Friday, April 29, 2005

An Important Quibble

From: ON LINE opinion - Australia's e-journal of social and political debate

Bring me your Huddled Murdochs!

By John HartleyPosted Wednesday, April 27, 2005

“So how do we get to those digital natives? In his Opinion Journal piece, Mr Murdoch points to the importance of education, but only to claim that it is failing to meet the challenge, a fact that is only disguised by the performance of immigrants:

The evidence of the contributions these immigrants make to our society is all around us - especially in the critical area of education. Adam Smith (another Scotsman) knew that without a decent system of education, a modern capitalist society was committing suicide. Well, our modern public school systems simply are not producing the talent the American economy needs to compete in the future. And it often seems that it is our immigrants who are holding the whole thing up. … The point is that by almost any measure of educational excellence you choose, if you're in America you're going to find immigrants or their children at the top.
Like the US, Australia is a settler society, founded on successive waves of immigration. But is Australia up to the digital challenge?”

In this passing reference to Adam Smith in Rupert Murdoch’s opinion piece, quoted in the extract by John Hartley, we have an almost nonsensical statement:

“Adam Smith (another Scotsman) knew that without a decent system of education, a modern capitalist society was committing suicide.”

In 18th century Britain, Adam Smith knew nothing of what was appropriate for a “modern capitalist society”. He certainly never speculated about the society that he could not foresee in the late 19th century. By then, society had irreversibly changed from the agricultural society Smith knew well (his family were land improving farmers in Fife) into what we now call the industrial revolution.

Smith did not write about ‘capitalism’ – the word was no invented until the 1850s. He wrote about agrarian markets in which commercial markets were reviving after the long centuries of stagnation and decline following the fall of Rome 1300 years earlier.

The education reforms Smith advocated were to serve the needs of the society he knew about, not ‘a modern capitalist’ society that he nothing about. He wrote about the superior education he believed was prevalent in ancient Greece and Rome (Wealth of Nations, V.i.f.: 788) and why the state should fund education of the ‘inferior ranks of people’ to prevent them becoming misled by ‘the delusions of enthusiasm and superstition, which among ignorant nations, frequently occasions the most dreadful disorders’.

He continued:

‘An instructed and intelligent people besides are always more decent and orderly than an ignorant and stupid one. They feel themselves, each individually, more respectable, and more likely to obtain the respect of their lawful superiors. They are more disposed to examine, and more capable of seeing through, the interested complaints of faction and sedition, and they are, upon that account, less apt to be misled into any wanton or unnecessary opposition to the measures of government. In free countries, where the safety of the government depends very much upon the favourable judgement which the people may form of its conduct, it must surely be of the highest importance that they should not be disposed to judge rashly or capriciously concerning it’. (Wealth of Nations, V.i.f.61: 788)

This prescription, of course, may be applied to a ‘modern capitalist society’ two centuries later, but that is not Murdoch’s claim. He says that Smith ‘knew’ that it applied to a ‘modern capitalist society’, which is absurd.

Hartley’s article can be read at:http://www.onlineopinion.com.au/view.asp?article=3384

Tuesday, April 26, 2005

First Sign of the Tide Turning?

Is this the first sign that the message of "Lost Legacy" is having an, albeit, small impact, and the trend is in the right direction?

James Keith correctly presents the basic message I try to get through about Adam Smith. He was not a sort of econmic version of so-called "social-darwinism" (neither was Charles Darwin!). Smith was not for "capitalism, red in tooth and claw". He knew nothing of capitalsm and would have found such talk uncomfortable when set against his moral philosophy, captured by James Keith.

Smith's message was about how competitive markets in stable societies, under individual liberty and the rule of law not men, would enhance the living standards of all, especially the very poor and those on subsistence wages. Of course, he knew that the wealthy would gain most but that was the way human societies worked. Allowing monopolists freedom to exploit their suppliers, employees and consumers was not in his message, nor was curbing competition by social programmes of 'equality' of outcome as opposed to equality of opportunity. Once this message from Smith becomes general then a whole host of suggestions would emerge to make societies more harmonious, more efficient (waste is a tax on poverty), and less divisive.


Remarks by U.S. Consul General James R. KeithAmerican Chamber of Commerce LuncheonJ.W. Marriott Hotel, Hong Kong, Monday, April 25, 2005
(As prepared for delivery)


"Hong Kong's Political Economy

The Scotsman Adam Smith speaks in his writing to the heart of Hong Kong's success. Like Hong Kong itself, Smith is often taken to mean different things to different people. As Professor Gavin Kennedy of the Edinburgh Business School has written, Smith was a moral philosopher who wrote about political economy. He took the long view of social development and had a healthy skepticism of quick fixes. Stability was a virtue, and even serious deficiencies needed time to be repaired. Commerce was the inexorable means toward the objective of a prosperity that would settle deeply into society, creating and increasing wealth through investment and the expansion of jobs. This much is universally associated with Smith and his Wealth of Nations and seems to apply directly to Hong Kong's situation. But to me, Smith's Theory of Moral Sentiments is his greater legacy. Smith saw society evolving in ways that would produce natural harmony through the increasing dependence of individuals on the labor of their fellow citizens. As Professor Kennedy notes, Smith believed people in society would serve their own interests by serving the interests of others from whom they needed life's daily necessities. Smith's legacy, and the key point for Hong Kong, is his blend of liberty, justice, and economics. In Theory of Moral Sentiments, Smith writes:

"What reward is most proper for promoting the practice of truth, justice, and humanity? The confidence, the esteem, and love of those we live with."

This notion of Smith's reflects a key proposition I have tried to articulate during my tenure in Hong Kong. In discussing American ideals and values against the backdrop of the social, political, and economic upheavals over the past several years, my message could be reduced to a very simple proposition. It's a proposition that harks back to the Basic Law and the Joint Declaration. It recalls wartime Governor Sir Mark Young and continues back to Adam Smith. It is simply that we believe the people's voice should be heard. As the people have voiced a clear preference for the rule of law, we suggest an overriding principle of our domestic and foreign policy: Trust your people. As Smith rightly advises, it is essential for the people to build trust and confidence in each other if the government is to trust the instincts and preferences of the masses."

The full text of retiring US Consul General for Hong Kong, James Keith's speech can be found at: http://tokyo.usembassy.gov/e/p/tp-20050426-18.html

Sunday, April 24, 2005

Why Smith did not publish "Jurisprudence" 3

Phew;

thanks for that. I can see your point. If he had published "Jurisprudence" and come out sympathetic to a more American view of law and liberty, it would have undermined the standing of "The Wealth of Nations" and other works in the minds of the political figures that were in a position to act upon its prescriptions. That seems quite a plausible argument.

I don't know how far his years as a customs man distracted him. He was a Commissioner of Customs, the top rank, so it was presumably a fairly honorific title, a sinecure. On the other hand, he seems to have been signing letters on all sorts of trivial matters – we have a copy of one in the Adam Smith Institute office. So perhaps he did actually take it as a serious job rather than just a reward for past service to the nation.

