Friday, October 31, 2008

Adam Smith's Possible Thoughts on Mental Illnesses and Sympathy

A discussion on the radio yesterday about the reaction of work colleagues and (strangely) within the immediate family during which a person who had recovered from a mental illness (without saying what was involved) asserted that other people react to physical illnesses with far greater sympathy and understanding than they do to mental illnesses or disorders.

This struck me as odd in that I thought that any illness would attract sympathy from relatives and even some degree with others.

But Adam Smith explains that even within physical illnesses there are degrees of sympathy. The impartial spectator has sympathy for what it understands. Perhaps this extract from Moral Sentiments gives a flavour of Smith’s thinking, which I have lightly applied to mental illnesses (read the chapter for a fuller explanation).

Pain never calls forth any very lively sympathy unless it is accompanied with danger. We sympathize with the fear, though not with the agony of the sufferer. Fear, however, is a passion derived altogether from the imagination, which represents, with an uncertainty and fluctuation that increases our anxiety, not what we really feel, but what we may hereafter possibly suffer. The gout or the tooth-ach, though exquisitely painful, excite very little sympathy; more dangerous diseases, though accompanied with very little pain, excite the highest.

Some people faint and grow sick at the sight of a chirurgical [surgical] operation, and that bodily pain which is occasioned by tearing the flesh, seems, in them, to excite the most excessive sympathy. We conceive in a much more lively and distinct manner the pain which proceeds from an external cause, than we do that which arises from an internal disorder.”

(TMS I.ii.1.9-10: p 30: Chap. I 'Of the Passions which take their origin from the body', p 27)

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James Hutton's Right to Precedence

The introduction to a remarkable, and welcome, booklet celebrating the opening of the recently beautifully restored (from Lottery funds) 19th-century Rotunda in Scarborough, England, contains these paragraphs which I noticed:

The 1770s to the 1820s was a period of major change and modernisation in Britain, with the Industrial and Agricultural revolutions in full swing. There as a renaissance in scientific thought too, which led to the birth of a new science, geology. Edinburgh lay at the centre of its development, primarily becaude ot was there that James Hutton (1726-1797), who had studied at both Edinburgh and Leiden universities, began challenging the established idea that the Earth was created in 4004 B. C. Hutton owned land in Berwickshire, where he observed the way that rivers eroded their surroundings to transport sediment to the sea. He realised that those sediments would ultimately form solid rock which could be uplifted to form mountains and eroded again. This process implied the passing of immense intervals of time. In 1795 Hutton published his revolutionary ideas in a book called Theory of the Earth.

A few years earlier, in 1797, a young man in south-west England was appointed as a surveyor’s assistant. He was called William Smith (1769-1839), and is now immortalised as the ‘Father of English Geology’
,”

Comment
My interest in James Hutton primarily is in his friendship and collaboration with Adam Smith. While acknowledging the major contributions of William Smith (no relation) to geology (‘father of English geology’), I was taken aback by the implication (‘a few years earlier') that William Smith he had a claim to precedence over James Hutton (widely credited as the ‘father of modern geology’).

James Hutton made the essence of his theory of the Earth in a paper (Concerning the system of the Earth, its duration, and stability), read to the Royal Society of Edinburgh at two meetings in 1785 (the first part was read by his friend, Joseph Black, the physician and chemist, in March and the second part by Hutton in April). His book, The Theory of the Earth, was published later but that does not affect Hutton’s rightful 'claim' to precedence.

Papers read at either of the Royal Societies in Edinburgh or London, or other prestigious bodies like the Linnaean Society, London, are clear statements of proven precedence, as applies from the reading of the papers on natural selection read at the Linnean Society on behalf of both Alfred Russell Wallace and Charles Darwin in July 1858.

My interest in James Hutton and his theories of the Earth is partly because of my current research project on the claims of many Smithian scholars that Adam Smith was motivated by his alleged beliefs in Christianity or some form of Deism, of which I intend to report in due course.

Meantime, search the Lost Legacy archives for my earlier article on James Hutton on 29 May 29 May, 2006: “James Hutton, geologist and Friend of Adam Smith'.

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David Warsh on the Bail Outs

David Warsh, author of Economic Principals, a weekly on-line news commentary on what economists have done and are doing about issues, big or small, and of the most promising specialist research subjects, plus deep background to the interface between economic research and practical, at least in their intentions, policies.

His recent on-line contribution contains this interesting piece about the source of current attempts by governments to revive stagnant banking systems:

What Just Happened?

The emergency continues, a little less desperate than before. A remedy that works – direct government investment in threatened institutions in exchange for equity – seems to have been settled on in most industrial democracies.

A number of mysteries remain. For instance:

How deep has been the opposition between the Federal Reserve Board and the US Treasury Department these last fifteen months? Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson have presented a generally united front. But what goes on behind the scenes? What of their staffs? The sheer opacity of Paulson’s initial plan to buy and hold troubled securities, and the clumsiness with which it was presented, has yet to be explained. What was the process by which it was developed and internally reviewed?

And where did the ultimately successful plan come from, anyway? Ten days ago it appeared that it was UK Prime Minister Gordon Brown’s idea. True enough, Brown boldly and confidently tackled his banking crisis at its root. A cartoon in the Financial Times depicted leaders of other industrial nations following him along in a cheerful dance. There followed the standard paeans to John Maynard Keyes.

But the basic blueprints Brown adopted had been drawn up in Stockholm in late 1992, when central bankers in Sweden, Norway and Finland moved swiftly to rescue their big banks after the collapse of a property bubble. The rescue succeeded, though its aftermath lingered on for four years.

What were the channels through which Swedish influence flowed to London and Washington? This is an especially interesting question because of the experience of the early 1930s, when Gustav Cassel argued without success that overly restrictive American monetary policy was making matters worse, and Gunnar Myrdal devised budgetary policies implemented by the new Social Democratic government in 1933 that spared Sweden the worst of the Great Depression.

In other words, economists of the Stockholm School implemented successful macroeconomic policies several years before John Maynard Keynes published his General Theory of Employment, Interest and Money in 1936, even if they were unable to make the case for what they were doing to the wider world
.”

Comment
Worth some thought, given that the media is searching for the guilty perpetrators of the current problems and for those culpable who were party to the disregard of warnings about their ‘spend-now-borrow-and-tax-later' policies. Come to think of it, the UK government is in effect continuing with the same policies that worsened the outcomes of what they conveniently call a 'global' crisis, an one partly of their own making.

David Warsh wrote the influential, Knowledge and the Wealth of Nations: A Story of Economic Discovery (W W Norton & Co Ltd, 2007). For a news review, see HERE, and for David’s own statement about his book, see HERE.

I claim no affinity in today’s topic to Lost Legacy’s main interests in Adam Smith’s moral philosophy and political economy but I strongly recommend that readers try a sample of Economic Principals (details HERE).

I started reading Economic Principals after I read Warsh’s book Knowledge and the Wealth of Nations, the title of which caught my attention, of course.

While I had qualms about Warsh’s repetition of the Chicago version of Adam Smith (reported on Lost Legacy at the time), he re-ignited my curiosity with his account of Paul Romer’s revival of increasing returns in respect of neoclassical growth theory (I have long since my student days been sceptical of Harrod-Domer's 'kife-edge' and Solow’s exogenous dead-end theories of growth).

From which re-reading, howwer, I was drawn to Allyn Young’s 1928 Economic Journal seminal article, ‘Increasing returns and economic progress’ (it’s online via google) and to the rehabilitation of Adam Smith’s growth theory in the context of the real importance of the division of labour (not the ‘pins’!) (discussed in my Adam Smith: a moral philosopher and his political economy, 2008, Palgrave Macmillian).

What might Economic Principals do for your research and interest in economics?

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Thursday, October 30, 2008

Adam Smith on Experts and Celebrities

An anonymous author of ‘Politics we believe in’ posted in RomeSentinel.com (‘serving Onieida county in the heart of New York state’) HERE, which reads like a manifesto (or, in extremis, to be like a recitation of a creed). It contains this sentence:

We believe Adam Smith’s abiding suspicion of anyone who claims special privilege or expertise.’

Comment
I understand the mood implied in this statement, especially in the context of the rest of declaration, and I can think of several places where Adam Smith expressed thoughts that could contribute to a manifesto writer to summarise them into the quoted sentence. But there is something – I know not what off hand – that is either missing or is left out.

Smith wasn’t too impressed by some examples of men of privilege – ‘vile rulers of mankind’ and he mocked the awe directed at what we describe today as ‘celebrities’, a far wider social phenomenon in the 21st century than was common among the narrower confines of 18th-century aristocratic society.

