Weekend Reading: Fareed Zakaria and Four Fed Chairs

Weekend Reading: Gavin Kennedy on Adam Smith: "Bound by The World Order in Which He Lived"

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Gavin Kennedy: "Bound by The World Order in Which He Lived:" On Why Adam Smith Was a Realist, Not an Ideologue:

Smith wrote The Wealth of Nations (WN) from years of prior research by several others, as well as his own labors (20 years), going back to early classical times. If he had not done so, others eventually would have replaced him and WN. Ideas about political economy became a small flood in the 19th century—today it's a raging tsunami of competing ideas and explanations, much of them non-scientific, often twisted for ideological purity; much of what the tsunami of daily drivel sweeps up as representative of Smith’s ideas is quite false. Hence, the title of my first book: Adam Smith’s Lost Legacy (2005).

WN was the second volume of an intended trilogy, covering Moral Philosophy; Political Economy, and Jurisprudence. Smith never finished his third book on Jurisprudence, though he had worked on it for decades since he joined Glasgow University as a professor (also parts of WN featured in his Jurisprudence lectures as early/late as 1763). The unfinished manuscript was burned along with other volumes of his papers on his direct deathbed instructions to his Literary Executors, Joseph Black (chemistry) and James Hutton (geology). However, we have a set of rough student accounts of his Lectures on Jurisprudence (1762-3), enabling us to gain rough ideas of his views on jurisprudence and the roles of government legislation integrated with moral and economic matters. This still leaves his considered views incomplete. Unfortunately, Smith ordered his unfinished manuscript to be destroyed. I have my own views as to why this work was not concluded.

If we supposed instead that Smith had not completed WN in 1776, would it have affected the progress of economic theory, given the course of other people's’ published economic ideas in Europe? Clearly, the details of the history of economics would have been different, but by how much we don’t know. I do not think it would have mattered that much because by Smith’s time, and for many decades after him, there was a wide, even occasionally deep, knowledge of political economy in print in northern Europe. Much of this material took the form of thousands of short printed essays, which have been collected by Yale University and are now available to researchers. A few major volumes on political economy were published before and contemporary with Smith; however, many of them did not have the longer-term impact of WN or The Theory of Moral Sentiments (TMS ). One such major work was Sir James Steuart’s An Inquiry into the Principles of Political Economy, published in 1767, which disappeared without trace, so to speak; Smith said he had replied to all its errors in WN ‘without mentioning its author’s name.’ He also responded to other papers, such as Jeremy Bentham’s on interest rates and the French Physiocrats’ on the predominance of agriculture. I also refer you to Samuel Pufendorf, the German scholar whose writings on political economy were widely read in European universities (including Glasgow) before Smith. In fact, many of Pufendorf’s ideas were contained in WN.

The above facts lead me to conclude that in the absence of WN the substance of political economy would have been similar, though, its detailed influence on the UK (and the early US) state politics and practices may have been different. It should also be noted that Smith’s actual influence on UK political economy (in the sense of changing it), was slow to be adopted, and there was much resistance to his recommendations from legislators and powerful political interests who did not accept Smith’s ideas on economic policy—tariffs, prohibitions, and natural liberty. The State Establishment did not suddenly cave in to Smith’s ideas and has not done so since! His ideas remain controversial and, uniquely, have been transformed in many cases into mere shadows of his actual ideas, where they are not outright contradictory....

Smith conjectured that when humans had progressed enough from the early ‘savagery,’ some of them tried to explain—however crudely—the natural events around them, albeit wrapped in a ‘vulgar polytheistic’ theology. The young and insightful Smith pointed to the implications for individuals seeking explanations for such events and thereby gradually opening the road to science and its explanations. We do not know where or which human minds had devised even the crudest of tools; we can be sure that many fanciful explanations were adopted across the wandering and widely separated bands. If a discovery was made in one geographical space useful for the making of stone axe-heads, this did not preclude similar independent discoveries in other, distant, areas on other continents. Early exchange behavior was discovered independently across the globe and took many cultural forms, as the modern sciences of anthropology and archeology demonstrate. Smith’s first essay on the History of Astronomy also published posthumously in 1795) was a conjecture from his young mind suggesting that no matter what the obstacles, the search for explanations continues....

In reality, Smith was a man of deep social relationships with like-minded peers.  The anecdotes that feature in ‘gossip’ from the period are found to be more innuendo than factually objective.

