Economist's View

"AD, AS, Y, Output Gaps, Cuba, Monopolistic Competition, and Recalculation"

Nick Rowe has a nice explanation of why output in the U.S. is generally demand determined, and why this isn't necessarily true in all countries. See here.

Just one peripheral comment. Nick says that it took "half a century for monopolistic competition to make the transition to macro." That is true, for a long time perfect competition was assumed in these models for analytical convenience. But I've always thought that Keynes had monopolistically competitive markets in mind when he wrote the General Theory, and that this came about due to the influence of Joan Robinson (her theory of monopolistic competition appeared in 1933), something that was lost in the macroeconomics literature until the revival of these models in the early 1980s and their incorporation into the New Keynesian framework.

"The Very Best Short Summary of Adam Smith's Life and Work"

Adam Smith, the "Newton of political economy," may not be quite the "advocate of ‘market forces’, the enemy of government regulation, and believer in something called the ‘invisible hand" as you've been led to believe:

The Very Best Short Summary of Adam Smith's Life and Work, by Gavin Kennedy: Chris Berry, Professor of Political Theory at University of Glasgow is a leading expert on the life and work of one of the University of Glasgow's most famous academics, Adam Smith. He has created a 10 minute talk ... that describes the making of the man, the global significance of his writing and explains why Smith's work still resonates with us today:

Adam Smith in 10 Minutes: Adam Smith was born in Kirkcaldy in 1723. He entered Glasgow University at the early - but for the time not unusual - age of fourteen. He studied logic, metaphysics, maths and later Newtonian physics and moral philosophy under some of the leading scholars of the day. In 1740 Smith was awarded a Snell Scholarship (which is still in existence today) to study at Balliol College, Oxford. Smith preferred Glasgow, however, because Oxford’s curriculum was antiquated and he thought the teachers were lazy since, in contrast to Glasgow, their salary did not depend on the number of students taught. ...

The seeds of Smith's two great books were sown in his professorial years. The Theory of Moral Sentiments appeared in 1759 and drew on his lectures. It went through six editions in his lifetime. ... Although his second great book the Wealth of Nations was published in 1776 we know that he had already considered many of its leading themes at Glasgow as he lectured on as he put it: 'those arts which contribute to subsistence, and to the accumulation of property, in producing correspondent movements or alterations in law and government'. ...

If Smith of popular repute is the ‘father of capitalism’, the advocate of ‘market forces’, the enemy of government regulation and believer in something called the ‘invisible hand’ to produce optimum economic outcomes then he would be a disappointed parent. All his work is deeply steeped in moral philosophy. Indeed the simple fact that the final edition of the Moral Sentiments containing extensive revisions appeared in 1790, the year of his death, tells us is that Smith’s commitment to the moral point of view endured alongside and beyond the publication of the Wealth of Nations.

The Moral Sentiments is a leading example of a particular approach to moral philosophy – one that regards it not as sets of rationally or Divine ordained prescriptions but as the interaction of human feelings, emotions or sentiments in the real settings of human life. In many ways it is a book of social and moral psychology. What we can call economic behaviour is necessarily situated in a moral context. But more than that the key theme of the book is an opposition to the view that all morality or virtue is reducible to self-interest. Indeed his opening sentence declares that everyday human experience proves that false, he writes:

Was the Invisible Hand "Central" to Smith?

Daniel Klein, Professor of Economics at George Mason University and Editor of Econ Journal Watch, asks:

What probably would you put on the truth of a broad hypothesis of deliberate centrality?

Here's more background on the question:

In a Word or Two, Placed in the Middle: The Invisible Hand in Smith’s Tomes, by Daniel B. Klein and Brandon Lucas: Abstract:  The meaning and significance of Smith’s expression “led by an invisible hand” has been long debated, and especially lately. We speak to the large debate only in fine, by focusing on the conjecture, first hinted at by Peter Minowitz, that Smith deliberately placed his central idea, as represented by the phrase “led by an invisible hand,” at the physical center of his masterworks. We bring supportive evidence and argumentation to the conjecture. The four most significant points developed are as follows: (1) The expression “led by an invisible hand” occurs pretty much dead center of the 1^st and 2^nd editions of Wealth of Nations, and of the final edition of the volumes containing Theory of Moral Sentiments. (2) The expression in WN drifted only a bit from the center, only about 5 percent from the center in the final edition (and even less if the index is excluded). (3) The rhetoric lectures show that Smith not only was conscious of deliberate placement of potent words at the center, but thought it significant enough to remark on to his pupils, noting that Thucydides “often expresses all that he labours so much in a word or two, sometimes placed in the middle of the narration.” (4) There numerous and rich ways in which centrality and middle-ness hold special and positive significance in Smith’s thought. In conjunction with larger considerations, these points may be helpful in assessing the significance of Smith’s famous phrase.

Here's a figure showing centrality through the 7 editions of each work.

This is an attempt to rescue the invisible hand from critics who argue that the invisible hand idea that is attributed to Smith was not a central part of his writing (e.g. see Gavin Kennedy).

In answer to the question, it doesn't seem very likely to me that this was intentional.

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Note: If you are unfamiliar with the debate over the invisible hand, here is Gavin Kennedy:

...Lost Legacy has never been slow in criticizing the ‘Chicago Adam Smith’, a person with ideas that are far from the ideas of the Adam Smith born in Kirkcaldy in 1723.

George Stigler’s boast that “Adam Smith is alive and well and lives in Chicago” (1976) reflects to invention of the Adam Smith of the “invisible hand” (a mere metaphor for Adam Smith whose single use of it in Wealth Of Nations referred to the unintended consequences of the risk-avoidance of some, but not all merchants ... who preferred the home trade), and had nothing to do, at least in Adam Smith’s mind, with how markets worked, ... or how the price system worked.

The belief that the “invisible hand” was a significant ‘idea’, ‘concept’, ‘theory’, or ‘paradigm’ was wholly invented in the 1950s by neo-classical economists on the back of general equilibrium mathematics ... and in support of a worthy criticism of Cold War, Soviet central planning. It is now taught in every economics 101 class as if it had historical validity, mainly by people who have never bothered to read Wealth Of Nations. ...

Update: See " Yet Another Note on Adam Smith's "Invisible Hand": What It Is and What It Is Not" by Brad Delong.

"John Stuart Mill as a Social Science Founder"

Daniel Little discusses John Stuart Mill's significant contributions to the creation of a positivist science of society:

John Stuart Mill as a social science founder, by Daniel Little: John Stuart Mill was Britain's leading thinker when it came to issues having to do with logic and scientific knowledge in the mid-nineteenth century. His System of Logic was first published in 1843 and was reprinted in numerous editions, and it constituted a comprehensive treatment of scientific knowledge and inference within the empiricist tradition. 

The book devoted an entire section to the logic of what Mill referred to as the "moral sciences" (Book VI, published separately as The Logic of the Moral Sciences). He defined the moral sciences as those areas of study having to do with human dispositions, character, and action, extending from psychology to social science. The conception of social science knowledge that he presents has had a deep impact on subsequent thinking about "scientific" social analysis and is worth examining again. (Here is a link to the Gutenberg etext edition of the System of Logic.)

Mill developed a general vision of science that was derived from the best current examples of progress in the natural sciences, and he then applied this vision to the effort to understand human and social phenomena scientifically. Putting his vision simply, science consists of the discovery of general causal laws based on systematic empirical observation. It lays the framework for a positivist conception of social science, and it prepares a charge of "Not scientific!" to social scientists who deviate from these central positivist tenets.

Malthus "Would have been Very Much at Home in the Blogosphere"

In Thomas Malthus' time, there was a dispute over the corn laws (which were tariffs on imported grains imposed in the early 1800s). Landlords favored the corn laws, and though the landlords were the most powerful class at that time, they were coming under increasing attack from the rising merchant and industrial capital classes. Why the conflict?

The tariffs raised the price of corn, something the landlords favored, but since corn was a key component of the subsistence workers relied upon to survive, the price of labor - the wage rate - would reflect the price of corn. If the price of corn was high, wages would be high, and when the price of labor rises merchants and capitalists would have a more difficult time selling their goods profitably. The fear was compounded by the end of the Napoleonic wars and the threat of large imports of cheap grain from France.

So what was the effect of the corn laws on the price of corn, on wages, on the welfare of the poor, and so on? Finding an answer to this question, as well as the answer to what impact poor laws have, and what causes gluts (recessions) drove both Malthus and Ricardo to develop theoretical models that could guide them to the answer and hence to the correct policy prescription. Thus, their analytical contributions to economics were driven primarily by the important social questions of the time.

Here's more on Malthus:

Malthus blogging on the Corn Laws, by Daniel Little: I think that Thomas Malthus would have been very much at home in the blogosphere. He weighed in on the issues of the day, bringing careful logical analysis of economic theory to bear on the policy issues that were up for debate. And he was very interested in making the connection between economic principles and real empirical evidence. This is particularly true in his contributions to the debate on the Corn Laws in 1814 and 1815. Malthus authored pamphlets on these issues in 1814 ("Observations on the effects of the corn laws"; link) and 1815 ("Grounds of an opinion on the policy of restricting the importation of foreign corn"; link), and they repay scrutiny today; they are powerful instances of a very smart economist probing the theory and the facts surrounding a complex policy issue. (Here is a nice survey of Malthus's theories; link.)

The Corn Laws might be thought of as a form of "stimulus package" for the British economy in the early nineteenth century. By setting a high tariff on the import of wheat and other grains, Parliament aimed to protect the agricultural sector and to encourage the expansion of grain production to make Britain more independent from external grain providers. One might also compare the debate to the NAFTA debate or to policy deliberations in the 1960s concerning "import substitution" strategies. Opponents argued that removal of the tariffs would bring down the price of grain, a central component of the wage basket; this would help the poor and would also permit a significant reduction of the wage as well. So the issue divides the interests of land owners, industrialists, and the poor.

Malthus's position in the two essays is somewhat different. In the first article he promises to lay out the issue dispassionately, dispelling false opinions about what the effects of the proposed policy might be and diving into the advantages and disadvantages of the policy. He writes that "some important considerations have been neglected on both sides of the question, and the effects of the corn laws, and of a rise or fall in the price of corn, on the agriculture and general wealth of the state, have not yet been fully laid before the public." A bit further on, he writes:

My main object is to assist in affording the materials for a just and enlightened decision; and whatever that decision may be, to prevent disappointment, in the event of the effects of the measure not being such as were previously contemplated. Nothing would tend so powerfully to bring the general principles of political economy into disrepute, and to prevent their spreading, as their being supported upon any occasion by reasoning, which constant and unequivocal experience should afterwards prove to be fallacious.

So--"let's do rigorous and systematic analysis based on the principles of political economy and our best understanding of the facts." Good advice for a policy debate.

Quite a bit of the analysis is devoted to refuting an idea that Malthus attributes to Adam Smith ... [...continue reading...]

"Why is Economics Not an Evolutionary Science?"

This was written by Thorstein Veblen in 1898. It's long, but if you have the time to read it, it's worth it. To me, there is an important lesson here that has been forgotten even by those - or perhaps especially by those - at places like the University of Chicago who proclaim themselves to be positivists in search of the truth.

"Adam Smith and Web 2.0"

Nicholas Gruen says that while the "collaborative web ... can’t be easily explained within economists’ standard framework," Adam Smith "would have understood":

Adam Smith and Web 2.0, by Nicholas Gruen: History plays tricks on us. The real internet revolution picked up after the internet bubble had burst. And the economist whose framework helps most in thinking about the internet revolution is none other than Adam Smith, who kicked off economics more than 200 years ago.

The internet boom involved companies using the net to broadcast to customers — like ads on TV — or to automate the sales process: for instance, with customers booking their own airline tickets or ordering books. Today Web 2.0, or collaborative web, is enabling armies of volunteers to build a better world. Some are building and giving away public goods such as open-source software (Linux and Firefox) and reference resources (Wikipedia). Others provide expert analysis and commentary on blogs, often surpassing professional journalists. Others, such as Facebook, connect people with something in common.

These phenomena can’t be easily explained within economists’ standard framework, in which economic decision-makers are reduced to the ideal type known in the trade as homo economicus. Homo economicus is a pure, calculating egoist optimising his profit or “utility” without regard for others’ views or conduct (except where they’re useful to his ends).

Homo economicus might not explain which films we see or with whom we socialise. But a theory’s job is to highlight some aspects of reality — by leaving out others. When you make investments or haggle for a car or house, you’re probably doing the best homo economicus impression you can.

Even here, however, something’s seriously wrong. We’re socially comparative beings. We care deeply about the conduct, opinions and values of our peers, using comparisons with them to orient our own ideas about what we need or value and how wealthy we want or need to be. As for the subtler aspects of our economy, from the motivation of employees to those amazing things Web 2.0 is bringing forth, well, homo economicus doesn’t seem to get close to what’s going on.

Enter Adam Smith’s Theory of Moral Sentiments, published 250 years ago last month, a book he intended partly as a theoretical foundation for his later economics. As Smith sees it, we begin our lives as blobs of infantile egoism — infans economicus, if you like. But from then on Smith sees the process that we now call socialisation deepening and transforming us.

We learn from our immediate family, on whom we are utterly dependent, that some things win their approval and admiration, others their disapproval and even disgust. Our craving of approval and dread of disapproval and our ability to understand others by imagining ourselves in their shoes draw us into a lifelong dialectical social drama.

In modern economics, the attraction of great power, fame or wealth is simple greed for more. Smith’s richer psychology offers a more plausible explanation. “(T)o what purpose is all the toil and bustle of this world?” Smith asks. What human drive lies behind avarice and ambition?

Is it to supply the necessities of nature? The wages of the meanest labourer can supply them. To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation, are all the advantages which we can propose to derive from it. It is the vanity, not the ease or the pleasure, which interests us.

Smith was an advocate of self-interest in human affairs, but in a much richer, more interesting way than is usually thought. In advocating a larger role for self-interest, Smith identified the public goods that are prerequisites for self-interest becoming socially constructive. Within economics the invisible hand only works in a peaceful, lawful society, and with strong, free competition.

Within society more generally, self-interest becomes a rich ethical meal, not the morally anorectic egoism of homo economicus. Our natural sociality enriches and educates our self-interest. Craving esteem and imagining ourselves as others see us, we gain some objective appreciation of our own moral worth. And this is ultimately a spur towards virtue as we strive to be worthy of the esteem we crave (although, of course, as we are mere mortals there is much stumbling on our journey).

Web 2.0 is scaling up the scope for human sociality and opening up new vistas for the expression of self-interest. And yet profit-seeking is only a small part of how that self-interest is manifesting itself.