What a boon that "Astronomy" was saved from the flames. I guess that most readers of Smith don't understand much about science and scientific method. But "Astronomy" is a really penetrating, clear, and refreshing take on the subject. We're lucky too to have his students' notes on things like "Policy" but of course they lack the coherence of the Master himself.

Posted by Eamonn Butler at April 23, 2005 05:56 PM

Eamonn

In a letter to Andreas Holt, Commissioner of the Danish Board of trade and Economy, dated 26 October 1780, apologising for a delay in replying to him, Smith wrote, by way of explanation:

“I am occupied four days in every Week at the custom House; during which it is impossible to sit down seriously to nay other business; during the other three days too, I am liable to be frequently interrupted by the extraordinary duties of my office, as well as by my own private affairs, and the common duties of society” (Correspondence of Adam Smith, E. C. Mossner and I. S Ross, eds., Oxford University Press, pp. 248-9)

But was he really busy or just claiming a plausible excuse for being so? The fact is that this does not really matter to the points I made above. For the Commissioner’s post to be a true or a plausible excuse for not completing “Jurisprudence”, he only needed to be appointed to the post. Whether in practice this made him too busy or the appearance of being too busy, the appointment served its purpose. Nobody was likely to visit him to confirm or deny his claims - an intrusive media did not feature in 18th century Edinburgh.

The fact remains that if he had not been appointed a Commissioner of Customs, somebody else would have been – there were many names able to do the job – but nobody else could write “Jurisprudence”. That is the true measure of what he had done by deliberately making himself ‘too busy’ to write it.

On his juvenile essay, ‘Astronomy’, I believe it played a far larger part in his decision to abandon his ordination into the Church at Oxford and to choose instead the “uncertain future” of becoming a philosopher than is realised. But that is another story covered in “Adam Smith’s Lost Legacy” (Palgrave Macmillan, 2005)…

Why Smith did not publish "Jurisprudence": 2

Posted by Dr Eamonn Butler, Adam Smith Institute Blog site (link below left column):

Prof, I think that's the most erudite comment ever posted on this site!

Yes, I was only speculating that the rush of the Grand Tour and the effort of "The Wealth of Nations" distracted him. But I can see that, from such a prominent figure, a book that could be taken to be so critical of the British government and its policy towards the Americans could have been just too controversial for his tastes.

On the other hand, he was pretty frank about it in "The Wealth of Nations" and that hadn't done him too much harm – I guess that a fair proportion of his more intelligent readers actually agreed with him. Are you saying it was the looming prospect of revolution in France that did for the book? But how far was that predicted back in 1790?

Smith indeed ordered his notes to be burned, but then he ordered all his papers to be burned, as people did at that time: they did not want to be judged on still-incomplete manuscripts. Had it been complete, then like Hume with his "Dialogues on Natural Religion", might he perhaps have allowed it to be published after his death? Sure, he was not as ebullient a character as Hume: but was it just that he feared the consequences, or might it have been that the work was substantially incomplete?

Posted by Eamonn Butler at April 22, 2005 08:53 PM

Posted by me in response: 23 April, 2005, 5.45 pm:

Dear Dr Eamonn Butler (ASI)

Good points and worth bearing in mind, recognising that we are speculating (or at least I am).

Smith was in London (1773-6) where he discussed privately the developing American situation with academics, friends, colleagues and government officials. No doubt he expressed himself and listened to others. But the focus was on the events and how they might be resolved. What we know of his advice shows him dealing pragmatically with these events and not ideologically. His discourses on Jurisprudence and the evolution of government were unlikely to have featured.
The leaders of the American colonists were beginning to explore other ideas about government that would lead after 1783 to the US Constitution, which were several steps further along the road to republican democracy than he had advocated publicly. This only added to the tensions he must have felt, knowing how he had pushed the boundaries with his ‘six principles’ of Liberty in his Glasgow Lectures on constitutional monarchy. Friendly advice to ‘tone it down’ if he wanted to influence the King’s Ministers would not have been necessary for such a prudent man.

As it was, in 1793 the Judiciary questioned the contents of the “Wealth of Nations” and criticised him for it. Edmund Burke also joined in. The fact is they did not have copies of his Lectures, nor, of course, a published book or a manuscript.

The events in France surprised many people, so I do not think Smith was influenced in 1783 to drop Jurisprudence by expectations on that score. Smith realised that he could not complete Jurisprudence without commenting on the American Constitution. If he wrote positively about it, he would cause offence in high places and disappoint many; if he wrote negatively, he would betray his concepts of Liberty. By not writing at all he avoided both.

I see no contradiction in his ordering the burning of an unfinished manuscript; his problem was to explain why he did not finish it over the 31 years (1759-1790) that he claimed publicly to be writing it, particularly during the critical 14 years (1776-1790) when he deliberately chose to do something trivial instead. If he had not been a Commissioner of Customs, somebody else would have been, but nobody else could or did write “Jurisprudence”. That is the true measure of his fateful neglect.

He ‘saved’ from the flames his ‘juvenile’ essay, ‘Philosophical Method’ (also known as his “History of Astronomy”). He was horrified at the request from David Hume for him to publish the ‘Dialogues on Religion’ after Hume’s death. He wanted nothing to do with it or the expected controversy it would cause, despite the deep offence he caused Hume (who, characteristically, 'forgave' him). As it is the zealots savaged even his single page in praise of Hume’s character.

Smith was determined to avoid controversy. The issue is not that “Jurisprudence” was incomplete; it was that if he completed it he feared the consequences for his reputation with the people he was trying to influence. Hence, he didn’t.

That the French Revolution broke out at the end of his life no doubt convinced him of the prudence of his earlier decision to desist from anything disrespectful of authority or likely to be interpreted as such. If he had lived to see the Terror he would have felt completely vindicated.

Remember, Smith lived in Scotland where religious zealots in the 18th century were ever vigilant for the slightest sign of unorthodoxy; he had avoided successfully their attention by excessive prudence in all things. In Britain, he was no less careful to avoid inciting political criticism from those he despised because they were wedded to faction and favour.

[With slight editing]

Saturday, April 23, 2005

Why Smith did not publish "Jurisprudence"

Dr Eamonn Butler in the ASI Blog has opened a discussion on the consequences of Adam Smith not completing his promised work, "Jurisprudence".

My comments are published below. To follow the discussion visit the Adam Smith Institute (via the link in the left column):

Comments: The lost principles of justice

The excellent piece you wrote today raises interesting questions as to why Smith did not complete his book on “Jurisprudence”, despite first announcing it in 1759 in “Moral Sentiments” and reporting as late as a few months before he died (1790) that it was nearly finished.
You suggest he was too busy with “Wealth of Nations” (1766-76). OK, that explains the 17-year gap to 1776. The Grand Tour took from 1764-6, but what of the years to 1790?

He took the post of Commissioner for Customs, but he did not need the money – he gave most of it to charity – and he kept working three days a week until a few months before he died. He had a perfect excuse for not finishing “Jurisprudence”, despite his regular announcements.
I have heard from scholarly experts on Smith that they believe he did not finish it because he could not reconcile Natural Liberty with Justice (the negative virtue protecting property and harm against the person).