Smith's mocking tone was relieved by his observations that such popular reverence about the trivia of the daily lives of the ‘rich and powerful’ was a necessary part of the ‘distinction of ranks’ in a stable society (TMS I.iii.2: ‘Of the Origin of Ambition, and the distinction of Ranks’). Of course, in republican America there is little if any similar distinction of ranks based on birth and family lineage than was commoner in the centuries that preceded the foundation of the USA, but i the USA (and elsewhere) there is no mean application of the ‘celebrity’ culture of ‘wealth and fame’ among popular attitudes.

As a scholar, Adam Smith respected ‘expertise’ – his praise of thsoe who demonstrated it is not uncommon for distinguished ‘men of letters’ throughout his books.

Again, at the same time, he was also given to writing withering criticism of those who presumed (like sovereigns, statesmen, legislators in ‘councils and senates’, and those who influenced them, such as scheming ‘merchants and manufacturers’) that they knew better what people wanted, or how they should go about their lawful business, and who attempted to exercise ‘an authority which could safely be trusted … to no single person’ and would ‘be dangerous’ in ‘the hands of a man who had the folly and presumption’ to ‘fancy himself fit to exercise it'. (WN IV.ii.10: p 456)

Adam Smith was not a ideologue. Firm statements he made about many things often had a modifying qualification to go with it. Societies, Smith knew, are complex, not absolutes. And no student of history, of which there is a dearth in our generations, can fail to appreciate the quiet wisdom of Adam Smith as set against slight caricatures of him, even when meant in the best of sense as in the author while ‘serving Onieida county in the heart of New York state’.

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Monday, October 27, 2008

A Step in The Right Direction

David C. Korten writes in Sott.net (‘signs of the times’) (7 October), HERE:

The Betrayal of Adam Smith”

“Smith strongly disliked both governments and corporations. He viewed government primarily as an instrument for extracting taxes to subsidize elites and intervening in the market to protect corporate monopolies. In his words,

"Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.''

Smith never suggested that government should not intervene to set and enforce minimum social, health, worker safety, and environmental standards in the common interest or to protect the poor and nature from the rich. Given that most governments of his day were monarchies, the possibility probably never occurred to him.

Indeed, these same conditions are fundamental to Adam Smith's famous assertion in The Wealth of Nations that the invisible hand of the market translates the pursuit of self-interest into a public benefit. Note that the following is the only mention of the famous invisible hand in the entire 1,000 pages of The Wealth of Nations.

By preferring the support of domestic to that of foreign industry, he [the entrepreneur] 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.

Smith assumed a natural preference on the part of the entrepreneur to invest at home where he could keep a close eye on his holdings. Of course, this was long before jet travel, telephones, fax machines, and the Internet. Because local investment provides local employment and produces local goods for local consumption using local resources, the entrepreneur's natural inclination contributes to the vitality of the local economy. And because the owner and the enterprise are both local they are more readily held to local standards.

Even on pure business logic, Smith firmly opposed the absentee ownership of companies:

The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own .... Negligence and profusion, therefore, must always prevail, more or less in the management of the affairs of such a company?

If corporate libertarians had a serious allegiance to market principles and human rights, they would be calling for policies aimed at achieving the conditions under which markets function in a democratic fashion in the public interest. They would be calling for an end to corporate welfare, the breakup of corporate monopolies, the equitable distribution of property ownership, the internalization of social and environmental costs, local ownership, a living wage for working people, rooted capital, and a progressive tax system.

Corporate libertarianism is not about creating the conditions that market theory argues will optimize the public interest, because its real concern is with private, not public, interests
.”

Comment
David C. Korten is almost on the right track, but his quotations deprived of their context leave them open to enough misinterpretation to weaken some part of his conclusions.

extracting taxes to subsidize elites’

Hardly the whole story. The use of taxation to ‘maintain the dignity of the sovereign’ was a small part of the purpose of taxation, just as the splendid buildings in Washington DC are part of maintaining the dignity of the United States. Of course, splendid palaces can become burdensome and their maintenance and repair can be objectionable amidst a country’s mass poverty (think Iraq under Hussein).

But the main purposes of taxation were to fund the first duty of the sovereign, the defence of the citizens from invasions, defence being more ‘important than opulence’; the maintenance of justice, without which society ‘would crumble to atoms’, the erection and maintenance of public works that facilitate commerce; and public institutions such as education of all ranks of the people through a system of’ little schools’ in every parish on the Scottish model. Smith's reference to public support for health measures was confined to palliative care for victims of ‘loathsome diseases’ like leprosy and supported specific interventions in certain fields – banking being one – where the conduct of individuals threatened the entire society.

He never saw a role of government as having an appropriate role in “intervening in the market to protect corporate monopolies”. The exact reverse, in fact; Book IV of Wealth Of Nations is a detailed critique of misguided policies imposed by legislators to pass laws protecting monopolies, forming Guilds, pursuing trade policies of protectionism and misguided mercantile political economy.

Civil government was originally established “for the defense of the rich against the poor, or of those who have some property against those who have none at all”.

But this was not its permanent feature. Without families who set up the first experiments in herding animals and farming the land having security in their property, there would have been no movements from the hunter-gatherer mode of subsistence. That was Adam Smith’s point in the quoted passage, from his Lectures in Jurisprudence delivered in Glasgow University in 1762.

Anarchists, libertarians and Marxists who pounce on these remarks in justification cannot create an alternative history of how a section of the dispersed human race moved from hunter-gathering to commerce without the establishment of property 8-11,000 years ago.

Smith believed that the surest way to “protect the poor and nature from the rich” (accepting for the moment that this is a way to express it) was by the institutions of Natural Liberty and by the poor becoming richer from their participation in the world of commerce. As opulence spread across all ranks of society and liberty was assured, the poor would be major beneficiaries. He did not speculate as to what might happen if those conditions were realised.

David C. Korten’s recognition that the invisible hand appears only once in Wealth Of Nations (Book IV in fact) is welcome but he presents the context as the ‘famous assertion in The Wealth of Nations that the invisible hand of the market translates the pursuit of self-interest into a public benefit’.

Yet Smith never presented the ‘invisible hand’, even in the single instance where he cites the metaphor, as anything to do with ‘the market’ (all covered in Books I and II of Wealth Of Nations) nor as a general ‘law’ that it ‘translates the pursuit of self-interest into a public benefit’. That least is a fiction added to modern economics from the 1950s, completely transforming economic theory into a branch of religion.

Smith firmly opposed the absentee ownership of companies”.

Not quite. His strictures against ‘companies’ were directed at the experience of the Royal Chartered trading companies, in particular the East India Company, the directors of which were in London and officers of the Company, and the underling managers, were in India, a year’s sailing away (two years there and back) and who operated in an awful manner that disgraced them and those nominally in control. It was difficult enough to manage the Royal Chartered British Colonies in North America – only weeks away in sailing time – let along a group of grasping buccaneers out of sight, out of reach, and out of any sense of common decency and humanity “long before jet travel, telephones, fax machines, and the Internet.”

As for ‘corporate libertarians’, I have much sympathy for David Korten’s description of them, bearing in mind that modern economies are a long way from the commercial economies that Adam Smith knew and wrote about.

One thing has not changed though – human nature and its corruptibility – and an affliction shared by all sides of the argument from Left to Right.

Smith understood this, which is why he never predicted the future, nor argued that if legislators and those who influenced them read Wealth Of Nations and Moral Sentiments and adopted his analyses and associated policies the world would change into a utopia.

He was no ideologue, nor was he an idealist. He was a philosopher and he saw his life’s work as ‘doing nothing and observing everything’. As it happens, those he wrote for in the 18th century did not take heed; his legacy was emasculated in the 19th century and in the 20th century it was turned on its head, with little change expected in the 21st.

Sunday, October 26, 2008

A Reader Comments and I Concur

Michael Webster, reader of Lost Legacy, introduced the thinking behind the modern economists’ ‘theory of an invisible hand’, which they incorrectly call Adam Smith’s theory (see his comment on Friday’s post “The Invisible Hand Gang” below).

I have stated these origins of the modern ‘invisible hand’ notion many times on Lost Legacy and therefore I agree with Michael Webster. I read John McMillan’s Reinventing the Bazaar’ a year or so ago and found: a) it is an exciting and readable voyage through the world of markets - all those market minded commentators keeping their heads down at present should read it; and b) McMillan’s account of the invisible hand’s transformation from commonplace literary metaphor in mid-18th century into its mythical 20th-century status is accurate, though now well beyond its originators intentions.

