do what he (and they) had no choice but to do, and the outcome of the landlord's choice was to “advance the interest of society, and afford means to the multiplication of the species”.

In Wealth Of Nations (1776-90) Smith applied the same metaphor that resulted in a similar outcome. He mentions the location of the ‘object’ of the metaphor six times. It was the choice of investing capital in “domestic industry” or in the “foreign trade of consumption”, and either choice affected the arithmetic amount of investment going into ”domestic industry” (the whole is the sum of its parts). Into this decision, Smith raised the important issue that the merchants faced in their assessment of the relative risks involved in their investment choice. In so far as some, but not all, merchant investors perceived that there were greater risks in foreign trade (he describes those greater risks in paragraph 6), they are more likely to choose to invest in “domestic industry”. Their attitudes to risks were subjective; their minds could not be seen, but their minds affected their decisions.

Smith states clearly: “By preferring the support of domestick to that of foreign industry, he intends only his own security, and by directing that [domestick] 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 and end that was no part of his intention” (WN Book IV, chapter 2, paragraph 9: p 456).

The IH metaphor “describes in a more striking and interesting manner” its object, specifically the insecurity felt by the merchant investor. The outcome of their choice is to “advance the interest of society” by increasing the arithmetic sum of the contributions of “domestck industry” which increases the “annual revenue and employment”, which in Smith’s view, promoted the “pubic interest”.

Why cannot Daniel Klein and Mark Skousen acknowledge Smith’s clear intentions in his use of the IH metaphor? Are they protecting their theories of how modern economies work? Surely, their theories of the modern world would still work, whatever Adam Smith wrote in 1759-90?


Thursday, February 16, 2012

Mark Skousen In a Muddle

Mark Skousen (15 February) HERE
posts his talk at Hilldale College “Will the Real Adam Smith Please Stand Up?”

I shall make further comments on this talk later, but first I want to refer to a particularly erroneous few sentences so that I clear up some of Mark’s confusions.

Critics of laissez faire — from Cambridge economist Emma Rothschild to British Labor Party leader Gordon Brown — have recently become quite unhappy by what they consider a conspiracy by free-marketeers to claim Adam Smith as their hero and symbol of laissez faire. They seem to be especially annoyed that the Adam Smith Institute, a London-based free-market think tank, raised a popular statue of the grand old man on Mile High Street in Edinburgh on July 4, 2008.”

That Gordon Brown, former British Prime minister, is critical of laissez-faire, as understood today, and given his social democratic politics, is not surprising. There may be a different quality in Emma Rothschild’s criticism of laissez-faire on scholarly grounds. She may be closer to my specific and regular criticism of linking Adam Smith to laissez-faire.

In short, it is more complicated than Mark Scousen makes out, especially when these two are associated with the strange charge that “[t]hey seem to be especially annoyed that the Adam Smith Institute, a London-based free-market think tank, raised a popular statue of the grand old man on Mile High Street in Edinburgh on July 4, 2008.”

Gordon would probably be bemused by my comments (I have known him since he was a post-graduate at Edinburgh University and we have regularly debated on Scottish Independence over the years. I am not a social democrat). But I would think that Gordon objects, not to the statue of Adam Smith, erected in 2008 on Edinburgh’s High Street, but to the associated publicity that Adam Smith favoured laissez-faire policies, a common enough attribution in modern economics and in rightist political propaganda. Gordon opposes laissez-faire politically (not that it has ever existed). Incidentally, Gordon has been active since 2010 in his Kirkcaldy constituency (he remains an MP) in raising support and funds for the preservation of Adam Smith's mother's garden (all that remains of her house which was demolished in the 19th century), where Adam wrote Wealth Of Nations between 1767 and 1773).

Now, my own opposition to the attribution that Smith favoured ‘laissez-faire’ has nothing to do with its politics; it’s based on the factual case that Adam Smith never mentioned the words ‘laissez-faire’ in either of his two books, Moral Sentiments or Wealth Of Nations, and on several occasions he drew attention to the need for societies to legislate against instances of what he called ‘natural liberty’, a philosophical concept conveniently but wrongly confused with laissez-faire by left and right commentators. Emma Rothschild, like most scholars, certainly knows the difference. Perhaps Mark Skousen is unaware of these points.