I select two examples: he was supposed to have entered the Edinburgh Customs office building (now the City Chambers) where a member of the City Guard stood to attention and smartly shouldered his musket, as was the custom at Government Offices. Smith, of course, entered the offices as the senior Commissioner of HM Customs on his way to his large office, overlooking the Firth of Forth anchorage a few miles to the East. The anecdote alleges that Smith responded to the soldier presenting arms by ‘mocking’ the guard’s drill using his walking cane in place of a mucket, and allegedly showing his implied awkwardness. In fact, Smith was an Honorary Officer of the City Guard and was responding to a drill he knew well. His attention to detail suggests he executed the drill commendably. It was a sign of his social skills and his ability to mix socially with men of all social ranks.

The other complaint is about his ‘awkward social graces.’ It’s true that he often chose to keep quiet while others, who were pushier, dominated the proceedings. However, in the company of fellow philosophers, he was much more relaxed and socially participative. He wrote of his own experience in the Theory of Moral Sentiments (1759):

It is for a reason … that a certain reserve is necessary when we talk of our own friends, our own studies, our own professions. All these are objects which we cannot expect should interest our companions in the same degree in which they interest us. And it is for want of this reserve, that one half of mankind make bad company to the other. A philosopher is company to a philosopher only; a member of a club to his own little knot of companions (TMS I.ii.3.1, pp. 33-34).

When he lived in Edinburgh (1778-90), he had a regular social life with the literati, with Enlightenment scholars, both resident and visiting, including authors and poets from England. Socially, he mainly centered on other contributors to the Scottish Enlightenment. Moreover, he held an ‘open house’ at his home, Panmure House and also held regular weekend ‘sessions’ at the nearby Oyster Bar with his closer Enlightenment friends (known unofficially as ‘Adam Smith’s Club’).

Looking back at the mid-to-late 18th century, it is easy to forget the much smaller scale of society at the time. The population was tiny compared to today. Intellectuals were dispersed thinly. Edinburgh’s (and Europe’s) vibrant intellectually-minded membership of the Enlightenment was measured in a dozen or so. They all knew each other. In sum, Smith’s circle of close friends was not large by today’s standards, but it was significant for the time. By no measures would it be considered to make him a ‘solitary figure,’ either in Scotland or London. Foreigners sought him out, and he welcomed them. What remains of his correspondence shows him to have been in active contact with many leading citizens in Europe, especially when writing The Wealth of Nations and later.

Smith lived a double life. In private, he has attended to his mother and went to great lengths to hide from her his non-religious beliefs. His views were, however, shared with his closest friends, including Dr. William Robertson, Moderator of the Church of Scotland and Principal of Edinburgh University, and with Hugh Blair, the charismatic local Minister of the Church of Scotland, plus other members of the Church or self-proclaimed Deists. Within the privacy of the regular meetings at his Sunday lunches and the Oyster bar, they all knew of his need to avoid publicity or disclosures by others that would seriously upset his mother. He did not make any public statements on religion that would upset her. After she died in 1784, he prepared a new and last edition of Moral Sentiments that considerably altered the theological emphasis of the earlier editions. [I discuss these matters in my paper in the Journal of The History of Economic Thought (JHET, 2011. The Hidden Adam Smith in his Alleged Theology, September, pp 385-402, and in The Oxford Handbook of Adam Smith, 2013, Adam Smith on Religion, pp 464-84. OUP)....

As philosophers, [Smith and Hume] became close collaborators. Though they did not agree on everything, they did not quarrel. Hume had many friends in the religious establishment who knew, of course, of his extreme skepticism on revealed religion (he never admitted to atheism). Hume was such a charming and intelligent companion he got on well with the senior members of the Church, as well as Smith’s mother. But he never found common ground with the more fanatical sect of Calvinists that dominated Church government at the time.

Moral Sentiments was published in 1759 and addressed moral conduct and associated dilemmas that are broadly still relevant. Along with The Wealth of Nations, Smith’s analyses remain relevant, though his remedies may have to be changed because of their content restricted to the experiences of the 18th century. Obviously, they cannot be used on a one-for-one transfer to the 21st century. Smith never forecasted the future, with the sole exception of his prophesy that in 100 years from 1776, the then fledgling new state of North America would become the largest and richest economy in the world. This was in the context of his proposed union of America and the UK, with the common parliament moving, in due course, from London to New York. Of course, just months later, the colonies declared independence and chose a presidential system, not a monarchy!

What does Smith’s content offer in our age? Not much in detail, but as an analytical method, it offers a lot, provided the changes are reflected in modern analysis and methodology. Take two examples. First, Smith’s solid analysis of the exchange mechanism is linked in both books. In WN, the parties try to persuade each other that their bargained exchange is linked: ‘If you give this that I want, you shall have that which you want’ (WN I.ii. p 26). In TMS, he explains several times how differing parties use persuasion through conversation (not coercion) to find common ground for the exchange.