Arrow and Debreu’s works are of theoretical interest only, but of little consequence for much else. Diminishing returns is no longer in pole position; increasing returns has moved up the starting order; exogenous growth theory left unexplained major components of growth; endogenous growth theory brings disequilibrium into the heart of the old equations, and, of course, the enormous change in the role of governments since the late 19th century and their expenditures as a proportion of GDP has added new dimensions inside market economies, not least from the role of politicians, or as Smith might have put it, from legislators and those who influence them.

True, Smith wrote (WN IV.ii.9: p 456) in the case of some merchants (not all!), that ‘only’ for their ‘own security’ – a.k.a, risk avoidance – they would prefer to invest their capital locally, as many did (increasing the domestic investment), rather than risk the greater uncertainties of sending it abroad, especially across the North Atlantic, despite which many individuals continued to trade abroad (hence reducing the amount of capital that could have been invested locally). The net sum added/detracted from domestic investment, and the metaphor was intended for those 18th-century readers who could not follow Smith’s argument, despite which too many seem unable to udnerstand it today after two hunred years plus of advances in economics.

From this sole example, which applies ‘in many other cases’ (Smith doesn’t state if by ‘many’ he meant a large number or a significant proportion), yet the ‘worshippers' of the metaphor of the invisible hand, i.e., what ‘most classical market economists think’, extend it to all cases.

Michael Webster asserts:

Whether or not Adam Smith had the insight about prices and an invisible hand is going to be largely irrelevant to them.”

They may believe, of course, what they wish, but the consequences of purveying an untruth that corrupts what Adam Smith was teaching about the role of markets is unhelpful when policy makers discuss markets. We may also note here that Adam Smith (at least not the one born in Kirkcaldy in 1723) did not bless markets with quasi-religious ‘pusillanimous superstition’ (there is a large literature by senior economists purporting to find godly apparitions in competitive markets).

Those who inject ‘invisible hands’ (even ‘feet’ too!) over-egg their ‘theories’ of markets as ‘promoting ends’ (social benefits) whatever the motivations, intentions, and behaviours of market makers, which we know to be false by the numerous of cases of fraud, pollution, monopolies, cartels, dangerous products and practices that regularly surface and, as now, occasionally cause massive crises of confidence.

Adam Smith was never a proponent of laissez-faire. His support for Natural Liberty transcended commercial societies – natural law theory applied to all societies as a standard of conduct – but he gave instances in Wealth Of Nations for example where interventions were justified to restrain ‘injudicious’ banking behaviours that threatened greater disasters socially:

To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.”

(WN II.ii.94: p 324: read Book II, chapter 2, of Wealth Of Nations, which is instructive for resisting extremist rants about market infallibilities, such as quasi-religious beliefs in invisible hands.)

Adam Smith was never an ideologue about markets, nor about human behaviour (for evidence of the latter see his Moral Sentiments; see also my recent Adam Smith: a moral philosopher and his political economy, 2008, Palgrave Macmillan).

Invisible hand myths are propaganda, not science. They undermine the credibility of competitive markets and give succour to the enemies of markets, who call for ever tighter state-imposed regulations and the triumph of politicians over myriads of market decisions, despite Adam Smith’s clear warning:

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.” (WN IV.ii.10: p 456)

The problem is that the mythical theory of the invisible hand, which Smith never countenanced as part of his theory of markets (Book I and II of Wealth Of Nations), discredits his more important warnings about ‘statesmen’ legislating (i.e., governments, planning commissions, and such like) to assume an authority for which they are incapable of exercising, all because ‘modern economists’ have lauded the invisible hand for purposes which Smith never endorsed. Unwittingly, they encourage those who would ram anti-market propaganda down their throats and silence the intellectual and practical case for markets.

The circled wagons of market economies are now under legislative pressure (election campaigns and failing governments in the US and UK) from a revived Left, the forces of which lurk restlessly just beyond the light of our campfires. They have been given a new breath of life by incompetence, recklessness, and self-interested selfishness (there's nothing ‘enlightened’ about them at all) by those who were complicit in the myth of the invisible hand and those who fell asleep when supposed to be on guard duty.

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Saturday, October 25, 2008

The End of Invisible Hands?

Hartmut Fischer and Bruce Wyndick (professors in the department of economics at the University of San Francisco) write in the San Francisco Chronicle, 24 October, with contribution from with their department colleagues, professors Jacques Artus, Michael Lehmann, John Veitch and Sunny Wong, HERE:

“Test your economic meltdown IQ”

“Greetings Economics 101 class. As you are well aware, we are living in perilous economic times. Adam Smith's invisible hand, which we studied with admiration in the first week of class, appears to have annihilated a significant portion of our economy. The crisis has entirely reshaped the presidential campaign just days before election day
.”

Comment
Follow the link for the answers and then the questions in their article, but my interest is not in the intellectual ‘fall out’ from the financial crisis. It is in the seeming ‘confession’ that the professorial instructors teach (at least until the second week of term) the mythical theory of the invisible hand of the market, gratuitously attributed to Adam Smith, the moral philosopher, born in Kirkcaldy, Fife ( 1723-1790).

This attribution likely would offend many authors who used the invisible hand metaphor before Adam Smith (some of them were contemporaries of Adam Smith), because we know how possessive academics and literary figures are about their prior use of an idea, a phrase, or a metaphor.

Among these authors who have legitimate claims for the metaphor to be associated with their names we have:

Homer (Iliad, 720 BC); ‘And from behind Zeus thrust him [Hector] on with exceeding mighty hand’;

Horace, Fulminantis manus Jovis (‘The mighty hand of thundering Jove’);

Ovid of Caeneus at Troy: ‘twisted and plied his invisible hand,inflicting wound within wound’;

Lactantius (De divinio praemio, c.250-325): early use of ‘invisibilis’;

Augustine, 354-430AD, “God’s ‘hand’ is his power, which moves visible things by invisible means’;

Shakespeare, (1605) ‘Thy Bloody and Invisible Hand’;

Glanvill, J. 1661. ‘nature work[ing] by an invisible hand in all things’; ‘invisible intellectual agents’;

Voltaire (1694-1778) in (1718): “Tremble, unfortunate King, an invisible hand suspends above your head’; and ‘an invisible hand pushed away my presents’;

Daniel Defoe, ‘A sudden Blow from an almost invisible Hand, blasted all my Happiness’, in Moll Flanders (1722); ‘it has all been brought to pass by an invisible hand’ (Colonel Jack, 1723);

Nicolas Lenglet Dufesnoy (1735) an “invisible hand” has sole power over “what happens under our eyes”;

Charles Rollin (1661-1741), whom Pierre Force describes as ‘very well known in English and Scottish Universities’, said of the military successes of Israeli Kings “the rapidity of their consequences ought to have enabled them to discern the invisible hand which conducted them”;

William Leechman (1755): ‘the silent and unseen hand of an all wise Providence which over-rules all the events all the events of human life, and all the resolutions of the human will’;

Charles Bonnet (whom Smith befriended in Geneva in 1765) wrote of the economy of the animal: “It is led towards its end by an invisible hand”;

Jean-Baptiste Robinet (1761) (a translator of Hume) refers to fresh water as “those basins of mineral water, prepared by an invisible hand”;

Walpole, H. 1764. ‘the door was clapped-to with violence by an invisible hand’

Reeve, C. (1778) ‘Presently after, he thought he was hurried away by an invisible hand, and led into a wild heath’. ”

[The sources of these references are listed in my paper: “Adam Smith and the Invisible Hand: from metaphor to myth”, presented at the History of Economic Thought, 40th Anniversary Conference, September, 2008: available for download; send for an electronic copy from: gavin AT negwebDot com)]

The professors from the University of California apparently inducted their innocent students into the myth that the metaphor had something to do with economics as taught by Adam Smith. So much were they enthused by the miraculous powers of the metaphor that they “studied [it] with admiration in the first week of class”.

Unfortunately, events apparently intruded because the mystical invisible hand now “appears to have annihilated a significant portion of our economy”, which is an amazing accomplishment for an entity that does not exist and never has existed, and particularly not in Adam Smith’s political economy.

That it exists, or not as the case may be now, was an invention of some modern economists from the mid-1950s who invented mathematical models to prove the existence of a theoretical general equilibrium in a mythical economy (Debreu and Arrow - for which they won their Nobel Prizes).

This myth passed through economics graduates and tutors like an infection, and was spread by politically motivated economists to politicians of a rightwards disposition until it quickly became a mantra for all kinds of ideological propositions that seemed to exculpate corporations and governments (two social structures that were never as non-aligned as its proponents implied) from responsibility for their conduct - whatever they did had social benefits in extreme versions, though clearly a counter-factual if they looked outside their windows.