I most certainly have never felt “annoyed that the Adam Smith Institute, a London-based free-market think tank” raised the necessary subscriptions from the public (not the state) to pay for and erect Smith's statue (which an Edinburgh labour council voted the necessary permission under the planning laws). Indeed, I was one of them who donated funds to the ASI project. My name is on the subscription list affixed to the statue. I am also proud to be a Fellow of the Adam Smith Institute, which is not an organisation that requires slavish adherence to every dot and tittle of its programme. It prefers, as I do, markets where possible and the state only where necessary; a very Smithian position indeed.

Mark Skousen does not seem to appreciate the true liberal nature of the ASI, nor the distinction to which I have drawn attention above in respect of Gordon Brown and Emma Rothschild.

Follow the link HERE and read Mark’s full article.


Wednesday, February 15, 2012

A Man With a Theory Writes

Ewald Wessels (Cape Town) posts in Business Day, South Africa, 14 February HERE
Wessels portrays a version of history that sees imperialism and colonies as the motor for European countries enriching themselves and he lays the blame at Adam Smith’s door for all the problems in the modern world, finding from his account “doubts about the Scotsman’s intentions" (which he does not elaborate upon):

“The unhidden hand in the market”

European countries enriched themselves in the era of empires through government intervention and military action to promote their own industrial development at the expense of their competitors and their colonies, as meticulously detailed in a new book, Anyone who is interested in the political economy of development would do well to read this book.
Sophus A. Reinert, in a new book, Translating Empire [Emulation and the Origins of Political Economy, Harvard UP. 2006], argues:

“Starting in 17th-century England, the awareness grew in the dominant European countries that the socioeconomic development of their own people required them to develop their manufacturing industries; to become importers of raw materials and exporters of manufactured goods. Having succeeded in achieving world dominance in manufacturing, they then promoted free-trade theories to discourage emulation of their own success by countries from which they imported their raw materials.
Reinert is scathing about Adam Smith and his "invisible hand": "Scholars and lay people alike", he remarks, "continue to be obsessed by Adam Smith, but by the most lenient standards of historical evidence, we must accept that he was a treacherous guide to his age." He goes on to say that "the extent to which Smith was off the mark cannot but invoke doubts about the Scotsman’s intentions".

Reinert appears to base his ideas on five essays on some relatively obscure contemporary 17th-18th century pamphlets (example: Genovesi’s Storia del commercio della Gran Brettagna), presumably as evidence of a pan-European conspiratorial appreciation of what was actually going on. The thinking that is able to link disparate events to ‘know’ what others did not see, either at the time or later, is an admirable trait, though mainly unreliable.

I find Reinert’s assertion “"Scholars and lay people alike", he remarks, "continue to be obsessed by Adam Smith, but by the most lenient standards of historical evidence, we must accept that he was a treacherous guide to his age”. He is an example of being hoisted by his own petard.

Adam Smith did not believe in “an invisible hand” as presented by Sophus A. Reinert, though being an US-trained academic he simply recoils from what modern economists have made out what Smith supposedly meant, devoid of actual evidence that he used the IH metaphor in the way he is alleged to have done.

Reinert derives his own version of Adam Smith from “the most lenient standards of historical evidence”. The notion that industrial commerce developed in the UK from importing raw materials from the rest of the world flies in the face of the evidence of domestic inputs (coal, iron, water) and technology being the most significant factors in Britain’s development. Gold, diamonds and spices did not kick-start industrialization. (See Deidre MaCloskey, Bourgeois Dignity: why economics cannot explain the modern world', Chicago, 2010).

“Scholars and lay people alike [who] continue to be obsessed by Adam Smith" in the main carry a great deal of false baggage with them, much of which had nothing to do with Adam Smith. On Lost Legacy, I discuss these false ideas, and their modern sources, almost every day.

Hence, when Ewald Wessels has “doubts about the Scotsman’s intentions" he displays a mysterious quality. Adam Smith was a moral philosopher. His “intentions”, so far has he had any, were confined to understanding the world and how its history influenced it. No conspiracies, no “hidden” motives, and no “treachery”. He was not out to change the world. He called it as he saw it and left posterity to do what it would. He made no predictions about the future, and, if anything, was possibly pessimistically minded about whether anybody would actually implement anything he suggested.

Worth A Look?

If you are interested in some work undertaken recently on applying some of Adam Smith’s ideas on political economy, using techniques familiar to modern economics graduates, a working paper may be of use to you.

The author is not listed (at least I did not find one), and they want $80 for it to subscribe (they probably have a long lis of other papers; might be worth a browse.

