Friday, March 31, 2017



I have long remonstrated with correspondents and with authors in the general media who insist that Adam Smith wrote about ‘capitalism’ (or in extreme cases actually ‘invented’ the word).
Relying as I do on the Oxford English DIctionary as my valuable source for all matters to do with the English language, I followed its statement that ‘capitalism’s first use in English is in William Makepiece Thackery’s novel, ‘The Newcomes”, a family tale linked very much to financial business matters in the 1850s, of which I have a copy.
But progress marches on, particularly in the continuous electronic search of all publications printed in English. Well, they have recently found some new first sources for ‘capitalism’.
Mark Brady, a professor of economics specialising in the use of mathematics, especially in the manipulation of statistical data. He is also a prolific publisher of articles in this field, both historical and current.
His most recent communication with me refers to two earlier uses of the word “capitalism” before Thackery’s:
The first reference is from The Standard in 1833 (23 April):
when the same tyranny of capitalism…
The second reference is from the Caledonian Mercury in 1848 (26 September):
That sweeping tide of capitalism and money loving…
I must thank Mark for his vigilance and for sharing this news with me.

It is better to be nearly right than absolutely wrong. If any readers come across even earlier references, I would be delighted to be corrected and brought up to date.

Monday, March 27, 2017



Palgrave Macmillan

Delivery date is looming, requiring my focus on priorities. 

If I see a comment-worthy item for Lost Legacy I shall seriously consider a post, but lately the flow of worthy news has been more like aimless wind-blown sand in a desert than a flow.

So its back to my day (and night) job, with much to cover today …

Friday, March 17, 2017


Prof. (Dr.) S. N. Misra posts (16 March) on Pragativadi HERE 
“Towards a new language of growth”
“It was Adam Smith who is credited with inking the syntax of capitalism, when he wrote: “Market forces, as if by an invisible hand, will lead to welfare of all”. He was writing in the backdrop of industrial revolution when technology was making a tectonic shift in the wellbeing of European nations. Smith also underlined the importance of division of labour and ‘self-interest’ in bolstering the market forces. He had famously observed: “It is not from the benevolence of the butcher; the brewer or the baker that we expect our dinner, but from their regard to their own interests”.  David Ricardo took the free market theory a step further when he argued that free trade would tap the comparative advantage in production of commodities between nations and increase global wealth significantly. Globalization as a concept owes its origin to this free trade theory of Ricardo. Export of goods and services has contributed to one-third of global wealth. The unbelievable prosperity of many emerging market economies like China, South Korea and Thailand owe their origin to this expert led growth strategy.”
There are multiple problems with Prof. Misra’s statements above.
Who exactly credited Adam Smith with “inking the syntax of capitalism”? The claim is a nonsense anyway. The word ‘capitalism’ was first used in English in 1854. While Smith was alive (1723-90) it is debateable that ‘capitalism’ existed yet.
Adam Smith NEVER wrote”:
Market forces, as if by an invisible hand, will lead to welfare of all.”
Smith’s reference ONCE in Wealth of Nations (1776) to different subject, specifically to a risk averse merchant who preferred to invest domestically rather than in foriegn trade, for which he was ‘led by an invisible hand’ to benefit the domestic economy by the extent of his investment and its associated employment, which Smith considered to be a public benefit.
Smith also added throughout Wealth of Nations, that many other actions by  “merchants and manufacturers” led to disbenefits, such as import controls, prohibitions and rising domestic prices and less competition, decreasing and slowing the spread of wealth growth.
When Smith was writing there was no:
 “backdrop of industrial revolution when technology was making a tectonic shift in the well being of European nations.” 
Manufacturing was still in its early infancy. Large factories manufacturing prodcts were almost unknown across the land until the division of labour was mechanised with machinery, a process hardly begun before the turn of the century (Watt’s mechanised steam power, in mining and cotton manufactures and such like). The “tectonic shift” came later and took time to spread, requiring large capitals. Many European countries did not participate until mid-19th century onwards
Finally: “Globalization as a concept owes its origin to this free trade theory of Ricardo.
The actuality of “globalization” originated not from a ‘concept’, but from what people did quite independently of the writings of economists. 
Ricardo - and Smith, Marx, etc. - were not, so to speak players, in society. If they had never existed and had not written a word, the industrial revolution, capitalism, imperialism, socialism, modern globalisation and so on would still have happened. 

