Moral Sentiments and The Wealth Of Nations

Gavin Kennedy from Adam Smith's Lost Legacy discusses whether Adam Smith's Moral Sentiments and Wealth Of Nations are contradictory:

No Contradictions Between Moral Sentiments and Wealth Of Nations, by Gavin Kennedy: Questions about whether Moral Sentiments and Wealth Of Nations are at odds with each other arise from time to time, even among scholars, and the idea is without plausibility once you look behind the assertion and apply a time-line to when both books were in preparation. In these respects the publication dates (1759 and 1776) are misleading.

Clive Crook takes up the issue of the alleged gap in The Atlantic.com (here) and talks some good sense:

“I agree that Smith is badly served by many of his supposed followers. The idea that "greed is good", which one often sees attributed to him, is a travesty. He was no libertarian either. His idea of "natural liberty" was almost the opposite of what it is usually taken to mean (namely, "do as you wish"). He was at pains in both books to emphasize the importance of self-control, of regard for the opinions of others, and of an expansive role of government in providing security, rule of law, and economic infrastructure. Way ahead of his time, he was even in favor of compulsory schooling.

But I think it is wrong to regard Moral Sentiments as somehow at odds with Wealth of Nations, which seems to be the prevailing view. You quote one or the other, according to taste, but never both. Smith certainly saw no rift. ...

Smith believed that most people are self-interested, sympathetic, and wish to be well thought of. Successful commercial societies, he argued, are built on these traits. The question is, how can they best be combined? In modern terms, how can institutions and incentives shape, channel, and balance these sometimes conflicting instincts to promote greater peace and prosperity? This is the subject of both books.

In Wealth of Nations, addressed to rulers, Smith exalts competition as the way to keep self-interest in check, and to subordinate producers to consumers. That is why the book is so opposed to protected monopolies and, above all, barriers to trade. In Moral Sentiments, he puts less weight on public policy and more on the wellsprings of virtue. He underlines the need for the approval of others, not just as an end in itself but also as a requirement for flourishing in commercial society. In short, competition disciplines producers (Wealth of Nations); commercial interaction nurtures propriety and prudence (Moral Sentiments). These are different perspectives, but by no means contradictory.

What would Smith ... have made of the modern [creative captialism] debate? Hard to say,... but ... I am sure about one thing. He would have disagreed ... that a new kind of capitalism is needed to marry sentiment and self-interest. This is exactly what ordinary profit-seeking commerce achieves, in Smith's telling. This is the over-arching idea in both books.”

Comment I have discussed the “creative capitalism project” before... Clive Crook is aware of the similarities, connectedness and purpose of each of Adam Smith’s books and this alone makes his article worth reading.

The ‘debate’ seems to assume that the two books are quite different. Moral Sentiments is about the history of ethics and Wealth Of Nations is a about the hsitory of economic ideas and a critique of political economy, as it was understood in the 18th century, or, if you like, sympathy and self interest. In these stripped-down, one-word meanings the entire context and purpose of the books is thrown away, and their publication dates lends credence to the charges made by would-be ‘smart’ commentators.

First, Moral Sentiments was not a manifesto of Smith’s ideas. Its contents came from the ethics course he gave at Glasgow University between 1752 and 1764 to young students preparing themselves for the ‘AM’ degree. Hence, before jumping to conclusions about its author’s views on morality, we ought to recognise that preparing a basic course in moral philosophy for 14 to 17-year olds requires that the lecturer cover the whole subject and not just his own views. I have been reminding those who read into Moral Sentiments a strong strain of Christianity/Deism in Smith’s thinking, they may be fooling themselves by attributing to Smith their selective interpretations of the views he identifies belonging to the authors he cites, and not necessarily his own.

It helps in this respect to read Book VII of Moral Sentiments first and then read I-VI, which is the order in which he gave his lectures. Book VII reviews ideas on moral philosophy since Greco-Roman times, and he continually refers to the ideas of earlier moral philosophers throughout. Smith taught the subject as it stood up to mid-18th century, and he did so in an institution in which the prevailing orthodoxy expected its students to become competent in the history of the subject by the time they graduated. This meant covering the ‘names’ and their ideas, with some leeway leftover for the professor to make available his own ideas, as long as they were muted, could be interpreted as no challenge to orthodox Calvinism, and were preceded by prayers in the Protestant tradition at the start of every class. Smith was not comfortable with the requirement to open lectures with prayers, nor with teaching everything in Latin (he asked to be excused from the prayers requirement, but was refused permission).