The way we express our self-interest on Web 2.0 is something new, and also as old as humanity itself. Why do millions of us blog? For the same reason we talk and write emails, text messages, instant messages and letters (remember them?). We do it to communicate feelings, ideas, needs and experiences with others who might understand us. They might even write back! Whether it’s the evolution of language itself or the evolution of culture and social mores, people’s interaction like this builds communities of shared meaning and understanding.

Even Smith’s description of a market was inherently social — he toyed with the idea that the fundamental human drive behind bargaining was the desire we each have to persuade others to see it our way. Smith would have understood the foundational proposition of an early Web 2.0 credo, “the cluetrain manifesto” — “Markets are conversations”.

As Web 2.0 burgeons, its denizens pursue their interests like the merchants in Smith’s Wealth of Nations, posting and commenting on blogs, making and exchanging programming code and mash-ups of each other’s content, making connections based on social or practical needs. Some serve practical needs — perhaps they need some software bug fixed. Others are “know-alls” proving their superior knowledge. Some express their love of a subject.

And just as the miracle of a healthy market enables the merchant’s self-interest to serve the common good, so this new alchemy of the web aggregates individual efforts into freely available public goods. Likewise this unruly mix of motives gives us glimpses of our better selves. To use Smith’s description of the psychology of ambition, it lures us on our quest for an “easy empire over the affections of mankind”, which is a hint, a tease calling us on a quest for a more distant and difficult destination — virtue itself. 

I Feel Your Pain

Gavin Kennedy of Adam Smith's Lost Legacy recommends this essay on The Theory of Moral Sentiments:

Cut-throat behaviour makes empathy flow, by Nicholas Gruen, Commentary, Sydney Morning Herald: ...Smith's Theory Of Moral Sentiments argued that people seeking their own interests in a society were united by their sympathy or fellow feeling for others. If that sounds a bit lame to you - a monopolist's sympathy for his customers rarely stops him exploiting them - Smith wasn't arguing that people always do the right thing. His point was subtler and more powerful. Smith observed the way we internalise others' values and live enmeshed in social meanings and expectations.

In thrall to Newton's explanation of the movement of planets via a single, uniform principle - that of gravity - he looked for a similar foundation for human behaviour in society. In modern parlance Smith argued that we were hard-wired for sympathy or fellow feeling with others, not in the sense that we always take their side, but in the deeper sense that our understanding and ultimate judgment of them depends on an imaginative sympathy, on the process of being able to place ourselves in their position, to see the world through their eyes.

We feel others' pain and elation (though not usually as strongly as them) but we do so through some act of imaginative sympathy. Horror, fear, pain and elation are all "infectious" in this way, sometimes viscerally so. ...

The whole of human sociality is built on these foundations. Indeed, armed with his theory, Smith argued that those who strive for riches do it not principally because of the utility it buys but because they crave the esteem of others. Smith despaired that we were so impressed by the wealthy. ...

[He also recommends Dan klein's podcast on the same topic- see today's daily links.]

"Why Bother with Adam Smith?"

Gavin Kennedy reacts to some of the recent criticism of economists for reading and citing the sacred texts and ancient tomes:

Thought for the Day - 3, Adam Smith's Lost Legacy: ...There is a debate underway among historians of economic thought on whether economists really need to study the history of ideas in what we may loosely term our discipline. Those economists who take the view that the history of economic ideas really has nothing to do with modern economics, point to it being unnecessary for ‘real scientists’ to read the works of Isaac Newton, and his lesser luminaries, so why bother with Adam Smith and the rest?

My views on this debate (I have not joined in, so far) are predictable. The physical world is fairly constant – each and every carbon atom is assumed to behave the same way, and has done so through the ages, and unless that changes in known circumstances, its properties and relationships with other atoms are not expected to change. Knowledge gains in hard sciences build upon earlier knowledge gains, and future knowledge gains continue the process.

Turning to economics – part of human sciences – it is quite different. We hardly know about past economic history; even recent history is controversial and is well short of arriving at a settled view. There are political views of economic behaviours – as far as I know, we do not have ‘leftwing’ or ‘rightwing’ carbon atoms – and we do not have a settled view on what constitutes economic society or on what would constitute a society that could be said to be the basis for all further societies without (controversial) changes.

"Adam Smith’s Market Never Stood Alone"

Amartya Sen explains how Adam Smith has been misinterpreted, and how the beliefs associated with that misinterpretation lead to a form of capitalism that Smith would not have approved of. In fact, Smith would not have been surprised that the type of capitalism we have seen in recent decades would lead to the difficulties we are having today:

Adam Smith’s market never stood alone, by Amartya Sen, Commentary, Financial Times: ...[T]he market economy has been exceptionally dynamic, generating unprecedented expansion of the global economy over the past 60 years. Not any more, at least not right now. .... The question that arises most forcefully now is not so much about the end of capitalism as about the nature of capitalism and the need for change. ...

Do we really need a “new capitalism”...? ... What exactly is capitalism? The standard definition seems to take reliance on markets for economic transactions as a necessary qualification... In a similar way, dependence on the profit motive, and on ... private ownership, are seen as archetypal features of capitalism. However,... All the affluent countries in the world – those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Taiwan, Australia and others – have depended for some time on transactions that occur largely outside the markets, such as unemployment benefits, public pensions and other features of social security, and the public provision of school education and healthcare. The creditable performance of the allegedly capitalist systems in the days when there were real achievements drew on a combination of institutions that went much beyond relying only on a profit-maximising market economy. ...

The Austrian and Chicago Schools

This is from History of Economic Thought: A Critical Perspective, by E.K. Hunt, a long out of print textbook I had when I was an undergraduate at CSU Chico [update: it is has been published again by M E Sharpe]. It explains how the "Austrian and Chicago schools reduce all human behavior to rational maximizing exchanges and hence are able to prove that in every respect, economic and non-economic, a free market, capitalist system is the best of all possible worlds," and gives some of the critical reactions to that point of view:

The Austrian and Chicago Schools

The school of neoclassical economists that advocates extreme laissez-faire Capitalism represents the contemporary counterparts of Senior and Bastiat. In a sense this group really represents two separate but similar schools - the Austrian School and the Chicago School. The Austrian School traces its lineage directly back to Carl Menger (Chapter Eleven), Menger's extreme methodological individualism is the basis of the social philosophy of the Austrian School.

While Menger's first generation of disciples included both social reformers and conservatives, the ultraconservative nature of the Austrian School is more properly thought of as the product of two of Menger's second-generation disciples, Ludwig von Mises and Friedrich A. Hayek. Both von Mises and Hayek taught at various times at the University of Chicago. Together with Frank H. Knight, who taught for many years at the University of Chicago, they were the most important influences in the formation of the Chicago School. For the past generation, Milton Friedman has been the most influential member of the Chicago School. In 1976, Friedman was awarded the Nobel Prize in economics.

The problem with classifying the Austrian and Chicago schools together is that although they both emphasize the universal beneficence of exchange, extreme individualism, and a doctrinaire advocacy of laissez-faire, they have methodological differences. The Austrians generally advocate a rationalist approach to economic theory, while Milton Friedman and his followers generally advocate an empiricist approach. Although it is currently very common in the academic economics profession to hear all extremely individualistic advocates of laissez-faire referred to as the "Chicago School," it is probably more accurate to say that the more conservative wing of contemporary neoclassicism is about evenly divided between those who on methodological grounds follow the Austrian School and those who follow Friedman's Chicago School. We do not believe these methodological differences to be terribly significant,17 so we shall consider these contemporary advocates of extreme laissez-faire together.

"Economists' Pretensions About Science"

Gavin Kennedy continues his crusade against the myth of the invisible hand:

An Evolutionist Speaks Out About Economists' Pretensions About Science, by Gavin Kennedy: Massimo Pigliucci, professor in the departments of Ecology and Evolution, Stony Brook, NY, contributes an important piece of work in the Blog, Rationallyspeakingout.org (‘a site devoted to positive scepticism') (here):

Economics learns a thing or two from evolutionary biology

Economics is supposed to be a solid discipline, founded on complex mathematical models (and we all know math is really, really difficult). They even give Nobel prizes to economists, for crying out loud! And yet, economics has always had to fight off the same reputation of being a “soft” science that has plagued sociology, psychology, and to some extent even some of the biological sciences, like ecology and evolutionary biology. Indeed, like practitioners in those other fields of inquiry, some economists admit of being guilty of “physics envy,” that is, of using the physical sciences as the model for what their field ought to be like. Turns out even the assumption that a good science should be modeled on physics is “flawed,” to use Greenspan’s apt phrase.

A recent article by Chelsea Wald in Science (12 December 2008) puts things in perspective by asking how it is possible that so many smart people in the financial sector made irrational decisions over a period of years, despite clear data showing there was a problem, and eventually leading to a worldwide economic crisis that is at the least poking at, if not shaking, the foundations of capitalism itself.

Part of the answer is to be found in the persistent idea in economics that “markets” work because people are rational agents who act in their own self-interest and have perfect, instantaneous access to relevant information about the businesses they are considering investing in. Economists are not stupid, and they know very well that perfect rationality, complete information and instant access are all light years away from the reality of how markets operate. And in fact recent models have relaxed these assumptions to some extent. But it is so much more tractable to model things that way! After all, physicists do it too: remember those problems in Physics 101 that started “consider a spherical cow…”?

The Pursuit of Wealth

Tim Duy:

For A Sunday Morning, by Tim Duy: An unusually quiet Sunday morning – the kids are with their grandparents, leaving me with a chance to think of something beyond the immediate economic data. This morning that meant a stream of thoughts triggered by Paul Krugman’s most recent op-ed, particularly this:

Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.

Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.

In this paragraph, Krugman sounds less like an economist and more like a philosopher. But I am not complaining in the least; economists lost a sense of the essential humanity of their topic when they gravitated down a path of sanitized mathematical and statistical methodology. Indeed, I often think that economists share no small blame for our current economic challenges, as the profession provided the intellectual basis for free markets but often failed to place that ideology in a larger social perspective. It is as if the profession followed the path of The Wealth of Nations but forgot The Theory of Moral Sentiments. The latter is Adam Smith’s philosophical tome, and if you can only read one of these two, it is my recommendation. I suspect that Krugman had TMS in mind when he wrote the above paragraphs. An excerpt from Smith:

What Causes Gluts and How Can They be Cured?

In Britain in 1818, a large decline in agricultural prices led to the severe depression of 1819, and the high levels of unemployment that followed led to general social unrest:

In August of that year, thousands of workers had demonstrated in the streets of Manchester. The British government had called out the armed forces and the demonstrators were brutally suppressed. Ten demonstrators were killed and many hundreds were severely injured in what came to be known as the "Peterloo Massacre." This occurred just one year before the publication of the first edition of Malthus's Principles. Malthus was extremely aware that depressions not only could but did happen in a capitalist economy; he was also well aware of the potential revolutionary danger of such labor uprisings. His single most important goal in writing the Principles was to promote an understanding of these crises, or gluts, and to propose policies to mitigate them. [History of Economic Thought, by E.K. Hunt]

Malthus answer was to explain how it was possible for the demand for goods and services to be less than the amount of goods and services produced - so his was a theory of deficient demand - and when that happened, goods would pile up in the marketplace and a general glut would ensue.

But why did this happen? Why did goods pile up in the marketplace and simply rot away (creatively) while so many people struggled to meet the necessities of life? His solution was to realize that the costs of production (i.e. the natural value of the goods) had to be equal to the income of the various classes in society, i.e. that the value of production had to equal wages plus interest plus profits (notice that rents are missing - more on that below).

Are Specialized Ants More Productive?

Specialist ants are no better at their jobs than non-specialists:

Are ants that specialize better at their job?, EurekAlert: Adam Smith ... wrote in 1776 that specialized labor provides benefits to human industry, and similar benefits have been suggested to explain the world-wide success of ants, and other social insects which live in colonies. Ants are found on every continent besides Antarctica, and their success has been attributed to the evolution of specialization – it has been theorized that this increases the efficiency of individual workers - but has rarely been measured. However, a new paper by Anna Dornhaus, published in this week's issue of PLoS Biology, shows that individual rock ants (Temnothorax albipennis) specializing on one task are no more efficient than those that perform multiple tasks.

Rock ants are not physically specialized for any particular task. Dornhaus ... measured how often and how readily individual ants performed certain tasks and considered an ant more specialized the more it concentrated its work on one particular task. She expected rock ants that specialized to work more efficiently, but that's not what she found. Dornhaus explains, "It turns out that the ones that are specialized on a particular job are not particularly good at doing that job."...

Although the specialists were not more efficient, they did put in more hours of work. Even though putting in longer hours might seem like the way to success, it wastes colony resources. Dornhaus found that specialists and generalists work equally fast. "Speed does matter because every minute they spend outside is dangerous and energy costly," she said. "They burn fuel, and they risk dying."

It's not known why ants choose the jobs they do, or why some are slow to begin work. She said it might be explained by how quickly an individual detects work to be done, like noticing dirty dishes in the sink. A person with a lower threshold will notice and wash the dishes as soon as there are one or two in the sink. However, a person with a higher threshold doesn't notice the dishes until there are at least 10 piled up. The dishes will still be washed, just not as frequently.

Dornhaus concludes that, at least in this species, a task is not primarily performed by individuals that are especially adapted to it. How much these results apply to the other tasks performed by these ants, or other ant species, or even social insects more generally, remains to be verified. Dorrnhaus's next step is investigating "switching costs," such as the time it takes to walk from one side of the nest to the other or the break in concentration when switching between tasks. Dornhaus suggests specialization might minimize such costs.

Adam Smith cited three benefits from specialization:

1. The worker would become more adept at the task.
2. The time saved from not changing tasks.
3. With specialization, tasks can be isolated and identified, and machinery can be built to do the job in place of labor.

Thought there are plans to look at Smith's second reason for an increase in productivity due to specialization, time saved from staying at one job all day, so far this research only looks at the first reason, dexterity. However, dexterity may not be the most important of the three reasons, and I think that Smith was thinking more about an individual's ability to learn by doing rather than inherent differences across workers. But to the extent that there are differences across workers, and to the extent that it matters for the job, humans may use a different selection mechanism than ants. As to the third reason, I'm not expecting ants to build much capital, so their long-run productivity - the wealth of the ant nation - may be quite limited.

I should note that Smith also thought there was a downside to specialization, i.e. that doing the same task over and over day in and day out dulls the mind.

