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.


Blogger Socrates said...

Dear Gavin,

You commit a few errors in your commentary on my letter to South Africa's 'Business Day':

While you call Reinert US-trained, his PhD was actually earned at Cambridge, together with an M.Phil. in political thought and intellectual history, and, before joining the faculty at the Harvard Business School, he was a research fellow and an affiliated lecturer in history at Gonville & Caius College at Cambridge. He did study history, as an undergraduate, at Cornell University but that does not prove an American bias - current academic affiliations in both Germany and Italy attest to the international breadth of his academic experience.

The reference to Adam Smith's "invisible hand" was my own, Reinert does not refer to this metaphor. It may well be that Smith's original meaning has changed in the writings of others but, whatever he himself meant by the metaphor, it has played a considerable role in the evolution of current "free market" theory (particularly in the popular mind) and that is why I quoted it. As for the role of raw materials in the development of Britain, yes, in the 17th century England was a net exporter of raw material to the continent of Europe, mainly in the form of wool, which was re-imported to England as finished cloth and clothing. But Britain went from importing 34.7 percent raw materials and 31.7 percent manufactured goods in the period 1699 – 1702 to importing 62.3 percent raw materials and a mere 4.3 percent manufactured goods in the 1840's.

I certainly don't lay the blame on Smith for "all the problems of the modern world" as you state. Read my letter carefully. Also, note its context within a current African debate on the degree to which governments should become involved in the economies of their countries. You will see that what I sought to do was to argue for intelligent cooperation between Africa's governments and the private sector in pursuit of the goal of using the continent's immense raw material endowment as an aid to the socio-economic development of its people. (It is in this respect that Britain's historical example is relevant.) Free market theory, as many of its proponents currently articulate it, would leave the economic component of human development entirely to the market. That won't work.

In the sentence that expresses "doubt about the Scotsman's intentions" I was a quoting Reinert, not expressing my own opinion. On his page 283, Reinert says: [Smith] "was either eerily duplicitous or remarkably ignorant in claiming that 'every town and country….in proportion as they have opened their ports to all nations, instead of being ruined by this free trade, as the principles of the commercial system would lead us to expect, have been enriched by it.' " Reinert goes on to say: "Too many cities and states had been impoverished through trade by 1776 to allow for alternative explanations."

I am not sufficiently familiar with economic history prior to 1776 to be able to second-guess Reinert. But I do know that the way in which the Royal navy forced Naples in the early 19th century to dismantle its tariff system, while Britain maintained its own tariffs, ruined the economy of that (then) city-state. I have also witnessed the way in which South Africa's economy has suffered as a result of an ill-considered opening of its markets in the last two decades – we now have an unemployment rate that is well in excess of the maximum unemployment rate reached in the USA at the depth of the Great Depression of the 1930's.

The popular debate in the past has tended to be between the merits and demerits of the two extremes of "laissez faire" and command economics. I think most of us realise nowadays that the optimum lies somewhere in between. The question is precisely where the boundary should lie in each individual country.

Ewald Wessels

11:33 pm  
Blogger Gavin Kennedy said...

Ewald Wessels,
Thank you for your comment and explanation of your thesis.

I would suggest that you read Deidrie McCloskey's Bourgeois Dignity: why economists cannot explain the real world (Chicago, 2011), in which she tests explanations for why industrialisation began in 16th-18th century Britain, and not the other places (China, etc) that reached the level from which it should have begun elsewhere, centuries before Britain. It is a thorough survey statistically and economically, and from wider explanations.

The key factor is the appearance and tolerance of innovators and their ideas, and not their suppression by the powerful forces of government and religious and philosophical superstition. Foreign trade remained a relatively small share of growing GNP in these centuries and was not the motor force. Science and technology were developing in China (most things were already invented in China some time before Europe, but their political system was hostile to their application and to liberty, and the people who would do that).
There are lessons here for what has been holding Africa back - though stirrings are underway.

Apologies for 'US trained' Reinert. He certainly articulates the prevailing 'ideology' of US academe, re-invisible hand myths. In that sense, I too am 'US-trained', being taught my first economics from Samuelson, and Friedman, etc..

Imperial Britain was a mercantile power worldwide, not a laissez-faire, free market force. It did not follow Smith's advice in the very last sentence of Wealth Of Nations about the "modesty of its circumstances". Instead, its governments went for a 'second' Empire after losing its first in North America.

I agree that the 'optimum' lies between command economies and free markets. I have visited South Africa several times, but do not presume to know how make that optimum practicable within it political system or circumstances.


6:41 am  

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