That this was claimed to be done in the name of Adam Smith’s life’s work only had credibility because neither the originators of the myth nor its proponents actually read or were familiar with Adam Smith’s Works, which actually had no illusions about how ‘merchants and manufacturers’, even in the early stages of commercial economies, would behave when they aligned their interests with legislators and the people who influenced them.

This was true in Adam Smith’s lifetime – indeed, Wealth Of Nations includes a stern polemic against the ‘mercantile political economy’ which dominated British state-managed economic relationships – and it has been true ever since.

Since the western economies grew as they did to produce opulence on a scale never reached in history which, contrary to Karl Marx raised mass living standards to unprecedented levels, they have continued to practice much of the mercantile political economy criticised by the Adam Smith born in Kirkcaldy, though sadly lacking in the mythical world of the Adam Smith invented by economists in the environs of 59th Street, Chicago.

Clearly, the six good professors of the department of economics at the University of California, perhaps unwittingly, have been complicit in this deception. They can check this out by turning to the opening two books of Wealth Of Nations, which are about how commercial economies in Smith’s day operated without him making a single mention of ‘an invisible hand’. Strange!

They can also turn to Book IV, which contains the only mention of ‘an invisible hand’ in Wealth Of Nations (on page 456 of the Oxford University Press ‘Glasgow Edition’), which is also strange because Book IV.ii. is about the risk avoidance of some, but not all, merchants when choosing between sending capital abroad or investing it locally.

This ought to cause them to ponder how this was made into a convenient ‘theory of markets’ by overly zealous scholars seeking, dare I say, a ‘quantum of solace’ for their general equilibrium abstractions which are well short of confirming that such entities existed in the real world – a bit like the theory of the ‘ether’ to explain what ancient physicists did not yet understand’. And once they understood the physics they abandoned the theory of the ether.

I hope the same response will follow once our six economists understand how Adam Smith from Kirkcaldy understood how markets work - without invisible hands.

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Friday, October 24, 2008

The Invisible Hand Gang

Richard Murphy writes on the Blog, Tax research UK, 24 October, ">HERE:

“Farewell Adam Smith: welcome the new economy"

As Greenspan said:

'I made a mistake in presuming that the self-interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders.'

So farewell to the mythical ‘invisible hand’ of Adam Smith.”

[I was just about to compose my rebuttal as a rebuttal in Lost Legacy when I noted somebody had placed a comment already and I paused to read it. Here it is, in full]:

And a reader of Tax Research UK comments on its Blog:

1. Alex Cobham wrote:

Not that you do this here, Richard, but Smith has so often been traduced that it’s worth dropping in a few original quotes to illustrate how distorted the a view of him the ‘invisible hand’ gang have promoted.

1. On unregulated business (referring to local rather than international, but clearly in conflict with the popular interpretation of the invisible hand line):

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices.”

2. the ‘invisible hand’…
… gets one mention only in The Wealth of Nations, and in a very specific circumstance around international trade - see e.g. Prof Gavin Kennedy on this here:
http://adamsmithslostlegacy.com/2008/04/adam-smiths-use-of-invisible-hand.html

3. On banking regulation
“To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law, not to infringe, but to support.

“Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.”

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

You could go on. I haven’t spent nearly as much time as I might like reading Smith, but even without doing that it’s clear that he was a varied and intelligent thinker and writer - not a narrow-minded ideologue.

He didn’t need to be right every time - who is? - to be a towering figure in founding economics. And he certainly doesn’t deserve the distortion of his work by the ‘invisible hand’ gang - or the abuse he sometimes gets from others who believe that distortion.

Comment
Well done, Alex Cobham. Worthy Winner of October’s Lost Legacy prize. I like the 'invisible hand gang'

Who said Lost Legacy is a wasted fight?

There are small signs that the fight for Adam Smith’s Lost Legacy has had some effect, judging from snippets in some Blogs.

I am so pleased, but the struggle continues…

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Adam Smith on What Kept Industry in Motion

Braintree’ posts on the Blog, ‘Dow WTF?!’ 23 october, HERE:

Adam Smith, Merit and Demerit

“In Wealth of the Nations, Smith also confessed that the success of capitalism depended on the propagation of the myth of human equality, noting that the myth is a necessary “deception which arouses and keeps in continual motion the industry of mankind.”


Comment

“the success of capitalism depended on the propagation of the myth of human equality”

That is news to me.

I suspect Braintree has made it up, or to be charitable, mixed up. Tut, tut!

The evidence for my assertion (I do not mean to be gratuitously rude) is the rest of Braintree’s sentence, which he alleges is a quote from Wealth Of Nations:

noting that the myth is a necessary “deception which arouses and keeps in continual motion the industry of mankind.”

I recognised this immediately as in fact a quotation from chapter IV of Moral Sentiments (TMS IV.1.9: p 183) and it has nothing at all to do with equality!

Smith outlines his theory of utility and beauty and notes how people are often more pleased with an object of beauty (widely conceived) than they are with its utility.

He gives examples of a room with chairs in it that are disarranged, and their owner, ‘angry with his servant’, puts them into the appropriate order, even though he could ‘have set himself down upon one of them’ where they were, instead of placing them neatly against the wall. From this Smith concludes that it is not the ‘conveniency’ that is important to this man but ‘their arrangements’, which bestows upon his chairs their ‘propriety and beauty’.

Likewise, a man with a watch that happens to run two minutes slow, so he ‘sells it for a couple guineas’ and ‘purchases another at fifty, which will not lose above a minute in a fortnight’. What interests the man with a watch is not its timekeeping per se (remember, time the 18th century was less of a burning issue than it has become today), but the ‘perfection of the machine which serves to attain it.’ Leading Smith to ask: ‘How many people ruin themselves by laying out money on trinkets of frivolous utility’ (TMS IV.1.6: p 180).

After the parable of the ‘poor man’s son, whom heaven in its anger has visited with ambition’ he concludes:

And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants.” (TMS IV.1.10: p 181).

It is the pursuit of trinkets and frivolities that keeps inudstry in motion, not the myth of equality. 'Keeping up with the Joneses' is about competing to be better than others, not about equality.

Now, this has nothing to with Adam Smith preaching ‘equality’, an absurd suggestion with the contrary state of others, visible to him and all who stepped out of their houses and passed by the multitudes of people around them from all classes and levels of opulence and poverty (poor people in Edinburgh and Glasgow tended to walk a lot mroe than today).

Braintree claims that Adam Smith taught that “the success of capitalism depended on the propagation of the myth of human equality”. He didn’t.

And anyway ‘capitalism’ as a word and phenomenon were unknown to Adam Smith, who died in 1790 (the word being invested in 1854 by Thackeray, the novelist, in his book, The Newcomes, and the phenomenon something that evolved in the 19th century.

Smith saw commerce and industry as generating employment for poor families and a means to spread opulence down to the poorer section of the community, which was the larger proportion of society. The rich became better off, but so did the poor who needed a share of opulence the most. His views were no myth, as anybody reading Moral Sentiments and Wealth Of Nations would realise.

I won’t bother going to examine Braintree’s assertions about Adam Smith’s views on ‘merit’ and ‘demerit’. His misrepresentations above are enough for one day.

Get On Your Bikes

Dom Sansom (Suva) writes to the editor of the Soloman Star, the island’s leading Daily Newspaper, 24 October, HERE:

“DEAR EDITOR – If you are worried about the global economic downturn how it may affect us, the father of economics, Adam Smith, (1723-1790) and author of The Wealth of Nations, theorised that the behaviour of rational people is governed by enlightened self-interest.

It’s hard to think of a better example of enlightened self-interest than giving up the car and going by bicycle.

Do that and you’re guaranteed to save a four-figure sum (self interest part) every year while dramatically reducing your carbon footprint and helping the environment (enlightened part) at the same time.

If divorcing the car is a step too far, cycling to work just three days a week could easily save you hundreds of dollars a year, while contributing to your fitness and well-being.”

Comment
But why do readers buy cars in the first place, all imported into the Soloman Islands, along with bicycles too?

Yes, because people can afford them. Adam Smith noted that people had ‘a coach and four’ because they were rich; they weren’t rich because they had a coach and four; and the same with car ownership and bicycle use. They will do what they do because they can or can’t do it (some people who can afford to drive cannot ride a bicycle).

Dom Sansom’s letter, however, is topical; the Island’s Prime Minister, Dr Derek Sikua, is in court charged with driving under the influence of liquor. Perhaps the good Dr will lead the way by taking up his bicycle and save money, reduce his carbon footprint, and save the environment too. More likely, the taxpayer will provide him with a personal driver.