"We Were All Keynesians Then"

Though the idea is likely far older, using public works projects to stimulate employment goes back at least to the mercantilists. For example, Sir William Petty (1623-1687) believed the government should employ the idle to work on roads, dredge rivers, build bridges, that sort of thing, though he did say in A Treaties of Taxes and Contributions (1662) that "tis of no matter if it be employed to build a useless Pyramid upon Salisbury Plain, bring the Stones at Stonehenge to Tower-Hill, or the like," so it was more of a traditional Keynesian view on stimulating aggregate demand than one devoted purely to construction of infrastructure. Thomas Malthus (1766-1834) believed that:

It is also of importance to know that, in our endeavors to assist the working class in a period like the present, it is desirable to employ them in those kinds of labour, the results of which do not come for sale into the market, such as roads and public works, The objection to employing a large sum in this way, raised by taxes, would not be its tendency to diminish the capital employed in productive labour; because this, to a certain extent is exactly what is wanted; but it might, perhaps, have some effect of concealing too much the failure of the national demand for labor, and prevent the population from gradually accommodating itself to regular demand. This, however, might be, in a considerable degree, corrected by the [low] wages given. [Political Economy, 2nd Ed., 429-430]

And, from 80 years ago, Calvin Coolidge echoes this theme:

We Were All Keynesians Then, Journal of Political Economy, Back Cover, Vol. 104, No. 5 (Oct., 1996):  The idea of utilizing construction, particularly of public works, as a stabilizing factor in the business and employment situation has long been a plan of perfection among students of these problems. If in periods of great business activity the work of construction might be somewhat relaxed; and if in periods of business depression and slack employment those works might be expanded to provide occupation for workers otherwise idle, the result would be a stabilization and equalization which would moderate the alternations of employment and unemployment. This in turn would tend to favorable modification of the economic cycle. . . The first and easiest application of such a regulation is in connection with public works; the construction program which involves public buildings, highways, public utilities, and the like. Most forms of Government construction could be handled in conformity to such a policy, once it was definitely established. . . This applies not only to the construction activities of the Federal Government, but to those of states, counties and cities.

More than this, the economies possible under such a plan are apparent. When everybody wants to do the same thing at the same time, it becomes unduly expensive. Every element of costs, in every direction, tends to expand. These conditions reverse themselves in times of slack employment and subnormal activity, with the result that important economies are possible.

I am convinced that if the Government units would generally adopt such a policy, and if, having adopted it, they would give the fullest publicity to the resultant savings, the showing would have a compelling influence upon business generally. Quasi-public concerns, such as railroads and other public utilities, and the great corporations whose requirements can be quite accurately anticipated and charted, would be impressed that their interest could be served by a like procedure.

[Calvin Coolidge, address before the Associated General Contractors of America; quoted in L. W. Wallace, "A Federal Department of Public Works and Domain: Its Planning, Activities, and Influence in Leveling the Business Cycle," Proceedings of the Academy of Political Science 12 (July 1927): 108-9] (Suggested by David Laidler)

Everything new is old again, and it's time to rebuild. Given the state of our infrastructure and the state of the economy, both of which have crumbling foundations, it's past time to start these projects. So what are we waiting for?

"Creed of Greed Not Supported by Adam Smith"

Gavin Kennedy:

A Gem Amidst the Dross, Adam Smith's Lost Legacy: It is a positive sign that not every commentator on current affairs in the current corporate finance crisis purveys the inaccurate nonsense that a source of the problem lies in anything written by Adam Smith...

Eli Cox, Chair, department of Marketing at McCombs School of Business, writes in McCombs Today (‘News from the McCombs School of Business’)...:

Creed of Greed Not Supported by Adam Smith: Ordinary Americans have a deepening mistrust of free-market capitalism as our nation has gone from Enron, WorldCom, Adelphia and Tyco to Bear Sterns, Freddie Mac, Fannie May and Lehman Brothers. Sadly, this mistrust is justified because too many corporate executives have adopted the creed of greed. This creed is based on the false view that Adam Smith believed that that personal greed generates the public virtue of economic growth. In fact, Smith would have been revolted by this misrepresentation of his views, as he actually wrote the following:

“Justice [the human virtue of not harming others]…is the main pillar that supports the whole building. If justice is removed, the great fabric of human society which seems to have been under the darling care of Nature must in a moment crumble into atoms….Men, though naturally sympathetic, feel so little for others with whom they have no particular connection in comparison to what they feel for themselves. The misery of one who is merely their fellow creature is of so little importance to them in comparison to even a small convenience of their own. They have it so much in their power to hurt him and may have so many temptations to do so that if the principle of justice did not stand up within them in his defense and overawe them into a respect for his innocence, they would like wild beasts be ready to fly upon him at all times. Under such circumstances a man would enter an assembly of others as he enters a den of lions.”

...The quote found above ... from The Wealth of Nations states that unbridled greed destroys a free market system.

The pernicious view that “economic man” is selfish and rational and that Smith’s invisible hand will clean up the mess has been perpetuated by the Chicago School of Economics. ...

Comment
How true! At last a sign that some of the vast faculty of economists, trained in the academic world that has long been dominated by Chicago since the early 50s and by those who went onto teaching across the Western World’s universities, colleges, and school, have not lost their critical faculties – they show signs of actually reading what Adam Smith wrote and not what their tutors told them.

[I have long exposed the view that the patron saint of students was Saint Thomas – ‘don’t trust what you are told by tutors – read it for yourself!]

...Professor Eli Cox ... is right to assert that the myths of the majority fed on Chicago’s misappropriation of Adam Smith’s legacy contributes to the popular groundswell of distrust of markets and in consequence strengthens the corporate statists in favour of even bigger government.

Friedman, and the many others, who linked free markets to their myths about invisible hands, laissez faire and the elision of self interest into greed, severely damage the constant struggle for clean markets, open and transparent competition, and tolerable levels of public goods in place of big government in too close an alliance with big corporate interests.

Markets, operating under a regime of justice (and the prosecution of corporate criminals), are part of the solution; they are not the problem.

Adam Smith and the Division of Labor

Gavin Kennedy at Adam Smith's Lost Legacy says Adam Smith was "on the side of the labourers on the issues that mattered most to them: higher wages are preferred to lower wages, a point worth remembering, I think, on Labour Day.":

Adam Smith and the Importance of the Liberating Force of the Division of Labour, by Gavin Kennedy:  Daniel Bulone writes in Tunnel Vision (‘Observations on Exchange’), 1 September: “Adam Smith: Machine-Minded Misanthrope or Merry Man of Manufacture?” Here:

“Adam Smith lived in a time when industry was on the verge of revolution. A unique relationship between workers and machines had begun, one in which the two worked together, in an almost equal partnership, to produce marketable goods. This leads one to wonder if the newfound brotherhood of man and machine affected Smith’s writings. What is more, did Smith see people as a means toward an end? It is hard to avoid thinking as much, when he speaks of workers in terms of what they can produce. ... It is true that he was a scientist, whose job was to quantify the activities of workers. However, the way he speaks of the division of labor makes it seem as though it is a way to transcend the bothersome tendencies of humanity. ... Essentially, Smith’s process involves the greater value of the whole above that of the individual. According to him, people achieve maximum efficiency when they are cogs in a vast network of industry.

In addition to thinking of people as commodities, he does not have a particularly sunny view of humanity. When speaking of a common workman in WON, Smith states that the problem of too many tasks at once “renders him almost always slothful and lazy, and incapable of any vigorous application.” ...

Comment
This is rather a sad way to look at Adam Smith on the division of labour.

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.

"The Malthusian Trap Is Not the Whole Story"

Gavin Kennedy wonders if per capita income captures the full story of what was happening during "the first millennia of commerce":

The Malthusian Trap Is Not the Whole Story, Adam Smith's Lost Legacy: ...I am reading Robert Payne’s ‘The Christian Centuries from Christ to Dante’, 1966. ... I didn’t acquire this book from a religious interest in the topic; my motives for doing so are forgotten now, but my interest ... is from a discussion we were having some months ago on Gregory Clarke’s book, Farewell to Alms ... on The Marginal Revolution Blog...

The proposition that I lodged at the back of my mind which did not seem to fit the assertion that population grew (excluding the Black Death years), subsistence incomes had remained the lot of the population (the Malthusian trap) for millennia. Now, I didn’t deny the statistical evidence; I had trouble reconciling the facts with other evidence that this was not the whole story.

Societies were changing slowly and remained unequal; a necessary consequence of the Adam Smith’s last three Ages of Man (shepherding, farming and commerce). The elites of these societies certainly were not generally on subsistence compared to the majority of their populations. They lived differently, if in many years the differences were marginal.

But, and this is what irritated my understanding of Greg Clarke’s thesis, from the great agricultural settled societies onwards, these settled societies (unlike the mobile shepherding tribes) were associated with stone buildings, defensive walls, armed retainers on them, religious mystics and rituals, later, with special buildings (temples, synagogues, churches), and in some cases, philosophers.

Now all these had to be paid for (even in conditions of slavery), both materials and wages (subsistence goods), or circulating capital in Adam Smith’s theory of growth. The only source of this capital is by extraction from annual revenue of society, which the ruling elites controlled. If this diversion is significant (and it was) the per capita subsistence of the majority is not the key statistic about what was happening from the first millennia of commerce.

Moreover the products of what we call stone-based ‘civilisations’ had a lasting impact on future generations in wide areas of knowledge, the pre-condition of the technology that made what is called the ‘industrial revolution’ possible and the almost simultaneous solution to the Malthusian trap as Malthus was writing his book about it.

Back to Robert Payne’s Christian Centuries, which details the stone-built evidence of centuries of architectural monuments, ever greater in their magnificence, to the extraction thesis applied across Europe. Judging by the accounts in Payne’s book, the substance of my nagging doubts about Clarke’s focus on per capita incomes seems firmer now than before.

But then I am only up the 12th century (‘The Gothic Splendour') of Christian Rome’s complicity in the extraction process. I shall press on with the next chapter...

"Brand Names Before the Industrial Revolution"

How did medieval manufacturing guilds solve the "twin afflictions of adverse selection and counterfeit goods" that made long-distance trade difficult? :

Brand Names Before the Industrial Revolution, by Gary Richardson, NBER WP 13930, April 2008: Abstract In medieval Europe, manufacturers sold durable goods to anonymous consumers in distant markets, this essay argues, by making products with conspicuous characteristics. Examples of these unique, observable traits included cloth of distinctive colors, fabric with unmistakable weaves, and pewter that resonated at a particular pitch. These attributes identified merchandise because consumers could observe them readily, but counterfeiters could copy them only at great cost, if at all. Conspicuous characteristics fulfilled many of the functions that patents, trademarks, and brand names do today. The words that referred to products with conspicuous characteristics served as brand names in the Middle Ages. Data drawn from an array of industries corroborates this conjecture. The abundance of evidence suggests that conspicuous characteristics played a key role in the expansion of manufacturing before the Industrial Revolution.

Introduction In medieval Europe, manufacturers seeking to sell merchandise to anonymous consumers in distant markets had to overcome the obstacles of adverse selection and counterfeit goods. These obstacles arose because purchasers of defective products lacked legal recourse and because intellectual property, such as patents and trademarks, lacked legal protection. Adverse selection particularly afflicted markets for durable merchandise – such as textiles and metalware – with attributes that consumers could not observe before purchase. In these markets, sellers knew more than buyers about the quality of their wares. Manufacturers could cheat consumers and had an incentive to do so. Fear of being cheated deterred consumers from purchasing durable products. Exchanges that should have occurred because they were mutually beneficial did not occur because buyers worried that sellers would deceive them.1

Ophelimity vs. Wantability

In 1918, Irving Fisher wrote an AER article trying to replace the term utility with something he found more suitable:

Is "Utility" the Most Suitable Term for the Concept It is Used to Denote?, by Irving Fisher, American Economic Review, volume 8 (1918), pp. 335-7: In all sciences, and particularly in one like economics, which appeals to the general public and which uses concepts and terms already at least partially familiar, it is a matter of some practical importance to select a suitable terminology.

The concept called "final degree of utility" by Jevon's, "effective utility", "specific utility", and "marginal efficiency" by J. B. Clark, "marginal utility" and "marginal desirability" by Marshall, Gide and others, "Grenznutzen" by the Austrians, "Werth der letzten Atome" by Gossen, "rareté" by Walras, and "ophélimité" by Pareto, seem still in need of really satisfactory terms by which to express it.

Jevon's Contribution to Index Number Theory

Walter Bagehot responds negatively to William Stanley Jevon's proposal to construct a price index based upon household consumption, and then use the index to adjust contracts to reflect variations in the purchasing power of money. This is from an 1875 edition of The Economist:

A New Standard of Value, by Walter Bagehot, The Economist, November 20, 1875, reprinted in the Economic Journal, volume 2 (1892): Professor Jevons, of Manchester -- so well known in the economical and statistical world by his researches on coal -- has written an excellent treatise on 'Money and the Mechanism of Exchange', which we strongly recommend to our readers. It is extremely clear, brief without being dry, and contains a good deal of very interesting information. And we may add that it is written in a style of scientific modesty rare in currency books. Mr Jevons is perpetually aware that the subject abounds in questions of nicety and difficulty, on which he is quite ready to admit that he may be wrong. It would be a happy thing if persons far less competent than Mr Jevons to write on the subject, but who incessantly do so, could be brought to that admission.

On one point, however, we are at issue with Mr Jevons: he has far more hope from economical science than we have. He thinks that it can point out to mankind a far better theoretical standard of value than gold or silver, and believes that, though it is encumbered with some difficulties, probably the new plan would on the whole, when we got used to it, work better than our present one. But for ourselves we much fear that political economy has no such boon to confer on mankind, and that we must adhere to one or other of the precious metals as a standard of value, like our forefathers. Mr Jevons shall explain his fundamental idea in his own words.

Adam Smith On Religious Institutions

This is from Gavin Kennedy at Adam Smith's Lost Legacy:

Adam Smith On Religious Institutions, by Gavin Kennedy: Walter Russell Meade writes an interesting article, ‘Born Again’ in The Atlantic.com (March) on religious movements in the USA and goes back to Adam Smith’s Wealth Of Nations for his theme:

“In 1776, Adam Smith published The Wealth of Nations, a sly and subversive classic of secular humanism too often mistaken today for a mere lecture on the benefits of capitalism. In it, Smith said relatively little about religion and even less about the United States. Yet he managed to put his finger on the forces that are still shaping the role of religion in American politics today. His analysis is a better guide to the future of the evangelical movement than are most contemporary accounts.

Smith saw what we see: the progress of modernity, he noted, was not undermining religion in the Britain of his day. Instead, religious revivals were blooming. These new religious movements often rejected the liberal values of a free society. They favored absolute moral codes, conservative interpretations of religious doctrines, and political activism to enact their values into law.