Maybe. I have put forward a different suggestion (“Adam Smith’s Lost Legacy”, Palgrave Macmillan, March 2005).

Smith delayed publishing “Wealth of Nations” from 1773 to 1776, and David Hume warned him not to wait any longer for a resolution of the American rebellion. I think the answer lies in the circumstances of the American rebellion and its possible impact on Britain (Smith advocated withdrawing gracefully from the colonies).

The students’ notes published as “Jurisprudence” (1976) gave detailed accounts of his Glasgow lectures (1763-4). They develop his 4 stages theory of the evolution of society and analyse the evolution of the Rule of Law, Justice and Constitutional Monarchy in Britain. Smith, by nature was not a revolutionary, nor given to advocating major changes, especially quickly, in constitutional matters. His lectures show he was comfortable with what the American colonists adopted into their Constitution, including the separation of powers and republican government. He seemed to see the British Monarchy eventually transforming itself into republic in all but name by becoming impotent figureheads with no power.

However, the American colonists had won their liberty by contesting the King’s Will in armed rebellion. That was not something the ever prudent Smith would wish to be seen supporting.
If “Jurisprudence” had been published he risked offending his King; there was no way a book from Smith could avoid commenting honestly on the American Constitution and its contrast to British constitutional arrangements.

He chose not to do so, deliberately and with forethought. He sought and took the Customs Commissioner’s post in 1783 and spent the remaining years of his life being assiduously ‘busy’, but not from competing his manuscript.

And a wise move for him that was too. In 1789 the French revolution began. He died in 1790. The Terror erupted in 1793. Any leeway he might have been granted before 1790 would have been swept away had he lived, if “Jurisprudence” was considered by a panicky Establishment to be seditious in the British context.

Smith did not know students had copied his lectures. On his deathbed he ordered the “Jurisprudence” manuscript to be destroyed. He felt his reputation safe.
As it was, Dugald Stewart and others were interviewed in 1793-4 by the Scottish judiciary searching for evidence that Smith’s works might incite ignorant mobs to seek mischief. His friends survived – some of them by denying they agreed with “Wealth of Nations”! Leaders of the ‘mobs’ got 14 years transportation.

The authorities had their suspicions about him, but what they did not have was Smith’s “Jurisprudence”.

Posted on ASI by gavin kennedy at April 22, 2005 08:38 PM

Thursday, April 21, 2005

Smith and Judeo-Christian Religions

The notion that the road to ‘maximising’ a nation’s wealth is to combine the ‘invisible hand’ with the Judeo-Christian Bible cannot be taken seriously, though Thomas E. Brewton advocates it in his posting of 20 April 2005, “Adam Smith vs. Robert Reich”, on www.IntellectualConservative.com (‘the only site on the web devoted exclusively to intellectual conservatism’) from Phoenix, Arizona. IC is produced by Rachel, Andrew and Sandra Alexander (Rachel is a lawyer) and their names suggest Scottish roots in the family.

As usual the ‘invisible hand’ is promoted from a single mention in Adam Smith’s Wealth of Nations into an all embracing maxim, even into a fundamental law of economics, to be let loose everywhere and without restraint.

Smith did not conclude this from his use of the metaphor on a single occasion to explain why the normal tendency of ‘merchants and manufacturers’ to prefer to keep their capital invested locally, where they could watch over it, rather than invest abroad or in the carrying trade, where they could not watch over it so closely, had the effect of promoting the national wealth, which they did not intend.

So individual inclinations produce “the greatest value [where] 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.” [Wealth of Nations, IV.ii.9: 456]

To generalise from a single observation, aimed at making a different point, into the general ‘law’ of economic policy is absurd, especially when the law is interpreted to mean that all actions of modern business should be without constraint on the grounds that the invisible hand is something real, universal and constant.

In many other cases, it may not be the case at all, and Smith spent whole chapters of Wealth of Nations discussing the cases where merchants and manufacturers should be constrained because of their tendency to create monopolies under the impetus of their real, universal and constant’ intention of promoting their own gain.

Tomas Brewton goes further in his sweeping generalisations about how economies function:

“Our Judeo-Christian heritage admonishes us both to love the Lord God with all our heart, soul, mind, and strength, and, vitally important, to love others as we want to be loved. It calls on everyone individually to do his best to deal decently, pleasantly, and honestly with his fellows.”

He concludes:

“An ‘invisible hand’ maximizes a nation’s economic and social welfare, when individuals are permitted the maximum possible economic liberty and when they are self-restrained by the moral dictates of our Judeo-Christian heritage. One cannot function effectively without the other.” (For the full text of the article visit: www.intellectualconservative.com)

The existence of several capitalist non-Judeo-Christian countries (Japan, Taiwan, Singapore, Malaysia, China, India) could be taken as evidence that Brewton’s generalisation is suspect. As could the existence of several nominally Judeo-Christian countries in Latin America that are not performing as well as they might could be taken as counter-evidence. Past contributions to economic and social evolution from parts of the globe before Judeo-Christian beliefs were dominant in the West could also be called upon as evidence (Greece, Persia, India, China, Egypt). The historical map is not so clear-cut and, as ever, choosing your base line can affect the outcome.

Given also that Brewton, and indeed, IntellectualConservative.com, features David Hume (Smith non-religious friend) as a major contributor to his false story of the necessary inextricable intertwining of capitalism and Judeo-Christian religious beliefs conveniently mentions not a word at Hume’s persecution by the same Christian zealots during his lifetime.
Smith avoided persecution because he ensured he never gave offence deliberately to the zealots

Brewton also intertwines Adam Smith’s economics of his version of the ‘invisible hand’ with the usual false attribution to Smith of so-called laissez faire economics. But that is an old song already questioned here many times, so on this occasion I will let it pass. (It is covered in greater detail in “Adam Smith’s Lost Legacy”, as well as other posts below.)

I'm still no good a crosswrods

My wife told me that there was a clue in The Times (London) Cryptic Crossword for 20 April that even I should be able to solve: ’21 Down: Adam, economist and forger, 5 letters’.

In this limited context she was right. It had to be ‘Adam Smith’. But as someone who is hopeless at solving crossword puzzles, she has often told me that the only correct answers in puzzles, such as those in The Times (she regards most others as being ‘too easy’), are those that you can ‘justify twice’. Hence guessing is not an option for genuine puzzle servers.

I suggested that we know that Adam Smith was an economist, or rather he wrote about political economy – ‘economists’ had not yet been named as such in the 1770s – but a ‘forger’?

Perhaps, I opined, the allegations of Professor Salim Rashid, of the University of Illinois, Champaign-Urbana, were better known than I thought. Rashid has written several essays in refereed journals and a book (The Myth of Adam Smith, Edward Elgar, Cheltenham, UK, 1998) showing that Adam Smith was a serial ‘borrower’ from the works of contemporaries and near contemporaries, and that he frequently failed to give appropriate scholarly acknowledgements (at least by anything like the fastidious determination of modern academics). That could (loosely) make him a ‘forger’ …

Her look told me to stop showing off.