Follow the link HERE 14 February

“Complexity, competition and growth: Key ideas from Adam Smith, modeled using agent-based simulation

This dissertation uses agent-based simulation to study markets in ways that depart from the Walrasian tradition, and to vindicate Adam Smith’s beliefs about the power of the division of labor to enhance productivity, which mainstream economics has neglected because Walrasian equilibrium is incompatible with nonconvexities such as fixed costs.

The first article, “The Invisible Hand, Reloaded,” studies a market in which firms in a commodity market try to maximize profits by estimating demand via an OLS regression, while customers choose the lowest-price firm, but face random firm-specific transactions costs. I call this “empiricist competition.” Near perfect competition emerges with very few firms (e.g., n=3), and the result cross-applies to the free entry case, to U-shaped average costs, and even to (gently) falling average costs, in which case empiricist competition gives rise to a downward-sloping supply curve .

The second article, “The Division of Labor is Limited by the Extent of the Market,” vindicates the thesis of Chapter 3 of The Wealth of Nations by building a market of decentralized retailers, following Howitt and Clower (2000), and then equips agents with avoidable-cost production functions, taste-for-variety utility functions, and techniques to sift through hundreds or thousands of corner solutions to find the optimum behavior when they face buy-sell price spreads and stockout and “jobout” constraints on what they can buy or sell at each price. This gives rise to endogenous specialization, which is compatible with competition yet causes GDP per capita to rise indefinitely with population growth or with the accumulation of “capital” (foregone consumption, subject to diminishing returns and depreciation, which augments labor). What emerges is an interpretation of technological change, not as new discoveries a la Romer (1990), but as the exploration of an already-known technology space which requires sufficient labor-cum-capital to explore. Unlike Romer (1990), this interpretation of technology is a candidate to explain the wealth and poverty of nations.

The third article, “Bayesian Skill Reputation Systems, presents a model where agents are endowed with skills whose quality is unobservable and opportunities arrive each turn which can only be exploited by certain skills, I show how agents can use Bayesian updating to derive pretty accurate knowledge about the quality of skills. However, the Bayesian skill reputation system quickly fails when agents can conceal past failures, which suggests a reason why, as Granovetter (1983) showed, networks of “weak ties” are so important for finding jobs, and why employers are suspicious of gaps in resumes.”

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Tuesday, February 14, 2012

A Psychologist Writes On Adam Smith

Peter Corning posts in Psychology Today, “The Fair Society: Adam Smith’s Psychology: His “invisible hand” was only part of the story; so was morality!”

He demonstrates in the use of his evidence to support his analysis of Adam Smith’s psychology at a standard (sadly) somewhere below that expected of a former faculty member of Stanford University.

[Before critics jump in with charges of an ‘ad hominem’ fallacy, they should note that I am attacking the quality of Dr Corning’s methodology on this occasion, not his undoubted worthiness as a person or his proficiency as a psychologist].

He writes (follow the link):

Man...is led by an invisible hand

This implies Adam Smith made a general statement about all or most men; he didn’t. In Wealth Of Nations (Book IV, chapter 2, paragraph 9), on the only occasion that he used the IH metaphor in that Work, he spoke of a specific group of merchant traders, but clearly not all, who were concerned about the security of their capital (he specifies this group four times) and who chose, therefore, to invest in “domestic industry” rather than take extra risks in the “foreign trade of consumption”.

It was this merchant alone who was `’led by an invisible hand” to invest locally, and it was the result of his “insecurity” that caused “domestic industry” to be higher than it would otherwise have been; specifically it produced a higher “domestic” annual “revenue and employment” (simply”, the arithmetic whole is the ‘sum of its parts’), and, because increasing employment benefitted the poor, Smith regarded this consequence as a public benefit.

In spite of their natural selfishness and rapacity...[men] are led by an invisible hand to...advance the interest of the society..."

Here, Peter Corning quotes from Moral Sentiments (Part IV, chapter 1, paragraph 10) and, for too trusting readers, he obscures the fact that Adam Smith is not referring to “men” in general but only to “a few lordly masters”, for whom “Providence” divided the earth unequally. He specifically refers to a “proud and unfeeling landlord” viewing “his extensive fields” without a thought for the wants of his brethren”, and who in his “imagination” he consumes the “whole harvest that grows upon them”. Beyond the little that he consumes himself” - “ the capacity of his stomach bears no proportion to the immensity of his desires”, he “receives] no more than that of the meanest peasant”

Crucially, because of this physical fact, “he is obliged to distribute among those, who prepare in the nicest manner, that little which he himself makes use of”. The “rich” landowners as a group act similarly and they distribute the “produce of all their improvements” to all the others who are dependent upon them, as they too are dependent on their labourers. Now Smith is clear the nature of the benefit to society, specifically, over the generations since the “land was divided” by Providence (c. 10,000 years ago since the discovery of farming): it affords the “means to the multiplication of the species”.

