Who's misreading Adam Smith?

So in an attempt to open my mind to different viewpoints (applause, please), I've been following Think Progress for a while, only to find out what I already knew: bloggers tend to be really biased. It's okay to have certain principles, of course. Some people refer to having an opinion as "bias;" I don't. What I mean by bias is simply the ability to take information and use it solely for your own purposes, rather than seeking to modify those purposes. Take, for instance, this post about "John Bolton's Misreading Of Adam Smith." In it, Ali Gharib criticizes John Bolton for taking a single quote from Wealth of Nations and using it to drum up support for the conservative cause. Bolton is quoted as saying this:

Adam Smith wrote in The Wealth of Nations that “the first duty of the sovereign, that of protecting the society from the violence and invasion of other independent societies, can be performed only by means of a military force.” Today, failing to protect our national security inevitably endangers our economic prosperity by making us vulnerable to global adversaries.

It is clear that President Obama does not agree with Smith’s wisdom. Obama’s policies are jeopardizing not only our national security and economy, but our constitutional sovereignty too.

That is why I have been considering running for President.

Gharib, in turn, uses Smith in the following way:

Other than providing for defense and a robust justice system, Smith wrote that the duties of the sovereign also include setting up “public institutions and public works” for:

facilitating the commerce of the society, and those for promoting the instruction of the people. The institutions for instruction are of two kinds: those for the education of youth, and those for the instruction of people of all ages.

Smith clearly indicates that other duties of the sovereign include educating the populace — possibly up through the university level — and paying for infrastructure projects that keep commerce strong, “such as good roads, bridges, navigable canals, harbours, etc.”

In short, Smith believed not only that governments should shoulder responsibility for the first duty of defense, but for other public projects as well. And how should governments pay for all of this, according to Smith? Well, with a progressive tax:

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.

So, which side is misreading Adam Smith?

The Unselfish Gene?

Today as I was reading an article by Yochai Benkler on the Harvard Business Review entitled, "The Unselfish Gene" (by way of The Browser) I began to get depressed. Not because, as the article forcefully argues, it turns out our selfishness is not the key to understanding all human behavior. This should be rather uplifting, I suppose. Rather, it was because I found it contained so many pernicious errors in reasoning that I began to wonder how our cultural elite can be so blind.

To begin with, let's summarize the major premise. For years now we've been operating under the assumption that humans are fundamentally driven by the selfish desire to advance one's own interests, the so-called "rational actor theory." Thus we have to determine which personal incentives to use in order to drive people toward good behavior. But now, thanks to modern science, we can successfully say that in general, people actually like to cooperate with one another!

My first critique, which is almost my most overarching critique, can be stated as follows: how can we possibly think we needed modern science to figure this out?

The Unselfish Gene?

Today as I was reading an article by Yochai Benkler on the Harvard Business Review entitled, "The Unselfish Gene" (by way of The Browser) I began to get depressed. Not because, as the article forcefully argues, it turns out our selfishness is not the key to understanding all human behavior. This should be rather uplifting, I suppose. Rather, it was because I found it contained so many pernicious errors in reasoning that I began to wonder how our cultural elite can be so blind.

To begin with, let's summarize the major premise. For years now we've been operating under the assumption that humans are fundamentally driven by the selfish desire to advance one's own interests, the so-called "rational actor theory." Thus we have to determine which personal incentives to use in order to drive people toward good behavior. But now, thanks to modern science, we can successfully say that in general, people actually like to cooperate with one another!

My first critique, which is almost my most overarching critique, can be stated as follows: how can we possibly think we needed modern science to figure this out?

Happy Birthday, Wealth of Nations

In celebration of Wealth of Nations being published this day in 1776, The Freeman has an interesting article on the use of the phrase "Invisible Hand" in Adam Smith's political and economic philosophy. Here's an amusing excerpt:

A fascinating discovery uncovered by Daniel Klein, professor of economics at George Mason University, may shed light on this debate. Based on a brief remark by Peter Minowitz, the Santa Clara University political philosopher, that the “invisible hand” phrase lies roughly in the middle of both of Smith’s books, Klein made preliminary investigations. He next recruited Brandon Lucas, then a doctoral student at Mason, to investigate further. Klein and Lucas report in Economic Affairs (March 2011) that they found considerable evidence that Smith “deliberately placed ‘led by an invisible hand’ at the centre of his tomes” and that the concept “holds special and positive significance in Smith’s thought.”