However, he also taught Jurisprudence to the same class, a subject that contained a fair amount in it that re-appeared verbatim in Wealth Of Nations, including noticeably the sections that covered the ‘Butcher, Brewer, and Baker’ passage which are so popular with those who see mistakenly that it extols the virtues of self-interest. It doesn’t actually do that, because read carefully in its context (a rare occurrence), the entire chapter is about addressing the other party’s interests and not your own.

Quick quote grabbers (most do not read the book at all) jump to the ‘its-all-about selfish self interest’, which elides into selfishness and then to ‘greed’, when it is about neither. Smith was saying, ‘stop thinking about your own needs; think about the other persons’ and persuade them that the exchange of what you have for what you want from them, so they get what they want from you what they give to you, makes you both better off.

It wasn’t that Smith changed his mind when he came to write Wealth Of Nations in 1764 (he already had a written draft in 1763), 5 years after he published Moral Sentiments in 1759 (but not, note, 17 years later in 1776 when he published Wealth Of Nations). He was giving the substance of both Moral Sentiments and Wealth Of Nations simultaneously in the same classroom to the same students for 11years.

If there was a glaring contradiction in the two sets of lectures he (and his brighter students) would have noticed it. The two books are not at odds at all. Clive Crook is right in that respect.

Comments

[bob mcmanus]

"could be interpreted as no challenge to orthodox Calvinism"

Last week I read Andy Denis "Was Smith an Individualist" riffing off some old work of A.L. Macfie.

"As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestick industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. (WN IV.ii.9)16"

Denis was apparently unsympathetic to a view of the individual as virtuous only in so far as that individual serves, wittingly or not, not himself but property and society. But I related TULIP and Theological Stewardship right on into ole Karl Marx, and wasn't so outraged.

But if Moral Sentiments was written for adolescents under theocratic constraints maybe I need to rethink it.

http://www.staff.city.ac.uk/andy.denis/research/indiv.html

[Lafayette]

Moral Sentiment is at least as good a work as Wealth of Nations. The former is barely unknown by most today and the latter is quoted to make a economic texts seem erudite, perhaps to evoke a superior wisdom from the past. As the article states, neither book is widely read, as they can be tedious reading - due to the English of its time.

Given that Smith was also fond of Greek/Roman philosophers, particularly Socrates, his own works are an update of that which had come before in a more modern context. Are they applicable today in our context?

Business Ethics is more appropriate presently, some would think. Unfortunately, neither is this taught sufficiently largely, and more so as a university course rather than given as business seminars - where it might, perhaps, be more effective.

The fact remains nonetheless that no society can prosper without an ethical code. And basing one on religion is simply not adequate. Rereading Socrates indicates clearly that some ideas of morality are universal and do not need the trappings of Christianity to be relevant.

[bob mcmanus]

http://www.chicagogsb.edu/research/selectedpapers/Ronald.pdf

Ronald Coase "Adam Smith's View of Man" 1976

"Smith was saying, ‘stop thinking about your own needs; think about the other persons’"

Smith may have said that, doesn't everybody? But I don't think a case can be made that Smith believed the world does or could work that way.

"Adam Smith would not
have thought it sensible to treat man as a
rational utility-maximiser. He thinks of man
as he actually is-dominated, it is true, by
self-love but not without some concern for
others, able to reason but not necessarily in
such a way as to reach the right conclusion,
seeing the outcomes of his actions but
through a veil of self-delusion." ...Coase

[donna]

In my MBA program I was required to take an ethics class. I really wish more of our business schools would require that -- it would save us so much of the bad business practices and extreme self-interest that we see glorified in this country.

[Bruce Wilder]

Summarizing the Wealth of Nations as being about "self-interest" does seem an excessively narrow perspective, even allowing Smith's concern to articulate an idea of enlightened self-interest, which takes account of, and serves a general interest.

"An Inquiry in the Wealth of Nations" is so titled, because Smith is writing a full-scale demolition of mercantilism, while walking over the physiocrats, to do it. He is an Enlightenment philosophe, championing both critical reason and humanism. In the context of his own time, the big issue is to establish the overriding importance of human interest (selfish and collective, both), and to displace reifications of gold and silver (the Mercantilists) or land (the Physiocrats), with a modern humanist conception of man as the measure of all things, and to demonstrate the capacity of critical reason to understand and improve society and the state.

The Libertarians are right that Smith is engaged in a full-throated assault on the need for Authority to direct economic affairs in detail. That Smith does not use his proto-Libertarianism to cloak brutality, as some modern Libertarians sometimes seem to do with their sophomoric philosophical pretensions, is less a statement about Smith than about modern Libertarianism. In Smith's time, brutality did not yet feel the need to wear a cloak; conscience-less Authority from rank alone was enough. Smith, like all the Enlightenment philosophes, was championing the power of reason and enlightened self-interest against unreasoning and inhumane Authority serving princely interests, not unbridled profit-maximization against reasoned Authority serving the public interest.