But Dom Sansom is to be congratulated by applying modern economics (though not quite Smithian) to a problem and, with a single policy, addressing several objectives too.

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Adam Smith and Keynes

Susan Lee writes on a ‘A Keynsian Halloween’ in Forbes.com, 24 October HERE:

Keynes' central (and disputable) insight was that markets were not self-correcting during economic downturns. He rejected Adam Smith's idea that businesses, when they found they were holding too much inventory, would drop their prices. Lower prices would then entice consumers back into the market and the economy would perk up again.

Instead, Keynes argued that downturns could become protracted. When faced with too much inventory, businesses would cut back production and lay off workers. Since the unemployed wouldn't have money to spend, the economy could stagnate at low levels of production and employment
.”

Comment
A bit unfair to Adam Smith, who was not in a position to speak of what all businesses would do, as might be inferred from what we know of a modern market economy. Dearth and feasts in his day came from agriculture and not the relatively small commercial sector, itself separated into local impacts only.
Notions of ‘managing an economy’ were two centuries later.

Even with this qualification, Susan Lee’s contrast between Smith and Keynes (surely ‘Keynesian’ and not ‘Keynsian’?) is not quite right. Smith spoke of what a seller would do in a local market – too many apples on the barrow would lead to a fall in price per apple.

Even if that local example of a seller’s reaction to a lack of buyers was extended to the entire country, it would still lead to a drop in prices. To suggest it wouldn’t is to deny experience.

Whether this would revive the economy or not is not an issue addressed by Adam Smith, though it might be addressed by post-Smithian economists who, across the board, claimed Smith authored their versions of economics popular from Mill, Marshall, and the neo-classicals, when clearly he didn’t, as a reading of Wealth Of Nations shows.

When Smith discussed ‘the natural and market Price of Commodies’ (WN.I.vii.pp 72-81), he followed his argument through as market prices fell. Landlords would withdraw their land as rent income fell; as wage income fell, labourers would look for other work; and employers would withdraw from that line of activity as prfots fell (WN I.vii.13: pp 74-5), and eventually market prices would adjust to their ‘natural rate’.

Smith discusses at length the effects on price of changes in ‘effectual demand’; he does not discuss general slumps in demand across all commodities; but for what he does discuss, his ideas are broadly correct. By the early 20th century, Keynes moved the discussion well beyond the simple effectual local demand ideas of Smith.

Indeed, late 19th century economists generalized Smith’s arguments pertaining to local market conditions into strong assertions about ‘laissez-faire’ as if they were Smith’s views (he never mentioned laissez-faire) and adopted the policy of leaving markets to solve the trade cycle, as if this was Smith’s view. The epigones were responsible for this turn of events.

Keynes, brought up, so to speak, with this so-called Smithian package, struck out in a different direction (‘The End of Laissez-faire’, 1926) and went on in the General Theory (1936) to prescribe solutions as he saw them for a stricken economy and not just a reaction by a market-stall holder of too many apples left over near closing time in a street market.

Hence, Susan Lee ascribes to Smith a view that he did not articulate about a condition he did not face and credits to Keynes a criticism he had no business making in regard to Adam Smith, but he did have grounds for his criticism if directed at contemporary 20th century economists. She should have written:

He rejected the contemporary idea popular among his contemproaries that businesses, when they found they were holding too much inventory, would drop their prices.’

As in so many other areas of economic commentary by columnists and professional economists, including Nobel Prize winners, they attack an innocent man for the doctrinal sins of his successors.

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Thursday, October 23, 2008

Is Twice in a Week a Trend?

It’s nice to be quoted on other Blogs and this is happening more frequently lately two events are not yet a trend, but it's better than once a year!

Ben Cohen (the editor of www.thedailybanter.com) posts on Huffington Post (23 October) HERE: a reference to Lost legacy in an article “Andrew Sullivan Hasn't Read Adam Smith

This quotes from my piece which takes note of my piece on Lost Legacy , “Speak Softly About Big Ideas”.

More Comment on Daily Kos Quotes

Part 2: ‘wipeltz’ writes in Daily Kos, (‘the state of the nation’) 22 October, HERE:

"Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniencies, and amusements of human life. But after the division of labour has once thoroughly taken place, it is but a very small part of these with which a man's own labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase."

Comment
This is part of Adam Smith’s explanations for the long-term and general effects of the division of labour, which went a long way beyond the famous pin factory example showing the increase in productivity from the way process work may be separated among several labourers.

The substantive point of Adam Smith’s focus on the division of labour was both historical – it raised the living standards of the meanest paid labourer well above the living standards of the hunter-gatherer and also began the long road to extending the life spans once the ‘Mathusian trap’ was breached from the 18th century onwards.

Totally independent hunter-gatherers could meet their basic needs in a few hours work per day, but while the ‘propensity to truck, barter, and exchange' remained relatively undeveloped – they had little surplus output to exchange among their small bands – nobody produced a surplus of items that they could exchange, except only occasionally, for the small surplus output of others, until the leap from personal independence to dependence took place. With shepherding, farming, and commerce, that leap was accomplished.

For their incomes from specialized work, labourers earn the means to exchange multiple selected items produced by others. Yanomamö tribes on the Amazon have access to scores of items; New Yorker tribes on the Hudson have access to billions them. How many they can access at any one time depends on their relative incomes, which is Smith’s point. The rich can acquire more.

"This disposition to admire, and almost to worship, the rich and powerful, and to despise, or at least neglect persons of poor and mean conditions, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments." [Moral Sentiments, I.iii.3.1: p 61]

Comment
This comes from the opening chapters of Moral Sentiments, 'Of Propriety', and they are well worth reading.

Nowadays, the mob worships celebrity, some of whom have dubious merits for which they are celebrated. In Smith’s day they were ‘rich and famous’ and were found in monarchies and governments all over Europe and, er, the British colonies.

Smith has much to say about them and about the mob who worshipped them or gained vicarious pleasure from learning of their extravagant foibles, triumphs and tragedies. Where would literature be without the classic tales of the phenomena of the rich and powerful (and before anybody gets smug, cast your mind back to the Camelot Kennedy family – no relation)?

Here is another paragraph along the same lines:

“Of such mighty importance does it appear to be, in the imaginations of men, to stand in that situation which sets them most in the view of general sympathy and attention. And thus, place, that great object which divides the wives of aldermen, is the end of half the labours of human life; and is the cause of all the tumult and bustle, all the rapine and injustice, which avarice and ambition have introduced into this world.” [TMS I.iii.2.7: p 57)

How true! How relevant! Read Adam Smith for yourself; don’t rely on a few quotes, especially those tossed about to stiffen somebody’s otherwise weak and partial arguments.

Labels: ,

Some Comments on Quotations from Adam Smith

‘wipeltz’ writes in Daily Kos, (‘the state of the nation’) 22 October, HERE:

"Adam Smith, socialist? The search for the Historical Adam

Very possibly, some of the original text has been corrupted during its various editions . Did the Historical Adam really prefigure the class analysis that showed up later in Karl's Manifesto to the Exploited?

Most notably and possibly inserted much later, under the influence of Karl's Manifesto:

"Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all."


Comment
Adam Smith taught at Glasgow University from 1751-64 and some students in his class took detailed notes of his lectures, which were found in two versions in 1895 and 1958 in two separate places (Oxford and Inverness), and were published as his Lectures in Jurisprudence (Glasgow Edition, OUP) in 1978).

Many parts of the lectures were taken verbatim into Wealth Of Nations. He accounts for the origins of post-hunting societies such as shepherding andifarming, both of which require property rights if they are to become established. This happened in parts of and the Near East (from 11,000 years ago) and Western Europe (from 8,000 – 6,000 years ago).

Those parts of the world that did not evolve property (most of North and South America, Africa, South Asia and Australia, but not North Africa, Arabia, India, and China) remained hunter-gatherer societies until the 20th century, with a few remaining isolated instances today.

With property came civil government to protect it against the poor, hence Smith’s statements. He could have added, because it certainly became a feature of history, protection against jealous rich families who eyed the property of rich neighbours. These were the origins of law and justice.

"All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind." [WN III.iv.10: p 418]

Comment
This is a part of Smith’s account of the withering away of the power of the feudal lords, and how their vileness was the author of their downfall.