Adam Smith was very specific about the benefits from each of the cases. Far from being a general outcome, the IH metaphor is a localized outcome in which Smith uses a popular 17th-18th-century metaphor (not a simile!) to “describe in a more striking and interesting manner” their specific case-objects. In TMS, the mutual dependence of the “proud and unfeeling landlords” on the dependent “thousands whom they employ” (no food, no labour and no labour no food), had nothing to do with “charity”! In WN the IH metaphor describes the ‘insecurity’ felt by some, but not all, merchants – [See Adam Smith’s (1762) “Lectures in Rhetoric and Belles Letters’, p. 29, where he describes the role and purpose of metaphors.]

The generalization from two cases into a general theorem is a modern invention (from the 1940s). Dr Corner criticizes a pure invention that has nothing to do with Adam Smith’s use of the metaphor. It serves an ideology and has no scientific basis. The invisible hand does not exist: see Warren Samuels, 2011, Erasing the Invisible Hand: essays on an elusive and misused concept in economics”, Cambridge University Press.

More important, many of Smith's modern acolytes seem unaware of his cautionary warnings, especially in his earlier work, The Theory of Moral Sentiments, where (as a Stoic and a Christian) he stressed the fact that everything in a free market depends on a moral foundation of trust, honest dealing and, as he himself put it, "justice".

Peter Corning is partly right here, except that Adam Smith did not write Moral Sentiments “as a Stoic and a Christian”, certainly by when he prepared and published the 6th edition in 1790. To make that case here would take too much space, so I refer readers to my paper, “The Hidden Adam Smith in his Alleged Theology”, Journal of the History of Economics, no 3, 2011. Unintentionally, I am sure, Peter Corning has swallowed the myths among what he calls, “Smith's modern acolytes”, who purvey them around the Academy and which the media and politics popularises in a vulgar presentation of Adam Smith’s views. On this last point, Adam Smith never used ideas associated with the French Physiocrats of “laissez-faire”.

It is always risky treading into fields outside one’s expertise. I am not damning Peter Corner’s broad points; I am trying to sharpen them to represent Adam Smith’s legacy as the appropriate counter-point to slavish acceptance of myths about his work.


Monday, February 13, 2012

These Guys Should Know Better

Rob Norton HERE
Concise Encyclopedia of Economics, quoted by “Utah” in the Rio Norte Line HERE

"Unintended Consequences" by Rob Norton

“The concept of unintended consequences is one of the building blocks of economics. Adam Smith’s “invisible hand,” the most famous metaphor in social science, is an example of a positive unintended consequence. Smith maintained that each individual, seeking only his own gain, “is led by an invisible hand to promote an end which was no part of his intention,” that end being the public interest. “It is not from the benevolence of the butcher, or the baker, that we expect our dinner,” Smith wrote, “but from regard to their own self interest.

This authoritative source (from Liberty Fund) has been instrumental in spreading the fallacious notion of the entirely modern notion (from the late 1940s, pace Paul Samuelson) that there is “an invisible hand” at work in capitalist economies, and worse, that Adam Smith initiated the idea.

One excellent antidote to the “invisible hand” myth is Warren J. Samuels’ last book (he passed away just before it was published): “Erasing the Invisible Hand: essays on an elusive and misused concept in economics”, 2011, Cambridge University Press). I suggest that the good people of Liberty Fund read it.

Generalising from a single instance of Smith’s use of the IH metaphor and joining it to another quotation on an different subject is always dangerous when presenting Adam Smith’s ideas.

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Sunday, February 12, 2012

How to Undermine the Credibility of a Reform

john s. mill’ posts in the Daily Kos a contribution to the reform of the taxation schedule HERE

“Obama needs to come up with Progressive Tax Reform. I favor a progressive consumption tax.”

However, it is best to be historically accurate when alleging terminology and ideas belong to Adam Smith.