That the Theory of Moral Sentiments evolved out of Adam Smith's coursework is a good point, but does not go far enough. It evolved, too, out of the coursework of Smith's teacher and predecessor, Francis Hutcheson, a (the?) founder of the Scottish Enlightenment. Hutcheson's summary work, was published postumously by his son, only about five years before Theory of Moral Sentiments, but, I think, is considered disappointing by scholars (I've never read it -- Hutcheson's early essays are considered the important ones for shaping the suprisingly generous humanism of the Scottish Enlightenment.) One can draw a straight line from Smith's predecessor, Francis Hutcheson through to Bentham, and see how humane feeling and reason conspired together to undermine the preoccupation with the "needs" of states, conceived of as little more than the household of the King, and the arbitrary moral injunctions of God.

Smith was transferring the focus of economics from the "needs" of Princely households to the more prosaic needs and productive activities of human beings. And, he was championing the power of Reason, against the Authority of arbitrary, traditional claims by vested interests operating through Guilds and Chartered trading companies. That the wealth of nations might have something to do with commerce in pins was a revolutionary thought, on many fronts. And, in the greater philosophical revolution by far, he was demonstrating the power of reason over authority in elaborating a useful understanding of what made a country and a people, strong and prosperous -- not-very-subtly subverting previous notions of what it meant for a nation to be strong and prosperous. (He was in hard-scrabble Scotland, victim of the Darien Scheme, so hostility to mercantalism came naturally, and the doctrines of the physiocrats, would have seemed less than helpful.)

What I don't find in Smith's Wealth of Nations -- because it is not there -- is any recognition that Authority or Bureaucracy might have a necessary economic function. He's not a Socialist, I think, only because he did not have before him the surprising achievments of Capitalist planning and bureaucratic enterprise, which overawed so many in the late 19th century. For Smith, the new insurance companies of London, with their beehives of clerks, were as unlikely to survive and prosper as the London Guildhall. The East India Companies did not much impress Smith, I think. And, it doesn't seem to have occured to him that his pin factory required an active manager. The absence of these examples and this experience from Wealth of Nations should not be taken as an anticipation of Hayek, let alone as an endorsement of 20th century libertarianism.

I think it obvious that Creative Capitalism draws its inspiration largely from the success of private business firms in employing managed organization to innovate in the control of economic processes.

I would fault most of the discussion, there, for failing to confront that aspect of the economics squarely. I don't think that's all that surprising, because economics tends to skirt problems of administrative or technical or managerial efficiency, no matter how large bureaucracy looms in the developed world. Highly rationalized, capitalist planning and managerial organization did not loom large in Adam Smith's world, where the anti-rational remnants of feudal decadence still seemed more prominent. The precedent set by inhumane and arational feudal enterprise -- slavery and serfdom, artisan and trading guilds, monasteries as factories and banks, the Doge of Venice or the depredations of the East India Company -- discouraged Smith from thinking much about management as an economic function.

To quibble over the importance, say, of the incentive to profit-maximization seems to me to be insanely ignorant, and downright non-sensical. Modern business enterprise is organized around rent-seeking, not profit-maximization, anyway; the availability of a source of rents to finance the structured incentives of a bureaucracy is a sine-qua-non. If any analogizing of business enterprise success is to be applied to designing solutions to global social problems, that much, at least, ought to be acknowledged at the outset. But, while genuine concern for the interests of common humanity is in Smith, understanding of capitalist planning and managerial organization is not. That absence from Wealth of Nations doesn't contradict Theory of Moral Sentiments. Even less is it an endorsement of the arrogant ignorance of modern libertarians.

[outsider]

outsider says...

"Do what thou wilt shall be the whole of the law." Aleister Crowley, who was kicked out of approximately five continents due to moral terpitude once decreed.

Or... "An uncaught thief is a king." Arab proverb.

Or... "Like all revolutionary regimes, Khomeini's Iran was soon embroiled with a war with it's neighbor." Niall Ferguson... Colossus, the rise and fall of the American Empire.

The moral writing of history belongs to the victors. Montezuma ( a learned historian) did not write of Cortez, described as a "congenital syphiletic, a fair horseman, a good swordsman, and a vicious infighter with a knife and an insatiable lust for gold, the Spaniards wrote of the aztecs.

The revolutionary regime of the Neo-Cons matches history. They attack when granted control. ( The revolutionaries?).

"Morality?" Heinlein... "Morality is the property of one class of beings. Those that have survived. Morality does not exist for an extinct species."