Some modern analysts insist that exchange is a process of each party gaining equally (common among some anthropologists and marginal utility theorists); their assertion does not conform to experience. Smith was closer to the idea that each bargainer makes gains that are not necessarily equal, but positive to each party. The negotiating experience of my Edinburgh Business School (Heriot-Watt University) was built from my former consultancy, Negotiate Ltd (from which I retired in 2010), and continues those Smithian concepts that are still valid in the 21st century (see: G. Kennedy, 1998. The New Negotiating Edge, Brearly, London).

On the other hand, Smith’s ideas in certain areas have been shown to be wrong and add nothing to modern analytical experience. Think of the so-called ‘labour theory of value,’ which, while dominant in the 17th and 18th century, was no longer regarded as worthwhile by the late 19th century, and today is practically non-existent.

Much else has moved into the more fertile analysis suited to the explanation of economic phenomenon that appeared and matured in the significant growth of economic activity—and population—the area which Smith had not experienced.  He looked backwards to how the wealth of nations was driven since earlier times and what this meant for his times. What set him apart from his contemporaries was, and remains, his analytical insight into how his world was changing. The relationship between the market and the state has become vastly more complex over two centuries and remain unresolved and not yet fully understood. People who presume to speak for Adam Smith often (I find) do not really understand his thinking.

A professor recently admitted that he had placed on his shelf Smith’s TMS 35 years ago and not read it until recently. For him it was an inspiring revelation and his popular book on it has become a hit. Unfortunately, this is not uncommon (I refer to the not reading of the book, not to the discovery of new insight)....

I do not consider ‘the invisible hand’ to be important, certainly no more so than the many other metaphors he used in his works. It has become important since it became noticed and excessively commented upon among modern economists, mainly because it was particularly misrepresented by Paul Samuelson in his very successful textbook, Economics: an introductory analysis, McGraw-Hill, 1948 and its 19 subsequent editions; see Gavin Kennedy, ‘PAUL SAMUELSON AND THE INVENTION OF THE MODERN ECONOMICS OF THE INVISIBLE HAND’. Journal of the History of Economic Ideas, vol. 28(3), pp. 105-119.

Derivations of Samuelson’s assertion that Smith claimed that the ‘selfish’ actions of individuals are led as if by an ‘invisible hand’ to ’achieve the best good of all’ have become universal. This assertion at first gradually spread in scholarly and public media and then went ballistic into tens of thousands of repetitive assertions all across the whole world’s media (see Figure 11.1 page 316, showing references to the ‘Invisible Hand’ from 1825 -2006 in my essay, ‘The Invisible Hand in Philosophy and Economics’ in Propriety and Prosperity, Hardwick and Marsh, Palgrave 2014. Today, Samuelson’s statement is believed by most people, including by Nobel Prize winners (who should know better, assuming they have read Adam Smith’s singular mention of the ‘invisible hand’ in The Wealth of Nations). On top of this misconstruction, wild assertions about how economies allegedly operate are believed and advocated by those who rely on Samuelson’s misrepresentation (broadly Rightist ideologues, who see perfection in free markets in some sense), and those who denounce them (broadly Leftist ideologues who see perfection in government management).

This issue is important because, at root, it is an invention that misdirects those who would seek to understand the benefits, and the inevitable limitations, of real world economies. Moreover, the modern theory of the ‘invisible hand’ bears no relation to Smith’s use of the metaphor. Clearly, in real world, economies’ selfishness seldom leads to public benefits. In fact, such behavior leads to public disbenefits, as Smith showed in his regular criticism of the selfish actions of those who agitated (and also bribed) for the imposition of self-serving tariffs (and even outright legal prohibitions) on foreign goods, aimed to reduce, even abolish, competition in order to raise domestic prices and profits. That so few economists completely miss these consequences when praising these ‘selfish’ merchants, is a glaring error.

The ‘invisible hand’, allegedly of the market, is supposed to drive the economy if allowed to do so by enlightened government. But markets are driven by visible prices and cannot work without them. There is nothing invisible about markets. Adding to markets an ‘invisible hand’ adds nothing to our understanding of how markets work. It confuses rather than adds to knowledge. And Smith was not so foolish as to obfuscate his analysis with such nonsense.

The ‘invisible hand’ was used metaphorically and not as a noun. Smith’s recommended to use metaphors in rhetoric, as outlined in his series of ‘Lectures on Rhetoric and Belles Lettres’ (LRBL, 1748-63). Alarmingly, most economists who misquote his use of the ‘invisible hand’ metaphor have not read his rhetoric lectures, which, he argued, should be about ensuring the speaker’s perspicuity. A metaphor, Smith said, ‘gives due strength of expression to the object to be described and at the same time does this in a more striking and interesting manner’ (LRBL, p. 29).