For example, Adam Smith did not “first develop” a set of “canons” of taxation by “which to judge taxes”. That is a modern invention, like much else mis-attributed to Adam Smith’s originality, particularly when Smith never made any claims to that affect (such as, for example, in the origins of ideas about the “division of labour”, which he explicitly disavowed). Instead, Smith reported on the “maxims” of taxation that had long existed among “most nations”, which he summarised as “maxims”, without claiming his originality, that is, he explicitly denies they originated with him in 1776:

The evident justice and utility of the foregoing maxims have recommended them more of less to the attention of all nations. All nations have endeavoured, to the best of their judgement, to render taxes as equal as they could contrive, as certain, as convenient to the contributor, both in time and in the mode of payment, and in proportion to the revenue which they brought to the prince, as little burdensome to the people.” (Wealth Of Nations, Book V. Chapter 2).

Both Right and Left play the game of dragging Adam Smith's name into support for their contending modern propositions. In my view, this tends to discredit their ideas before I consider them on their merits. They could avoid this elementary error - and gain more credibility - by first reading Adam Smith on these alleged claims, especially when they also change Smith's language (in this case changing Smith's use of "Maxims" to "Canons" - an instant give-away for anybody familiar with his works).


Saturday, February 11, 2012

Homo Economicus

Fabio Rojas comments on
“the economics of science’ on Org,net HERE

The one thing that left me scratching my head are quotes like this: "From this research, Stern synthesized an insight that remains with him today. “Scientists don’t only care about money,” he says. “They care about discovery, and control. Those are just first-order facts about the scientific enterprise.”

The Stern quote hits on a theme that has been old hat in the social analysis of science since the day of Merton, if not earlier. Why are economists constantly surprised by these findings? Isn't variance in human motivation the plausible prior hypothesis? Don't economists believe in differences in personality and socialization? Isn't the real question the degree to which specific activities are governed by financial considerations, not treating non-financial considerations as anomalies?”

Only those modern economists wedded to notions of Homo economicus and ‘Max U’ (and not given to introspection or to self-examination) would be surprised at the presence of multiple motivations in everyday life. That’s the problem with highly simplified (naked!) theories that are devised to fit calculus rather than the real world.


Friday, February 10, 2012

Adam Smith on Unproductive Labour

Karl W. Eli (New York) writes to the Financial Times HERE

“‘Trivial’ professions – but necessary”

“Jagdish Bhagwati criticises Adam Smith for condemning the labours of “churchmen, lawyers, physicians, men of letters of all kinds, players, buffoons, musicians etc”.

I am surprised that Jagdish Bahadwati may have slipped up here, as might Karl Eli).

Adam Smith did not condemn the “unproductive” sectors; he categorized them by whether they added to the annual revenue of a society or whether they spent resources without replacing them in the ‘great wheel of circulation’.

Admittedly, this was rather blunt designation, and much misunderstood, because, perhaps, it is mixed up with prodigality – spending your income with replacing it while en route to bankruptcy.

The army and Royal Navy were ‘unproductive’ – they consumed what was allocated to them. However, the commercial suppliers of victuals, weaponry, munitions, uniforms, and such like, were productive. They aimed to make a profit on their labours and such profits added to the country’s annual revenues.

Likewise necessary inputs into the legal professions (quills, gowns, wigs, fitted-out court rooms, books, uniforms, provisions, the services of inns, jails, and such like) when produced commercially, were productive. Similarly, theatre owners and their staff, artistes and playwrights, hotel owners and their servants, musicians and their instruments, printers of their posters and bills, their costumes, including for buffoons, even puppeteers and commercial makers of their dolls, were productive, as were those employed in providing wine (France), whisky (Scotland), gin, and beer (England) - when they produced profits - were productive.

In practice, the expense of Sovereigns and their Courts, invariably ran at a loss, but their bankers, lenders (risky if Jewish because regularly pillaged), producers of fine furniture, clothes, jewelry, plates, paintings, and so on, if they made a profit could be productive, and those of their suppliers in the supply chain, who managed to get profits from successful payment, also made a productive contribution to annual revenue.

There was no question of these groups being non-useful or unnecessary. Smith’s definition made it clear that it was their contribution or otherwise to society’s annual revenue that determined their productivity, not their social value.

Adam Smith’s comment was in fact even-handed, if we read his not very clearly expressed meaning.


Looney Tunes no 25



Hints of the Invisible Hand behind the Knox ordeal

“I've previously written that I suspect that one of the motives behind Amanda Knox's ordeal was to serve as a distraction from our governments' treason in service of the British empire, and the above excerpts support this position, because both the Daily Mail and the State Department are British imperial tools. The Daily Mail is one of the most unabashed outlets of blatant fabrications on the planet, and spying on Knox is partly intended as a form of SRA, by making her feel as if she's still in prison ("Big Brother is watching you"). The current Secretary of State is pushing the British line against Syria, although I don't know her motive.”