Though, of course, that creative writers do exist, human understanding is an important element in human culture.

Wednesday, March 15, 2017


Brian Francis posts (13 March) on Nation News (Barbados) HERE 
As I See Things: Economic Redeemer, no 1”
“Arguably, one of the most highly debated issues in the history of economic thought has to be the efficacy of free markets and their capabilities in generating “best” possible outcomes in relation to inter alia the prices at which commodities are traded, the levels of output, the maximisation of consumer and producer surpluses, and the enhancement of competition among firms.
Discussions along those lines would more than likely begin with the wisdom of Adam Smith and his hotly mooted concept of the “Invisible Hand”.
Indeed, in his most widely recognised contribution to economic discourse, The Wealth Of Nations, Smith’s philosophical perspective is reflected in the fact that he “was guided by one universal principle; namely, self-interest.
Every individual has the desire to better his own lot. It was on this belief that he regarded the entire economic world as a big workshop created by the division of labour.
Indeed, Smith believed that human conduct was governed by self-love, sympathy, the desire to be free, a sense of propriety, a habit of labour and the propensity to satisfy his wants with the help of others. Each man is the best judge of his own interest. If complete freedom is given, a man would make efforts not only to better his own lot, but also would make efforts to promote the general good. Thus, “an invisible hand is behind all human motives”.
But Smith was only one of several economic thinkers whose contributions are reflected in the classical school. No doubt, classical economists believed sincerely in laissez faire. It is no wonder, therefore, that they have advocated “that Government is best which governs least."
What a mixture of occasional insight and popular error!
The History  of Economic Thought long pre-dates Adam Smith’s contributions, insightful and thoughtful as they were. Wealth of Nations, his most famous Work is about that history and decidedly not about the futures, of which he wrote very little. 
Smith did not make predictions, other than his isolated comment on the prospects for the North American, former British colonies, specifically ,that in ‘100 years’ the newly independent colonies would exceed the economic power of the UK (Smith, Wealth of Nations, Book IV, chapter vi, i.c. page 625 (Oxford University, Glasgow Edition, page 625).
Smith’s so-called “hotly mooted concept of the “Invisible Hand” is itself a major misunderstanding of his use (once) in Wealth of Nations to describe the sensible actions of a merchant, who did not trust trading with foreigner’s, nor the probity of their foreign legal systems, who therefore confined his investments to domestic opportunities.
Smith noted that the economic consequences of this situation was that his profitable domestic investment served the merchant’s “own gain”, which was what he was interested in. In addition, his actions led to the economy’s gain. The merchant was “led by an invisible hand” to benefit society which was “no part of his intention” (WN IV.ii.9 p 456).
This simple statement has grown into a almighty mysterious theory - even a solid and certain belief - touted by modern economists as if it is significant, even a law of economics. The facts are much simpler: 
By investing his capital domestically there are two obvious effects: the merchant’s investment adds to the total of domestic investment, just as any consequentual employment adds to the total aggregate of domestic employment. These two effects are inseparable consequences of the merchant’s motivated actions to which the ‘invisible hand’ refers. 
Now this is so clear as to be virtually obvious, even trivial. This alone explains why none of Smith’s contemporaries, who knew him personally, such as Professor Dugald Stewart, the son of Professor Michael Stewart, who was a student at Glasgow University with Adam Smith, mentioned the ‘invisible hand’. Nor did any of the major political economists of the early 19th century - both friends and critics - mention Smith’s ‘invisible hand’. 
The question is why? Because it was so obvious as to be trivial! The whole is the sum of its parts. Of course individual actions add to the whole of domestic investment! So what?
Indeed, it was first discussed in the 1870s, as if the IH was something special. Though mainline economists steadfastly ignored it, until the brilliant Paul Samuelson led the way to a misreading of Smith’s metaphor in 1948 in his Economics textbook (McGraw-Hill) - 5 million sales - and those millions passed on the misinformation to generations of Econ 101 sudents and the invented meaning became an absolute truth and their future careers spread the misunderstanding across the world’s media and into the minds of tens of millions of belivers, including Brian Francis, in deepest Barbados …