The idea they're getting at? Wealth of Nations has a chiastic structure, with "invisible hand" in the center!

You've seen it all when people are doing Midrash on Adam Smith.

Evolution: Smith before Darwin

In Appendix A of The Fatal Conceit, Hayek has this to say about the development of evolutionary theory:

Though in Hume, and also in the works of Bernard Mandeville, we can watch the gradual emergence of the twin concepts of the formations of spontaneous orders and of selective evolution..., it was Adam Smith and Adam Ferguson who first made systematic use of this approach. Smith's work marks the breakthrough of an evolutionary approach which has progressively displaced the stationary Aristotelian view. The nineteenth-century enthusiast who claimed that the Wealth of Nations was in importance second only to the Bible has often been ridiculed; but he may not have exaggerated so much....

While Smith has been recognised by several writers as the originator of cybernetics (Emmet, 1958, Hardin, 1961), recent examinations of Charles Darwin's notebooks (Vorzimmer, 1977; Gruber, 1974) suggest that his reading of Adam Smith in the crucial year 1838 led Darwin to his decisive breakthrough.

Thus from the Scottish moral philosophers of the eighteenth century stem the chief impulses toward a theory of evolution, the variety of disciplines now known as cybernetics, general systems theory, synergetics, autopoiesis, etc., as well as the understanding of the superior self-ordering power of the market system, and of the evolution also of language, morals, and law (Ullman-Margalit, 1978, and Keller, 1982).

Moral of the story: Read Wealth of Nations.

Adam Smith on the role of government

Sometimes people wonder, what do libertarians believe government should do? It always sounds as if they don't want the government to get involved at all!

Well, I don't know about libertarians, but Adam Smith had a pretty clear vision of what government should, and should not, do. From Wealth of Nations, the end of Book IV:

It is thus that every system which endeavours, either, by extraordinary encouragements, to draw towards a particular species of industry a greater share of the capital of the society than what would naturally go to it; or, by extraordinary restraints, to force from a particular species of industry some share of the capital which would otherwise be employed in it; is in reality subversive of the great purpose which it means to promote. It retards, instead of accelerating, the progress of the society towards real wealth and greatness: and diminishes, instead of increasing, the real value of the annual produce of its land and labour.

All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society. According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings; first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.

A remarkably concise yet robust statement of political philosophy, if you ask me.

Adam Smith on imperfect competition

From Wealth of Nations, Book IV, Chapter IX:

Some speculative physicians seem to have imagined that the health of the human body could be preserved only by a certain precise regimen of diet and exercise, of which every, the smallest, violation necessarily occasioned some degree of disease or disorder proportioned to the degree of the violation. Experience, however, would seem to show, that the human body frequently preserves, to all appearance at least, the most perfect state of health under a vast variety of different regimens; even under some which are generally believed to be very far from being perfectly wholesome. But the healthful state of the human body, it would seem, contains in itself some unknown principle of preservation, capable either of preventing or of correcting, in many respects, the bad effects even of a very faulty regimen. Mr. Quesnai [a French economist], who was himself a physician, and a very speculative physician, seems to have entertained a notion of the same kind concerning the political body, and to have imagined that it would thrive and prosper only under a certain precise regimen, the exact regimen of perfect liberty and perfect justice. He seems not to have considered that in the political body, the natural effort which every man is continually making to better his own condition, is a principle of preservation capable of preventing and correcting, in many respects, the bad effects of a political economy, in some degree both partial and oppressive. Such a political economy, though it no doubt retards more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of teh bad effects of the folly and injustice of man; in the same manner as it has done in the natural body, for remedying those of his sloth and intemperance.

This argument is significant to me for a number of reasons. For one, it deflates the vaunted economic achievements that many wish to ascribe to government. That is, economies have flourished not because of, but rather in spite of the meddling of government. For another, it is a nice statement of Enlightenment optimism: things naturally progress forward, in spite of many serious obstacles. It would be foolish, however, to describe Smith as a simple optimist. There are many other statements in this treatise which sound rather pessimistic. Nevertheless, this is perhaps a hopeful statement for libertarians, who will, with near absolute certainty, never be satisfied with how government handles the economy.

