History of Economics Society Annual Meeting (York University, Toronto) 3

The first session I attended today was ‘Plato, Aristotle (and Marx?)’. It is becoming clear that a respectable number of contributors are interested in the philosophical links in the history of economic thought, including in Adam Smith’s work.

Anna Greco took Plato’s republic as the theme of ‘Economic Effectiveness and Economic Efficiency’ (largely about the different perspectives on the division of labour of Plato and modern economics) and Spenser Pack reported on Aristotle and his ‘difficult relationship with Modern theory’ from which I learned a lot about what I had previously known very little. He showed strong philosophical links between Aristotle and Smith. Robert Urquhart advanced a proposition of ‘Marx as a Left Aristotelian’ and made good case for his hypothesis. I found this session the most interesting and clearest intellectual survey. The discussion was equally good (those speaking occasionally dropped into conversation mode and I could not hear them well, or in some parts at all).

The plenary session on, ‘Why do Historians of Economics Hate Social Studies of Science?’ struck a chord with me. I have long been suspicious of disciplinary boundaries (in some cases, Iron Curtains), where excursions into or visitors from other disciplines might help economists conduct their studies better. I could not imagine Adam Smith’s work being so productive of insights if he had written solely within the strict boundaries of modern social science, or at least as it is practised in some areas by colleagues.

The major problem of this session was the familiar one that speakers from the floor tended to speak conversationally, though there were mikes present but they were not used. What is it with the coming generation of academics that they prefer to speak and not be heard than get up and go to a mike? Some members of the audience shouted advice to ‘speak up’ and were ignored (I didn’t do this at any meeting). ‘Twas a pity’, as was the failure of speakers to repeat or summarise the inaudible questions or comments in reply.

Next up after lunch – in my case a cup of coffee (decaf) and a Danish - was Maria Pia Paganelli whose paper was on ‘Approbation and the Desire to Better One’s Condition in Adam Smith’. This was presented well and her argument was solid. She took the usual assertion among modern economists of Adam Smith supposedly stating that in the search for approbation (praise), people’s self interests would have social benefits, and she showed that this conclusion was unsustainable in many cases, using a simple graphic.

I followed with my paper on Smith’s theory of bargaining, showing how his tentative view that the ‘propensity to truck, barter, and exchange’ appears to have been prevalent in pre-history, first as reciprocation, and that this evolved into bargaining, which Smith described as the conditional proposition (‘If you give me what I want, then I will give you this that you want’). My work in bargaining since 1972 completely concurs with the significance that Smith attached to the conditional proposition (largely mised by colleagues). This allows for an interpretation of the famous paragraph about the ‘butcher, the brewer, and the baker’ that is different from common interpretations among main stream economists, including, sadly, among some historians of economic thought.

In the next session, I chose to attend a fascinating discussion of ‘The Economics of Altruism’, which was presented by Steven Medema (‘Creating a Paradox: self-interest, civic duty, and the evolution of the theory of the rational voter’; Alain Marciona (‘Altruism and Rescue Law’) and Phillipe Fontaine (‘Beyond Altruism’). I have never been happy with the use made of word like ‘altruism’ in social sciences generally. It’s not that I have an alternative word for the phenomenon of altruism so much as it requires the observer to know what’s going on in the mind of the ‘altruist’, which is a feat beyond human capacity. However, the session was interesting, as were the questions. The speakers spoke up and the quietest, Phillipe Fontaine, was audible because I was sitting at the front.

Sandra Peart’s Presidential Address (‘We’re all “Persons” now: classical economists, on marriage, the franchise, and socialism’) was of the standard I have come to expect from her – you can see why she held the presidency of the society this past year. She also seems – from observation – to be popular across the board.

I missed the full-booked HES Banquet (I had a headache – quite a stressful day – but I gave my paid-for ticket to a delegate for his wife, and wondered if that was an example of altruism?).

The morning of the last day was devoted to ‘David Hume’s Political Economy’ and this session consisted of presentations by four of the authors of a new book of the title (Routledge, 2008, edited by Carl Wennerlind and Margaret Schabas). The papers were ‘The Historical Context of David Hume’s Political Economy’; ‘David Hume on Value, Manners and Morals’; David Hume’s Monetary Thought: theory and applications’; and ‘The reception of David Hume’s Political Economy in France.’ There was considerable unanimity among the authors and I shall order a copy as the book is now out – each presenter waved a copy with pride to prove it. (If there had been a flyer for it I would ordered one).

Smith and Hume were friends, as is well known – Hume kept a room for him to stay when he (rarely) visited Edinburgh (1766-73). Smith did not treat his friend well on at least two occasions: when Hume applied for a chair in Glasgow University – most assume it was for the Chair in Logic, but I believe it may have been for the Chair in Moral Philosophy in 1751, which Smith was gathering support for his own candidacy.

He wrote to a University colleague, William Cullen, his famous words: ‘I should prefer David Hume to any man for a colleague; but I am afraid the public would not be of that opinion; and the interest of the society will oblige us to have some regard to the opinion of the public’, which damned him with faint praise [Correspondence, No. 10, p 5-6, November 1751].