Smith observed a relationship between these revivals and the process that we now call urbanization. Young people, arriving in cities in search of work, faced new opportunities and temptations without the structure that village life—with its communities of relatives and others that watched and guided young people—had provided. “A single week’s thoughtlessness and dissipation is often sufficient to undo a poor workman forever,” wrote Smith about life in London. But the city’s small sectarian religious congregations gave rural immigrants a social-support network and a moral code that could keep them on the straight and narrow as they built new lives. These movements were a response to the dislocations of modernity; there was no reason to expect them to fade away.

Yet in the teeming religious marketplace of Britain’s cities, Smith also saw pressures that would limit the political impact of religious beliefs and prevent theocracy. With so many competing denominations, he noted, religious leaders could acquire political influence only by finding allies outside their own version of the faith—and the process of forming those alliances would drive them toward agendas that could appeal to a wider, multi-faith audience. To be politically significant, he wrote, religious extremists had to move toward broader and necessarily more-moderate coalitions. Their entry into politics would, itself, moderate them.”

...A small quibble first:

“In it, Smith said relatively little about religion and even less about the United States.”

The United States were created after Wealth Of Nations was published in 1776, but Adam Smith had plenty to say about the British colonies in America. At a rough estimate the American colonies, feature across 109 pages in Book IV, his major and ‘violent attack’ on mercantile political economy, while his discussion on how religions are organized, plus his recommendations discussed by Walter Russell Meade, take up 26 pages...

I would imagine Adam Smith would admit to paying a great deal of attention to the colonies and ex-colonies of North America, reflecting his close interest in the institutional changes brought about by the rebellion. So much so, that his close friends, David Hume and the Duke of Buccleuch, cautioned him against becoming too ‘zealous’ about American affairs (Corr. 149: p 185-6).

It was also fairly risky for him too, because if he was to influence legislatures and British cabinets on the broader issues of changing British policies towards the economy, it did not help his case by being seen to be ‘indulgent’ towards the King’s ‘enemies’. I believe that among his papers burnt just before he died, he included his unfinished manuscript for his oft promised (since 1759) book on Jurisprudence – ‘an account of the general principles of law and government’ and ‘the theory of the rules by which civil governments ought to be directed’. The key word here is ‘ought’ because this would involve him in taking a stand, I believe in favour, of the principles of the US Constitutional provisions and this would have compromised his influence with the King’s Ministers. Hence, he arranged to become ‘too busy’ to write by taking the post of a Scottish Commissioner of Customs from 1778-1790.

Briefly, Adam Smith favoured the promotion (or the State refraining from curbing) the spread of splinter religious factions and small churches at the behest of the Established Churches of England and Scotland. This was to help create favourable conditions for integrating families uprooted from rural areas into urban environments and fill needs that the Established Churches were less capable of meeting. Proliferation would also prevent any one version of religion from being oppressive, which was one step short of disestablishing to Churches of England and Scotland from their monopolies of social patronage in the United Kingdom. ...

PS: I have been reading several academic papers on Adam Smith and religion, such as Brendon Long's 'Adam Smith's natural theology of society'... I am toying with the idea of doing some serious work on whether Adam Smith was a Christian, or even a deist. Any literature references from readers would be welcomed.

"Dancing With Tycoons?"

Whenever I read about thinkers like Adam Smith or Karl Marx and their evolutionary approach to modes of production, e.g. their explanations for the transition from feudalism to capitalism, I always wonder if capitalism is the end of the road, the last of the great modes of production, or if something else will follow. Marx, of course, thought capitalism would be supplanted by socialism and then communism, but I'm not so sure about that. I've always thought one possibility for the next step is worker ownership, though it's not quite clear how such firms would get started in the first place, i.e. where the capital would come from and who would decide which firms to start. But I suppose institutions could be constructed that would solve this problem (I'm not recommending this, but you could, for example, pass a constitutional amendment or more simply a law requiring an entrepreneur to sell the firm to the employees after the initial investment had been tripled or after fifteen years had passed, whichever comes first, or something along those lines. But that lacks institutional imagination and in any case I'm probably thinking too narrowly. Technological change, robots, computers, things I can't think of yet because they haven't been invented, things like that will likely frame the next step in our evolution to the next mode of production). So is this - capitalism as we know it - the end of the road, or will something else follow? Will capitalism be replaced by a newer, better mode of production? What will it be?

Here's David Warsh on a related topic - employee stock ownership plans:

Dancing With Tycoons?, Economic Principles: One of the things that news reporters learn early in their careers, if they are fortunate, is not to take anyone’s claim to authority too seriously. For example, I remember meeting Louis Kelso in the early 1980s.

Kelso was the San Francisco attorney and amateur economist who, starting in 1958, had gained a measure of fame as the author of a plea for employee ownership that he called The Capitalist Manifesto...

But it wasn’t until Mortimer Adler, the entrepreneurial educator, University of Chicago hanger-on, and founder of a Great Books of the Western World business, took an interest ... and agreed to share a byline on The Capitalist Manifesto that Kelso’s “two-factor economics of reality” began to attract a following, mainly among lawyers, small investors and businessfolk. A steady stream of books poured forth... He was in the process of taking his critique of neoclassical economics to Mike Wallace and 60 Minutes when we met.

Private-equity artists William Simon, Michael Milken, and Ronald Perelman were in their ascendancy at the time; the buyout firm of Kohlberg Kravis Roberts & Co. was gathering steam: famous journal articles, by Franco Modigliani & Merton Miller and Michael Jensen & William Meckling, were revolutionizing the practice of corporate finance: though wealthy, Kelso was an easy guy to ignore. He died, at 77, in 1991.

On the other hand, Kelso had been politically acute. In the early 1970s, he and his associates made a concerted effort to sell their ideas on Capitol Hill. They culminated in a famous dinner at the Madison Hotel in 1973 with Louisiana Sen. Russell Long. Son of famous Louisiana demagogue Huey Long and chairman of the Finance Committee, Sen. Long became a convert over the course of the four-hour meal. He was no populist Robin Hood, he asserted (implying that his father had been), but he liked the idea that every worker should become an owner of capital – he even paid for dinner. (Norman Kurland has written a thorough history of the episode.)

The upshot was that the influential Long wrote a series of little-noted tax breaks for Employee Stock Ownership Plans (ESOPs) into an enormous piece of legislation that eventually would become the Employee Retirement Income Security Act of 1974 (ERISA). The measure thus created a set of opportunities for a new generation of missionary organizers of worker ownership for firms for whom the Chrysler bailout of 1979 was a signal event. ...

How Laissez Faire was Adam Smith?

Gavin Kennedy of Adam Smith's Lost Legacy says not as much as you may have been led to believe:

How Laissez Faire was Adam Smith?, by Gavin Kennedy: Greg Whiteside writes ... here: "Adam Smith must be rolling over in his grave right now":

Arguably the father of modern economics, Adam Smith was a proponent of a Laissez-Faire style of economics. ...

Comment ‘Rolling over in his grave’? Not quite. I’m glad Greg Whiteside began with ‘arguably’. He wasn’t so sure then, and he shouldn’t be because Adam Smith did not recommend laissez faire economics, though he had many opportunities to do so. He doesn’t mention laissez faire (leave alone; or ‘laissez nous faire’, leave us alone', in its original format) in Wealth Of Nations, nor in anything else he wrote, including his correspondence.

That he is reputed to be a proponent of laissez faire is a fault of the people who started this assertion on no other basis than they had not read Wealth Of Nations through, confining their reading to selected quotations. If they had read Wealth Of Nations they would find items on the following list:

Boccaccio: The Decameron, "Introduction"

This account of the plague is from Boccaccio's The Decameron (1353) :

Boccaccio: The Decameron, "Introduction": Thirteen hundred and forty-eight years had passed since the fruitful Incarnation of the Son of God, when there came into the noble city of Florence, the most beautiful of all Italian cities, a deadly pestilence, which, either because of the operations of the heavenly bodies, or because of the just wrath of God mandating punishment for our iniquitous ways, several years earlier had originated in the Orient, where it destroyed countless lives, scarcely resting in one place before it moved to the next, and turning westward its strength grew monstrously. No human wisdom or foresight had any value: enormous amounts of refuse and manure were removed from the city by appointed officials, the sick were barred from entering the city, and many instructions were given to preserve health; just as useless were the humble supplications to God given not one time but many times in appointed processions, and all the other ways devout people called on God; despite all this, at the beginning of the spring of that year, that horrible plague began with its dolorous effects in a most awe-inspiring manner, as I will tell you. [...continue reading...]

"Creative Destruction's Reconstruction"

Brad DeLong on Schumpeter, my comments are at the end:

Creative Destruction's Reconstruction: Joseph Schumpeter Revisited, by J. Bradford Delong, Chronicle of Higher Education: My guess is that average literate Americans know of three 20th-century economists: John Maynard Keynes, Milton Friedman, and Alan Greenspan. ... In Prophet of Innovation: Joseph Schumpeter and Creative Destruction ..., Thomas K. McCraw, an emeritus professor of business history at Harvard Business School, tries to add another name to the list - Joseph Schumpeter. ...

Over the previous two and a half centuries, three different economic worldviews, in succession, reigned. In the late 18th and early 19th centuries, Adam Smith's was the key economic perspective, focusing on domestic and international trade and growth, the division of labor, the power of the market, and the minimal security of property and tolerable administration of justice that were needed to carry a country to prosperity. You could agree or you could disagree with Smith's conclusions and judgments, but his was the proper topical agenda.

The second reign was that of David Ricardo and Karl Marx. Their preoccupations dominated the late 19th and early 20th centuries. They worried most about the distribution of income and the laws of the market that made it so unequal. They were uneasy about ... whether an ungoverned market economy could produce a distribution of income - both relative and absolute - fit for a livable world. Again, you could agree or disagree with their judgments about trade, rent, capitalism, and machinery, but they asked the right questions.

The third reign was that of John Maynard Keynes. His agenda dominated the middle and late 20th century. Keynes's theories centered on what economists call Say's Law... Say's Law supposedly guaranteed something like full employment..., if the market was allowed to work. Keynes argued that Say's Law was false in theory, but that the government could, if it acted skillfully, make it true in practice. Agree or disagree with his conclusions, Keynes was in any case right to focus on the central bank and the tax-and-spend government to supplement the market's somewhat-palsied invisible hand to achieve stable and full employment.

But there ought to have been a fourth reign, for there was a set of themes not sufficiently explored. That missing reign was Schumpeter's, for he had insights into the nature of markets and growth that escaped other observers. It is in that sense that the late 20th and early 21st centuries in economics ought to have been his: He asked the right questions for our era.

"Marx's 'Das Kapital' Lives On"

An excerpt from a book on Karl Marx:

Marx's 'Das Kapital' Lives On in Capitalist Age, NPR
[Listen Now]: ...Excerpt: 'Marx's Das Kapital: A Biography' by Francis Wheen: Chapter 1: Gestation ... Marx's earliest ambitions were literary. As a law student at the University of Berlin he wrote a book of poetry, a verse drama and even a novel, Scorpion and Felix, which was dashed off in a fit of intoxicated whimsy while under the spell of Laurence Sterne's Tristram Shandy. After these experiments, he admitted defeat: 'Suddenly, as if by a magic touch - oh, the touch was at first a shattering blow - I caught sight of the distant realm of true poetry like a distant fairy palace, and all my creations crumbled into nothing… A curtain had fallen, my holy of holies was rent asunder, and new gods had to be installed.' Suffering some kind of breakdown, he was ordered by his doctor to retreat to the countryside for a long rest - whereupon he at last succumbed to the siren voice of G. W. F. ...

After gaining his doctorate [Marx] thought of becoming a philosophy lecturer, but then decided that daily proximity to professors would be intolerable. 'Who would want to have to talk always with intellectual skunks, with people who study only for the purpose of finding new dead ends in every corner of the world!' Besides, since leaving university Marx had been turning his thoughts from idealism to materialism, from the abstract to the actual. 'Since every true philosophy is the intellectual quintessence of its time,' he wrote in 1842, 'the time must come when philosophy not only internally by its content, but also externally through its form, comes into contact and interaction with the real world of its day.' That spring he began writing for a new liberal newspaper in Cologne, the Rheinische Zeitung; within six months he had been appointed editor.

Marx's journalism is characterized by a reckless belligerence which explains why he spent most of his adult life in exile and political isolation. His very first article for the Rheinische Zeitung was a lacerating assault on both the intolerance of Prussian absolutism and the feeble-mindedness of its liberal opponents. Not content with making enemies of the government and opposition simultaneously, he turned against his own comrades as well, denouncing the Young Hegelians for 'rowdiness and blackguardism'. Only two months after Marx's assumption of editorial responsibility, the provincial governor asked the censorship ministers in Berlin to prosecute him for 'impudent and disrespectful criticism'.

No less a figure than Tsar Nicholas of Russia also begged the Prussian king to suppress the Rheinische Zeitung, having taken umbrage at an anti-Russian diatribe. The paper was duly closed in March 1843: at the age of twenty-four, Marx was already wielding a pen that could terrify and infuriate the crowned heads of Europe. ...

Marx was a pretty effective blogger. Here is a page from an archive of his posts, with more here.

Update: Andrew Leonard has more.

"The Theory of Moral Neuroscience"

Adam Smith's Lost Legacy says this discussion of how neuroscience is confirming the role of empathy in human sociality and morality is "worth a look":

The Theory of Moral Neuroscience, by Ronald Bailey, Reason Online: "As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation," observed ... Adam Smith in the first chapter of ... The Theory of Moral Sentiments (1759). "Whatever is the passion which arises from any object in the person principally concerned, an analogous emotion springs up, at the thought of his situation, in the breast of every attentive spectator." Smith's argument is that our ability to empathize with others is at the root of our morality.

Recent discoveries in neuroscience are bolstering Smith's insights about the crucial role of empathy in human sociality and morality. For example, in the 1990s, Italian scientists researching motor neurons in macaque monkeys discovered mirror neurons. As the story goes, a monkey's brain had been wired up to detect the firing of his neurons... One researcher returned from lunch licking an ice cream cone. As the monkey watched the researcher, some of his neurons fired as though he were eating the ice cream... The monkey's neurons were "mirroring" the activity that the monkey was observing.

Neuroscientist Giacomo Rizzolatti and his colleagues ... reported their discovery of monkey mirror neurons in 1996. Researchers soon found evidence for mirror neurons in human beings. Just like monkeys, it turns out that when we see someone perform an action—picking up a glass of water or kicking a ball—our mirror neurons simulate that action in our brains. Researchers have suggested that mirror neurons are crucially involved in the distinctive human development of language, morality, and culture.