It is perhaps best understood by quoting the whole paragraph (better still read the chapter):

But what all the violence of the feudal institutions could never have effected, the silent and insensible operation of foreign commerce and manufactures gradually brought about. These gradually furnished the great proprietors with something for which they could exchange the whole surplus produce of their lands, and which they could consume themselves without sharing it either with tenants or retainers. All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons. For a pair of diamond buckles, perhaps, or for something as frivolous and useless, they exchanged the maintenance, or what is the same thing, the price of the maintenance of a thousand men for a year, and with it the whole weight and authority which it could give them. The buckles, however, were to be all their own, and no other human creature was to have any share of them; whereas in the more ancient method of expence they must have shared with at least a thousand people. With the judges that were to determine the preference this difference was perfectly decisive; and thus, for the gratification of the most childish, the meanest, and the most sordid of all vanities, they gradually bartered their whole power and authority.” [WN III.iv.10P 418]

Adam Smith Was Not a Socialist Nor a Neo-Con


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One of the more pleasing consequences of the current financial crisis and its recessionary tendencies is the greater interest in the works of Adam Smith, though, sadly, mainly to mock the false image of his ideas created by neoclassical economists from the 1950s, but also happily, in places, to take an interest in what he actually wrote.

One such example of somebody expressing curiosity about Adam Smith’s ideas is that of ‘wipeltz’, for example, who writes in Daily Kos, (‘the state of the nation’) 22 October, HERE:

wipeltz’ asks: ‘Adam Smith, socialist? The search for the Historical Adam’, followed by several quotations from Wealth Of Nations and one from Moral Sentiments, which he/she finds curious in view of Adam Smith’s reputation in the media and academe for his being installed on a pedestal by various figures, including Nobel Prize winners as an icon of laissez-faire, small government, and the ubiquitous ‘invisible hand’ that allegedly asserts that when anybody pursues their self interest, usually elided into ‘greed’ and selfishness’, by some mystical process they end up benefiting society as well as themselves.

Readers of Lost Legacy will recognize that ultra-libertarian ideas about Adam Smith and his political economy are often misleading.

Here is the comment I sent to Daily Kos in response to the questions by ‘wipeltz’:

First the good news for readers of KOS: none of the passages quoted by ‘wipeltz’ from Wealth Of Nations and Moral Sentiments were ‘possibly inserted much later, under the influence of [Marx's] Manifesto’, itself a very strange idea.

While the majority of economists have not read Wealth Of Nations, a small minority of scholars in each generation have read Smith’s Works closely and none have reported to my knowledge any such corruptions. We can state categorically that the worry that ‘Very possibly, some of the original text has been corrupted during its various editions’ is unfounded.

The Wealth Of Nations, published in 1776 and the five editions of it (1776, 1778, 1784, 1786, 1789) edited by Adam Smith before he died in 1790, are intact as he wrote them. The definitive six-volume edition of Adam Smith’s Works and Correspondence is known as the ‘Glasgow Edition’ and was published by Oxford University Press throughout 1976-83.

A popular priced, ‘exact photographic reproduction’ of the Oxford University Press volumes is published by Liberty Fund, Indiana. [I can assure any Kos readers who may suspect its integrity that no changes or omissions have been made in the Liberty Fund reprints.] An authoritative American edition of Wealth Of Nations was edited by Edwin Canaan in 1904 and reprinted in 1937 by Random House, and it is still widely used by scholars. My copy is kept on my desk for reading Canaan’s editorial footnotes.

Perhaps, one brief comment: while the actual text written by Adam Smith has not been altered, his ideas have largely been emasculated from their original meanings by modern economists from the mid-50s onwards. In particular in respect of ideas Adam Smith never advanced, such as laissez-faire (he never mentioned the words), a so-called ‘invisible hand’ explanation of how markets worked (only mentioned once in Wealth Of Nations and on a different topic), ‘small’ government (Smith had a relatively large public expenditure agenda), and ‘non-intervention’ in markets (Smith made several suggestions for intervention, including in banking).

I shall discuss the various quotations offered by ‘wipeltz’ in Daily Kos in a later post today.

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Speak Softly About Big Ideas

Andrew Sullivan (‘The Daily Dish’) writes in The Atlantic, 22 Oct, HERE:

Adam Smith On Spreading The Wealth”

“The intellectual father of market capitalism:

‘The necessaries of life occasion the great expense of the poor. . . . The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. . . . It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.’

Notice how he puts it: "not very unreasonable."

In my view, still lamentable. But also not a rigid rule, since real conservatives do not believe in rigid rules. My view - again - is that the obvious problems of the US economy right now are not the same as they were in the 1970s. I would prefer a candidate who would cut entitlements and defense to a candidate who raised taxes on the successful
.”

Comment
They are not the same as they were in the 1770s either.

Taxation in Britain at the time that Adam Smith was writing and editing Wealth Of Nations did not include income taxes (that came later in 1798 - Smith died in 1790), and import taxes, tariffs and excise duties contributed a major source of government revenue.

In the item quoted by Andrew Sullivan (incidentally from WN V.ii.e.6: p 842; ‘Taxes on the rent of homes’) Smith was addressing readers, among whom were legislators and those who influenced them, who were likely to have to pay an increase in rent taxes.

Persuading any group of tax payers (or non-taxpayers) of the merits of a particular tax payment is hard at the best of times and as Adam Smith was neither a campaigning politician, nor a man of system, ‘wise in his own conceit’ (Moral Sentiments, pp 233-4), he states his proposition in modest language with a view to appealing to the widest constituency, for which the tone “It is not very unreasonable” is the appropriate language.

If Andrew Sullivan were to use similar language when he tries to persuade people with whom he deals, I dare say he might find himself reaching many more willing readers (or investors) than, perhaps, he manages today with a blunter tone of voice.

Labels:

Tuesday, October 21, 2008

A Snigger on Me...I'll Loosen Up...

Hume’s Ghost’in his Blog, The Daily Doubter ("Doubt is not a pleasant condition, but certainty is absurd." – Voltaire’) writes (19 October) HERE:

Communist Adam Smith on spreading the wealth'

"Servants, labourers, and workmen of different kinds, make up the far greater part of every political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labor as to be themselves tolerably well fed, cloathed and lodged." - Adam Smith, The Wealth of Nations Bk. 1, Ch.8


[More precisely it's: WN I.viii.36: p 96]

Comment
To which I posted a comment, taking it seriously:

“I am surprised that you equate Adam Smith’s concern for the relative position of labouring people in society and their families with a ‘communist’ view.

Smith believed that commercial economies, if allowed to grow by the use of sufficient of the revenues from business for investment in productive enterprises (those that sold their output and recovered their costs, plus a profit), instead of spending the bulk of their revenues on non-productive activities – prodigality in consumption, wasted government expenditure on wars for trivial ends such as dynastic successions of princes, colonies, and ‘jealousy of trade’- would enable employment to expand year-on-year and thereby permit labourers to participate in the trend to opulence.

Now his language may have been antiquated by today’s standards and as there was no welfare state or even a call for the redistribution of income (except from fairly active charities), nevertheless this view formed an important part of his Wealth Of Nations.

Read the quotation in context and sample commonly held views to the contrary of Smith’s about keeping workers on low wages to induce them to work longer hours, and so on.

Smith a communist? No! He was a man of ‘humanity
.”

To which ‘Hume’s Ghost’ replies (20 October):

Hume's Ghost said...

“It was sarcasm, dude.”

Comment
Oh, dear!

Monday, October 20, 2008

Best Article on the Financial Crisis Bar None

Eamonn Butler writes, 21 October, in The Australian (Canberra) HERE:
“No such thing as a free lunch”

"WITH turmoil in the world's markets, politicians and commentators have been demanding more regulation and control of the financial sector. Kevin Rudd even says it was caused by extreme capitalism. Their reaction is predictable, but entirely wrong.

This crisis was not caused by capitalism being fatally flawed. It was caused by politicians forcing the banks to give out bad loans, monetary authorities flooding the West with cheap credit and regulators being asleep at the wheel.

Indeed, one can date its origin precisely, to October 12, 1977, when US president Jimmy Carter signed the anti-redlining law. Before then, lenders generally denied loans to people in poor neighbourhoods, believing that the local mix of low incomes and a weak housing market would lead to many people defaulting. But the politicians -with good intent - wanted to make home ownership available to all Americans. So lenders were forced into giving out risky mortgages, what we call sub-prime loans.

By 1985, this torrent of bad business had nearly bankrupted the US's savings and loan institutions. So the government took on their bad debt and encouraged them to consolidate, unwittingly making them too big to be allowed to fail.

Meanwhile, several other problems worried the monetary authorities. In 1987, the US stock market plummeted, fearing that other lenders could collapse. There have been other successive crises. Asia's markets sank. Mexico, Argentina and even Russia defaulted on their loans. Over-valued dotcom stocks crashed. Then there was 9/11. Each time, Western authorities responded by flooding the markets with cash.