What was the ‘object’ of the metaphorically invisible hand? In The Wealth of Nations, he introduced the case of the merchant who avoided foreign trade because it was too risky for him. That clearly was his motive, and therefore, he invested his capital domestically, where he was more confident of earning a profit, and, should there be a dispute, he had more confidence in the local justice system. Those were the motives of his actions. Note that there is no mention of general markets. The merchant’s motives were obviously invisible to others, unless he identified them generally and truthfully, which in Smith’s account he didn’t. His intention was the personal security of his capital.

However, by intentionally investing locally and not abroad, the merchant added his assets to the total of domestic capital and, in doing so, unintentionally added to ‘domestic revenue and employment,’ which was not his intended purpose. To give ‘due strength of expression’ to the merchant’s hidden motives (hidden because we cannot see into the minds others), Smith applied the metaphor: the merchant was ‘led by an invisible hand’—his motives—to the consequential and unintended benefits to the domestic economy and those who lived in it by raising ‘domestic revenue and employment’ (in modern parlance, raising the GDP).

It was not the ‘invisible hand’ of the market economy that Smith described, but the unintentional consequences of the merchant’s private motives for his actions. His motives led him to act intentionally, and his consequential actions had unintended beneficial consequences for the public good. There was no ‘invisible hand’ intentionally leading to consequential benefits, and to believe that there was is close to being a theological assertion (as some are, who bring such an explained mystical or miraculous ‘spirit’ into economics).

Smith’s ‘invisible hand’ reference was not confined to market economies because in Moral Sentiments he applied the metaphor to the early agricultural economies, not noted for the existence of markets. Throughout history, agriculture has been associated with slavery—think ancient Greece, Egypt, Babylon, China, Rome, early Europe, and the southern USA). Smith’s third reference to the ‘invisible hand’ in his History of Astronomy was not as a metaphor—it was a proper noun for the Roman God, Jupiter. Readers can become aware of the wide range of modern (mis)applications of the metaphor by looking for daily references to ‘invisible hands’ on Google Alerts (I receive scores a day!). Economics would have more authority if it could terminate belief in mystical/magical invisible hands guiding market economies. Certainly, merchants do not intentionally act to create unintentional consequences—otherwise, they would not be unintentional!...

Low wages... narrowed the market from which capital and labor could add to the economic activity of production and consumption. Smith favored higher wages for laborers; employers preferred their freedom under law to set wages. Labor scarcities in North America tended to raise wages (except for slaves) and were to become drivers for rising prosperity.

Smith was not a left-of-center (or right-of-center) thinker. He told it as it was in terms of the age he lived in. He supported repeal of the laws that preserved the inheritance rights and prevented the breakup of large (unproductive) estates through entails. I don’t think we can ascribe to the Mayflower emigrants either Republican or Democratic values!

I find allusions to a ‘left’ thinking Smith unconvincing....

Smith’s attacks on the mercantile political economy were unrelenting. Realistically, he did not expect it to end because of the ‘clamour’ of interested parties. Moral philosophy was at the center of his thinking. The notion of ‘self-betterment’  drove the gradual evolutionary destiny of puny humans from living in a state of nature (Lectures on Jurisprudence) to civilizations. His speculations in this regard are neglected by modern scholars. From erecting branches for crude shelter to stone-built wonders of the world, the production of the ‘common laborers’ coat (WN) through chains of exchange relationships, Smith showed he understood social evolution, in which exchange over long distances became possible and fruitful—all driven by ‘self-betterment’ on both sides of the multiple transactions....

Today, Smith’s ‘posthumous fame’ is largely at variance with what he actually wrote about. He did not favor laissez-faire, especially in its one-sided version of the purely self-interested actions of ‘merchants and manufacturers’ (a scurrilous set of one-sided exponents of ‘laissez-faire,’ Smith favored ‘natural liberty’ for all).

Smith’s ideas are still not faithfully represented in modern economics.

I am skeptical of classical economists claiming to be his ‘intellectual heirs.’ Even today the ‘neo-classical’ perpetuate the myth of the ‘invisible hand’ and ascribe it to the market.  All markets work using visible prices (and cannot work without them!). What then is the role of an invisible hand?  That even Nobel Prize winners repeat the canard of the ‘invisible hand’ is disappointing, to say the least. The Austrian School likewise promotes the myth of the ‘’invisible hand’ which is also disappointing.