No, it had to be a simpler justification. The only other one was that a blacksmith worked in a forge to prepare horseshoes for horses. Correct. By extension, that made him a ‘forger’? She repeated a stiff 'correct' to my belated attempt at the necessary two justifications for answering ‘Smith’, but, she added, once again, that I remained ‘a lucky guesser without a hope of ever solving a full Times Cryptic’!

Tuesday, April 19, 2005

No Madeline...

Madeline Shoemaker, a Freshman (first year BA Politics student) at The University of North Carolina, and editor of “The New Voice”, a conservative students’ paper on campus (www.thenewvoice.net), has had a piece she wrote published in The Lincoln Tribune (www.lincolntribune.com) in which she says:

“Conservative thinking also embraces the preservation of life, the elimination of tax and spend government, a free market and free competition society, and the ‘laissez-faire’ concept introduced by Adam Smith”

Now, I do not expect first year students, or even all undergraduates, to be aware that laissez faire (no need for quotation marks or hyphen) was not “introduced by Adam Smith’, in fact he never used the words at all in “Wealth of Nations”, nor in his published correspondence. Why should Madeline know this when her professors probably do not know it either, because in US academe the laissez faire/Adam Smith myth has been taught in every campus for near on a hundred years?

She is blameless; her teachers are not. However, the association of Adam Smith with the (untenable view) that capitalist firms should be left alone on the grounds that whatever they do has benign consequences on society does no favours for the valid case for limiting the instances in which the State interferes in their actions. Adam Smith was never in a position to give a view on what restrictions a future democratic society might wish to place on individual capitalist corporations because he was dead long before capitalism developed in the UK and in the USA in the 19th and 20th centuries.

Smith’s main concern in his polemic against mercantile policies in “Wealth of Nations” was to argue against ‘merchants and manufacturers’ being left alone to form monopolies, was against the state legislating to prevent tradesmen from practising their trades unless they had the permission of local Guilds (monopolists of labour), and was against the Act of Settlement that prevented labourers moving from where they lived to other places in search of work.

To transpose these sensible policies into a general carte blanche for employers a century later to employ women and children in coal mines and mills with appalling accident rates, until the first feeble Factory Inspectors began their work in the 1850s (and still necessary work today), allowing them cover to oppose intervention to stop firms polluting their neighbourhoods and those ‘downstream’, and do this all under the banner of laissez faire gives crude ‘conservatism’ a bad name and hands the moral ground over the those whose plans for intervention ‘throw the baby out with the bathwater’ and in consequence destroy wealth and limit growth. If the ‘anti-globalists’ triumph, the poorest in the Third World will really pay the price, and the richer world’s demonstrators will suffer comparative trifles.

Conservatism should go back to what Adam Smith actually wrote and realise he clung tenaciously to the moral ground, if only to shame legislators into adopting humanistic policies for political economy. Adopting the authentic polices of Adam Smith would dismantle modern mercantile interventions, which have created a global system that has little to do with free trade, and by doing so jeopardises Smithian prospects for free trade, competition and anti-monopoly laws.

One of the Better Guys on Adam Smith

I am impressed by Professor Edward Younkins' exposition of Adam Smith’s philosophy and economics, as expressed in his essay, "ADAM SMITH'S MORAL AND ECONOMIC SYSTEM" in Le Quebecois Libre, Montreal, 15 April, no 151, (http://www.quebecoislibre.org/05/050415-16.htm). I recommend that you read it because it gets quite close to an accurate representation of Smith's moral philosophy and his political economy.


However, I would comment on one aspect of his essay because it summarises the gap between me and Professor Younkins' interpretations of the same theme. He ascribes to Ayn Rand (a prominent philosopher who expounded the theory of "Objectivism" in defenc of Capitalism, the untried ideal, writing in the 1960s-70s in the US) a more accurate status on the philosophy of markets than Adam Smith, though given he wrote in the 18th century and she wrote in 20th, it might be expected that she would benefit from two hundred years of further thought than what was available to him. I read several of her books as an economics student in the 60s (who didn’t?) and I still have copies of her books and novels in my library.

Professor Younkins wrote, while stating Adam Smith's economics:

"When individuals pursue their own private interests in the economic sphere, society will be best served. From a person's desire to seek his own advantages and improve his conditions, wealth arises and an unintended or spontaneous order results. A free economy in which people seek their own private interests is said to be lead by an "invisible hand" in directions that benefit all."

This is one interpretation of Smith’s points and it is the majority interpretation too. It contains, however, what I call a 'fundamental error' ascribed to Smith by his successors rather than implied by him in what he wrote. I discuss this fundamental error in my book, "Adam Smith’s Lost Legacy" (Palgrave Macmillan, March 2005).

Most people see "Wealth of Nations" as Smith describing the transaction of ‘truck, barter and exchange’ as being driven by the mechanism is ‘self interest’ (WN, Book 1, chapter 2). In appealing to the ‘butcher, baker or brewer’ for their dinner in his famous example readers are enjoined by Smith specifically not to appeal to their own self-interest but to appeal to self-interest of the providers of their dinner. In short, they serve their own self-interest best by proposing to serve the self-interest of the providers.

This is quite the opposite interpretation to that normally given by many philosophers and economists, mainly, I think, because they have not thought about the process of negotiation that is involved in the act of 'truck, barter and exchange' closely enough. They leap over the actual process and go straight to the outcome, yet the process of negotiation is where the self-interest of each party is mediated - each must consider the self-interest of the other by trading what he or she wants for what the other person wants. This 'neutralises' selfishness at the moment of the transaction into an act of voluntary exchange, where instead of doing what is best for self, the negotiators do what is best for both of them.

This significant fact, emphasised by Smith in "Wealth of Nations", and in the various versions of the same passage in "Jurisprudence", appears to have been missed by readers 'in a hurry'. I unravelled it because of my long acquaintance with teaching managers how to negotiate (www.negotiate.co.uk), which I based on Smith’s exchange model ("Give me some of what I want and I will give you some of what you want").

Negotiation is about obtaining what we want from someone who wants something from us. When this passage is looked at closely it is not a self-interest model rooted in ‘Give me what I want’ (selfish), but an exchange based on each getting what each wants from the other based on each serving each other’s interest ("Adam Smith's Lost Legacy", chapters 22-24).

Secondly, Smith’s metaphor of the "invisible hand" has been generalised into an all embracing maxim to the entire society, which he never intended (he only mentioned it once in "Moral Sentiments" and once in "Wealth of Nations", both in an economic context, and only once in his 'juvenile' essay "History of Astronomy", , written mainly in 1743-48, in a comment he makes on pagan superstition).

In both TMS and WN his reference is to specific situations to illustrate ‘unintended consequences’, which clearly could be benign (the cause of the decline of feudal power and the consequence of 'merchants and manufacturers prefering to invest in the home and not foreign markets), but could also be malign in other contexts and circumstances (contrary to justice, inimical to the best interests of economic growth, and always from the establishment of monopolies, etc.,). As I have commented on many an occasion, I have never yet met a capitalist who preferred competition to enjoying his own monopoly.