After 9/11, the Federal Reserve took US interest rates down from 6.25 per cent to just 1 per cent, fearing this blow to investor confidence could sink the markets. But, again, its action boosted the wrong market by sustaining the credit bubble.
With loans six times cheaper, mortgage applications soared.

Lenders, awash with the Fed's cash, happily issued more sub-prime loans. With more people buying homes, house prices soared. Buying a house seemed a certain money-maker, so more people got more loans and bought more houses, continuing the spiral.
In London, that other great financial centre, a decade of government overspending saw public debt soaring. Private debt and house prices soared even faster.
So for 10 years, economies boomed, the champagne flowed and everyone had a great party. But it was financed by fake money, printed by the authorities solely to keep the party going. When the realisation broke, the long party turned into the inevitable hangover we suffer today.

The regulators, meanwhile, were unconscious on the floor. The US mortgage institutions, Fannie Mae and Freddie Mac, had 200 regulators on their case but still went bust for $US5 trillion. These semi-governmental companies allowed investors to believe the bad mortgages were guaranteed by government, causing credit rating agencies to give their dodgy bonds high scores.

Mortgage lenders repackaged these bad debts across the world, but nobody cried foul. Institutions were lending 30 times their asset base. Though the Bank of England knew that the huge mortgage lender Northern Rock was failing, the 2500 staff of Britain's financial regulator seemed to do nothing until it collapsed six months later. Even then, they had no coherent plan.

When the government is persuading the casino to hand out free chips and the regulators are standing drinks at the bar, you shouldn't be surprised if the customers place a few risky bets. It's the management, not the system, that deserves our scorn for breaking the basic rules of economics: there ain't no such thing as a free lunch.

Any sustainable solution has to get finance back to those basics. But the bailout package includes so many treats for special interests that it could save the culprits without helping the victims.

But it's a big world out there. China, the world's fourth biggest economy, continues to grow at nearly 10 per cent. India and other emerging economies are expanding, too. Even with the West in recession, world growth next year will probably be near 4 per cent. That's pretty good.

Western capitalism has been dealt a severe blow by inept politicians and officials. But global capitalism continues to pull hundreds of millions of people out of poverty. It's a great system. Let's not break it.”

Comment
Brilliant!

I have reproduced it in full – risking my relations with the good folks at The Australian (er, I always support Australia against the English at Rugby…).

It summarises the current crisis and points the finger at the real culprits. Readers may wish to circulate it in their own blogs and ask their readers to do likewise (don’t forget to credit it to The Australian newspaper, among Australia's best newspapers).

Eamonn Butler is director of the Adam Smith Institute and author of Adam Smith: A Primer (2007, IEA, London), and The Best Book on the Market (2008, Profile Books, London).

'Free Market Capitalism' is Not Laissez-Faire

P. A. Triot (‘pen name of a retired journalist’) writes in OEN (OpEdNews.com) HERE:

Government right to intervene economic matters”

“Neoconservative, by any name, means only one thing: laissez faire capitalism.

Free market capitalism is the newest name for laissez faire capitalism.
Laissez faire capitalism was first introduced to the world in the 18th century by Adam Smith who wrote "Wealth of Nations." Smith is regarded as the "father of modern economics."

The term "free market" was mentioned by Smith in his book as a condition of laissez faire capitalism.

The late Milton Friedman piggy-backed on Smith's concepts by sort of tweaking the lexicon and advocating free market capitalism all the way to a Nobel prize in economics (awarded in 1976).

The concept of free markets is in sharp contrast with controlled markets or regulated markets, in which governments regulate prices or supplies--either directly or indirectly.

What's left is that laissez faire capitalism and free market capitalism are synonymous terms.

All of this is simply economic theory, not fact at all.


Comment
P. A. Triot’ (patriot – get it?) makes an argument (read it from the link) that is founded on muddled history of Adam Smith’s contributions to political economy.

Smith never mentioned ‘laissez-faire’ once. He was familiar with the ideas of its exponents – French small merchants who wanted the French Minister, Colbert, to ‘leave us alone’ instead of regulating everything they could do quite well on their own. It became a slogan of some of the Physiocrats, but not all of them – Dr Quesnay, their leader, for example did not advocate it, and has been lumped with Adam Smith, first by mid-19th century conservative agitators (the Manchester School) and then a century later by propagandists, some of them Nobel Prize winners, of neoclassical general equilibrium theories and ‘free market’ American big business.

Adam Smith, meanwhile, was far more pragmatic. He certainly advocated freer markets than were available in mid-18th century. He heavily criticized the regulation and interferences of legislators and those who influenced them, the waste and prodigality of governments, the mercantile political economy of his day, dominated as it was false notions of gold and silver being wealth and thereby subjecting the real economy to policies that encouraged ‘jealousy of trade’, hostility to trading with and the trading of political rivals (France, the Dutch provinces, and Spain), and the record of sovereigns embarking on frivolous wars and colonial adventures.

His critique of governments that intervene in the economy is often taken by rightwing ideologues as proof that he opposed government intervention per se and favoured small government; his criticism of companies engaged in distant colonial adventures (the East India Company) for their rapacious behaviour and their internal lack of controls is often taken by leftwing ideologues as proof that he would have opposed capitalist firms as they developed in the 19th century and justifies their opposition to modern corporations.

Neither view is accurate, either as statement of fact, nor as a guide to Adam Smith’s prescriptions for commercial economies. It is not just a question of Adam Smith being ‘more nuanced’ that the caricature asserts; they are just plain wrong.

Wealth Of Nations has both general application and a specific context. It is not a textbook on economics, though it is based on current knowledge of his many predecessors, plus his own contributions derived from his historical analysis of how the commercial economies were revived (they had a long history in the classical world) after the long, near thousand year interregnum following the fall of Rome in the 5th century, and what was so exciting about the steady economic growth then germinating in western Europe, and particularly in Britain.

Smith saw the mercantile political economy in its various guises as distorting what caused the growth towards opulence; its related policies of forming trade monopolies through distant colonies, and the consequent wars that followed; its waste of scarce capital in various forms of prodigality; the legal system of primogeniture and entails as blocking agricultural prosperity through yeoman farming (as was sucessfuly shown in his mind by agricultural prosperity in some of the British colonies in North America which has abolished the legal inhibitions on land ownership); and the capture of the legislature by special interest groups that imposed protection, tariffs, prohibitions, and local-producer monopolies that widened private markets but narrowed competition to the detriment of the interests of consumers – the sole end of production.

Within his analysis there are many evident indicators that there was a crucial role for the government in creating and maintaining the necessary instruments for facilitating commerce (not running it). His programme for government expenditure was extensive but focussed: public works and public institutions such as infrastructure – Britain need functioning roads and highways, dredged ports and rivers, canals, bridges, and towns with night-lighting, pavements, sewage disposal, and police, backed by an independent judicial system and a reform of education provision, including for the children of poor labourers in schools part-funded by taxes and household contributions.

The first duty of government was defence and the island situation of Britain required a navy and an army (defence was more important that opulence) but the hostile stance of Britain towards neighbours since the fall of Rome, costs tens of millions (over £100 million in the seven-years war) that would be better spent on the above projects and on commercial activity that would increase employment and living standards.

That the “the late Milton Friedman piggy-backed on Smith's concepts’ is certainly true, but the responsibility for Smith’s works appearing in the distorted frame they have become, lies in the economics profession that has chosen to ignore the history of economic thought (lowly regarded by many modern economists as fit only for the elderly, the less talented, and the untenured).

If they were to read Adam Smith in context, they would find many of the failed policies imposed on legislators by the epigones, who quote Smith, but never read him for themselves, fully explained within his fairly primitive explanations of where Europe was going wrong, and, perhaps, why the global economy is still achieving less than it could achieve, if what has so far gone right (billions lifted out of poverty), despite the politicians and their advisors, was supported by arrangements that permitted commercial markets to do their work.

At that point, ‘Patriot’ would not equate ‘laissez-faire’ to ‘free-market capitalism' nor consider them as experienced in the real world.

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The Utopia of Root and Branch Reform

Benjamin Barber, author of ‘Consumed: How Markets Corrupt Children, Infantilize Adults and Swallow Citizens Whole’ writes in Guardian Unlimited (UK) (HERE):

Decades of eroded trust and democracy did the damage

The roots of the financial turmoil are a democratic deficit. Restoring civic faith is crucial for market economies to function”

“Because the secret of the invisible hand is not economic capital but social capital. Adam Smith knew that moral sentiments no less than capital markets undergird the wealth of nations. The liquidity crisis is a political crisis; the credit deficit is a democratic deficit. For trust is the social capital that permits private capital to be exchanged, contracts to be enforced, promises to be kept, expectations to be realised. Democracy is the common sea in which all those competing market boats and bickering fiscal sailors are kept afloat.
So although it was bad loans and greedy bankers and stupid hedge fund managers and ignorant investors who made the mess, it has been four decades of de-democratisation that has done the real damage.