When asked by Hume to arrange for the publication of his essay on Natural Religion when it was clear he was dying in 1775-6, Smith 'refused' and Hume was disappointed in this treatment and his correspondence shows his disappointment with Smith, who feared repercussions from society. Hume wrote, ever the diplomat, ‘I think, however, your Scruples groundless’ (3 May), and later that day, in a different letter, he wrote: ‘After reflecting more maturely… I have become sensible … of your situation’ [Correspondence: Letters Nos. 156, pp 194-5 and 157, pp 195-6].

The last plenary session was a practical teaching session: ‘Advancing the History of Economics in and out of the classroom’. Kirsten K. Madden gave a spirited address illustrating her ‘Interpretive Question Cluster Discussion Technique in a History of Economic Thought Course’. I was impressed with her message and illustrations.

Years ago, Heriot-Watt economics department introduced the ‘TIPS’ programme to Scottish economists and I believe it achieved improvements in performance in both faculty and students. That it could (would?) economise on faculty resources was a major barrier to its adoption by the departments who tried it. Tenured faculty engage in restrictive labour practices as much as the most unionised plants. But that is an old wound and I won’t go there.

Bruce Caldwell finished the conference with an exciting report on the new Centre for the History of Political Economy in North Caroline (Duke). This could have an impact on the recruitment of faculty prepared to add ‘HOPE’ courses to their curricula in mainstream departments. We shared a cab to the airport during which he gave me more details of his intentions.
…

So that was HES 2008. On the whole a good conference. I met many new faces and heard some excellent treatments. HES 2009 is to be in Denver, Colorado. If I am able to attend I shall do so.

Robert J. Samuelson's Take on Adam Smith

Robert J. Samuelson writes a Newsweek piece on “
“The Spirit Of Adam Smith: We Could Use It, Because (Contrary To Myth) He Tried To Balance Government And The Market”:

“Liberals are so protective of government that they cannot concede the great power of Smith's "invisible hand." Self-interest is not simply greed, selfishness or narcissism. If properly constrained, it is an immense force for social good, and much human progress stems from the independent exertions and creative energies of individuals and enterprises. Liberals recoil at this notion because it deprives them of the power, social status and psychological gratification of seeming to deliver (through government) all the trappings of the good society.”

Comment
Nomenclature: ‘Liberals’ in the USA and the UK have different meanings. But the point that Samuelson is a good one: there are enormous rewards – status, pay and jobs for highly regulated societies – for people employed in politics, NGOs, public agencies, lobbyists, think tanks, and consultancies.

“Meanwhile, conservatives are so contemptuous of government that they cannot admit that it is often more than a necessary evil. It creates the legal and political framework without which tolerably free markets could not survive. It also supplies the collective services--from defense to roads--that the private market doesn't and deals with the market's unwanted "excesses.'' Smith realized that government produced these benefits, but many conservatives who cite him seem oblivious to their existence or importance.”

Comment
Samuelson’s honest confession in not having read Wealth Of Nations raises questions about his justiifcation of his conviction of "the great power of Smith's "invisible hand." The sole reference to an invisible hand is buried in Book IV and Samuelson probably relies on references to it without realising that it had nothing to do with markets.

“I don't claim to have read Smith's "The Wealth of Nations' (1776) from cover to cover. But anyone who doubts the complexity of his thinking ought to plunge into a short but superb intellectual biography by historian Jerry Muller of Catholic University (""Adam Smith in His Time and Ours,'' Princeton University Press). In it, he demolishes the stereotype of Smith as an anti-government zealot. That image founders on one fact: Smith served for years as a bureaucrat, Scotland's Commissioner of Customs. He collected import duties, then the government's largest source of revenue. The job was akin to the head of the IRS today.

Smith's theories explained changes that had already occurred. In 18th-century Britain, feudalism had collapsed. Farm production rose, as did living standards. In England, people felt ashamed to go without shoes; in France, being shoeless was still common. Blankets, linens and ironware became common in England. Smith attributed the new wealth to the triumph of the market: buying and selling. Before, food was mostly consumed by those who produced it or their feudal lords. Manufacturing was also transformed. "Goods once produced laboriously at home--clothes, beer, candles ... furniture--could now be purchased,'' writes Muller.
The market multiplied wealth, Smith reasoned, because it led to economic specialization: the "division of labor" that--through more knowledge, experience and customized machinery--raised production. None of this was planned. It flowed (as if by an invisible hand) from the striving of sellers to maximize their wealth. "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner" Smith wrote memorably, "but from their regard to their own interest.'' ….Government's ability to cripple the market appalled Smith. "The Wealth of Nations" aimed to fortify legislators against "the pressures of economic groups'' for special privileges, Muller says. But Smith's skepticism of government wasn't a revulsion for it. He "enjoyed the work'' as customs commissioner, writes Muller. This was not hypocrisy, because Smith saw three vital roles for government: a) providing defense, b) ensuring justice and protecting property, and c) building roads, canals, harbors--"infrastructure.'' Government had to be properly financed.