When the metaphor of the 'invisible hand' is stretched to imply that all actions of modern day capitalists (a phenomenon that post-dated Smith’s life) are necessarily beneficial, it is an avoidable error of interpretation of his economic; the actions of men in society are not always benign, unintentionally or otherwise.

This is more clearly expressed in "Adam Smith’s Lost Legacy" and in this companion web site.

However, reading Professor Younkins' essay carefully and his book ('Capitalism and Commerce') will take you some some time, but they are well worth it for the clarity of his explanations.

Saturday, April 16, 2005

Flat Tax, Definite Maybe; Existing Tax allowances, No!

Early knee-jerk dismissals of the Flat Tax challenge to existing orthodoxy are that ”A Flat Tax may be right in theory but it will never work in practice”, which mocks its advocates as impractical “intellectuals”.

Then, as evidence accumulates that the Flat Tax is worthy of closer study, the last line of defence against it becomes: “A Flat Tax may be OK in practice but it will never work in theory”, which suggests that its advocates are unsound “intellectuals.”

Either way, an idea is on the march. Which political party will take a lead in favour of a serious enquiry into the merits of a Flat Tax?

How might Adam Smith have considered the choices?

Friday, April 15, 2005

Full Circle on Public Expenditure

Blog


14 April 2005

I am attending a day seminar in Edinburgh on the future of a public utility on Monday 18 April. It is about whether it should remain under public ownership or be privatised. Judging from the listed contributors it is fairly heavily biased in favour of remaining under public ownership. A rival seminar on the same utility in Edinburgh on 12 May will present the privatisation option. I wonder how many attendees at each seminar will have attended both?

The choice is interesting. Looking at it from a historical perspective we seem to have come full cycle. In the late18th century, Adam Smith made the case for government funded public works when no private capital could raise enough money from its own resources to erect and maintain roads, harbours and canals because likely profit streams would be uncertain and would probably not be realised, even though the works would be beneficial for commerce and growth.

When this situation was evident, government funded activities were appropriate, using national or local taxation to pay for them. Throughout the 19th and 20th centuries the state grew in size in all countries and took on wider and wider remits from political judgements about what a state should do in all kinds of activities well beyond those created by ‘market failure’. The tax base funded the expansion of the State.

Now the State accounts from 40 to 60 per cent of a country’s national product in Europe. In countries sensitive to the growing burden of taxation and borrowing, the scope for additional State expenditure is limited, politically. In short, the state cannot afford to raise the funds for new projects or commitments. One result has been the deterioration of maintenance and the replacement of public assets – a new twist on Galbraith’s charge of ‘private affluence, public squalor’ from the 1960s – because of the limitations of the tax base on corporate profits and personal incomes or consumer expenditures to support even minimal refurbishment and replacement programmes.

The Private Finance Initiative programme is a means by which the State funds the reconstruction of the public infrastructure and its expansion. Private capital is mobilised to supply State schools, hospitals, roads, bridges, water and sewage works, railways, air traffic control and public buildings of all kinds. These ‘concessions’ have contracts for 25-30 years, during which the privately funded and managed assets are paid a fee in return for agreed standards of performance. At the end of the contract the project reverts to public ownership. The State extends and replaced its infrastructure out of private funds, effectively paying for them by a method similar to a ‘mortgage’ as used by private citizens when buying their homes.

The objection that this is more expensive than the State raising the capital itself is spurious. It is always cheaper to buy a property for cash than paying for it by a mortgage – check how much your house will cost you to purchase over a 20 years mortgage, compared to paying cash for today’s asking price. The fact is that if you do not have the cash – true for most homebuyers and now too for States – then that option does not exist, either for you or the government.

States that try to borrow themselves out of insolvency (taxation receipts are insufficient to cover expenditures) end up with slower growth, higher unemployment and higher inflation than those that avoid this option. Examples of both proliferate in Western Europe.

That is why Adam Smith’s assertions in “Wealth of Nations” have come full circle. The obvious policy now would be to begin to dismantle over extended State activities, both in the funding and the managing of State provision infrastructures, institutions and welfare services and to replace them with privately funded and managed alternatives.

Thursday, April 14, 2005

A Distortion of Smith's Doctrine of Freedom

The Times (London)

On 11 April, William Rees-Mogg, a former editor of The Times, wrote in his regular weekly coloumn about his plans to send to the new Pope and to Prince Charles, heir to the British throne, a copy of Adam Smith's Weath of Nations. I sent the following letter to the Editor on 12 April and it was published in The Times on 14 April.

The edition of Wealth of Nations that Rees-Mogg announced he intended to send was the 1804 edition edited by William Playfair, which is particularly noted for the way in which Playfair interpolated into Smith's text his own criticisms of Smith, but did so in identical type face and size to that used to print Smith's Text, hence, it is difficult to see at a glance which are the words written by Smith and which those added by Playfair.

William Rees-Mogg did not mention that he edited Playfair's edition in a specially published expensive edition costing £450 a copy published in 1996. Presumably it was this one that he intended to send to the Pope and Prince Charles. I suggest he send the Glasgow Edition of 1976, published by Oxford University Press instead, which is regarded as the definitive sixth edition written and edited by Adam Smith in 1790 and which is also far more authoritative than the combined Playfair - Rees-Mogg edition.

Letters to the Editor
April 12, 2005


From: Professor Gavin Kennedy

Sir,

“Adam Smith’s view was that every man should be free to pursue his own interest in his own way, without encouragements or restraints, ‘upon the liberal plan of equality, liberty and justice’.” If this summary, attributed to William Playfair, Smith’s first editor, is what William Rees-Mogg (Comment, April 11) would pass on to the next pope or the next king, more is the pity, for it is a distortion of Smith’s doctrine.

He did not believe in such freedom. His The Wealth of Nations (1776) is a polemic against monopolistic tendencies enshrined in law by gullible legislators and he was against the proclivity of “merchants and manufacturers” to restrict entry to their trades by others. In short he favoured open competition, not the absence of restraints on what today we call capitalists.

The 19th-century mill and mine owners misappropriated Adam Smith in support of their demands to employ women and children, and men too, at whatever wages they decided to pay. This laissez faire doctrine, wrongly ascribed to Smith, continues today.

Even his isolated metaphor about the “invisible hand” (used in reference to something else entirely) is used to justify the false belief that all actions by entrepreneurs are always, albeit unintentionally, socially beneficial. Smith was too sharp an observer to purvey such an obvious error.

If the new pope and the king-in-waiting are to be gifted copies of The Wealth of Nations then not, please, the William Playfair 1804 edition; send the Glasgow Edition of 1976, which is much more authoritative because it is edited by academics and not a politically minded reactionary.

They might also profit from reading Smith’s The Theory of Moral Sentiments (1759). That way they will benefit from his real legacy and not that purveyed since the early 1800s.