A permanent footprint in the oilfields of the Mideast per PNAC?, History will judge.

[outsider]

outsider says...

Heinlein, "Or an extinct group, say the Tasmanians."

[ken melvin]

I think that the 'Old Testament' was innovative and relevant when 'twas written. So, Smith's works. Though we seem to have been experiencing a bit of a drought, in the past, great minds such as Smith, Keynes, ... have helped get a grip on what is going on and have provided insight into what needed be addressed and how to do so. On the other hand, there have been other times when willful idiots were in charge.

[paine]

bovard and pecuchet

laff there are passages ...like some here
in your first comment ....
where you equal those two now obscure
masters of
transmogrific
meme-nastics

[paine]

"Modern business enterprise is organized around rent-seeking, not profit-maximization..."

not sure i can agree ....can't a firm seek rents
and maximize profit at the same time??

both these names for possibly different kinds
of producer surplus
look to be filled with internal contradictions
once one watches the broad use of them in public discourse
both demotic and scientific

" the availability of a source of rents to finance the structured incentives of a bureaucracy is a sine-qua-non"
it gets dangerous to call supply regulating revenues ..rents

perhaps
the various forms of producer surplus
require a more detailed parsing
so these habitual snares

of course a vast and mind numbing conflation
serves the purposes of those seeking to creat or preserve
any ultimately anti progressive
antisocial chunk of surplus

[Lafayette]

BW: What I don't find in Smith's Wealth of Nations -- because it is not there -- is any recognition that Authority or Bureaucracy might have a necessary economic function.

Excellent essay.

The above, I suggest, will be found in Socratic philosophy, which argued for the Philosopher King, the enlightened autocrat. Socrates carried this notion a bit further, meaning he decried Athenian democracy because it was not enlightened but all too often bent to the decidedly unenlightened rule and passion of the majority.

What Socrates actually believed in leaves room for debate. But, I suggest that neither did Smith evoke, particularly, any bent for democracy. I suggest further that he wrote his thesis for it to be read by his King in hopes that it would bring about a more enlightened rule than that of Mercantilism.

Alas, that was not to be; at once, anyway. And, with all the talk of protectionism nowadays, one is led to wonder if it shall ever be.

NB: One can also be led to wonder if, today, we do not pursue another sort of Mercantilism, such as Individual Mercantilism. A kind in which is paramount also the belief that commerce generates wealth by the accumulation of profits and benign taxation of wealth is tantamount to a protectionism of the class that accumulates them ... ?

[bob mcmanus]

bovard and pecuchet

Paine, anyone who tries to use Flaubert in a sneer just reveals himself as an arrogant dilettante.

[Bruce Wilder]

L: "I suggest further that he wrote his thesis for it to be read by his King . . ."

I don't get that at all. Britain was a constitutional monarchy in 1776, with power decentralized though an extensive landed aristocracy co-existing with an untitled landed gentry, and a number of important institutions with varying degrees of independence from the central government in London.

Smith was, I believe, in his own mind, was addressing the average educated person of his time. He was writing in English, and not scholarly Latin or his own native Scots, because that was the common language of educated Britons.

The importance of the Wealth of Nations is due, in part, to it becoming an instant best-seller, and being widely read amidst the first stirrings of the Industrial Revolution -- the post-feudal 18th century economic quickening which did not yet have that name, but, of which, people in Britain were well-aware.

[Gegner]

It's extremely 'enlightening' to see that Smith's philosophical 'guides' were the ancient Greeks, who could not conceive of a society where slavery did not exist...

Which is to say it was 'unimaginable' to them, they could not conceive of how such a society could survive...such a decided 'lack/failure of imagination' brings us to today...

[S Brennan]

Mark,

A very thoughtful post.

Having pushed myself to read both [I am after all, an engineer], I find myself in agreement with much of Crook...also I think Bruce Wilder's post was outstanding...as were many others.

I think Smith was a creature of his age and should be read such. However, wise one might be, there are outcomes that our antecedents could not predict and so their words should be treated with respect, but always with the knowledge that our view is different not because our sight is keener, but because our nest is higher.

Smith did not understand how important the corporations would become, nor did foresee that industrialization would create as a byproduct such large swings in production and demand, but his moral sentiments for a productive society are just as germane today as when he wrote them.

[Lafayette]

Summer Sillies

bovard and pecuchet

Bavard, not bovard. And "pecuchet" is pure invention.

[Bruce Wilder]

paine: "can't a firm seek rents
and maximize profit at the same time??"