Research looking at the brains of autistic people highlights the role that some neuroscientists believe that mirror neurons play in empathy. ...[T]he symptoms of autism often involve a marked lack of awareness of the feelings of others and little or no social interaction or communications with others. In 2005, researchers at the University of California San Diego (UCSD) ...[found] "...results [that] support the hypothesis of a dysfunctional mirror neuron system in high-functioning individuals with ASD"... Mirror neurons are not absent from the brains of ASD people, but they are misfiring. ...

Mirror neurons are not the sole source of our moral sense. After all, ASD individuals are not notably immoral. However, they are an important part of it. Empathy, the ability to feel someone else's joy, pain, and gratitude, helps guide our pre-reflective moral values. So let's consider the limits of empathy for schooling us in morality. Harvard University psychologist Joshua Greene offers the case in which, while driving, you see a bleeding hiker lying by the roadside. You must decide between taking the man to the hospital or refuse to do so because the injured man would bleed all over your expensive upholstery.

Greene correctly observes, "Most people say that it would be seriously wrong to abandon this man out of concern for one's car seats" But what about the case in which you receive a letter from an international charity that promises to lift a poor family in Africa out of abject misery at the cost of a $200 contribution from you? "Most people say that it would not be wrong to refrain from making a donation in this case," writes Greene. What's the difference? ... Greene proposes an evolutionary answer. He points out that our ancestors evolved in an environment in which they could only choose to save people that they knew personally, not total strangers living continents away.

Greene's findings again buttress Adam Smith's insight from more than two centuries ago that empathy works to prompt us to help our neighbors but attenuates with social distance. "That we should be but little interested, therefore, in the fortune of those whom we can neither serve nor hurt, and who are in every respect so very remote from us, seems wisely ordered by Nature," writes Smith. ...

But we do not have to be the slaves of our evolved moral intuitions. By showing us the neural workings of our moral sense, neuroscience is giving us the tools to understand and improve our moral choices. As Greene concludes, "I am confident that the scientific study of human nature will have an increasingly important role in nature's grand experiment with moral animals." ...

"Interdependence is the Law of Society"

A passage from John Bates Clark's book, The Philosophy of Wealth: Economic Principles Newly Formulated published in 1894. Clark, an American neoclassical economist famous for developing the marginal productivity theory of distribution, was "one of one of the leading figures of the Marginalist Revolution":

CHAPTER XII. THE ECONOMIC FUNCTION OF THE CHURCH: ...The laws of spiritual poor-relief are of importance to the economist. The kind of spiritual poor-relief to be discussed here does not fall under the head of charity. Place a dozen men, each in his own boat, on the open sea, and start them for the nearest land. They are on an equality and completely independent. If any will not row, his destruction is on his own head. If any try to row and fail, it is the great law of charity, and that only, which constrains another to help him. If any venture to burden himself by towing a weaker brother to the shore, he is compelled to do so by no law legal or equitable, but the universal law of love.

But that is no picture of actual society. No man can paddle his own canoe as a member of that great social organism in which each individual labors, not for himself, but for the whole, and is dependent on the whole for employment and for pay. Independence is the law of isolation; interdependence is the law of society. Again and again, in actual history, society ceases to desire the product of a particular man's labor. The organic whole is in the position of employer to the millions who work, and it cannot always keep them busy; but it is not at liberty to starve them. It may take away their comforts; but, if it take their lives, it is murder. Civilization has placed us all in one boat; by mutual help we are sailing the homeward-bound ship of humanity. He who will not help may be thrown overboard, possibly; but he who, by force of circumstances, cannot, must be carried to the end.

It is thus in the nature of the social organism that the great principle of English law which asserts the ultimate right of every man to a maintenance finds its philosophical ground. That is an evil teaching which ventures to question this principle, and it would fare ill with a state which should attempt to follow such teaching in practice. Such action would surrender to the communists the championship of a great truth; it would place society in the wrong, and revolutionists in the right.

When a man who has had no hand in getting his neighbor into trouble, lends his aid in getting him out, that is charity. When an organized society relieves suffering which the society as a whole has caused, that is justice. Whatever part of the poor-tax goes to relieve sufferings resulting from general social causes, is paid, not given; the claim to it is as equitable as that of any officer to his salary. We may assume as a premise the principle asserted in the poor-law of Queen Elizabeth, which established the right of every man, not to be kept in idleness, indeed, but to be kept, while willing to work, from absolutely starving.

The higher nature may starve as well as the lower; and the duty of preventing such starvation has heretofore been made to rest mainly on spiritual grounds, and presented as a high order of charity. We place it on the ground of justice. The soul of man is not independent; the organic union of mankind includes mind as well as matter, and it is its nature, in every relation, to absorb and to subordinate the individual lives which are its molecules. He who is born into such a society is never independent in body or mind.

"The Historical Setting of the Austrian School of Economics"

According to the Ludwig von Mises Institute website, this essay "was first published in 1969. It was one of the last pieces Mises wrote." Here's a few passages along with the table of contents and links to the full essay (I've been assigned to teach The History of Economic Thought this fall, something I haven't done for quite awhile, and I am going to try to do more on the Austrian school than I've done in the past):

"Adam Smith and the iPhone"

Jonathan Wight of the University of Richmond says Adam Smith "pointed out that consumers often buy products not so much for their usefulness, as for the intrinsic beauty of their form and function":

Adam Smith and the iPhone, by Jonathan B. Wight, Commentary, ProJo.com: Consumers have now had a few weeks to fiddle with their new iPhones — the latest “must-have” device that makes phone calls, plays music, schedules appointments, surfs the Web...

Two questions emerge: Do consumers gobble up gadgets actually intending to use all these dazzling functions? Is the iPhone another example of wasteful spending by consumers crushed with debt — or, is it the sharp edge of technological innovation and progress that will bear fruit over time?

The history of economic thinking offers some insights. Adam Smith, the 18th Century economist and moral philosopher, pointed out that consumers often buy products not so much for their usefulness, as for the intrinsic beauty of their form and function. He writes, “What pleases these lovers of toys is not so much the utility, as the aptness of the machines which are fitted to promote it.”

A man, for example, buys a new watch that keeps exquisite time — not because he wishes to arrive on time, but because he wishes to own a machine capable of producing perfect time. Smith says the person who buys this watch “will not always be found either more scrupulously punctual than other men, or more anxiously concerned upon any other account, to know precisely what time of day it is.” Rather, what interests him is “the perfection of the machine” that attains this knowledge.

This is an important insight into human nature. A machine’s beauty is judged on the basis of hypothetical usefulness, and this characteristic is often valued more highly than actual usefulness. People buy fast cars that can potentially go 150 miles an hour, without ever intending to take them on the track.

Hence, products are purchased for what may seem like superficial or wasteful reasons. Many critics of capitalism bemoan our throw-away society, and the pressure to take on credit-card loans merely to assuage peer insecurity, in the guise of $100 sneakers or some other fad.

Smith would agree, and he worries, “How many people ruin themselves by laying out money on trinkets of frivolous utility? . . . All their pockets are stuffed with little conveniencies. They contrive new pockets, unknown in the clothes of other people, in order to carry a greater number.”

The owners of iPhones can actually unburden their pockets of the devices that the new machine replaces. But will owning the iPhone make anyone happier? People delude themselves into thinking so, but Smith says that after the initial rush of excitement, they will return to whatever state of happiness is their natural equilibrium. Only by constantly upgrading can one rekindle a blissful rush.

Smith’s system of progress through competition thus relies on consumers who stimulate markets by buying ever-more beautiful goods. The “invisible hand” operates through the self-delusion that compels people to think happiness depends on owning machines that perform feats of little actual utility. This stimulates technological innovation, which paradoxically may produce genuine human progress in the long run.

The genius of a competitive market system is not in the individual products produced, but in the climate of experimentation and discovery that unleashes the creativity of a society. ...

"Some People Worry about Peak Oil. I Worry More about Peak Grain."

Was Malthus right?:

Worry about bread, not oil, by Niall Ferguson, Commentary, telegraph.co.uk [via]: ...Thomas Malthus ... published his Essay on the Principle of Population. [in 1798]... Malthus's key insight was simple but devastating. "Population, when unchecked, increases in a geometrical ratio," he observed. But "subsistence increases only in an arithmetical ratio." In other words, humanity can increase like the number sequence 1, 2, 4, 8, 16, whereas our food supply can increase no faster than the number sequence 1, 2, 3, 4, 5. We are, quite simply, much better at reproducing ourselves than feeding ourselves.

Malthus concluded from this inexorable divergence between population and food supply that there must be "a strong and constantly operating check on population". This would take two forms: "misery" (famines and epidemics) and "vice", by which he meant not only alcohol abuse but also contraception and abortion (he was, after all, an ordained Anglican minister).

"The vices of mankind are active and able ministers of depopulation," wrote Malthus in an especially doleful passage... "They are the precursors in the great army of destruction; and often finish the dreadful work themselves.

"But should they fail in this war of extermination, sickly seasons, epidemics, pestilence, and plague advance in terrific array, and sweep off their thousands and tens of thousands. Should success be still incomplete, gigantic inevitable famine stalks in the rear, and with one mighty blow levels the population with the food of the world."

I wish I could have a free lunch for every time I've heard someone declare: "Malthus was wrong." Superficially, it is true, mankind seems to have broken free of the Malthusian trap. ...

The conventional explanation for our seeming escape from Malthus is the succession of revolutions in global agriculture, culminating in the post-war "Green Revolution" and the current wave of genetically modified crops.

Since the Fifties, the area of the world under cultivation has increased by roughly 11 per cent, while yields per hectare have increased by 120 per cent. ... Yet these statistics don't disprove Malthus. As he said, food production could increase only at an arithmetical rate, and a chart of world cereal yields since 1960 shows just such a linear progression...

Meanwhile, vice and misery have been operating just as Malthus foresaw to prevent the human population from exploding geometrically. On the one hand, contraception and abortion have been employed to reduce family sizes. On the other hand, wars, epidemics, disasters and famines have significantly increased mortality.

Together, vice and misery have ensured that the global population has grown at an arithmetic rather than a geometric rate. Indeed, they've managed to reduce the rate of population growth from 2.2 per cent per annum in the early Sixties to around 1.1 per cent today.

The real question is whether we could now be approaching a new era of misery. Even at an arithmetic rate, the United Nations expects the world's population to pass the 9 billion mark by 2050.

But can world food production keep pace? Plant physiologist Lloyd T Evans has estimated that "we must reach an average yield of four tons per hectare. to support a population of 8 billion". But yields right now are ... just three tons per hectare. And a world of eight billion people may be less than 20 years away.

Meanwhile, man-made forces are conspiring to put a ceiling on food production. Global warming and the resulting climate change may well be increasing the incidence of extreme weather events as well as inflicting permanent damage on some farming regions.

... At the same time, our effort to slow global warming by switching from fossil fuels to bio-fuels is taking large tracts of land out of food production. According to the OECD, American output of corn-based ethanol and European consumption of oilseeds for bio-fuels will double by 2016. ...

Some people worry about peak oil. I worry more about peak grain.

The fact is that world per capita cereal production has already passed its peak, which was back in the mid-Eighties, not least because of collapsing production in the former Soviet Union and sub-Saharan Africa. Simultaneously, however, rising incomes in Asia are causing a surge in worldwide food demand.

Already the symptoms of the coming food shortage are detectable. The International Monetary Fund recorded a 23 per cent rise in world food prices during the last 18 months. ...

"The great question now at issue," Malthus asked more than 200 years ago, "is whether man shall henceforth start forwards with accelerated velocity towards illimitable, and hitherto unconceived improvement, or be condemned to a perpetual oscillation between happiness and misery."

For a long time we have deluded ourselves that "illimitable improvement" was attainable. As the world approaches a new era of dearth, expect misery - and its old companion vice - to make a mighty Malthusian comeback.

Profit Theory in Neoclassical Economics

More on heterodox economics:

Profits and Loss, by Daniel Davies, Crooked Timber: ...A large part of my interest in heterodox economics derives from one major problem with neoclassical economics. In my opinion, it’s a big enough embarrassment to the profession that somebody ought to have done something about it.... I’m ... prepared to tentatively advance this “anomaly” in neoclassical economics as being constitutive of the difference between orthodox and heterodox economics, as currently practiced.

The anomaly I’m talking about is that neoclassical economics, in both macro and micro forms, nearly invariably works on the basis of models in which there are no profits.

Since in general, companies do earn profits, I think this is a pretty big problem.

Early Mercantilist Writing on Value and Profits

This is something I want to have in the archives. It discusses economic thought during the early mercantilist era:

[Hunt, E.K., History of Economic Thought: A Critical Perspective, Ch. 2]

Economic Ideas before Adam Smith In the early mercantilist period, most production was carried on by workers who still owned and controlled their own means of production. Capitalists were primarily merchants, and their capital consisted mostly of money and inventories of goods to be sold. It was only natural, therefore, that mercantilist writers looked to exchange, or buying and selling, as the source of profits. These profits were, of course, exchanged for commodities that constituted a portion of the surplus. But the merchants' share of the surplus was not, in this early period, acquired through control of the production process. The feudal lords still generally controlled production and expropriated the surplus. The result of exchange between the merchants and the lords was a sharing of the surplus by the two groups. Therefore, from the merchants' point of view it was exchange and not production that generated their profits.

Merchant capital consists of ownership of the means of buying, transporting, and selling, while industrial capital consists of ownership of the means necessary for producing. During this period industrial capital was still rather insignificant and inconspicuous, while merchant capital was widespread and significant. It was not, therefore, mental or theoretical inadequacy that caused mercantilist writers to look to buying and selling rather than production as the source of profits. Their ideas reflected the economic realities of the era in which they were writing.

Early Mercantilist Writing on Value and Profits Profit accrues to merchant capital when the price at which the merchant sells a commodity is sufficiently high to cover the price the merchant pays for the commod­ity, plus his expenses of handling, storing, transporting, and selling the commodity, plus a surplus over and above these costs. This surplus is the merchant's profit. Therefore an understanding of the determinants of the prices at which commodities were bought and sold was central to an understanding of the merchant's profits.