Yours faithfully

GAVIN KENNEDY
gk@ebs.hw.ac.uk

Wednesday, April 13, 2005

The term 'Dismal Science' brings no discredit to Economics

Dear Professor G. P. Landow
Professor English and Art History
Brown University
USA

Dear George
A contributor writes in the page (The Victorian Web: www.victorianweb.org/economics/laisez.html) devoted to Adam Smith:


"Thinkers such as Ricardo and Malthus postulated that overpopulation, low wages, and starvation would always continue to plague society. Economics, which started with Smith's guarded optimism, quickly became known as "the dismal science." (David Barber, Adam Smith)"

This contains popular, but nevertheless, gross errors. The term 'dismal science' was accorded to the alleged failings of Political Economy, or economics, in the 19th century in a pamphlet written by Thomas Carlyle. That much is true, but everything else in the two sentences is not only wrong, but also embarrassing.

Carlyle's pamphlet was titled: 'An Occasional discourse on the Negro Question', first published in 1849 (another edition appeared in London in 1851 entitled 'An Occasional discourse on the Nigger Question'; surely an outrageous and disgraceful indicator of the nature of Carlyle's argument, which far from merely poking fun at economists, actually exhibits a deep racist slant on the subject?

Carlyle did not direct his remarks at David Riccardo or Thomas Malthus, or even at Adam Smith. He was writing a rebuttal of ideas expressed by James Stewart Mill, whose book on political economy was published in 1848. Mill had advanced the notion that all peoples on Earth, from all races and colours, were basically the same. Blackmen and women were not born to slavery; they were forced into it. Carlyle absolutely disagreed with Mill's humanistic notion. He expresses in his pamphlet the most offensive justification of slavery, denied explicitly that Africans were of the same species at Europeans (the very idea incensed Carlyle - as it did his friends and colleagues, among whom we find Ruskin and Charles Dickens)and he lambasted J. S. Mill, an economist for claiming the contrary view.

It was the notion that people are equal as human beings that Carlyle found as evidence that economics was the 'dismal science'. This had nothing to do with Malthus, or Riccardo, or Smith (who explicitly agreed (1776) with the humanistic notion, later elaborated by Mill in 1848).
To suggest that the disgraceful origins of the notion of economics as a 'dismal science' had anything to with the contents of economics (the popular misconception), when what Carlyle was criticising was to the lasting credit of Smith and Mill, is a canard that should be corrected and not passed on in a web site addressing educational topics to young people.


You can find a scholarly account on this episode in Robert Dixon (University of Melbourne), "The Origins of the term 'Dismal Science'"at: www.economics.unimelb.edu.au/TLdevelopment/econochat/Dixonecon00.html
or simply go to Google and enter 'dismal science'.

Kind regards

Gavin Kennedy

author: "Adam Smith's Lost Legacy", 2005, Palgrave MacMillan
www.lostlegacy.co.uk

Tuesday, April 12, 2005

Oh No He Didn't!

Grand Forks Herald - Grand Forks, North Dakota, USA 10 April 2005

Weinstein to give presentation

Professor Jack Russell Weinstein will give a public report Monday entitled "Is Money All There Is?"

In his presentation, Weinstein will discuss what it means to be a whole person in a just society from Adam Smith's perspective. Smith, an architect of modern capitalism, introduced the free-market and the power and potential of capitalism to the world. Smith had envisioned the free-market as a catalyst for the cultivation of freedom, morality and social unity, as well as a tool to better the condition of all people.

Weinstein, of UND's Philosophy and Religion Department, is a Smith expert and wrote "On Adam Smith" in 2001.

Comment

“Smith, an architect of modern capitalism, introduced the free-market and the power and potential of capitalism to the world”

In one sentence Weinstein raises questions about his status as an ‘expert’ on Adam Smith (not that his error is unique because most of the economics profession in the US and elsewhere teaches and repeats the same error over and over again).
Smith, for the record, was no the ‘architect of modern capitalism’. Smith wrote in the mid-18th century and died before anything remotely akin to capitalism, modern or ancient, appeared on earth. Given this he could not have introduced the ‘power and potential of capitalism to the world’.

Smith’s ambitions for society were much more modest. He saw a gradual extension of commercial markets in Western Europe and expressed concerns at signs that countries were investing too much stock (what we now know as capital) in manufacturing and not enough in agricultural improvements.

His vision for the ex-American colonies (to which he was largely sympathetic) was that in 100 years (i.e., around 1880) it would become the premier agricultural power in the world. He did not foresee the immense technological advances of the 19th and 20th centuries that would transform relatively backward agricultural economies into industrial workshops and raise living standards by mass consumerism. Neither did anybody else among his scientific colleagues.

To keep asserting that he did is completely contrary to the facts, as a reading of his books would show to the half attentive reader, let alone ‘experts’ on his legacy.

Gratuitous misuse of Adam Smith's Name

New York Post, April 10, 2005
Adam Bronsky writes:
“New Jersey's Acting Gov. Richard Codey just sent me the strangest letter.
From the very first sentence, it aroused befuddlement: "I am pleased to report to you that the legislature has passed an increase to the New Jersey minimum wage and I am happy to sign the legislation.

Why in the name of Adam Smith would anyone be "pleased" to report such horrific news — particularly someone charged with safeguarding the state's economy and helping to keep folks from being thrown out of work (or not being hired in the first place)?”

Comment:

The rest is diatribe against the minimum wage. Its contents are debateable. I express no views here about them. My complaint is that he gratuitously associates Adam Smith with his views when there is nothing in Smith’s Works (“Theory of Moral Sentiments” or “Wealth of Nations”, or in his correspondence) to suggest he opposed raising the wages of labourers.

Indeed, if anything Smith was sympathetic to the plight of labourers who were subject to laws preventing them combining (striking) to raise their wages, while employers suffered from no such laws preventing them from combining (locking out their workforces) to lower them. He also opined on several occasions that no society could be healthy if the bulk of its population were deprived of decent incomes, given that they created the very wealth enjoyed by those who tended to oppress them.

That Adam Bronsky finds the news of an increase in the minimum wages ‘horrific’ is his entitlement. To join Adam Smith to his warped sense of horror is unjustified and mischievous.

Saturday, April 09, 2005

The Misappropriated "Invisible Hand"

Correspondence with Robin Chew: www.lucidcafe.com

Hi Robin

You have an interesting web site on Adam Smith. Mostly accurate. You write:

"Smith laid the intellectual framework that explained the free market and still holds true today. He is most often recognized for the expression "the invisible hand," which he used to demonstrate how self-interest guides the most efficient use of resources in a nation's economy, with public welfare coming as a by-product. To underscore his laissez-faire convictions, Smith argued that state and personal efforts, to promote social good are ineffectual compared to unbridled market forces."


However, these remarks about the 'invisible hand' should not be generalised to suggest Smith favoured 'unbridled competition'. He never used the words laissez faire, which most people would be surprised to hear, including many economists. The association of Adam Smith with this view is a 19th century literary invention, started by John S. Mill in 1848. The association of Smith with the 'invisible hand' is a 20th century invention, originating largely in the US academic community.