Not really. "Profit maximization", in a world of risk and uncertainty is practically impossible to give an operative definition. Quick, scan the financial reports of the Fortune 500, and tell me which ones failed to maximize profits last year? It is analytically empty and empirically vacant -- you don't get more meaningless than that.

By contrast, with a little study of the financial reports and other related journalism, for many businesses, I could tell you fairly precisely what assets they own, and maybe even tell you a pretty good story about how the company goes about managing the return on the key resources, and what keeps them in business from year to year, in good times and bad. It will be a story about how they manage their production and distribution, and how they manage risk and residual returns, and it will turn on how some resource they control is made to earn a rent, over and above any alternative use, and enables them to take risks and absorb variability in outcomes, without the business falling to pieces.

paine: "it gets dangerous to call supply regulating revenues ..rents"

I think the phrase, "rent-seeking" has become a pejorative, attached to a puerile analysis. It's unfortunate.

The concept of rent is based on the idea that there's a useful analysis of factor income, which turns on distinguishing between what the factor actually earns, and the minimum the factor would have to earn, to stay in that particular employment (i.e. the minimum below which, the market redistributes the factor to some other use).

A business with assets on which it is earning large rents is leading a comfortable, stable, structured life. Those rent-earning assets are, in effect, its real equity, and provide a kind of insurance that permits the business enterprise to attenuate risk.

If an enterprise is to build a large organization, it has to have that kind of risk-bearing capacity, in order to offer the kind of labor contracts a bureaucracy requires. To run a bureaucracy, you have to employ people on terms such that they will do what you tell them to do, and will otherwise act responsibly and circumspectly even when you are not watching.

Paying people to do what you tell them to do, when you tell them to do it -- to participate in a coordinated authoritarian structure ain't easy. It is simply not the same as paying someone self-employed for a specific service, who is free to supervise his own craft and go fishing when he wants.

You have to be able to offer, in short, more than a market rate for their services, so that they fear losing their jobs over your dissatisfaction, but they don't fear losing their jobs from mere market vicissitudes.
To do that, credibly, requires a huge capacity for risk attenuation. Owning capital factors that earn a rent makes that possible. Business organizes around rent-earning resources.

The advantage of being able to follow orders is that shows up where having everyone show up and do what they are told, results in big economies -- typically, where a production process can be effectively controlled by a large, well-coordinated organization, and error and waste systematically reduced.

An auto assembly plant is a good, imaginative example. Get 5000 people to show up at the same time, to perform boring, repetitive tasks, using highly specialized tools, and -- voila! -- you can assemble a $20,000 car out of $15,000 of parts with a total of less than 10 hours of labor. Even if you pay $100/hour, you can make money. And, those highly specialized tools you have sunk a large capital investment into -- you are using them more intensively than any other capital equipment and you are earning a substantial quasi-rent on them.

Most large business enterprises depend on making huge sunk cost investments, and then using the power of being highly organized (in Hannah Arendt's sense of "power") to ensure that they are able to recover that sunk cost investment. Typically, this involves being to able to produce something and distribute at a very low unit cost, due to economizing through management on error and waste, and to have the power to be able to administer everything about production/distribution (including the price!).

Rents, (along with process control) -- and I include quasi-rents and anti-rents -- are the key to understanding the structure of business and industry. In a world of uncertainty and risk, where enormous economies are available in sunk cost investment in more effective control of production/distribution processes, rents are a key source of the insurance needed to structure incentives.

I fear I am babbling.

[reason]

BW...
I fear I am babbling.

No I find it fascinating, enlightening. When is the book coming out? You are in fine form lately.

[Lafayette]

paine: "can't a firm seek rents and maximize profit at the same time??"

Depends upon the market, I should think. Microsoft has been doing it (at our great expense) for ... oh, almost thirty years in what is a so-called natural monopoly.

Bell Telephone did it for a donkey's age, but that was considered a Public Monopoly, i.e., accorded by the state. For this reason it was broken up and forced to lease lines to competition. (I am not sure about Bell, admittedly, but I know that is what happened to the incumbent telco operator in France.)

So, its doable but rare. Of course, a natural monopoly is the Holy Grail of a great many hi-tech companies.

And, a number of third world countries do it as a matter of course. The main telephone operator of Mexico, owned by the world's richest individual, is or was a monopoly. China has several giants that have been accorded state monopoly privileges (whilst being listed on the public exchange).

Meaning: With sufficient connivance, rents can be "bought" in an imperfect market.

[ken melvin]

Thanks Bruce, Lafayette, ..., all. 'Tis a pleasure reading such good stuff.