Friday, March 10, 2017


Just Checking ...
Reference nothing in particular: I was checking to see if there were any new comments this morning when I explored some of the headings in a table of Stats.
I came across one I had noticed before that listed the number of times anyone had accessed Lost Legacy to read it.
The grand total since 2005 was 1,641,365.
Thank you regular readers, one-time only visitors, and all those in-between...

Thursday, March 09, 2017


Mark Buchanan:The Misunderstanding at the Core of Economics posts (9 March) on Bloomberg HERE
“In the 1950s, Arrow and others proved a theorem that, many economists believe, put a rigorous mathematical foundation beneath Adam Smith's idea of the invisible hand. The theorem shows -- in a highly abstract model -- that producers and consumers can match their desires perfectly, given a particular set of prices. In this rarified atmosphere of “general equilibrium,” economic activity might take place efficiently without any central coordination, simply as a result of people pursuing their self-interest. It’s an insight that economists have used to argue for de-unionization, globalization and financial deregulation, all in the name of removing various frictions or distortions that prevent markets from achieving the elusive equilibrium.
Yet the theorem trails a dense cloud of caveats, which Arrow himself recognized could be more important than the proof itself. For one, it worked only in a perfect world, far removed from the one humans actually inhabit. Equilibrium is merely one of many conceivable states of that world; there’s no particular reason to believe that the economy would naturally tend toward it. Beautiful as the math may be, actual experience suggests that its magical efficiency is purely theoretical, and a poor guide to reality. …
… This perversion isn’t Arrow’s fault. He merely helped to prove a mathematical theorem, and was no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations of capitalism, and he was prescient in understanding how economic inequality might come to impair the workings of democratic government.’
Bloomberg is always worth reading, as Mark Buchanan’s article on Kenneth Arrow illustrates.
I have long been sceptical of the supposed, of what I call, the “Marshallian Cross” in every elementary textbook, supposedly showing the equilibrium of supply and demand where the respective supposed curve of demand prices cross the supposed curve of supply prices and intersect. The logic is impeccable. First year students are required to be able to reproduce the diagram and explain its significance.
But does anybody question its significance? Are markets replete with equilibrium prices? Is that how markets work? Or are consumers buying decisions made differently? Are suppliers price decisions the result of searching for an equilibrium price? Does anybody know what the equilibrium price is at any one moment in a market or do both parties make purchase/sale decisions on whatever price is on the ticket - subject to possible haggles - “how much for two instead of just one?”; “What’s the discount, if I order and pay for a dozen for delivery on Tuesday? And so on.

I often wonder if economists actually experience real markets and the behaviours of real people in them?


Andrea Saltelli post (8 March) ECONO TIMES HERE
Michael Polanyi recognised that Western science is, ultimately, a capitalist system. Like any market of goods and services, science comprises individual agents operating independently to achieve a collective good, guided by an invisible hand.
Scientists thus undertake research not to further human knowledge but to satisfy their own urges and curiosity, just as in Adam Smith’s example the baker makes the bread not out of sympathy for the hunger of mankind but to make a living. In both cases this results in a common good.
There is a difference between bakers and scientists, though. For Polanyi:
It appears, at first sight, that I have assimilated the pursuit of science to the market. But the emphasis should be in the opposite direction. The self coordination of independent scientists embodies a higher principle, a principle which is reduced to the mechanism of the market when applied to the production and distribution of material goods.
Gone the ‘Republic of Science’
Polanyi was aligning science with the economic model of the 1960s. But today his assumptions, both about the market and about science itself, are problematic. And so, too, is the scientists’ march on the US capital, for adopting the same vision of a highly principled science.
Does the market actually work as Adam Smith said? That’s questionable in the current times: economists George Akerlof and Robert Shiller have argued that the principle of the invisible hand now needs to be revisited. To survive in our consumerist society, every player must exploit the market by any possible means, including by taking advantage of consumer weaknesses.
How does a supposed ‘invisible hand’ guide the market for science in 2017? What does this invisible hand do? Just how scientific is such a notion taken from a modern false notion of a metaphor mentioned by Adam Smith in 1776 and applied in 2017?
Even comparing it with a ‘baker’ in 18th century Scotland, making bread for sale for which act he has prior costs in assembling the ingredients, applying baking techniques in his oven, bought from an oven-maker and serving his bread from a market stall for a fee to the local council, all of which is ascribed by Andrew Saltell to the “1960s”.