Nor did Smith believe that wealth was all that mattered.”

Comment
True, in the modern sense of ‘wealth’, but not in his original sense, where he defined wealth as the annual output of the ‘necessaries, conveniences, and amusements of life”. He saw the raising of living standards of the majority of the poorer members of society as being accompanied, and caused by, engagement through employment as a means to make society more mannered, more gentle and more educated the civilising virtues, and less brutalised, less ignorant, and less likely to be misled by fanatics.

On the whole this is a fair treatment of Smith's views and of its lack of support by 'Liberals' and 'Greed is Good' Conservatives. I also recommend Jerry Muller's Adam Smith in his time and ours, but I would suggest that reading Wealth Of Nations and Moral Sentiments might be the bets place to start from.

A Tall Sunday Story of an Invisible Hand

Dialektika (‘the working man in the world unit’)

Adam Smith and the invisible hand by Helen Joyce.

Joyce begins by slightly misleading her readers, by cutting into the famous paragraph 9 that mentions the metaphor of the invisible hand (WN IV.ii.9: 455-6).

By cutting out the crucial information that Adam Smith discusses not just the general individual in society but those particular individuals who employ ‘whatever capital [they] command’ (WN IV.ii.4: 454), namely merchant traders. He is dealing with a particular case of owners of capital who contemplate where to invest it and choose between engaging in the ‘foreign trade of consumption’, particularly, though not exclusively, in British colonies in North America or India, or investing it locally.

The decision centres on which destination is ‘most advantageous’, which boils down to which is most profitable and least risky? Both are profitable, but one (foreign trade) is more profitable and more risky than the other.

When he invests locally his ‘capital is never so long out of his sight’ and in the colonial trade it may be away from him for months, and subject to the vagaries of the weather at sea, risks of piracy, seizure during wars, dishonest handling in foreign ports, malfeasance when under the control of distant merchants, of whom he knows less than those close by him, the vagaries of foreign justice, and the fortunes of distant consumers.

Not considering the context of which Smith was addressing is tantamount to drawing in the minds of readers of the stripped down quotation a completely misleading impression that Smith is talking as a general rule of trade. He wasn’t! It isn't even mentioned during his long discussiosn of markets in Books I and II of Wealth Of Nations!

Smith is discussing the risk aversion of merchants to investing in trade abroad and necessarily investing locally. The consequence is for Joyce to downplay those parts of the quotation from paragraph 9 that make it clear of what he speaks.

The individual merchant ‘intends only his own security’ and it is this consideration, plus his desire to make profits, ‘provided he can thereby obtain he ordinary, or not a great deal less than the ordinary profits of stock’ (WN IV.ii.5: 454), which determine inexorably, by the arithmetic rule that the whole is the sum of its parts, that domestic products thereby ‘may be of the greatest value’, and certainly greater than they would be if merchants were risk neutral.

This conclusion is sufficiently explained by Smith and readers who understand its construction would see that truth immediately. His readers were educated and literate, but not necessarily all to the same standard, and to cap his presentation he drew on his knowledge of literature, both contemporary and classical, where the metaphor of ‘an invisible hand’, which was widely used and recognised in the 18th century, of ‘an invisible hand’.

The metaphor represents, as metaphors are supposed to, and as Smith taught in his lectures on Rhetoric (see: Lectures on Rhetoric and Belles Lettres,[1763] 1983), the object under discussion, namely the behaviour of risk averse merchants. It was not a ‘theory’, ‘concept’, or ‘paradigm’, nor the greatest idea of great significance. It was not a reference to God, or some divine intervention, which Joyce thought that Smith discovered because he ‘was profoundly religious, and saw the “invisible hand” as the mechanism by which a benevolent God administered a universe in which human happiness was maximised.’ Her conclusion is an assertion for which she has limited evidence.

Smith’s mother was ‘profoundly religious’ but there is no evidence that he was. Indeed, he had abandoned Oxford University to avoid continuing to become a priest in the Church of England and to preach in the Episcopalian Church in Scotland.

The metaphor of the invisible hand is just a metaphor. Nothing more.

Shakespeare used the invisible hand in Macbeth (the ‘Scottish play’), as did Daniel Defoe in Moll Flanders and Colonel Jack, and a score of other authors in books on the shelves of most educated people in the 18th century.

Helen Joyce makes several other wild assertions in her article (HERE). If I have time I shall return to them, but for now I have a conference to attend.

The 35th History of Economics Society Conference, Toronto, 2

From the interesting reminiscences of Geoff Harcourt (a veritable tour de force), I caught the tail end of the paper by Francis Peddle on ‘Hegel’s Concept of Poverty and Scottish Philosophy’. This was not the last reference to Hegel and Adam Smith’s (and Adam Ferguson and Dugald Stewart’s) influence on him. Hegel came up in several conversations during the rest of the day and, as I have little acquaintance with Hegel, it’s all new to me.