[paine]

bruce

much of weight and zest in your babble
i'll work thru it

but prof max is a seeking to up it
not an optimization
in that demtic sense our beloved trns nats indeed sek that
but more properly and particularly
max the capitalized value
of the firm's earnings path
as alchian long ago restated the prof max objective

my sysem guide called it

max the rate of the fim's capital growth
profits i use for the goo surplus
the surplus that regulate supply
motivates innovations
etc what the loon george gilder rhapsodized
in the reagan charged high 80-90s...
pre dot bomb
lot plop

[paine]

"residual returns.."

a wording worthy of
a rich guy's hidden ball trick

[paine]

"distinguishing between what the factor actually earns, and the minimum the factor would have to earn, to stay in that particular employment "

or enter another employment

again with the magic trick longo

"factor"

at least when
wicksteed and clark bent poor euler over a cannon
factor had still some contact to tangible means of production...
i prefer to keep it geisty
and use capital here
its flows and its stocks

human skill heads hands and muscles
plus stuff like assembly lines and turbines
are factors to me

physical means of production
viewable away from their paicular institutional seting
even if its ahistorical mayhaps
unimaginable
without those settings

"If an enterprise is to build a large organization, it has to have that kind of risk-bearing capacity, in order to offer the kind of labor contracts a bureaucracy requires"

nice passage i like this notion
of risk
even if its also
risk transfering and hazardous

the broad lower reaches
of the corporate hierarchy indeed
have to face no lose
from company red ink ...
beyond their position at the firm
and at the top of the hierarchy
there's a far greater compensation
the chance to play with other folks chips
lots of other folks chips ....

..if you're into...capitalist apologetics
you can call the ass hole innocent stockholders
risk takers...
cause indeed
the full socialization of risk
comes that much closer
with this approximation
ie
when society does its producing
thru " firms "
owned by an impersonal anonymous hord
of risk barers holding maket fungible shares
and ...but and
they be residual rent absorbers too
and windfall catchers
and other gains gotten by shrewdness or luck
not prior snatched by insider tower trolls

obviously
the actual process of surplus extraction
is only ofconcern to these risk barers andconsumption forebares when it adds up to real serious
profit and rent streams
ie earnings
above risk and interests charges
whether explicit or implicit ...eh ??

[paine]

bruce
now i shall babble :

again my guide ..my virgil in these matters
suggests at least three stages and forms
of organization of social production
that arise in particular forms
during the historic process of subsumption
of social production by private capitals

the first and most basic
is your darling .... co operation
larger scale organization

you very keenly lay out
its requirements and advances and advantages

-would that the libertarians of both right and left
heeded this --

by paradox coperation leads to
the follow on of the stage
viewed ou of context
that both smith
and the libertarian
wok so hard ....division of labor
in one case smith
its the proto capitalist form
ie intra firm divisons
in the other th libster
its the older cross market forms of division of l
which exposes the L-tarians' pre capitalist
fantasy vision)

co operation as already inplace
under private capital
sets up the necessy conditions
for an accelerated
infra firm stage d of l

then of course there's the final stage
the self sublation stage
mechanization etc
ie the auto plant
DBA the industrial revolution
or the post invention
of continuous invention stage

where the full force of true sunk costs
not just fxed costs
require the faustian drive to
discover over and over
new alas but ultimately vanishing sources
of profit above the crass rtuns
required to cover
the specific risks of enterprise
and borrowed cap costs

ie

"earning a substantial quasi-rent "

and here is where the red sea parts

the historic mission of private capital
is to push ever onward and upward
the forces of social production
thu pro tem surplus capture
as profits of enterprise
not the rent sink holes and traps
that prevent the surplus to flow away
ultimately to the final user/consumer
thru ever lower relative output prices
it in a phrase is the difference betwen quasi rent and say ...ground rent or more controversally IT rent rent
it is
at this point
where i entered the thread
rents are bad surplus earnings
profits good surplus earnings

marshall's quasi rents are the only ones
that are both profits of E
and rewards for progressive acts
of enhancing the social production system

having squared the circle
i leave it here...

[paine]

"Those rent-earning assets are, in effect, its real equity,"

as the source of its bumptuous credit lines
and market value

[paine]

more on factors and their rents

when they co operate in production
often
its analytically impossible
to parse out each factor type's contribution
to total value added ..eh ??

back on profit max
its a very keen notion
notice the intellectual collapse
of alternativ heuristic notions
like corporate guidance
by satisfice and market share sales max
i agree
one can't construct the optimal/maximal profit stream
of a firm
but one can observe tower trolls trying
to find higher returning paths ..eh ??
and not one of em
would admit to aims other than
long run maximal earnings

[paine]

comes down
to

weber vs marx

[Bruce Wilder]

paine: "weber vs marx"

I was thinking more in terms of Eugen Ritter von Böhm-Bawerk speaking at a seance through the Medium, Joe Stiglitz. YMMV

[Bruce Wilder]

"wicksteed and clark bent poor euler over a cannon
factor had still some contact to tangible means of production"

I actually think the Typal Classical Factor Analysis, where Land, Labor and Capital earned Rent, Wages, and Interest, had considerable merit, beyond excessive use of the uppercase, because it emphasized that factors varied in ways that were analytically important.