News that economists George Akerlof and Robert Shiller (“Phishing for Phools: the economics of manipulation and deception”: Princteon University Press) want to “revisit” modern invented notions of his use of the now infamous metaphor is to be welcomed. Though from memory, when I reviewd it on Lost Legacy, i am sure I was not that impressed.

Saturday, March 04, 2017



It is not often we are mentioned in Blog Land and I am always grateful for mentions, critical or otherwise. 
On this occasion it refers to my remarks about Paul Samuelson's role in initiating the fake news about Adam Smith's use of the 'invisible hand' metaphor. This crass error is now universally believed by millions  - even billions - across the planet and is quoted scores of time a day in the world media.
It is even spread by Nobel Prize Winners and many scholars who should know better and should inspect the evidence - and require their students to do so too.
So thanks to Mike Norman today.


Frances Coppola posts 3 February on  COPPOLA COMMENT HERE
“Adam Smith's "invisible hand" is perhaps one of the most misunderstood concepts in economics. It is usually interpreted to mean that when individuals all operate according to their own self-interest, their actions somehow combine to create a well-ordered, well-functioning society "as if guided by an invisible hand”.
Frances Coppola’s  DESCRIPTION IS WRONG: “as if guided by an invisible hand”, which is a simile, not a metaphor! 
Adam Smith did not write poor English: see his ‘Lectures on Rhetoric and Belles Lettres”, which he taught from 1748-1763, incidently his longest series of Lectures.
“To be fair, this statement about the "invisible hand" (from the Wealth of Nations) does seem to mean exactly that
[The rich] consume little more than the poor, and in spite of their natural selfishness and rapacity…they divide with the poor the produce of all their improvements. 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 the society, and afford means to the multiplication of the species.
Frances is wrong again: the above quotaion is not from Smith’s Wealth of Nations, 1776; it is from Smith’s earlier book: Moral Sentiments, 1759, at page 184, TMS IV.i.10.
This should have been challenged long ago on the lack of counterfactual evidence. It is an assertion, not a fact. Nonetheless, despite the glaring inequalities in our world today, it could be true.” 
Smith, writing in the 18th century about landlords and farm labourers was unable to discuss the ‘world today’, or ‘socialism’ - hardly relevant until the 20th century,
Frances continues:
The problem with Smith's statement is that it gives the impression that equitable distribution is not only possible, it is inevitable. The "invisible hand" guides the human species ever closer to complete equality of distribution.
But this is only half the story. The other half can be found in what I consider to be Smith's greater work, the Theory of Moral Sentiments: 
Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
For Smith, self-interest is inevitably benevolent in effect, whatever the intention. He does not consider the possibility that self-interest could have malevolent effects. Nor does he consider the possibility that short-sightedness and stupidity may have unexpected consequences. And this is because he is thinking in aggregates. Smith's "invisible hand" applies not to the individual, but to the group. The individual does whatever he wants: but the collective actions of thousands or millions of individuals together bring about a better society.”
Again Frances muddles the quotations. He attributes the above to Smith’s Theory of Moral Sentiments (1759) when in fact it comes from Smith’s Wealth of Nations (1776) - and draws the wrong conclusion:
For Smith, self-interest is inevitably benevolent in effect” 
Not at all true! Smith spends some considerable time referring to the merchants and manufacturers who lobby governments to impose tariffs on imported goods, and also outright prohibitions on imports altogether, with a view to reduce domestic competition so that they can raise prices.
Has Frances actually read Smith’s books? Or is he simply reading a book of quotations and got them muddled up?