Adam Smith on alcoholic beverages

From Wealth of Nations Book IV, Chapter III, Part II:

It deserves to be remarked too, that, if we consult experience, the cheapness of wine seems to be a cause, not of drunkenness, but of sobriety. The inhabitants of the wine countries are in general the soberest people in Europe; witness the Spaniards, the Italians, and the inhabitants of the southern provinces of France. People are seldom guilty of excess in what is their daily fare. Nobody affects the character of liberality and good fellowship, by being profuse of a liquor which is as cheap as small beer. On the contrary, in the countries which, either from excessive heat or cold, produce no grapes, and where wine consequently is dear and a rarity, drunkenness is a common vice...

Adam Smith on taxes

From Wealth of Nations, Book V, Chapter II, Part II:

"Before I enter upon the examination of particular taxes, it is necessary to premise the four following maxims with regard to taxes in general.

1. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state....
2. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person....
3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it....
4. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state."

I was thinking about these four maxims with respect to our income taxes. Aside from the fact that Adam Smith says taxing the wages of labor is a terrible idea, I also think our system fails miserably on the first and second of these maxims. I imagine this is fairly detrimental to our economy. That is, the tax code is so horrendously convoluted, that it is not only extremely unequal due to various loopholes, but it is far from clear how much will be owed from year to year.

One thing I will say, however, from reading this monumental treatise on economics: taxation is anything but simple. At various times I have been ideologically attracted to things like the "flat tax" or the "fair tax," but Smith's treatise has made me realize that taxation is a subtle and difficult project. Politics has probably given us very nearly the worst possible system of taxation for a country to still be as prosperous as ours; yet even if we had expert economists determining a system of taxation, I doubt it would be easy to come up with.

Still, Adam Smith is full of insights like this one, which I think libertarians and conservatives probably tout a little too much:

"High taxes, sometimes by diminishing the consumption of the taxed commodities, and sometimes by encouraging smuggling, frequently afford a smaller revenue to government than what might be drawn from more moderate taxes."

And of course, I think we can all agree with this:

"There is no art which one government sooner learns of another, than that of draining money from the pockets of the people."

Adam Smith, the prophet?

From Wealth of Nations Book V, Chapter III:

"The progress of the enormous debts which at present oppress, and will in the long-run probably ruin, all the great nations of Europe, has been pretty uniform."

It's like he could see the future.

Adam Smith on presumption

As I read through Adam Smith's Wealth of Nations, I'm finding that Book IV, Chapter II is a gold mine for some of his most concise and powerful statements on economic freedom.

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Apparently, this is the famous "invisible hand" argument. It's kind of funny to me that its context is merely a chapter on why laws against imports are bad. However, it really is quite a beautiful idea: we can actually benefit the whole society, which is incomprehensible to us, by focusing on that which is entirely comprehensible to us, namely our own self-interest.

Smith goes on:

What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman of lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would no-where be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

Ah, there it is! The presumption of state-led economic development.

Wisdom for Our Time

From Adam Smith's Wealth of Nations, Book IV, Chapter II:

"No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can only divert a part of it into a direction into which it might not otherwise have gone; and it is by no means certain that this artificial direction is likely to be more advantageous to the society than that into which it would have gone of its own accord."

And yet, we just keep trying...

Adam Smith on government spending

From The Wealth of Nations, Book II, Chapter III:

It is the highest impertinence and presumption, therefore, in kings and ministers to pretend to watch over the economy of private people, and to restrain their expence, either by sumptuary laws, or by prohbiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.

The more things change, the more they stay the same.

Great Quote from Adam Smith

The property which every man has in his own labour, as it is the original foundation of all other property, so it is the most sacred and inviolable. The patrimony of a poor man lies in the strength and dexterity in his hands; and to hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbour, is a plain violation of this most sacred property. It is a manifest encroachment upon the just liberty both of the workman, and of those who might be disposed to employ him. As it hinders the one from working at what he thinks proper, so it hinders the others from employing whom they think proper. To judge whether he is fit to be employed, may surely be trusted to the discretion of the employers whose interest it so much concerns. The affected anxiety of the law-giver lest they should employ an improper person, is evidently as impertinent as it is oppressive.

From The Wealth of Nations, Book I, Chapter X, Part II.

The thing that is far too often missed is how much classical liberals--defenders of the free market--cared for the rights of the poor.