Duncan K. Foley took the plenary session. He spoke from, or rather read from, a two-sided pile of typed pages, sometimes at breakneck speed on ‘The History of Economic Thought in the Education of Duncan Foley’. What I caught seemed interesting; unfortunately, much was lost in a rushed mumble, which the sound system did not do much to help in the vast auditorium. By reading from a paper, necessarily looking down at it (Duncan is an American-tall man), he did not help his delivery. I shall await its publication and make a more informed judgement.

The next session that I attended was ‘18th-century Thought’ and this was a gold-dust session for me. Three excellent presentations; three interesting topics; and three stimulating speakers – they made my day.

Loic Charles reported on his work with Christine Théré in Quesnay’s archives and their discovery of the close collaboration of Mirabeau in the ‘produit net’, showing how Mirabeau convinced Quesnay to re-define its meaning. The archives of their handwritten exchanges show this clearly. Incidentally, the French pronunciation (Charles is French) of Quesnay is ‘Kenay’, silent ‘s’; I never knew that, though the discussants from the floor clearly did.

Jeffrey Young (St Lawrence University) ran through his paper on the post-war literature on Malthusian ideas (Limits to Growth, etc.,) and illustrated his case with clear diagrams showing the ‘ecological’ version of Malthus and how they must be re-drawn to correspond to both Malthus’ original ideas and to analysis of he actual constraints on growth. I have seen a similarly constructed diagram by Gavin Reid, showing Adam Smith’s ‘Four Ages of Man’ (Hunting, Shepherding, Agriculture, and Commerce).

Young concluded that the real constraint on growth is not the physical shortage of resources so much as institutional deficiencies (population behaviours; wrong-headed policies). Malthusian predictions have not materialised, and apart from local problems, human prospects are much better than is propagated by ‘limits-to-growth’ type literature.

Young called his approach in the paper as ‘thin history'; for something ostensibly ‘thin’, he was remarkably productive in making his case. David Levy, his discussant was excellent – he spoke to the listeners in the room, and not as is often the case, he did not engage in a barely audible conversation with the speaker a few feet from him; he spoke to the seminar.

In a spirited contribution, Levy, spoke of his case that there are two separate claims to the ideas of Malthus: one is straight Malthusian set of ideas based on what he wrote; the other is a ‘Malthus’ invented by modern literature. I felt the same can be said of Adam Smith.

Benjamin Mitra Kahn (City University) spoke to 'Defining Economic Growth in the 18th century'. His exposition was excellent; his content well arranged, and his purpose fulfilled in showing how ideas about national income accounting slowly emerged as nation states wrestled with what seems to be a problem of classification of stocks and flows, but which was in fact a highly practical search for a clear method of selecting flows for taxation to finance wars.

I commented, briefly, that Adam Smith's distinction between 'productive' and 'unproductive labour' had nothing to do with national accounting, though incorrectly ascribed as that later. These had much to do with Smith's dynamics of growth: what added to growth (circulating capital) and which didn't (prodigality in consumption). It wasn't a divide into manufacturing and services, as is commonly claimed; providers of services for unproductive consumption, were profit-seeking suppliers who did replace their outlays plus a profit, some of which was re-invested in replacing labour and materoal costs and therefore were productive.

I attended part of the session ‘Money in Hume, Law and Cantillon’, in which James Ahiakpor spoke on the ‘Search for a Consistent Interpretation’ of ‘Hume on money’. Again, it is a case of being ‘interpreted’ by
20th-century theorists (Fisher, Taussig, Viner, et al) rather than his (Humes')contributions, ‘Of Money’, ‘Of Interest’ and ‘Of the Balance of Trade’, taken together. Ahiakpor made a competent case, supported by on-screen paragraphs from the different sources.

Here I took a break, and conversed in the coffee room with some participants, and bought a couple of books. The ‘In Memorium’ plenary session for ‘Bob’ Coats was well attended and had a video link to Warren Samuels, whom I had hoped to speak to about his 2007 paper on the modern treatment of the invisible hand. Clearly, he was convalescing and not in attendance. The speeches about Bob Coats (of whom I knew little, other than couple of his pieces I have read on 19th-century social conditions) were moving tributes to the man, his wife and partner, Sonia, and their work.

Lastly, I went to the reception for the outgoing editor of the excellent Journal of the History of Economic Thought, Steven Medema. After ten years, he hands over to the next editor. He has also organised the speakers for the Edinburgh Conference of HET in September, at which I am presenting a paper.

Small change: I was proposing to speak on ‘Adam Smith and the Labour Theory of Value’, basically showing he has been wrongly (dis)credited with a LTV. Instead, I have been asked to give my latest version of my paper, ‘Adam Smith and the Invisible Hand: from metaphor to myth’ and I am very pleased to do so. I shall present the LTV paper (now in final draft) next year at an early opportunity.

The ‘invisible hand’ is a more pressing issue than LTV among the profession and given the critical audience of the HET conference – small numbers, longer sessions, more discussion and more time for critical appraisal, I am pleased, apprehensive, but not complacent, at the challenge of a critical test before my peers for a theme I have been explicating and defending since 2005 on Lost Legacy.

The final paper goes into the conference secretariat next week. It is a clear case of presenting the original ‘S’ rather than the modern “S” (acknowledgements to David Levy).