Considering his opening sentence that “Adam Smith's "invisible hand" is perhaps one of the most misunderstood concepts in economics” which Francis goes on to demonstrate, I suggest you read it for yourself…

Friday, March 03, 2017


“An impossible mind: the late Kenneth Arrow
The world has lost one of its great economists”
“…The abstractions won him the Nobel prize at the age of 51. (He remains the youngest winner and the most cited by others in their prize lectures.) He established the conditions under which prices might successfully co-ordinate production and exchange, eliminating shortages and surpluses. Adam Smith provided the best metaphor for this underappreciated feat: the “invisible hand”, guiding resources to their best uses. Ken Arrow and his co-author, Gérard Debreu, provided the best algebra.” …
Yes, Indeed. A great economist, known to every economist who has graduated since the 1960s, and no doubt for a few more generations to come.
However, to suggest that “Adam Smith provided the best metaphor for this under appreciated feat: the “invisible hand”, guiding resources to their best uses”, confuses the INVISIBLE with the VISIBLE.
All prices are visible and it is their visibility that accounts 100 per cent for their role.  Without visibile prices markets would not work.
So how is that Adam Smith use of the metaphor of “an invisible hand” is supposed to be about VISIBLE prices?
Markets disperse information about their individual but visible prices. Customers search among VISIBLE prices of their potential purchases.
It is the dispersal of market information about visible prices that leads suppliers and customers to make sale/purchase decisions.
Again, what does the ‘invisible hand’ do?
This is a case of matching a metaphor applied for one role to another role made up for what purpose?
Yet for Smith, the metaphor referred to something else in the case to which he applied it. 
Consider the merchant who was motivated privately to avoid foreign trade because he did not trust either the foreign merchants, nor their legal systems, of which he was unsure of their probity if things went wrong. His aversion to foreign trade had nothing to do with prices, which are always VISIBLE!
Therefore the merchant invested his capital domestically. In doing so he simultaneously and unintentionally added his capital to domestic investment and to the domestic economy in wages that he paid to his workmen and other domestic suppliers. Of which purchases all prices were VISIBLE to him. 
His investment was intentional. However, the beneficial consequences for the domestic economy were unintentional. That was Adam Smith’s point. That was the purpose of the metaphor of ‘an invisible hand’; the merchant’s hidden and private motives (we cannot see into the minds of others) had consequences of which he was unaware
Now this is fairly obvious and was meant to be so by Smith’s use of the metaphor of an invisible hand (incidently a metaphor that was widely used in 17th and 18th century Britain; Smith did not ‘coin’ it!).
How do we know? Because none of Smith’s contemporaries - including fellow professors, such as Dugald Stewart who taught Smith’s political economy from the Wealth of Nations at Edinburgh and knew Smith well - never mentioned the ‘invisible hand’ metaphor.  It was even in a paragraph he quoted, of which his lecture did not mention!
Moreover, none of the leading poliical economists who followed him into the 19th century, such as Ricardo, Bastiat, Mill and the others, mentioned his use of the ‘invisible hand ‘metaphor. This silence continued right up to the 1870s and only a trickle of others followed until Paul Samuelson in his Economics textbook in 1948.
The question arises: why not? 
I suspect because the point that Smith made in his singular mention of “an invisible hand’ is actually faily trivial and hardly worth mentioning: a merchant’s intentional act of domestic investment for his own gain, simultaneously adds to the total of domestic revenue and employment, as Smith says it would.
The point was so obvious it was not worth mentioning by the professors who taught political economics for near on 100 years after Smith's death!
The whole is the sum of its parts! 
It does not require mathematics to establish the point - simple arithmetic suffices.
But after Samuelson (another brilliant mathematician) in 1948-2010: Le Deluge!
Even the genius of Kenneth Arrow got caught up in the myths of the invisible hand, as did all the other, albeit lesser worthies, who joined in to link it to the the higher maths of the Welfare theorems, General Equilibrium and the rest. 

But thanks Professor Arrow for what you did for economics.