[Lost Legacy: er, I’m speechless! …]


Thursday, February 09, 2012

The Power of Private Property Rights





Gavin Kennedy

Alex Tabarrok posts on Marginal Revolution on (9 February) HERE

"In our principles textbook, Modern Principles: Macroeconomics, Tyler [Cowen] and I illustrate the importance of property rights with the incentive effects of collective farming and the secret agreement of Xiaogang village (illustrated in Link, signed by the peasants with their thumbprints).

“The Secret Agreement that Revolutionized China”

"We write: The Great Leap Forward was a great leap backward – agricultural land was less productive in 1978 than it had been in 1949 when the communists took over. In 1978, however, farmers in the village of Xiaogang held a secret meeting. The farmers agreed to divide the communal land and assign it to individuals – each farmer had to produce a quota for the government but anything he or she produced in excess of the quota they would keep. The agreement violated government policy and as a result the farmers also pledged that if any of them were to be killed or jailed the others would raise his or her children until the age of 18. [The actual agreement is shown on Link.]

The change from collective property rights to something closer to private property rights had an immediate effect, investment, work effort and productivity increased. “You can’t be lazy when you work for your family and yourself,” said one of the farmers.
Word of the secret agreement leaked out and local bureaucrats cut off Xiaogang from fertilizer, seeds and pesticides. But amazingly, before Xiaogang could be stopped, farmers in other villages also began to abandon collective property. In Beijing, Mao Zedong was dead and a new set of rulers, seeing the productivity improvements, decided to let the experiment proceed.
For more background, NPR’s Planet Money has a great story on this secret agreement including this:

“Back then, even one straw belonged to the group,” says Yen Jingchang, who was a farmer in Xiaogang in 1978. “No one owned anything.

At one meeting with communist party officials, a farmer asked: “What about the teeth in my head? Do I own those?” Answer: No. Your teeth belong to the collective.

In theory, the government would take what the collective grew, and would also distribute food to each family. There was no incentive to work hard — to go out to the fields early, to put in extra effort, Yen Jingchang says.

“Work hard, don’t work hard — everyone gets the same,” he says. “So people don’t want to work.”

…Before the contract, the farmers would drag themselves out into the field only when the village whistle blew, marking the start of the work day. After the contract, the families went out before dawn.

“We all secretly competed,” says Yen Jingchang. “Everyone wanted to produce more than the next person.”
It was the same land, the same tools and the same people. Yet just by changing the economic rules — by saying, you get to keep some of what you grow — everything changed."

(Crossposted at SeeTheInvisibleHandResourceBank.com)

The power of private property rights even in totalitarian, unforgiving regimes!


Looney Tunes no 24


Nick Statt writes in Stony Book Press HERE

With only two days left, I am forced to the lab by way of the game’s ever-apparent invisible hand in the form of my pleading co-workers still placing their hope for humanity in a potential cure.


Julie Sze posts in ucf faculty supporting students HERE

“What to do? Thoughts on Staying Positive in Confusing Times ...”

“I do not want the uncertainty that started this quarter to allow our voices to be muffled beneath the invisible hand of the University system.


Marketing Risk Management, to Both Client and Provider
New York Times HERE

Stuart Elliot writes:

Although the concept for the campaign “did make the palms sweat” of some executives at Garp, Mr. Bernstein said, something “so visceral” was just what was needed.

He described the point of the campaign with a nod to the economist Adam Smith: “The invisible hand, it packs a punch.” That has a double meaning, Mr. Bernstein acknowledged, in that the hand delivering the punch in each ad is invisible, too.


An very unfair education reform plan
The Keene Sentinel HERE

Some might even say the measure is a thinly veiled handout rather than Adam Smith's “invisible hand” at work. It's all the more baffling given today's tough economic times.


IDI: Haredi middle class emerging
Jerusalem Post JEREMY SHARON writes HERE

The process is already under way and the invisible hand of Adam Smith is much more efficient than any court ruling or Knesset bill,” Stern explained.


Free-market IR
Denis Gallagher, writes in The Australian HERE

THE implied point that Grace Collier is conceding ("Workplace deals drive car firms into the ditch", 8/2) is that in a free-market economy all parties to an industrial agreement have an absolute right to make whatever agreements suits them as part of the invisible hand (a point that I am sure that she did not explicitly spell out, based presumably on her assumption that this is a given to intelligent readers).