... Sunday dawns, and I am ready for delivering my paper: ‘Adam Smith on Bargaining’ after lunch, and after a morning session on ‘Plato, Aristotle (and Marx?)’, plus a panel discussion on ‘historians and the history of social science’.

History of Economics Society 35th Annual Meeting 1

Toronto, Canada. I've been here couple of times, changing planes, but this is my first visit to the city on the ground. I have been here in imagination though. My grandfather was in Toronto from the coal fields of Killwinning in Ayr, Scotland from 1910 to the first world war when he returned home. He told me he came home to join the army but they sent him back down the pits to dig coal. Just as well, otherwise my mother would not have been born in 1916, nor me in 1940.

Riding around in taxis, I wodnered how much had changed. From the look of the buildings, the main roads, bridges and railways, it must have changed a great deal. My grandparents would never have recognised anything. They had met and married in Toronto, she from Moray, 'in service' to a Lord and family and he, a cobalt miner from somewhere in Canada.

York University, the conference venue, is large by Scottish, though not by Shanghai standards. Is also new, modern and neat. We're in the 'Schulich Scool of Business' building.

This afternoon (Friday) it was registration, an impressively efficient affair. I wandered off for a coffee with Geoff Harcourt (Cambridge) whom I have not met before but knew him from his role in the 'capital controversy' of the 60' and 70's (I still have a copy of his book). This was a debate between neoclassical economists in Cambridge, Mass. and Cambridge, England. He is a most interesting conversationalist, typical of what I missed from not going to Cambridge. We knew various people in common, but he knew many more, mostly 'big names' in the discipline, and his accounts of them and their work fascinated me. Geoff is a intellectual biorapher, particularly of the Joan Robinson, whom I met once when she was awarded a Honorary Degree at Brunel University, where I was a junior lecturer in the Economics Dept headed by John Vaizey. I also read her book, Imperfect Competition, which struck me as brilliant, and also because of a small point: it was the first economics text that I had read that had diagrams that included red lines as well as standard black. By the 1970s multi-coloured illustrations were fairly common and no longer limited to plain text and often impenetratable graphs. She was always readable.

At the evening supper I slipped away early, preferring to stick close to UK time zone habits as my stay here is short and it's a busy week to come with the unveiling arrangements of Adam Smith's statue in Edinburgh on 4 July.

Lost Legacy Loses Contact!

Apologies but my computer crashed on Tuesday (after a house guest used it for his emailsy). This cut me off on Wednesday. On Thursday I was travelling to the History of Economics Society Conference in Toronto and my office is wroking to undo the damage (in future I shall decline my hospitality being extended to my pc).

I am only able to post via my laptop in the hotel in Toronto.

However, I shall report on the HES Conference each day.

Sorry for this.

Gavin

More on Samuel Bowles' Misreading of Adam Smith

The problem with citing Adam Smith in support of an interpretation of a modern designed experiment in behavioural economics is that the understanding of modern economists, or indeed their familiarity with Adam Smith’s writings, leaves a great deal to be desired. If their understanding of Adam Smith’s theories is not just limited, but what they do know about them, usually from isolated third-hand quotations, is completely incorrect or at least lacking correctness in key places.

I have already referred critically to the article in the 20 June issue of Scientist by Samuel Bowles (for the Sante Fe Institute) and another reports of the article in Reasononline (free minds and free markets) (HERE:)

“Does the Invisible Hand Need a Helping Hand?”
(‘A behavioral economist explores the interaction of moral sentiments and self-interest) by Ronald Bailey, 24 June, asserts:

“In the June 20 issue of Science, Samuel Bowles, director of the Behavioral Sciences Program at the Santa Fe Institute, looks at how market interactions can fail to optimize the rewards of participants—e.g., the micromanager who gets less than he wants from his employees. For Bowles, the key is that policies designed for self-interested citizens may undermine "the moral sentiments." His citation of the "moral sentiments" obviously references Adam Smith's The Theory of Moral Sentiments (1759), in which Smith argued that people have an innate moral sense. This natural feeling of conscience and sympathy enables human beings to live and work together in mutually beneficial ways.”

“Bowles, with some evident regret, observes, "Before the advent of economics in the 18th century, it was more common to appeal to civic virtues." Bowles does recognize that such appeals "are hardly adequate to avoid market failures." How to resolve these market failures was the subject of Smith's second great book, The Wealth of Nations (1776), where he explained: "By pursuing his own interest (the individual) frequently promotes that of society more effectually than when he really intends to promote it."

Comment
I pick on these paragraphs because they contain serious errors of attribution to Adam Smith, easily corrected by reading Moral Sentiments and Wealth Of Nations.

“For Bowles, the key is that policies designed for self-interested citizens may undermine "the moral sentiments."

His citation of the "moral sentiments" obviously references Adam Smith's The Theory of Moral Sentiments (1759), in which Smith argued that people have an innate moral sense.”