Smith's used the word 'invisible hand' only three times. The first is in his essay on the Philosophical Method in reference to the History of Astronomy, written between 1743-8 (first published posthumously in 1795) in which he refers to pagan superstition and the 'invisible hand of Jupiter', the god, not the planet. This had nothing to with economics.

The second was in The Theory of Moral Sentiments (1759) in reference to rich landowners who are led by an 'invisible hand' to distribute the produce of the land they own (but do not work on) with the poor in the 'nearly the same' proportion as it would have been made if each family had owned the same equal amount of land and worked on it. The third, and last reference, is in Wealth of Nations (1776) and refers to a preference for home production rather than foreign trade by merchants and manufacturers; they are led by ‘an invisible hand' to maximise national production, which was not part of their private intentions.

Nowhere does Smith generalise this metaphor into society wide injunction. Not all unintended consequences of human action are benign (monopoly in the 18th century; pollution, etc., in the 21st). Indeed, Smith had strong reservations about leaving 'merchants and manufacturers' alone to do their will because of their inherent tendency to form monopolies, to restrict supply and to raise prices when ever they can.

For example, he held strong views about the disadvantages faced by common labourers who were prevented by laws and local magistrates from forming 'combinations' to raise wages, while 'Masters' were not prevented from forming combinations to lower or hold down wages (which they did regularly).

To transfer, out of context, isolated words from fairly minor asides in his books as 'rules' for the conduct of modern economies with vastly more complex interactions than were known to Smith in the mid-18th century - he never knew the word nor the phenomenon of 'capitalism', for instance - is an all too common error. I regard these as misuses Smith's Legacy.”


Correspondence with Professor Brad Delong (delong@econ.berkeley.edu)

Dear Brad

Your write:'The invisible hand assumed a "rational economic man," a greedy human.' Brad Delong

I have just read your paper on "Speculative Microeconomics for Tomorrow's Economy" and was drawn to it because of your mention of Adam Smith's insight into how an economy was 'regulated' (unintentionally) for maximising output.

Perhaps, I should put my hand up and say that your elaboration of how Smith is regarded today is perfectly correct. He is seen as a theorist of capitalism, even extravagantly as the 'high priest of capitalism'. Unfortunately, whatever his reputation he was no such theorist. He wrote in the mid-18th century and the markets he wrote about were primitive. He did not foresee 'capitalism' (a word he never used, or even knew). His markets were local village and town affairs that were common over western Europe, which he saw as a revival of the Commercial Age of classical Greece and the Roman Empire which were swept aside by war lords and barbarians following the Fall of Rome. These early markets were dormant for near 1,000 years.

That his work - and words taken out of context - became metaphors for 19th-21st century capitalist national and international mass markets is undeniable. That they represent his views certainly is deniable. This does not preclude referring to Smith's Works to see if anything he said has relevance today; it means that we first must dump much of the baggage falsely credited to Adam Smith by modern economists, and then apply the authentic prescriptions of Smith for economic growth and markets, which have more relevance than normally ascribed to him.

On your interesting assessments of the changing micro markets I would concur with your analysis. The analysis of the existing, or traditional market forms, I also concur, except when you link them to Adam Smith's ideas, particularly on the 'invisible hand', an isolated metaphor in Wealth of Nations, and from which I believe that you cannot really draw your generalised conclusions. But this is for debate!
From “The Politics of Babangida” by Dele Rotimi, in Vangaurd, Lagos, Nigeria, 6 April 2005:

“As a matter of fact, economics in our time has recorded fundamental departures from the free market fixities and rigidities of the classical schools of Adam Smith. From the last century onwards to the present, the Western states have made large concessions to the economics of socialism. Today, all over Europe even the jobless are paid benefits by government, as against the old doctrine of capitalism that only those who are in employment have a moral right to earn money.”

Babangida was ousted as a military dictator and is now trying to make a come back in Nigeria. Rotimi, correctly, is opposed to Babangida’s return but he makes a poor economics’ case against Babangida, which contains numerous errors. He advocates a subsidy-ridden economy on the Soviet model, where the people get below cost food and fuel and the political apparatus, cynically, is protected against valid opposition that proposes to run a growth economy without subsidies and without the usual inane policies of ‘statism’.

Adam Smith never advocated inflexibility in the appropriate policies for an end to monopoly or the interference of government. He was flexible about the measures and the time scale of remedial action to the problems of great societies.

Rotimi castigates Babangida for his abandonment of state subsidies for important consumer commodities in Nigeria, which led to popular riots (unsurprisingly) and rapid price inflation when he responded to public dissent and relaxed his sensible policies. Rotimi’s error is to defend price subsidies. They seldom work, they end in tears because the state cannot afford them indefinitely and they lead to corruption and wasteful mismanagement (state price controls lead to inspection and rules, and bribes tempt the inspectors). Above all they create a culture of dependence among the people. And it does not matter whether it is the goods consumed by the very poor that are subsidised or the goods consumed by the middle classes. Witness the ferocity of the middle class when ‘subsidies’ are curtailed, as shown recently in the UK when the government withdrew free university education.

What Rotimi calls the ‘economics of socialism’, or ‘welfare capitalism’, had nothing at all to do with Adam Smith because he was dead long before capitalism developed out of the industrial revolution of the 19th century. Employment pay was unknown in Smith’s day, not because he and others ignored what Rotimi calls the ‘toiling masses’ (betraying Rotimi’s an affinity with Soviet rhetoric), but because nobody in the 18th century considered such innovations common in the 20th century! To make ‘large concessions’ to the ‘economics of socialism’, capitalist economies had to become much richer than was imaginable in mid-18th century Scotland (by all standards a very poor country). It was never a ‘doctrine’ of capitalism that the unemployed had no ‘moral rights’; philanthropy and charity and state funded welfare grew up alongside the rising wealth generated by capitalism. Before capitalism, bad as it was for those at the bottom of the heap, it was much worse in the preceding millennia for everybody other than the very rich and powerful; with capitalism in the 19th and 20th centuries per capita income right through the social scale reached levels unprecedented throughout history.

Free people in markets do better than under dictatorships, Babangida’s included; free people under the rule of law do better than people living in almost every state in Africa who are subject to that continent’s many dictatorships; free people trading with rich countries that are burdened with highly subsidised and high priced food (even taxed too) from the Common Agricultural Policy, much of the surplus of which is dumped into poor countries, would do much better if Europe abandoned these elements of the ‘economics of socialism’ and let markets feed it and the poor countries too. Using scarce tax revenues in poor countries to subsidise consumer products, while much of the rest of the country’s taxes on productive sectors are confiscated in scams, corruption, wasteful monuments and heavily (subsidised) internal security forces, is no solution for Rotimi’s ‘toiling masses’, or the middle classes.

Adam Smith was never part of the problem for the poor of Africa – he is part of the solution.

Thursday, April 07, 2005

Smith's Legacy Applied in India and Britain!