Wicksteed, who, first formulated the production function, simply wanted to apply math to the Classical problem of income distribution, and factors became interchangeable, continuous variables, because it was mathematically convenient. A tale of something lost and something gained. Clark and Pareto exploited the something gained, and it would be churlish to complain at this late date. But, complain I will.

Capital is, in important respects, intangible, because capital is making a deal with the future, or the remains of a deal made in the past. Insisting on recognizing only the tangible capital, like tools and productive machinery, would be like a paleontologist insisting the dinosaurs are only their fossilized remains, while refusing to imagine the living, breathing beasts.

To analyze capital is to make contact with the imaginative leap, which enable a deal with the future, from the past.

[Bruce Wilder]

paine: back on profit max
its a very keen notion

In an abtract framework of complete information, it is barely defensible; in a framework of complex practical risk and uncertainty, it isn't just indefensible, it is meaningless.

paine: notice the intellectual collapse
of alternativ heuristic notions
like corporate guidance
by satisfice and market share sales max

Notice the felt need for such notions. Herbert Simon's Lecturer's handwaving did not solve the fundamental conceptual problem, nor did the failure of the handwaving repair the breach.

Distinguishing between A and not-A is just about as fundamental a test of conceptual integrity as you will find in nature. If you cannot, in applying a concept to the analysis of the world as it is, distinguish between instances where the concept correctly characterizes events from instances where it does not, the concept is not going to be scientifically useful. (There may be applications in religion, astrology, and motivational speaking.)

paine: rents are bad surplus earnings
profits good surplus earnings

profits are income, which demands changes in allocation of resources; rents are reliable income, which confirm the correct allocation of resources.

metaphorically, profits are girlfriends and soon-to-be ex-wives; rents are well-loved current and future wives

paine: "it's analytically impossible
to parse out each factor type's contribution
to total value added ..eh ??"

Indeed.

Which suggests why Wicksteed-to-Clark leads down a blind alley.

In real life, not only is it difficult-to-impossible to objectively assess marginal contributions, in real life, it is impossible to say, for sure, in advance, what output will be, and what it will prove to be worth: you will not know at the time when inputs are inputting, what the quantity/quality/value of output (aka value-added) will be. The division of income (and, remember, it is the division of income from the value of output that Wicksteed is analyzing with his production function) is a promise, with contingency as a necessary element.

Contingency cannot be eliminated entirely from the promise to any factor, but, if one factor, is earning mostly rent, it can accept more of the enterprise risk, insuring the promises made to other factors, so that a deal is done and output is realized. In a world of uncertainty, Knight's entrepreneur needs to be able to break the incentive bound, implied by Wicksteed's production function, and, therefore, needs to "own" (or control) a rent-earning factor, which factor can be assigned the bulk of residual income and risk, so that the contingent element of income promised to other factors can be credibly shaped within market-acceptable bounds.

[Bruce Wilder]

paine: "some contact to tangible means of production"

The defining element of Capital is Time, not tangibility; to focus exclusively on tangible embodiments of capital is to deal only with Capital's fossilized remains.

(I'm repeating myself, here, but only because I wanted to experience a second time, the self-satisfied glow I sometimes get from a particularly sharp-edged metaphor. Forgive me all.)

[Lafayette]

Good bedfellows

BW: Capital is, in important respects, intangible, because capital is making a deal with the future, or the remains of a deal made in the past.

Capital has become that, a deal with the future because such is what we have made of it, with our so-called Financial Engineering.

Classical, even neo-classical, attitudes towards capital were far more conventional. That is, it was the money left in the bank account resulting from a successful effort of individuals/corporations as market agents over a given period of time. That is, it was tangible. Such conventional wisdom, of the time, had little place for the financial gyrations that are commonly part of trading capital today.

Banks found, in the past 15 years or so, that arbitraging was handsomely profitable and because money was cheap and available they self-indulged in such trading. Of course, a good many have been burnt as any such high-risk venture is likely to entail.

I would like to think, but am not sure, that this faddish New Notion of Capital, as a purely futures risk-instrument profit generator, has come and gone; having been born of a special time under special circumstances.