Adam Smith did not assert that “people have an innate moral sense”, which is a fairly common error, though unsustainable if Moral Sentiments is consulted. The idea of an ‘innate moral sense’ properly should be attributed to Frances Hutcheson, Professor of Moral Philosophy at Glasgow University, and Adam Smith’s tutor from 1737-40. Not for the only time did Smith disagree with his old and much respected tutor, whom he described as ‘never to be forgotten’.

Smith excludes the innateness of moral sense by an imaginary example:

“Were it possible that a human creature could grow up to manhood in some solitary place, without any communication with his own species, he could no more think of his own character, of the propriety or demerit of his own sentiments and conduct, of the beauty or deformity of his own mind, than of the beauty or deformity of his own face. All these are objects which he cannot easily see, which naturally he does not look at, and with regard to which he is provided with no mirror which can present them to his view. Bring him into society, and he is immediately provided with the mirror which he wanted before. It is placed in the countenance and behaviour of those he lives with, which always mark when they enter into, and when they disapprove of his sentiments; and it is here that he first views the propriety and impropriety of his own passions, the beauty and deformity of his own mind. To a man who from his birth was a stranger to society, the objects of his passions, the external bodies which either pleased or hurt him, would occupy his whole attention. The passions themselves, the desires or aversions, the joys or sorrows, which those objects excited, though of all things the most immediately present to him, could scarce ever be the objects of his thoughts. The idea of them could never interest him so much as to call upon his attentive consideration. The consideration of his joy could in him excite no new joy, nor that of his sorrow any new sorrow, though the consideration of the causes of those passions might often excite both. Bring him into society, and all his own passions will immediately become the causes of new passions. He will observe that mankind approve of some of them, and are disgusted by others. He will be elevated in the one case, and cast down in the other; his desires and aversions, his joys and sorrows, will now often become the causes of new desires and new aversions, new joys and new sorrows: they will now, therefore, interest him deeply, and often call upon his most attentive consideration.” (TMS III.1.3: p 110)

Smith’s metaphor for the effect of society on the individual was as a ‘mirror’ by which people learn how to behave and how to distinguish between propriety and impropriety. They are not born with these attributes; they have no inbuilt set of values; these emerge, slowly and gradually, through contact with others, first with adults and then with other children (in the ‘great school of self command’). It is from these that their ‘impartial spectator’ emerges as the judge of their moral conduct.

Their “natural feeling of conscience and sympathy enables human beings to live and work together in mutually beneficial ways”, but only because they ‘live and work together’, and not because they are born to do so without the essential contact with others. Otherwise, children would ‘know’ how to express their moral senses without the need for the emotional chastisement of the others with whom they interact as they grow up and mature.

At the end of the article there is a clear recognition of Adam Smith’s theories of the location of the sources of moral sentiments: “In other words, as people gain more experience with markets, morals and material incentives pull together.” Yes, it is the gaining of experience from interaction with others in markets that teaches people the role of ‘markets, morals and material incentives’.

The second quotation, moving on from Moral Sentiments to Wealth Of Nations only carries weight in Samuel Bowles’ argument – at least as expressed by Ronald Bailey – because it is torn out of context:

"By pursuing his own interest (the individual) frequently promotes that of society more effectually than when he really intends to promote it." (WN IV.ii.9: p 456)

This is, of course, from the infamous (considering what has been done with it since the mid-20th century by modern economists) quotation from the paragraph that includes his lonely use of the metaphor of ‘an invisible hand’.

It is not true to suggest that this statement was about “how to resolve these market failures” which “was the subject of Smith's” Wealth Of Nations.

Regular readers will know that the paragraph in question, from Book IV and not from Books I, II, III or V, refers to the specific consequence of risk avoidance among merchants leading some, but by no means not all of them, to prefer to invest their scarce capitals locally rather than take the higher risks of piracy, disasters at sea, malfeasance of those strangers they trade with in distant foreign countries and colonies, and the longer delays from returning their capital and profits.

The inescapable consequence, by the laws of arithmetic, that the more capital that is invested locally (foregoing higher profits), the higher will be domestic capital formation, and the higher the ‘annual output of the necessaries, conveniences, and amusements of life’, summarized as the whole is the sum of its parts – increase the parts and the larger will be the whole.

The merchant who is risk averse ‘intends only his own security’ and thereby promotes the interest of the domestic economy, for the larger the local ‘industry’, the larger the local employment (Smith considered the two variables to be intimately linked), and the quicker the ‘spread of opulence’ especially ton the poorer labours and their families. It had nothing to do with ‘market failure’.

That behavioural economics is presented in this manner by Samuel Bowles and others, the greater is the pity because their incorrect interpretation of the very positive research results of their experiments compromises the real lessons that could be gleaned from them if modern economists were more familiar with Adam Smith’s true legacy.