Kalsa News Network, Punjab, India, 5 May 2005 (www.kntimes.com)

KNT carries a feature that discusses Adam Smith’s views of public works and how they should be funded:

“Governments provide a solution to this problem [that of collecting revenue and monitoring usage] by constructing the roads and recouping the expenses through taxes such as the income tax and the gasoline tax. Other pieces of infrastructure such as the sewage and water system work on the same principle. The idea of government activity in these areas is not new; it goes at least as far back as Adam Smith. In his 1776 masterpiece, The Wealth of Nations Smith wrote:

"The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain.

Higher taxes which lead to improvements in infrastructure can lead to higher economic growth. Once again, it depends on the usefulness on the infrastructure being created. A six-lane highway between two small towns in upstate New York is not likely to be worth the tax dollars spent on it. An improvement to the safety in the water supply in an impoverished area might be worth its weight in gold if it leads to reduced illness and suffering for the users of the system.”

The reference to Wealth of Nations is from Book V.i.c: 723. It is all right as far as it goes, but Smith explicitly states that the ‘system’ in operation on toll roads was ‘not of very long standing’ and abuses had not yet been eliminated. He was not happy with private ownership of toll roads, nor with public Commissioners running them. Both had disadvantages, particularly if governments used toll revenues to raise funds for other 'exigencies' besides repairing and maintaining the roads.

The author of the KNT piece applies the Smithian notion that only governments can afford infrastructure investment on the scale required in road building and for sewage and water supplies. Such is the growth of public expenditure in all developed countries that we have come full circle since the 18th century. Now the massive capital investment required for building and maintaining large-scale public works is beyond the ability (economic and political) of governments to fund them. Hence, they teh public sector descends into disrepair and low quality. When Galbraith spoke in the 1960s of ‘private affluence and public squalor’ he missed that point completely.

It is possible to meet the massive capital investments required for safe sewage and water systems by mobilising private capital under 'Public and Private Partnerships' where public authorities invite private organisations under contract to finance the erection, maintenance and operation of modern sewage and water works for long periods (20 to 39 years) for annual fees, paid out of taxation according to public usage and high quality and performance standards. This is a thoroughly Smithian principle applied to a practical problem.

I am glad these ideas are being discussed in the Punjab in India (and are being applied in Britain).

Wednesday, April 06, 2005

Freedom for people in markets

Seth Sandronsky in his review of a new book by Samir Amin, an unrestrained critic of all things American, called “The Liberal Virus: permanent war and the Americanisation of the world”, (Monthly Review Press, 2004), makes the following remark on Adam Smith’s version of ‘liberalism’:

"Once, to be a liberal meant to privilege the market over people. So wrote Adam Smith, the
guru of capitalism, over two centuries ago. For him liberalism was nations and peoples
pursuing their self-interest, or freedom, in the market place. Thus freed, society would
prosper.

Currently, liberalism describes policies or views that run counter to the market freedom
Smith backed. His vision was the traditional meaning of liberalism. Today it is actually the
conservative, or free-market approach. In George W. Bush’s America such liberalism is a
dangerous sickness…."

Of Samir’s latest critique of American foreign policy or Sandronsky’s vision of George W. Bush’s ‘dangerous sickness’, I shall say nothing. Of Sandronsky’s version of Adam Smith’s legacy I shall comment simply that Smith was never a ‘guru of capitalism’, an economy of which he knew nothing and said nothing.

Markets did not enjoy privileges in Smith’s day; his Wealth of Nations was a critique of the lack of freedom of people in markets under the institutional monopoly privileges awarded to ‘merchants and manufacturers’ by gullible governments and legislators. In no sense did Smith ‘privilege’ markets over people.

In fact, the sentence (and its disconcerting ‘Americanisation’ of nouns into verbs) is meaningless, except at the most trivial level:

if a person wants to sell apples above the competing prices of her neighbouring stall holders it is hardly dictatorial of the other stall holders, i.e., the market, to gain customers from among those who would otherwise be forced to buy their apples from the higher priced seller, or for the majority (all?) of the customers to choose to buy cheaper elsewhere. In both cases, the players in the market – all of them people – exercise their freedom to do so.

To complain that this ‘privileges’ (!) the majority of the people making up the market over the single seller, i.e., one person among the many people, is a strange, even reactionary, conclusion. It leads to the defence of monopoly – that people should be forced artificially to pay the higher prices sought by a high priced suppliers despite the lower prices offered and accepted by the majority of people in the market.

It was not ‘market freedom’ that Smith backed; it was individual freedom for people in markets to do with their revenue what they wished, within the law, and for suppliers to do with their ‘stock’ as they wished without artificial and unnecessary barriers to them exercising their ‘trades’, again within the law. It is the people who are free in markets, not markets that are free or ‘privileged’ over people.

[References: Dissident Voice, 5 April, 2005 in www.dissidentvoice.com, and "Adam Smith’s Lost Legacy", Palgrave Macmillan, 2005)

Tuesday, April 05, 2005

Invisible nonsense

Thanks to the wonders of Google I receive a Adam Smith alert each day wherever the name Adam Smith appears in the google search regime. Sometimes this refers to a Congressman called Adam Smith, sometimes to a Smith running in a race alongside somebody called Adam. Hovever, occasionally we hit 'bingo'.

One such was a piece from the Sun, a local newspaper on Ohio.com, on 3rd April 2005, called "Sweeping economic forces reshapes jobs, lives". This was a story about a distraught phone caller reacting to his loss of his job, almost incoherent in his distress.

The author asserted: "The 18th century economist Adam Smith had it right when he charactersied the guiding force in the economy as an invisble hand. Our understanding of the larger forces is often obscured by the struggles of the moment."

This is the balming equivalent of saying the 'God moves in mysterious ways' applied to economics. The fact that Smith never alluded to such nonsense is missed completely. His reference in "Wealth of Nations" to the 'invisible hand' had nothing to do with a "guiding force in the economy", as if that made it alright then. He was referring to the unintended consequence of 'merchants and manufacturers' (the latter not to be confused with their 19th century descendants who ran large factories employing thousands, with steam, later electric, power driven machinery, of which he knew nothing) choosing to prefer the home to the foreign market and by so doing achieving the optimum end of economic growth (Wealth of Nations, IV.ii.4-12).

This had nothing to do with the "guiding force of the economy", a wholly invented 20th-century generalisation from a single (indeed the sole) reference to the invisible hand in the "Wealth of Nations". The unintended consequences of people can be helpful and also detrimental to growth. The so-called invisible hand is not always benign; it can be destructive as well as beneficial. Hence, assessing every act of business as being part of a grand, unfathomable scheme by some higher order, perhaps devine, is plain silly.

Whether the closure of the plant leading to the distress of the caller to the Sun could be part of an unintended benign intention of the management, or it could be due to unexceptional incompetence or even malicious criminality, we do not know without further details.

As an example of the misapplication of Adam Smith's Legacy it has few rivals. That his Lost Legacy has reached the editorial pages of a local Ohio newspaper reveals the extent to which Adam Smith's true views have become distorted to the point of being a paraody of them.