Earlier medieval thinkers had asserted that the price of a commodity had to be sufficient to cover a craftsman's direct costs of production and to yield the craftsman a return on his own labor sufficient to maintain him in the style of life traditionally deemed appropriate for craftsmen. In other words, prices were determined by the costs of production, including an imputed, appropriate remuneration for the labor of the craftsmen.[1]

The early mercantilists generally abandoned this cost-of-production approach to the understanding of prices and focused on the point of sale to analyze exchange values. One scholar of mercantilist ideas has concluded that, despite a wide range of differences on specific issues, there are three important notions that run through most early mercantilist writings on value theory. First, the "value" or "natural value" of commodities was simply their actual market price. Second, the forces of supply and demand determined market value. Third, mercantilist writers frequently discussed "intrinsic value" or use value as the most important factor determining demand, and hence as an important causal determinant of market value.[2]

Nicholas Barbon, one of the most important of the mercantilist writers, summed up these three points in his pamphlet, A Discourse on Trade:

A Role for Heterodox Economists

This is my entry in the discussion of Chris Hayes' article on heterodox economists at TPM Cafe. It should appear early tomorrow. There are currently entries from Chris Hayes, Thomas Palley, Tyler Cowen, James Galbraith, Nathan Newman, Max Sawicky, and James Galbraith with a follow-up, and there are others yet to come. [Update: Here's the link to the post at TPM Cafe]

---

Most of the points to be made about Chris Hayes' recent article on heterodox economists and their place  within the economics profession have been made here already, so I am going to take a bit of a different approach and talk about one of the heterodox economists discussed in the essay.

One of the first heterodox economists mentioned  is Michael Perelman:

I strike up a conversation with economist Michael Perelman in the hallway. ... Perelman, who is there for the EPI reception, works at the margins of the discipline; he is one of a few hundred self-described "heterodox" economists at the conference. ... I ask him about how he relates to the so-called mainstream of his profession. "It's a mafia," he says quietly, his eyes roving over to the suits spilling out of the Freedom to Choose room.

I first met Michael in the late 1970s during my undergraduate days at California State University at Chico where he was a faculty member. I never took a class from Michael, and that is part of the story, but I also want to use his example to talk about how heterodox ideas are expressed within economics departments more generally.

Here's what the department website says about him today:

...Michael Perelman, Professor of Economics, is the most prolific author in the Department of Economics at Chico. He enjoys teaching a wide range of courses including [principles of micro and macro], ... Economics of the Future ..., ...U. S. Economic History..., ...Economics of Big Business..., ...History of Economic Thought... and ... Marxist Economic Thought... His classes emphasize critical thinking about the application of economic thought... He likes to publish what is discussed in classes. To date, Professor Perelman has authored fifteen books.

"Although known for his radical views, Professor Perelman is widely respected throughout the campus. Dr. Perelman is a scholar of high productivity--he has a record of scholarly research, writing and presentations that is prodigious. Even more, his level of work has been consistently high since he joined our faculty in Economics in 1971." (Arno J. Rethans, Dean, College of Business)

Mediaeval Economic Teaching on Usury

This material on usury is from an essay written in 1920. [There is another section on the just price doctrine that relates to the discussion of usury, but this was too long already]:

An Essay on Mediaeval Economic Teaching, by George O'Brien, 1920: Chapter 3, Section 2 -- The Sale and Use of Money

Sec. 1. Usury in Greece and Rome

The prohibition of usury has always occupied such a large place in histories of the Middle Ages, and particularly in discussions relating to the attitude of the Church towards economic questions, that it is important that its precise foundation and extent should be carefully studied. The usury prohibition has been the centre of so many bitter controversies, that it has almost become part of the stock-in-trade of the theological mob orators. The attitude of the Church towards usury only takes a slightly less prominent place than its attitude towards Galileo in the utterances of those who are anxious to convict it of error. We have referred to this current controversy, not in order that we might take a part in it, but that, on the contrary, we might avoid it. It is no part of our purpose in our treatment of this subject to discuss whether the usury prohibition was or was not suitable to the conditions of the Middle Ages; whether it did or did not impede industrial enterprise and commercial expansion; or whether it was or was not universally disregarded and evaded in real life. These are inquiries which, though full of interest, would not be in place in a discussion of theory. All we are concerned to do in the following pages is to indicate the grounds on which the prohibition of usury rested, the precise extent of its application, and the conceptions of economic theory which it indicated and involved.

We must remark in the first place that the prohibition of usury was in no sense peculiar to the Catholic Church in the Middle Ages, but, on the contrary, was to be found in many other religious and legal systems--for instance, in the writings of the Greek and Roman philosophers, amongst the Jews, and the followers of Mohammed. We shall give a very brief account of the other prohibitions of usury before coming to deal with the scholastic teaching on the subject.

We can find no trace of any legal prohibition of usury in ancient Greece. Although Solon's laws contained many provisions for the relief of poor debtors, they did not forbid the taking of interest, nor did they limit the rate of interest that might be taken. In Rome the Twelve Tables fixed a maximum rate of interest, which was probably ten or twelve per cent, per annum, but which cannot be determined with certainty owing to the doubtful signification of the expression 'unciarum foenus.' The legal rate of interest was gradually reduced until the year 347 B.C., when five per cent, was fixed as a maximum. In 342 B.C. interest was forbidden altogether by the Genucian Law; but this law, though never repealed, was in practice quite inoperative owing to the facility with which it could be evaded; and consequently the oppression of borrowers was prevented by the enactment, or perhaps it would be more correct to say the general recognition, of a maximum rate of interest of twelve per cent. per annum. This maximum rate--the Centesima--remained in operation until the time of Justinian. Justinian, who was under the influence of Christian teaching, and who might therefore be expected to have regarded usury with unfavourable eyes, fixed the following maximum rates of interest--maritime loans twelve per cent.; loans to ordinary persons, not in business, six per cent.; loans to high personages (illustres) and agriculturists, four per cent.

While the taking of interest was thus approved or tolerated by Greek and Roman law, it was at the same time reprobated by the philosophers of both countries. Plato objects to usury because it tends to set one class, the poor or the borrowers, against another, the rich or the lenders; and goes so far as to make it wrong for the borrower to repay either the principal or interest of his debt. He further considers that the profession of the usurer is to be despised, as it is an illiberal and debasing way of making money. While Plato therefore disapproves in no ambiguous words of usury, he does not develop the philosophical bases of his objection, but is content to condemn it rather for its probable ill effects than on account of its inherent injustice.

Aristotle condemns usury because it is the most extreme and dangerous form of chrematistic acquisition, or the art of making money for its own sake. As we have seen above, in discussing the legitimacy of commerce, buying cheap and selling dear was one form of chrematistic acquisition, which could only be justified by the presence of certain motives; and usury, according to the philosopher, was a still more striking example of the same kind of acquisition, because it consisted in making money from money, which was thus employed for a function different from that for which it had been originally invented. 'Usury is most reasonably detested, as the increase of our fortune arises from the money itself, and not by employing it for the purpose for which it was intended. For it was devised for the sake of exchange, but usury multiplies it. And hence usury has received the name of [Greek: tokos], or produce; for whatever is produced is itself like its parents; and usury is merely money born of money; so that of all means of money-making it is the most contrary to nature.' We need not pause here to discuss the precise significance of Aristotle's conceptions on this subject, as they are to us not so much of importance in themselves, as because they suggested a basis for the treatment of usury to Aquinas and his followers.

In Rome, as in Greece, the philosophers and moralists were unanimous in their condemnation of the practice of usury. Cicero condemns usury as being hateful to mankind, and makes Cato say that it is on the same level of moral obliquity as murder; and Seneca makes a point that became of some importance in the Middle Ages, namely, that usury is wrongful because it involves the selling of time. Plutarch develops the argument that money is sterile, and condemns the practices of contemporary money-lenders as unjust. The teaching of the philosophers as to the unlawfulness of usury was reflected in the popular feeling of the time.

Robert Solow on Joseph Schumpeter

Robert Solow reviews Prophet of Innovation: Joseph Schumpeter and Creative Destruction, by Thomas K. McCraw:

Heavy Thinker, by Robert M. Solow, TNR [open link]: I knew Joseph Schumpeter only in the last five years of his life, from 1945 until his death in 1950, at the age of sixty-six. To say that I knew him is actually a bit of an exaggeration..., I attended his courses on advanced economic theory and the history of economic thought. The theory lectures bordered on incoherent ... The history lectures were also disappointing. ...

Maybe it is just as well to slide over Schumpeter's failings at the end. He was past his peak; and the economics profession was moving in a direction--rigorous theory couched in mathematical terms--that he had always professed to admire but simply could not practice himself. ...

In 1940 Schumpeter seriously contemplated leaving Harvard to accept a ... more attractive offer from Yale. His senior colleagues at Harvard--some able, more of them drab--sent him a letter urging him to stay; it said the right things, but was perhaps a little perfunctory. A much more urgent, heartfelt, and mind-felt letter was signed by twenty-six junior faculty and advanced graduate students. The authors included the flower ... of the future of American economics. You have to admire the man who evoked those words from those people.

I wish I had known him then. It is to Schumpeter's eternal credit that, at a time when mediocrity often cottoned to mediocrity in Harvard economics, he stood always for intellectual quality and energy, regardless of ideology, ethnicity, or social position. McCraw makes this very clear, and understands its importance.

In recollecting Schumpeter, it is hard to tear oneself away from the exotic manner, the dubious politics, the carefully crafted image, the hidden self-doubts, the convoluted life story... McCraw covers all these in great and often fascinating detail. He makes full use of Schumpeter's diaries, which is where we learn of his self-doubt; it certainly was not evident in his public manner. ... Still, what really matters are Schumpeter's writings--the books and a couple of essays; and that is where I have something to add. ...

In my view--and that of most contemporary economists, I believe--Schumpeter's most original and most lastingly significant book was Theory of Economic Development, which appeared in 1911 (and was translated into English in 1934). It was at the University of Czernowitz, ... that he worked out his conception of the entrepreneur, the maker of "new combinations," as the driving force and characteristic figure of the fits-and-starts evolution of the capitalist economy. He was explicit that, while technological innovation was in the long run the most important function of the entrepreneur, organizational innovation in governance, finance, and management was comparable in significance.

Innovation is not the same thing as invention. Anyone can invent a new product or a new technique of production. The entrepreneur is the one who first sees its economic viability, bucks the odds, fights or worms his way into the market, and eventually wins or loses. Each win means profit for the entrepreneur and his backers, and it also means a jog upward for the whole economy. In the course of this process, which cannot possibly run smoothly, many businesses, individuals, and institutions, themselves founded on earlier successful innovations, will be undermined and swept away. Schumpeter called this birth-and-death process "creative destruction," and realized before anyone else that it was the main source of economic growth. There is no feasible alternative for capitalism; this is capitalism. ...

Conscientious Objections to Invisible Hands and Other Moral Sentiments

David Warsh has a very nice discussion of Adam's Fallacy: A Guide to Economic Theology, the book by Duncan Foley, and the relationship of Adam Smith's The Theory of Moral Sentiments to his work in The Wealth of Nations:

On the influence and authority of conscience, and other considerations not found in any economics textbook, by David Warsh: Duncan ... Foley was born in 1942. His father was an industrial physicist, his mother an environmentalist. Foley himself began attending Quaker meetings at age nine and joined the Society of Friends at fifteen. He graduated from Philadelphia's famous Central High School in 1960, from Swarthmore College in 1964 and went straight to Yale, where he skipped the core courses and took the qualifying exam instead, obtaining his Ph.D. in mathematical economics in just two years. In 1966, he moved to the Massachusetts Institute of Technology, to teach and do research.

As a young man during the Vietnam War, he told interviewers recently, "I remember almost fainting at times in micro theory course when I started to teach indifference curves and Pareto efficiency theory. I kept asking myself, "Is this an honest way to represent society and its contradictions to students?'"

Foley read Marx. He published mainstream papers: with Miguel Sidrauski, with Karl Shell, with Robert Engle, with Martin Hellwig. He moved to Stanford University in1973, and ... returned east to Barnard College of Columbia University in 1977.

After 22 years at Barnard, mostly teaching undergraduates, Foley moved downtown to the New School in 1999, replacing Robert Heilbroner as the senior figure there, with a view to building up the economics department. (He had published four ambitious books in those uptown years as well...)

Now Foley has followed still further in his predecessor's footsteps, writing an alternative version of Heilbroner's great book, The Worldly Philosophers.

Adam's Fallacy: A Guide to Economic Theology is a beautiful little book. It contains some of the most lucid exposition of the core ideas of economics that I have ever read. Laid out pretty much on the same plan as Heilbroner, though with none of the attention to history that makes The Worldly Philosophers such a gripping read, Adam's Fallacy leads the reader through the ideas of Adam Smith ("Adam's Vision"), David Ricardo and T.R. Malthus ("Gloomy Science"), Karl Marx ("The Severest Critic"), Alfred Marshall (who in "On the Margins" rates but a single mention, in contrast to many entertaining pages on Thorstein Veblen), and, finally, of the twentieth century trinity of John Maynard Keynes, Friedrich von Hayek and Joseph Schumpeter ("Voices in the Air"). As a penetrating critic of capitalist economic development, with its "immense opportunities, and its equally immense social and moral stresses," Foley has few peers.

Yet Adam's Fallacy seems to me, at least in a certain way, to be profoundly mistaken. The reason is simple to relate. Foley dwells entirely on what economists have managed to make so far of The Wealth of Nations, and gives short shrift to Smith's other book, The Theory of Moral Sentiments, and to the relationship of the one to the other. Published in 1759, seventeen years before the work for which Smith is remembered, Moral Sentiments is a compendium of much that today's economics leaves out -- declares "exogenous," in the argot of the field, "human nature" being quite beyond economists' models present-day ability to address.

Blaming the Poor for Their Poverty

Recent news that the U.S. population has surpassed 300 million along with the discussions of welfare policy associated with the ten year anniversary of welfare reform legislation brings up thoughts of Thomas Malthus. In Malthus' famous population theory, population grows geometrically while food supply increases at the slower arithmetic rate. Because of this, the size of the population will eventually exceed the available food supply necessary to support it.

Malthus believes there are two solutions to the inevitable overpopulation problem. First, there are preventive checks on population which reduce the birth rate. Preventive checks consist of moral restraint such as abstinence which Malthus believes to be virtuous, and vice such as prostitution and birth control which is not.

Second, there are positive checks on the population that increase the death rate - famine, misery, plague, and war - which, in Malthus' view, are unavoidable natural laws. They are unfortunate, but necessary to limit population. In his view, these positive checks represent punishment for those who are unable to limit population growth through moral restraint.