Self Interest is Other-Centred in Bargaining

I was sceptical about the title of a long post in ODE (‘the online community for intelligent optimists’) (HERE) this morning ( 23 June):

“The gospel according to Adam Smith
Is doing good compatible with making money? It is if you practise spiritual capitalism.” by Carleen Hawn (a business journalist based in San Francisco):

“Spiritual capitalism doesn’t mean prayer sessions on the shop floor and guided meditations in the boardroom. At least it doesn’t have to. What it does mean is the success of an enterprise is measured by values like “integrity” and “commitment” as much as by targets like “efficiency” and “profitability.” It’s based on the recognition that every businessperson—whether you’re the CEO of a major multinational or the head of your own small firm—is in the service industry, and the services rendered must benefit not just yourself and your shareholders, but the planet and other people as well. The first commandment of the growing spiritual-capitalism movement is: Taking care of business means taking care of others.
The spiritual father of spiritual capitalism is not Mahatma Gandhi or the Dalai Lama. It’s Adam Smith. After all, there’s a reason why his most famous work is called The Wealth of Nations and not The Wealth of Individuals. Smith, the 18th-century philosopher, argued that the free market—in which “every man, so long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with any other man”—is the best way to build wealth. He also argued that the benefits of the free market should accrue not just to individuals but to society as a whole.”

“Business and the Buddha author Lloyd Field argues that the traditional profit-for-profit’s-sake model of doing business isn’t just flawed but “based on greed, hatred and delusion.” Writes Field, “I do not believe this is what Adam Smith intended. The societal ills that result from this … stand in stark contrast to [Smith’s] goals.”

Comment
The article which follows (HERE) makes its case for ‘spiritual capitalism’ with a series of cases of business leaders who transformed the way they do business for associated targets in addition to the making of profits, mostly in people skills, people understanding, green issues and listening to what customers say.

The main cases are in finance businesses (Allianz, for expale) where they deal with people who have problems, or concerns of some kind. But there is also a case about a café business.

For Adam Smith, the ‘greed is good’ view of life (summarized in the 20th-century by Geco of ‘Wall Street’ and in the 18th century by Bernard Mandeville in the Fable of the Bees) are anathema to his philosophy and his political economy. This is not my conclusion drawn from a long philosophical discussion based on tenuous interpretations of obscure footnotes. It is a central concept in Wealth Of Nations and Moral Sentiments.

Take the famous quotation of the nature of the transactions you undertake for your dinner:

“It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

Whether this propensity be one of those original principles in human nature, of which no further account can be given; or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to enquire. It is common to all men, and to be found in no other race of animals, which seem to know neither this nor any other species of contracts. Two greyhounds, in running down the same hare, have sometimes the appearance of acting in some sort of concert. Each turns her towards his companion, or endeavours to intercept her when his companion turns her towards himself. This, however, is not the effect of any contract, but of the accidental concurrence of their passions in the same object at that particular time. Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.*42 Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that. When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him. Man sometimes uses the same arts with his brethren, and when he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will. He has not time, however, to do this upon every occasion. In civilized society he stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely*43 independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” (WN I.ii.2: 25-7)

Most read this passage as if it is a description of being self-interested in self. It is quite the opposite. Adam Smith makes it clear that he is reminding readers that when they want something from somebody else they have to take account of the other person’s self interest and not to take account only of their own interests:

“But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them.”

Note the words: ‘interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them.’ Could it be clearer? But more – there are two people involved in every transaction: the buyer and the seller and each are enjoined to follow the same mandate: interest the other person by understanding their advantages in completing the transaction.

How can they do this? By offering them a bargain:

‘Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.’

It’s not a one-way deal: ‘give me what I want!’ That won’t motivate somebody to transact with you. That’s not a bargain; it’s a one way street. You have to offer them something too: ‘Give me that which I want, and you shall have this which you want’. The bargain is a conditional proposition: ‘If you do this for me, Then I shall do that for you’.

Mostly, people quote the last sentence without the prologue:

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Worse! They quote the sentence without reading it. Address yourself to their self love, not your own. Telling them of your ‘own necessities’ is not persuasive. You have to tell them of the ‘advantages’ of the transaction to them. Your conditional offer tells them what they will get in return: ‘you shall have this which you want’. You must be other-centred in the bargain.

In summary, Adam Smith’s moral philosophy asserts that our own self-interest is best served by serving the self interests of others. That is what bargaining means for the exchange transactions of people in commercial societies. It is the integrity of bargaining that is compromised by monopoly businesses which eliminate or restrict competition, by coercive manipulation of supplies of goods, labour and capital, and political, religious, or ideological interventions in the freedoms of law abiding people to transact with those who are prepared to transact with them without harming others.

This is a long way from the ‘greed is good’ school of business. Smith did not call this ‘spiritual capitalism’ – he never knew the word capitalism, as it was first used in English in 1854, long after he had died in 1790 – nor was it a ‘gospel’ or anything ‘spiritual'. It was a plain description of how transactions were managed in a commercial society, free of the policies of mercantile political economy, the then dominant form of interference in the economy he knew well.

Carleen Hawn reports, via MindBodyGreen (‘share and discover better, healthier, and green living’) (HERE)on a central pillar of Adam Smith’s political economy written 232 years ago in Wealth Of Nations. That is a whole lot better than how most of the economics profession report of the goals of business, consumers, and governments of today.