If we haven't learned that lesson, otoh, then we are in for more of the same, which can only lead to perdition. Or, perhaps, bringing back Glass-Steagall towards assuring that the different notions of "risk undertaking", in Commercial and Investment Banking, are well separated with a firewall between them.

It would also help greatly if such a banking protocol were a global standard.

They do not seem to make for good bedfellows.

[wjd123]

Clive Crooks claims that the marriage of sentiment and self interest is "exactly what ordinary profit-seeking commerce achieves, in Smith's telling. This is the over arching idea in both books."

Yet only a century and a half after Smith finished writing his books, Marx was working on his concept of labor alienation and Socialism was in its heyday.

Clive Crook also writes this:

Smith believed that most people are self-interested, sympathetic, and wish to be well thought of. Successful commercial societies, he argued, are built on these traits. The question is, how can they best be combined? In modern terms, how can institutions and incentives shape, channel, and balance these sometimes conflicting instincts to promote greater peace and prosperity? This is the subject of both books.

Yet at the height of the Industrial Revolution the plight of labor was masked behind a belief in either Social Darwinism or a gradual evolution out of the evils of industrialism. Neither view seems very sympathetic to me. They seem an excuse for not intervening to mitigate those evils.

In the middle of the nineteenth century Charles Dickens in Hard Times was arguing that a utilitarian education based on facts and statistics deadened the capacity for sympathy.

As late as the beginning of the twentieth century Emile Durkheim as much a utilitarian as as a Kantian, a lover of facts and statistics who wanted to take the study of morality out of the hands of the moral philosophers and put it on a more positivist footing was writing these words about what he believed to be the "self-delusion" of the classical economist and their utilitarian bent:

It is said that for normal economic activity there is no need of regulations. But from what source could it derive such a privilege? How should this particular social function be exempt from a condition which is the most fundamental of any social structure? Clearly, if there has been self-delusion to this degree among the classical economists it is because the economic functions were studied as if they were an end in themselves. without considering what further effect they might have on the whole social order. Judged in this way, productive output seemed to be the sole primary aim in all industrial activity. In some ways it might appear that output, to be intensive, had no need at all to be regulated; that on the contrary, the best thing were to leave individual businesses and enterprises of self interest to excite and spur on one another in hot competition, instead of trying to curb and keep them within bounds. But production is not everything; and if industry can only bring its output to this pitch by keeping up a chronic state of warfare and endless dissatisfaction amongst the producers, there is nothing to balance the evil it does. Even from the strictly utilitarian standpoint, what is the purpose of heaping up riches if they do not serve to abate the desires of the greatest numbers, but, on the contrary, only to arouse their impatience for gain? That would be to lose sight of the fact that economic functions are not an end in themselves but only a means to an end; that they are one of the organs of social life and that social life is above all a harmonious community of endeavors, where minds will come together to work for the same aim. Society has no justification if it does not bring a little peace to people--peace in their hearts and peace in their mutual intercourse. If, then, industry can be productive only by disturbing their peace and unleashing warfare, it is not worth the cost. Professional Ethics and Civil Morals.

[Lafayette]

The sky's the limit

Article: if there has been self-delusion to this degree among the classical economists it is because the economic functions were studied as if they were an end in themselves. without considering what further effect they might have on the whole social order. Judged in this way, productive output seemed to be the sole primary aim in all industrial activity.

And it remains the prevalent gauge of economic activity. After all, the purpose of an economy is to employ people. Income Distribution comes in much later in the considerations.

Which is unfortunate, but due to the fact that a population does not pay attention, as economists do, to what is most important in economic activity -- not the generation of wealth but its distribution.

Polemics aside (and no discourse about the benefits of owning the means of production), a nation -- or its leaders -- decide how the wealth is distributed by means of Taxation Policy.

As has amply been discussed in this forum, Reagan's lowering of marginal tax rates seriously warped income distribution as only a cursory look at the Gini Index will indicate. Other, more serious, consequences have appeared, which have affected certain behavioural aspects of human nature.

Namely, the ability of some in positions of privilege (namely Top Management and Financiers) to manipulate the means of wealth generation. This apparent greed has become manifest in the economy.

How to write the wrong? Easy -- by increasing marginal income tax rates to confiscatory levels (80% and beyond). This would depend upon the level of income, obviously. Which is were the debate gets stuck.

Nobody wants to say when does confiscatory taxation should kick in. Because the answer grates. It confronts a basic, ingrained ideological precept of American culture: That people should earn absolutely as much as the rules permitted. The sky's the limit.

This point remains the mud in which the debate gets stuck and continues to turn its wheels, expending much energy but getting nowhere. One day, nonetheless, we must answer that question in order for Income Fairness to finally progress in America.