Malthus does not believe that positive checks can be avoided. If they are, then people will starve for lack of food. Thus, if we abhor starvation, we are foolish to try and prevent the positive checks to population:

It is an evident truth that, whatever may be the rate of increase in the means of subsistence, the increase of population must be limited by it, at least after the food has once been divided into the smallest shares that will support life. All the children born, beyond what would be required to keep up the population to this level, must necessarily perish, unless room be made for them by the deaths of grown persons. ... To act consistently therefore, we should facilitate, instead of foolishly and vainly endeavouring to impede, the operations of nature in producing this mortality; and if we dread the too frequent visitation of the horrid form of famine, we should sedulously encourage the other forms of destruction, which we compel nature to use. Instead of recommending cleanliness to the poor, we should encourage contrary habits. In our towns we should make the streets narrower, crowd more people into the houses, and court the return of the plague. In the country, we should build our villages near stagnant pools, and particularly encourage settlements in all marshy and unwholesome situations. But above all, we should reprobate specific remedies for ravaging diseases; and those benevolent, but much mistaken men, who have thought they were doing a service to mankind by projecting schemes for the total extirpation of particular disorders. If by these and similar means the annual mortality were increased ... we might probably every one of us marry at the age of puberty, and yet few be absolutely starved. [source]

Where does this thinking lead? To the idea that there must be no government relief for the poor:

A man who is born into a world already possessed, if he cannot get subsistence from his parents on whom he has a just demand, and if the society do not want his labour, has no claim of right to the smallest portion of food, and, in fact, has no business to be where he is. At nature’s mighty feast there is no vacant cover for him. She tells him to be gone, and will quickly execute her own orders, if he does not work upon the compassion of some of her guests. If these guests get up and make room for him, other intruders immediately appear demanding the same favour. ... The order and harmony of the feast is disturbed, the plenty that before reigned is changed into scarcity; and the happiness of the guests is destroyed by the spectacle of misery and dependence in every part of the hall, and by the clamorous importunity of those, who are justly enraged at not finding the provision which they had been taught to expect. The guests learn too late their error, in counter-acting those strict orders to all intruders, issued by the great mistress of the feast, who, wishing that all guests should have plenty, and knowing she could not provide for unlimited numbers, humanely refused to admit fresh comers when her table was already full. [source]

This statement was tempered in later editions of the Essay, but the message that helping the poor would only serve to increase their numbers and hence increase aggregate misery remained. The result of this was the Poor Law Amendment of 1834. From Brue:

Some of Malthus's ideas were adopted in the harsh Poor Law Amendment of 1834. The law abolished all relief for able-bodied people outside workhouses. A man applying for relief had to pawn all his possessions and then enter a workhouse before assistance was granted; his wife and children either entered a workhouse or were sent to work in the cotton mills. In either case the family was broken up and treated harshly in order to discourage it from becoming a public charge. The work house was invested with a social stigma, and entering it imposed high psychological costs. The law aimed at making public assistance so unbearable that most people would rather starve quietly than submit to its indignities. This system was to be the basis of English poor law policy until early in the twentieth century. Malthus, who died four months after the Poor Law Amendment was passed, must have regarded it as a vindication of his idea that there is not room enough at nature's feast for every one.

Ultimately, in Malthus view, the difference between the rich and the poor comes down to a difference in moral character. It is an attempt to convince us that poverty is inevitable, that it is the consequences of poor choices and the moral inferiority of the poor, and that there is little that can be done about it.

There is a long history of blaming the poor for being poor and downplaying other possible sources of inequality arising from differences in power, social position, institutional structure, and so on, followed by an argument that attempts to help the poor only serve to increase the incentive for immoral behavior. Increasingly, we appear to be heading down this road again. But before we do, we should remember where it leads.

The Grumbling Hive: or Knaves Turn'd Honest

In 1714, Bernanrd Mandeville published The Fable of the Bees: or Private Vices, Publick Benefits in which he suggested that private vices that were at odds with the moral code at the time would, if practiced by all, result in the greatest public good. Behaviors such as selfishness, greed, lavish consumption, and acquisitive behavior are necessary for a thriving and industrious economy. Thus, The Fable is often seen as a precursor to the idea that allowing individuals to pursue their self-interest without interference will result in the greatest common good. However, it can also be viewed as an early version of the idea that an increase in saving - seemingly virtuous behavior - can cause the economy to stagnate if the increased saving causes under consumption. This essay, written nine years earlier in 1705, forms the basis for the Fable:

The
Grumbling Hive:
or
Knaves Turn'd Honest
by Bernard Mandeville
1705
A Spacious Hive well stock'd with Bees,
That lived in Luxury and Ease;
And yet as fam'd for Laws and Arms,
As yielding large and early Swarms;
Was counted the great Nursery
Of Sciences and Industry.
No Bees had better Government,
More Fickleness, or less Content.
They were not Slaves to Tyranny,
Nor ruled by wild Democracy;
But Kings, that could not wrong, because
Their Power was circumscrib'd by Laws.

Tim Duy: In Defense of Hayek

Tim Duy comes to the defense of Hayek:

In Defense of Hayek, by Tim Duy: I feel a need to at least quickly defend Hayek against Jeffery Sachs attacks. Sachs leaves the impression that Hayek is a right wing ideologue who argues against any state provision of social services. From the Road to Serfdom:

There is no reason why in a society which has reached the general level of wealth which ours has attained the first kind of security should not be guaranteed to all without endangering general freedom…there can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody…Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of the assistance – where, in short, we deal with genuinely insurable risks – the case for the state’s helping to organize a comprehensive system of social insurance is very strong….To the same category belongs also the increase of security through the state’s rendering assistance to the victims of such “acts of God” as earthquakes and floods. Whenever communal action can mitigate disasters against which the individual can neither attempt to guard himself or make provision for the consequences, such communal action should undoubtedly be taken….There is, finally, the supremely important problem of combating general fluctuations of economic activity and the recurrent waves of large-scale unemployment which accompany them…

The type of planning that Hayek was vociferously opposed to is that meant to offset not insurable risk, but the fundamental shifts that accompany structural change:

The planning for security which has such an insidious effect on liberty is that for security of a different kind. It is planning designed to protect individuals or groups against diminutions of their income, which although in no way deserved yet in competitive society occur daily, against losses imposing severe hardships having no moral justification yet inseparable from the competitive system.

In other words, it is appropriate for society to guarantee a proscribed level of health care accessibility, but not to guarantee you against loss because technological change eliminates your job. Note that  Hayek’s list of accessible social services is actually quite broad. And in other parts of the Road to Serfdom, he recognizes the need for government to address externalities, monopolies, etc.

I dislike efforts to color Hayek as a one-dimensional personality as much as I am irritated by efforts from the right to discredit Keynes as a socialist. Of course, some blame for the attack on Hayek should be directed to the right; so called supporters of Hayek have damaged his reputation with such simplistic expositions as this cartoon.

Speaking of Keynes, Robert Skidelsky’s masterful biography includes Keynes’s thoughts on Hayek:

Keynes’s response was unexpected. Hayek’s was a “grand book,” he wrote, and “we all have the greatest reason to be grateful to you for saying so well what needs so much to be said….Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement, but in deeply moved agreement.”

Keynes did note, however, that Hayek, by admitting to the need for government to serve a social function, recognized that there was in fact need for a middle ground, but could not determine where to draw it.

Finally, it is important to recognize that Hayek was writing in reaction to the rise of Fascism in Germany and Stalinism in the Soviet Union. There is an important lesson there, and God help us if we ignore it in an eagerness to discredit Hayek.

Medieval Regulations Establishing a Sound Coinage

This is something I collected for my monetary theory and policy course for the section on the evolution of money. These are regulations over a nearly 600 year time period (c. 681-1248) designed to overcome losses and transaction inefficiencies due to "sweating, debasing, clipping, and counterfeiting of coins":

From The Laws of the Visigoths: On Coinage, c. 681: Monetary regulations establishing a sound coinage formed a part of the program of the early kings of France, Anglo-Saxon England, Lombardy, and the Visigothic kingdoms for the enrichment of their territories. Sweating, debasing, clipping, and counterfeiting of coins prevalent throughout the Middle Ages indicate that the art of designing and striking coins was not highly developed.

Law of the Visigoths. King Eruigius:

V11.6.i. We do not forbid the torture of slaves by the lord or lady in person for cases of false money, so that the truth might be more easily arrived at by such torture; so that if the serf of another betray something, or say what is true, if his lord wishes it, he might be freed by his lord; and a reward should be given by the fisc to his lord. But if the lord be unwilling to free him, three gold uncias might be given by the fisc to the serf; if he be a free man he deserves six uncias of gold for revealing the truth.

V11.6.ii. Whoever shall have debased, clipped, or shaved the coinage should be arrested as soon as the judge learns of it, and, if he be a serf, his right hand should be cut off.

Vll.6.iii. Whoever takes gold for ornaments, debases it, or corrupts it with an alloy of bronze or silver or other more common metal, let him be held as a thief.

Vll.6.v. Let none dare to refuse a gold solidus of full weight, to whomsoever it belong, if it be not debased; nor require money of less weight for anything of his. Whoever shall do anything against this rule and refuse a gold solidus of full weight that is not false, or seek reward for changing it, shall be arrested by the judge, and compelled to pay three gold solidi to him whose money he refused. And one third of a solidus shall be kept by the judge.

Xll.3.xviii. One pound of gold is worth seventy-two solidi of gold. One uncia is worth six solidi. A stater of gold is worth three solidi. A drachma is worth twelve silver solid. A third of a gold solidus is worth five silver solidi. A seliqua is worth one and a third silver solidi.

"The Many Faces of Adam Smith"

This column by Alan Krueger from 2001 is a reminder that Adam Smith was not a "narrow, unyielding defender of unfettered free enterprise":

The many faces of Adam Smith: Rediscovering 'The Wealth of Nations.', by Alan B. Krueger, Economic Scene, NY Times, August 2001: ...In her book ..., [Emma Rothschild, director of the Center for History and Economics at King's College, Cambridge] argues that [Adam] Smith has been reinvented as a narrow, unyielding defender of unfettered free enterprise. Yes, he emphasized the motivating force of self-interest and gains from free trade, but he also viewed freedom in a broader sense than economic freedom and championed the disadvantaged.

The real Adam Smith was a complex thinker, capable of holding and exploring ideas even when they were in conflict. To understand Smith, Ms. Rothschild says his contributions must be viewed in light of 18th-century institutions.

Smith worried about the encroachment of government on economic activity, but his concerns were directed at least as much toward parish councils, church wardens, big corporations, guilds and religious institutions as to the national government; these institutions were part and parcel of 18th-century government.

Ms. Rothschild stresses that Smith was sometimes tolerant of government intervention, "especially when the object is to reduce poverty." Smith passionately argued, "When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favour of the masters." He saw a tacit conspiracy on the part of employers "always and everywhere" to keep wages as low as possible.

Smith was a Rawlsian before the philosopher John Rawls, proclaiming: "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed and lodged."

At the turn of the 19th century, Adam Smith's arguments were invoked by Samuel Whitbread in favor of a minimum wage and by William Pitt against it. "There is something of Smith," Ms. Rothschild wryly observed, "on both sides of the parliamentary debate."

Or consider taxes. Dick Armey does not miss an opportunity to enlist Adam Smith in support of his flat tax. Smith did favor low taxes and argued that subjects "ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities." But he also argued, "It is not very unreasonable that the rich should contribute to the public expence, not only in proportion to their revenue, but something more than in that proportion."

Would Mr. Armey support a tax on luxury carriages? Smith did.

Smith also supported universal government-financed education because he believed the division of labor destined people to perform monotonous, mind-numbing tasks that eroded their intelligence, not because education led to economic gain. His economic policy had social and moral objectives, not just the maximization of national income. To Smith, enlightenment was for the masses. ...

[T]here can be little doubt that Smith's faith in the invisible hand has been exaggerated by modern commentators. Smith used the metaphor only once in "The Wealth of Nations," applied it narrowly and presented the idea with more than his usual number of caveats.

He persistently worried that if merchants and manufacturers pursued their self-interest by seeking government regulation and privilege, the invisible hand would not work its magic...

The beauty of Adam Smith -- why he is still worth reading and debating after 225 years -- is that he saw economics as deeply intertwined with human nature, with people's feelings, emotions and thoughts. He eloquently reported what he observed firsthand or learned from history without prejudice or fear. I suspect that that is also why he found it so hard to hew to a consistent line: some observations led to generalities that were incongruent with other generalities drawn from other observations. The elegant properties of laissez-faire rest on assumptions -- including the absence of market power -- that Smith's observations led him to doubt sometimes.

Smith's internal conflicts also demonstrate that deviations from some principles, like proportional taxation and laissez-faire, are sometimes required to satisfy others, like support for the disadvantaged and universal education...

Veblen's Theory of the Leisure Class: The Musical

Veblen as musical theater:

Up to Date in Kansas City: Seven New Musicals Get Readings in Festival July 15 & 22, by Kenneth Jones: Could the next great American musical surface in Kansas City? Theatre League, Inc., is investing in that idea with the first annual Kansas City Crossroads Musical Theater Festival, starting July 15. ... Works were solicited in recent months in an open submission process. The July 15 presentations are Frog Kiss, An Unlikely Romance, Too Good To Be True, Maccabeat and Thorstein Veblen's Theory of the Leisure Class... Here are the titles, creative teams and casts for the 2006 Crossroads Musical Theater Festival:

Thorstein Veblen's Theory of the Leisure Class, book and lyrics by Charles Leipart, music by Richard B. Evans. Directed by Ernest Williams, music directed by Tony Bernal. 2 & 8 PM July 15 at Kansas City Ballet, 16th and Broadway.

It's New York City, 1900, and out-of-work economics professor Thorstein Veblen takes his 'Theory of the Leisure Class' to the Fifth Avenue Vaudeville Theatre stage. He announces that to facilitate the promotion and sale of his recently published economic treatise, he has engaged several unemployed actors to present a musical demonstration of his socio-economic theory. He introduces the heroine of his story, Ellen Potts, a soon-to-be-heiress, with an overdeveloped social conscience. Veblen's demonstration takes Ellen through courtship, marriage, and the pursuit of her dream of social justice for the poor of New York — and ultimately into conflict with Veblen's vision of a Conspicuously Consuming and Status Driven American Society.

Cast: Jim Korinke, Heidi Stubblefield, James Wright, Elaine Fox, Lyndsey Agron, Chris Cobbett, Mark Snethen, Dean Vivian and Cindy Baker.

For relevance to today, there are other choices as well such as Veblen's The Theory of Business Enterprise (1904), though I have a hard time imagining anything of his as a musical, play, etc. Here's a small part of chapter 10:

The largest and most promising factor of cultural discipline - most promising as a corrective of iconoclastic vagaries - over which business principles rule is national politics. ... Business interests urge an aggressive national policy and business men direct it. Such a policy is warlike as well as patriotic. The direct cultural value of a warlike business policy is unequivocal. It makes for a conservative animus on the part of the populace. During war time, ... under martial law, civil rights are in abeyance; and the more warfare and armament the more abeyance. Military training is a training in ceremonial precedence, arbitrary command, and unquestioning obedience. A military organization is essentially a servile organization. Insubordination is the deadly sin. The more consistent and the more comprehensive this military training, the more effectually will the members of the community be trained into habits of subordination and away from that growing propensity to make light of personal authority that is the chief infirmity of democracy. This applies first and most decidedly, of course, to the soldiery, but it applies only in a less degree to the rest of the population. They learn to think in warlike terms of rank, authority, and subordination, and so grow progressively more patient of encroachments upon their civil rights. ...