Adam Smith on Poverty

A post by Don Arthur in the Australian Blog, Club Troppo, (HERE) which has been quoted on Lost Legacy in the past when I referred to articles by Nicholas Gruen, opens an interesting and important discussion on poverty in societies and Adam Smith’s expressed view on the issue. I only quote some parts of it, and I have deleted several excellent references and discussions of recent work by academics on related matters. Check the link and read them for yourself:

“What if Adam Smith was right about poverty?
Don Arthur, 22 June 22

"Well-being isn’t just about our relationship with things, it’s also about our relationships with each other. Poverty hurts, not just because it can leave you feeling hungry, cold and sick, but because it can also leave you feeling ignored, excluded and ashamed. In The Theory of Moral Sentiments Adam Smith argued that all of us want others to pay attention to us and treat us with respect. And "it is chiefly from this regard to the sentiments of mankind, that we pursue riches and avoid poverty."

Recent research confirms Smith’s intuitions — social pain is every bit as aversive as physical pain. And Smith’s thoughts about the way people use material goods to achieve social goals are even more compelling in the light of Gary Becker’s theory of household production. Becker argues that all human beings have stable preferences that relate to fundamental aspects of life such as "health, prestige, sensual pleasure, benevolence, or envy" rather than to specific goods and services. If Becker is right, material goods are often only a means to social ends.

So if Smith is right then what should we do about involuntary poverty? Is it enough to provide state subsidised goods such as housing and healthcare and to dole out money for necessities?

Adam Smith — Poverty as social exclusion
According to Adam Smith, human beings are by nature social creatures. In The Theory of Moral Sentiments, he wrote:

'Nature, when she formed man for society, endowed him with an original desire to please, and an original aversion to offend his brethren. She taught him to feel pleasure in their favourable, and pain in their unfavourable regard. The reason poverty causes pain is not just because it can leave people feeling hungry, cold and sick, but because it is associated with unfavourable regard.'

As he explains:

'The poor man … is ashamed of his poverty. He feels that it either places him out of the sight of mankind, or, that if they take any notice of him, they have, however, scarce any fellow–feeling with the misery and distress which he suffers. He is mortified upon both accounts; for though to be overlooked, and to be disapproved of, are things entirely different, yet as obscurity covers us from the daylight of honour and approbation, to feel that we are taken no notice of, necessarily damps the most agreeable hope, and disappoints the most ardent desire, of human nature. The poor man goes out and comes in unheeded, and when in the midst of a crowd is in the same obscurity as if shut up in his own hovel.'

For Smith, a person’s possessions function as signals of underlying personal characteristics — characteristics that others regard either favourably or unfavourably. In the Wealth of Nations he wrote:

'A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty, which, it is presumed, nobody can well fall into without extreme bad conduct.'

As Mark Thoma notes, Adam Smith thought poverty was about much more than physical deprivation. The labourer’s linen shirt has value because it can be used to influence other people’s opinions. The labourer is using the shirt as a raw material in a production process — a process that affects other people’s mental states, changes their behaviour and, ultimately, improves the psychological well being of the wearer.

The ‘good’ that is being consumed here is not the shirt — it is the observer’s opinion. While it’s true that the observer’s opinion only affects the labourer’s well being via behavioural signaling, this is true of many consumer goods.

Social pain
Smith argued that human beings are hard-wired to care about each other’s opinions. As he put it, nature taught people to feel pleasure in the favourable regard of others, and pain in their unfavourable regard.

Gary Becker and household production
Adam Smith’s labourer valued his linen shirt, not just because it protected him from the sun and wind, but because it protected him from the unfavourable judgments of those he depended on. Smith argued that all human beings want others to notice and approve of them. More recently, economist Gary Becker and Robert Michael suggested that all human beings might have the same basic preferences. It seems likely that some of these preferences relate to social approval:

'In the standard theory [of choice] all consumers behave similarly in the sense that they all maximize the same thing — utility or satisfaction. It is only a further extension then to argue that they all derive that utility from the same "basic pleasures".

The social utility of wealth
According to Smith, the rich get far more attention and respect than the poor — even when they’ve done nothing to merit it. "In equal degrees of merit", he wrote, "there is scarce any man who does not respect more the rich and the great, than the poor and the humble." Material consumption acts a signal of underlying characteristics — characteristics that are able to provoke deference, approval and affection.
What if Adam Smith was right?

For Adam Smith poverty meant having visibly less than others. But it’s not obvious that Smith’s problem of poverty could be solved simply by handing out food, housing and health care to those at the bottom of the income distribution. Smith argued that people have social as well as physical needs. In our society, working-age adults meet many of these needs through paid employment. Work is not just a source of income, it can also be a source of status, belonging and approval from others.
This view of well-being helps explain why income redistribution on its own will never be enough to guarantee that the needs of the least advantaged are met. When income support payments are linked to tests of employability (as with disability payments) or job search effort (as with unemployment payments), eligibility for the payments is itself a signal (whether we like it or not).

If we’re committed to constantly improving well-being of the least advantaged, what policies should we support?”

Comment
I may come back to this later as I am about to leave for my wife’s birthday party and it would not be nice to delay proceedings at our daughter's house. Meanwhile read the whole posting by Don Arthur; it is an excellent use of your time.