Comment
Benjamin Barber’s article is a storming piece, of which I have only quoted a sample, that brings in Reagan and Thatcher as villains, and a host of faceless sinners, including real and imaginary governments (the ones we have had and the imaginary ones Benjamin speaks with the assurance of the proselytiser who has all the answers), who are different in an array of qualities as not to have been seen in all history and whom are exceedingly rare as individuals in the world we live in.
However, follow the link to see what I mean.

His assurance that “the secret of the invisible hand” was that Adam Smith was not talking about “economic capital but social capital” because “Adam Smith knew that moral sentiments no less than capital markets undergird the wealth of nations”, is contentious.

It runs two ideas, one wrongly imposed by modern economists on Adam Smith and the other a general thesis of Adam Smith’s about how societies evolve and individuals in them are socialised into the mores of whatever society they grow up in (even one consisting of ‘robbers and murderers’, see TMS II.ii.3.3: p 86).

Whatever else Adam Smith may have meant by his use of the popular 18th-century metaphor of ‘an invisible hand’ in Moral Sentiments and Wealth Of Nations it was not about ‘economic’ or ‘social capital’.

In its only singular use in Moral Sentiments (TMS IV.1.10: p 184) had nothing to do with capital; it was about rich landlords feeding their servants, retainers and tenants from the annual output of their fields because, if they didn’t their power would crumble as their dependents starved in the winter – they had no other choice, whatever their motives (who would labour in their fields and grand houses?).

Its only use in Wealth Of Nations (WN IV.ii.9: 456) had nothing to with capital, but was about the risk-avoidance of some, but by no means all, merchants in choosing between trading in foreign countries, particularly the British colonies in North America, where the perceived risks were higher, or trading locally where the risks were lower, and thereby, unintentionally, raising national investment above what it otherwise would be (by arithmetic, the ‘whole is the sum of its parts’). There was an abundant trade between Britain and its colonies, including India.

In neither case was the metaphor more than a metaphor for readers who did not understand why this happened. It only became a ‘theory’, ‘a paradigm’, or a ‘concept’ from the mid-20th century under the evangelical guise of Chicago-led neoclassical economists who burdened Smith’s reputation with something he never asserted.

Benjamin creates a theory of the ‘democratic deficit’ that also has nothing to do with Adam Smith, who didn’t have a vote in the 18th-century British electoral franchise, and was more concerned with the progress of Liberty in the United Kingdom than with democracy, and with major changes in the dominating political economy of the day.

He didn’t expect much to change in the proclivity of legislators and those who influenced them (the body politic) to act in the interests of ‘merchants and manufacturers’ and was, therefore, not too optimistic that they would dismantle the economic arrangements that they and their allies gained from. (He said that expectations that 'free trade should ever be entirely restored in Great Britain' were 'absurd' and 'Utopian'; WN IV.ii.43: p 471)

Whether what Benjamin advocates so vociferously would come about by replacing the entire democratic system that exists in the USA and elsewhere with something else like ‘social capital’ is not my area of expertise (I don’t vote in the USA).

However, I quote below from one of his anonymous correspondents who is unconvinced:

MoveAnyMountain” writes:

This is an interesting use of the word "democratic". If I choose to invest my money in a company I like, this looks democratic to me. The market is just made up of a billion or so people like me - some directly, some through intermediaries such as pension funds.

What the author seems to be arguing is that the market will be more "democratic" if control of my money is taken from me and those other billion people and entrusted to a small oligarchy of buffoons we have a say about every four or five years.
How is this democratic? It is a demand for a massive level of State control over my life and my assets. Such as they are. It is about as undemocratic a proposal I have seen in a long while.

The author is also flatly wrong about markets. They run on trust. But they also build trust. Societies that trade have higher levels of trust than those that do not. Markets reward trustworthiness and hence there is far more of it in market economies. China has poisoned milk, Denmark does not. Every product you see is the result of thousands of people who have never seen each other co-operating in a capitalist enterprise that relies on and builds trust.

So the solution is to trust me with my money. I know what I want done with it. If I trust my bank (which I picked because it was so boring and trustworthy) then the Government ought to trust me to manage my money myself. The solution is not to let people I do not know and do not trust control it for me. After all, British civil servants are so much more trustworthy with money than the Banks aren't they? Anyone remember the Dome?”


Comment
I suggest readers follow the link and read Benjamin’s article in full for themselves.

Sunday, October 19, 2008

Adam Smith on Land Reform

Pitsburgh Tribune-Review Editorial, 19 October, (HERE):

"A stunning advance":

"What will those agrarian reformers running China think of next?

Unlike urban areas, where free markets have been allowed to flourish, China's agricultural sector is impoverished by the inequities and inefficiencies of socialism.

But now comes word of a breakthrough in modern economic thinking: China's rulers plan to implement a policy that by 2020 will permit peasants to buy and sell land-use contracts.

It's not up to 16th-century British common-law standards yet but the reform could lead to such things as bigger, more efficient farms and the use of land rights as collateral for bank loans.

China's peasants still won't be able to own their own land. But both Mao and Adam Smith are spinning in their graves at the prospect of basic property rights coming to China.”

Comment
I can see why Mao, a revolutionary in a hurry, might be ‘spinning in his grave’, but the point about Adam Smith doing likewise baffles me.

The issues is about getting from where we are to where we want to be, a subject that Adam Smith dealt with on several occasions, and on all those occasions he took a pragmatic not an ideological stance: move ‘slowly and gradually’, a careful step at a time to ensure the changes became embedded and that social disruption was minimized, especially where it concerned the lives of labouring families.

Now today's Communists leaders are ultra-cautious – they want to hold onto their power at all costs, and the pace they have chosen – from now to 2020 – fits their mindset. And they have the awful example of Mao Tse Dung if they were inclined to take risks. The billion people in China are not easily regimented. Mao’s madness of his ‘great leap forward’ to Communes killed millions from starvation and only the rigid tyranny of the Communist State prevented its political collapse.

Smith for example is renowned in modern times for being in favour of free trade. Many economists interpret that reputation as a rigid, ideological, no compromises, stance of the ‘father of economics’ (a somewhat dubious distinction, if taken too seriously), but Wealth Of Nations makes clear there were serious exceptions to his recommendations that the British economy be transformed into free trade, above all in that it should be done slowly, taking into consideration the effect of a change in policy on the employees in the currently protected businesses, whose families would suffer deep privations if its was undertaken at a stroke.

I wish some free traders who are too free with quoting Adam Smith would actually read Book IV of Wealth Of Nations and appreciate what he actually wrote and why he was cautious about sudden change.

In China, the state owns all the land; peasants own none of it. Moving from owning nothing to owning something is an exhilarating change for the good. Adam Smith would approve. He opposed the legal forms of primogeniture and entails which together froze the land in great estates which could only be passed intact to the eldest male relative and could never be allowed to sell of smaller sections of a property to others. The proprietor could only sell the estate intact, undivided, and entire.

Smith favoured abolishing entails – this action would free-up parcels of land in vast unproductive estates for productive use by small farmers (sturdy yeomen) and he pointed to those British colonies in North America that had followed this policy which had created rapid economic growth as a result (compared to the experiences of Spanish laws in South America). The transformation would not be instant. Many great estates were productive and their owners invested in wealth creation, but many more were rundown, semi-impoverished and in decay as agricultural businesses, their owns clinging on to a few acres around their palatial buildings, with a few poverty-stricken tenants not much better off.

The Chinese appear, in effect to be holding onto their ‘entail’ policy, but promoting where they can control it, the right of their tenants to buy and sell their ‘land-use rights’. This will have the effect of consolidating small parcelts of land into more viable farms. In time, it will create a new farming class, one step short of private ownership of land. By 2020 and beyond, the expropriated Chinese peasants of the Communist decades, who take advantage of these reforms, will become large-scale private farmers and have political clout to go with that economic status.

Why would Adam Smith ‘spin in his grave’? He always took the long view of history.

Indeed, as I recently passed by his grave in Edinburgh (en route to Panmure House, now owned by Edinburgh Business School Heriot-Watt University) – I have to admit I heard no sounds of him ‘spinning’, but maybe I may have - I can't be sure - caught a faint sound of somebody chuckling…

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