[T]he pomp and circumstance of war and armaments, and the sensational appeals to patriotic pride ... direct the popular interest to other, nobler, institutionally less hazardous matters than the unequal distribution of wealth or of creature comforts. Warlike and patriotic preoccupations fortify the barbarian virtues of subordination and prescriptive authority. Habituation to a warlike, predatory scheme of life is the strongest disciplinary factor that can be brought to counteract the vulgarization of modern life wrought by peaceful industry and the machine process, and to rehabilitate the decaying sense of status and differential dignity. ...

In this direction, evidently, lies the hope of a corrective for "social unrest" and similar disorders of civilized life. There can, indeed, be no serious question but that a consistent return to the ancient virtues of allegiance, piety, servility, graded dignity, class prerogative, and prescriptive authority would greatly conduce to popular content and to the facie management of affairs. Such is the promise held out by a strenuous national policy.

This Day in History: Keynes Predicts Economic Chaos

On a whim, I went to This Day in History at the History Channel web site. This is what I found:

Keynes Predicts Economic Chaos, June 28, 1919: ...By the fall of 1918, it was apparent to the leaders of Germany that defeat was inevitable in World War I. After four years of terrible attrition, Germany no longer had the men or resources to resist the Allies, who had been given a tremendous boost by the infusion of American manpower and supplies. In order to avert an Allied invasion of Germany, the German government contacted U.S. President Woodrow Wilson in October 1918 and asked him to arrange a general armistice. Earlier that year, Wilson had proclaimed his "Fourteen Points," which proposed terms for a "just and stable peace" ... The Germans asked that the armistice be established along these terms... On November 11, 1918, the armistice was signed and went into effect, and fighting in World War I came to an end.

In January 1919, John Maynard Keynes traveled to the Paris Peace Conference as the chief representative of the British Treasury. The brilliant 35-year-old economist had previously won acclaim for his work with the Indian currency and his management of British finances during the war. In Paris, he sat on an economic council and advised British Prime Minister David Lloyd George, but the important peacemaking decisions were out of his hands, and President Wilson, Prime Minister Lloyd George, and French Prime Minister Georges Clemenceau wielded the real authority. Germany had no role in the negotiations deciding its fate...

It soon became apparent that the treaty would bear only a faint resemblance to the Fourteen Points that had been proposed by Wilson and embraced by the Germans. Wilson, a great idealist, had few negotiating skills, and he soon buckled under the pressure of Clemenceau, who hoped to punish Germany as severely as it had punished France in the Treaty of Frankfurt that ended the Franco-Prussian War in 1871. ...

The treaty that began to emerge was a thinly veiled Carthaginian Peace, an agreement that accomplished Clemenceau's hope to crush France's old rival. According to its terms, Germany was to relinquish 10 percent of its territory. It was to be disarmed, and its overseas empire taken over by the Allies. Most detrimental to Germany's immediate future, however, was the confiscation of its foreign financial holdings and its merchant carrier fleet. The German economy, already devastated by the war, was thus further crippled, and the stiff war reparations demanded ensured that it would not soon return to its feet. ...

Keynes, horrified by the terms of the emerging treaty, presented a plan to the Allied leaders in which the German government be given a substantial loan, thus allowing it to buy food and materials while beginning reparations payments immediately. ... President Wilson turned it down because he feared it would not receive congressional approval. In a private letter to a friend, Keynes called the idealistic American president "the greatest fraud on earth." On June 5, 1919, Keynes wrote a note to Lloyd George informing the prime minister that he was resigning his post in protest of the impending "devastation of Europe."

The Germans initially refused to sign the Treaty of Versailles, and it took an ultimatum from the Allies to bring the German delegation to Paris on June 28. .... Clemenceau chose the location for the signing of the treaty: the Hall of Mirrors in Versailles Palace, site of the signing of the Treaty of Frankfurt that ended the Franco-Prussian War. At the ceremony, General Jan Christiaan Smuts, soon to be president of South Africa, was the only Allied leader to protest formally the Treaty of Versailles, saying it would do grave injury to the industrial revival of Europe.

At Smuts' urging, Keynes began work on The Economic Consequences of the Peace. It was published in December 1919 and was widely read. In the book, Keynes made a grim prophecy that would have particular relevance to the next generation of Europeans: "If we aim at the impoverishment of Central Europe, vengeance, I dare say, will not limp. Nothing can then delay for very long the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the later German war will fade into nothing, and which will destroy, whoever is victor, the civilisation and the progress of our generation."

Germany soon fell hopelessly behind in its reparations payments, and in 1923 France and Belgium occupied the industrial Ruhr region as a means of forcing payment. In protest, workers and employers closed down the factories in the region. Catastrophic inflation ensued, and Germany's fragile economy began quickly to collapse. By the time the crash came in November 1923, a lifetime of savings could not buy a loaf of bread. That month, the Nazi Party led by Adolf Hitler launched an abortive coup against Germany's government. The Nazis were crushed and Hitler was imprisoned, but many resentful Germans sympathized with the Nazis and their hatred of the Treaty of Versailles.

A decade later, Hitler would exploit this continuing bitterness among Germans to seize control of the German state. In the 1930s, the Treaty of Versailles was significantly revised and altered in Germany's favor, but this belated amendment could not stop the rise of German militarism and the subsequent outbreak of World War II....

What Ended Serfdom?

While surfing for material related to another post, I came across this piece by Paul Krugman written in 2003 on the end of serfdom. It's interesting to think about the analysis in terms of the global labor market developing today, China, India, the decline of unions, the loss health and retirement benefits as the social contract changes, sweatshops, etc., but the main reason for passing it along is for its general historical interest and its analysis of the economics underlying the end of the feudal era:

Serf's Up!, by Paul Krugman: James Surowiecki writes fine columns, and this one is no exception. But he's got the story of the effects of the Black Death on serfdom backwards. He - and anyone else curious about history - should read  Evsey Domar's  classic 1970 paper "The causes of slavery or serfdom: a hypothesis." (Sorry, doesn't seem to be available online. Update: Domar's paper is available here. Thanks smk - Brad DeLong too for posting it.)

Here's what Surowiecki says: "The Black Death helped undermine feudalism. The population decline was so severe that the individual’s labor grew more valuable, which enabled serfs to abandon their lords and become tenant farmers or urban workers." That sounds plausible, but it's not the way it happened. According to Domar, serfdom actually withered away before the Black Death, as European population grew close to its Malthusian limit. The puzzle is why serfdom wasn't reinstituted after the Black Death.

Domar was motivated by his knowledge of Russian history. Serfdom in Russia, he knew, wasn't an institution that dated back to the Dark Ages. Instead, it was mainly a 16th-century creation, contemporaneous with the beginning of the great Russian expansion into the steppes. Why?

He came up with a simple yet powerful insight: there's no point in enslaving or enserfing a man unless the wage you would have to pay him if he was free is substantially above the cost of feeding, housing, and clothing him.

Imagine a pre-industrial society where population is pressing on limited land supplies, and the marginal product of labor - and hence the real wage rate under competitive conditions - is barely at subsistence. In that case, why bother establishing property rights in human beings? It costs no more to hire a free worker than to feed an indentured laborer. Indeed, by 1300 - with Europe very much a Malthusian society - serfdom had withered away from lack of interest.

But now suppose that for some reason land becomes abundant, and labor scarce. Then competition among landowners will tend to push up wages of free workers, and the ruling class will try, if it can, to pin peasants down and prevent them from bargaining for a higher standard of living. In Russia, it was all about gunpowder: suddenly steppe nomads were no longer so formidable, and the rich lands of the Ukraine were open for settlement. Serfdom was an effort to keep peasants from taking advantage of this situation. (And if I've got it right, those who were venturesome enough to run away and set up outside the system became Cossacks.)

Meanwhile, the New World opened in the west. Sure enough, the colonizing powers tried various forms of indentured servitude - making serfs of the Indians in Spanish territories, bringing over indentured servants in Virginia. But eventually they hit on a better solution, from their point of view: importing slaves from Africa.

Here's the puzzle. In Europe circa 1100, with population scarce, serfdom was useful to the ruling class. By 1300 it wasn't, and had been allowed to drift away. But after 1348 it should have been worthwhile again. Yet it wasn't effectively reimposed. There were attempts to restrain wages and limit labor mobility, as well as attempts to tax the peasants (Wat Tyler's rebellion fits into all this.) But all-out feudalism didn't return. Why?

And an even bigger question: why hasn't indentured servitude made a comeback in the modern era? Yes, I know, human rights and all that - but if it was profitable to have indentured servants in the modern world, I'm sure that Richard Scaife's think tanks would have no trouble finding justifications, and assorted Christian groups would explain why it's God's will.

Anyway, have to get back to real work. But try to find a copy of Domar's paper and read it.

Adam Smith's Harmony of Interests

There's a new book on Adam Smith:

Adam Smith Bio Recalls Moralist, Hypochondria, by Matthew Lynn, Bloomberg: Economics has become a big deal in book publishing of late. ... Right on cue comes James Buchan's ''Adam Smith and the Pursuit of Perfect Liberty''... Buchan's thesis is that Smith was really a moralist, not an economist. ... It's an intriguing argument, and one Buchan almost pulls off.

Buchan ... doesn't waste too much time on Smith's life, and rightly so. The doings of economists are on the dry side of things, and Smith was a dullish fish even among his own kind. Try as he might, Buchan can't breathe much human warmth into his subject.

Smith ... rarely traveled, was regularly unwell and had a gloomy disposition... ''At Oxford, we have the first signs of the depression and hypochondria that is the ruling principle of Smith's character,'' Buchan writes. The Scotsman never married, nor has Buchan dug up any serious liaisons. ... No matter. Smith the man needn't detain us for long. Smith the thinker is what matters...

Most people these days regard Smith as the founder of free-market economics. He's the hero of the get-the-government-off-our-backs crowd. He's the pin-up boy of the flat-taxers and the business-knows-best crew.

None of this would have resonated in 18th-century Edinburgh and Glasgow, however. Smith was essentially a moral philosopher, and he viewed economics as a branch of that inquiry, as Buchan reminds us. Smith's vision of the ''invisible hand'' of the market grew out of a wider vision of a moral and just society.

Almost two decades before he published ''The Wealth of Nations,'' the book for which he is rightly remembered, Smith brought out ''The Theory of Moral Sentiments,'' to wide acclaim. That volume, which appeared in 1759, went through six editions in his lifetime and was translated into French and German. ''It was not eclipsed by 'The Wealth of Nations' till the rise of political economy amid the battles and factory smoke of the Victorian age,'' Buchan writes. ...

Most people these days accept that a free market is the best way to organize an economy. Yet many increasingly worry about whether it's a moral system... So it's good to be reminded that Smith first started to question government meddling in the economy because he was interested in morality and freedom...

His purpose was to build a just society. When each human is allowed to earn his own living in his own way, Smith argued, he ultimately benefits the society around him... Although Smith will still be remembered primarily as an economist, Buchan is right to try to restore the philosophical Smith to the prominence he deserves.

Let me take this a bit further. Smith understands that unbridled self-interest where, for example, the strong can devour the weak will not lead to an harmonious, just society.

The Theory of Moral Sentiments discusses how sympathy, empathy, benevolence, generosity, compassion, etc., which "Nature has lighted up in the human heart" restrain selfishness in socially optimal ways, and in The Wealth of Nations competition directs the restrained self-interest to the social optimum. This process of channeling self-interest to produce the social optimum through moral sentiments and competition is the invisible hand at work.

When invoking Adam Smith's name to explain, say, CEO pay and the widening income distribution as free market outcomes, it's important to remember that the social optimum will not occur without the appropriate restraints on the pursuit of self-interest in the surrounding social, political, and economic environment.

Nothing But the Revised Facts?

I wonder if economists will ever suffer the fate of historians in Florida and be prevented from talking about relative values. "We've heard you are teaching that prices are correctly interpreted as relative and not absolute. That so? Off to jail Mr. ivory tower smarty-pants":

All history is 'revisionist', by Jonathan Zimmerman, Commentary, LA Times: Just when you thought it was safe to study American history again … the revisionists are back!

You know, those relativists who distort or simply fabricate the past to make it fit their present-day biases. For instance, ... in 2003, President Bush attacked "revisionist historians" who questioned his justifications for using force against Saddam Hussein. He did it again on Veterans Day in 2005. "It is deeply irresponsible," he declared, "to rewrite the history of how the war began."

And just last week, in an unprecedented move, the president's brother approved a law barring revisionist history in Florida public schools. "The history of the United States shall be taught as genuine history and shall not follow the revisionist or postmodernist viewpoints of relative truth," declares Florida's Education Omnibus Bill, signed by Gov. Jeb Bush. "American history shall be viewed as factual, not as constructed."

Ironically, the Florida law is itself revisionist history. Once upon a time, it theorizes, history — especially about the founding of the country — was based on facts. But sometime during the 1960s ... American historians supposedly started embracing newfangled theories of moral relativism and French postmodernism, abandoning their traditional quest for facts, truth and certainty.

The result was a flurry of new interpretations, casting doubt on the entire past as we had previously understood it. Because one theory was as good as another, then nothing could be true or false. God, nation, family and school: It was all up for grabs.

There's just one problem with this history-of-our-history: It's wrong.

Hardly a brainchild of the flower-power '60s, the concept of historical interpretation has been at the heart of our profession from the 1920s... Before that time, ... some historians believed that they could render a purely factual and objective account of the past. But most of them had given up on what historian Charles Beard called the "noble dream" by the interwar period, when scholars came to realize that the very selection of facts was an act of interpretation.

That's why Cornell's Carl Becker chose the title "Everyman His Own Historian" for his 1931 address to the American Historical Assn., probably the most famous short piece of writing in our profession. ...

For instance, try to recount everything you did yesterday. Not just a few things, ... but everything. You can't. Even if you kept a diary and recorded what you did each minute, you would inevitably omit some detail: a sound in your ear, a twitch in your nose... So when somebody asks what you did yesterday, you select a certain few facts about your day and spin a story around them.

As do professional historians. They may draw on a wider array of facts and theories but, just like "Everyman," they choose certain data points and omit others, as well they must. ... [S]urely one of the biggest myths ... is that history is simply about "facts." This year marks the 75th anniversary of Becker's famous speech, yet Americans appear no nearer to understanding that all pasts are "constructed," that all facts require interpretation and that all history is "revisionist" history...