Adam Smith

Ruth Davidson speech to Adam Smith Institute


This week the ASI hosted the feisty Ruth Davidson to deliver a lecture on lessons from Scotland's founding father of economics - Adam Smith - as she outlined her vision of an alternative to the SNP's statist agenda.

Good Evening Ladies and Gentlemen.

Thank you for the opportunity to speak to you this evening.

It seems to me that there is a rather long and – if I might say – inglorious tradition of Scottish politicians hanging speeches round the neck of Adam Smith and his legacy.

I’m sure you’re familiar with them, but – for me – there seems to be two main types.

The first type is what I would refer to as the Gordon Brown method.

The Brown method is where you examine Smith’s philosophy from three hundred years ago and demonstrate that, astonishingly, it coincides almost exactly with your own policy agenda here in early 21st century.

Yes, it turns out that Adam Smith was a kind of New Labour prophet, just waiting to be discovered all this time.

Which shows your current policy platform isn’t a tricksy wheeze to triangulate left and right, all the better to scoop up the votes of middle England. Oh no!

It turns out that it has a “golden thread” linking it right back to the heart of the Scottish enlightenment where, before the words “Tony Blair” were ever heard, it was first discovered that liberal economics and social justice could go hand in hand.

The fact that Smith actually came from Kirkcaldy is just the cherry on top of the cake.

I can only say that if I was Gordon Brown looking for some kind of ballast to hold my political beliefs together, I probably wouldn’t have been able to resist either!

But that isn’t the only type of speech of course. There’s a slightly shabbier version of the Brown method which adds a great dollop of parochialism mixed with hubris.

This is the one where Politician B seeks to assert that pretty much everyone has got Adam Smith wrong from Day One. Apart, of course, from the speaker himself.

And why have they got him wrong?

Broadly speaking, continues Politician B, this is because they are not Scottish.

And, in not being Scottish, they therefore fail to understand the true meaning of Adam Smith.

Target number one is, of course, the Adam Smith Institute.


(Read the full speech here.)

Economic Nonsense: 46. Profit is a sign of exploitation


No.  Profit is the reward for investment.  An investor defers gratification and uses their money instead to try to make more money later.  Profit is the compensation he or she receives for doing this.  Part of it takes account of risk, the risk that the investment might not pay off or that the investor might lose the money they put up.  Part of the profit is reward for taking that risk.

The notion of profit as exploitation derives from a mistake made by Karl Marx.  He supposed that value resides in objects, rather than in the mind of the beholder.  Because he thought it resides in objects, he asked how it got there, and answered that value represents the labour it takes to make something.  A price charged above the value of that labour represents "surplus value," and is exploiting the workers who make the object.  Hence comes the notion of profit as exploitation.

In fact people value things differently, which is why they trade.  An object's value to me might represent the other uses I might have made of the money, had I not expended it in producing the object.  If someone values it more than that they will pay a price that includes a profit for me.  Far from being a sign of exploitation, profit serves a valuable human purpose in motivating people to produce goods and services that are of value to their fellow human beings.  It directs us to serve the needs of others in seeking a return for ourselves.  The butcher, the brewer and the baker might seek their own reward in terms of the profit they make, but in doing so they provide others with meat, ale and bread.

Profit is legitimate, and sends signals to others.  If some areas of production show high profits, others are motivated to enter that field themselves and bring extra production onto the market.  The competition with other producers will generally act to restrain or reduce the high profits.

239 years of The Wealth of Nations


Today is the 239th anniversary of the publication of The Wealth of Nations by Adam Smith. For nearly a quarter of a millennium, we have actually known the principles by which wealth is created and maximised. The trouble is, that for a fair chunk of the same time, we have been trying to resist that information, thinking that we can somehow do better than the market. The Wealth of Nations is a great book: most objective commentators would probably put it among the top five books ever written, in terms of its influence on humankind and the way we live.

Yes, it's very eighteenth-century stuff, sprawling and wordy, with enormous digressions on things that do not seem very interesting to us today. Luckily, you do not have to read it, because you can download my Condensed Wealth of Nations instead.

And yet, Adam Smith's original is the book which took economics out of its primitive phase and made it distinctly modern. With a bit of time and effort, any of us can understand what Smith says because what he is describing is all around us today.

The very first sentence of the book dismisses the old idea that the wealth of a nation was the amount of gold and silver that it had hoarded up in its vaults. Rather, says Smith, the measure of a country's wealth is what it produces. In that first sentence, he had invented the idea of gross domestic product. In the second, he notes the wealth of individual citizens of that country depends on how many citizens are sharing this GDP. (So there,he had invented the idea of GDP per capita.) In the third, he talks about how many people are actually working to produce this wealth. (The concepts of the participation rate, and productivity.) Before we are past the first page, we can see that this is sensational stuff.

But surely his greatest breakthrough was the realisation that we do not have to conquer people or make things in order to increase our wealth. We can also increase it by simply exchanging things. If you have something I want and I have something you want, we are both better off by swapping it. And that is the foundation of market exchange and trade, and of the specialisation that makes our production and exchange system so spectacularly efficient, creating and spreading benefit throughout the world.

So who did cook Adam Smith's dinner then?

The portrait of Adam Smith’s mother above has been published here with the kind permission of her owner Rory Cunningham

The portrait of Adam Smith’s mother above has been published here with the kind permission of her owner Rory Cunningham

Much excitement over in Grauniadland as a new book comes out talking about why that economically rational man so beloved of us neoliberals could not ever be the economically rational woman. Because, you know, women do all that caring and cleaning and stuff for love, not for reasons of calculated rational self-interest:

But a polemical and entertaining new book by journalist Katrine Marçal suggests that Economic Man has another major shortcoming: he’s not, and never could be, a woman.

Hmm. The book's blurb says:

It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest When Adam Smith wrote that all our actions stem from self-interest and the world turns because of financial gain he brought to life 'economic man'. Selfish and cynical, economic man has dominated our thinking ever since and his influence has spread from the market to how we shop, work and date. But every night Adam Smith's mother served him his dinner, not out of self-interest but out of love. Today, our economics focuses on self-interest and excludes all other motivations. It disregards the unpaid work of mothering, caring, cleaning and cooking. It insists that if women are paid less, then that's because their labour is worth less - how could it be otherwise? Economics has told us a story about how the world works and we have swallowed it, hook, line and sinker. Now it's time to change the story. In this courageous look at the mess we're in, Katrine Marcal tackles the biggest myth of our time and invites us to kick out economic man once and for all.

The contention is entirely poppycock of course. For we can only make sense of gender roles and how they have changed within that very concept of economic rationality. The work of Gary Becker explores this world, where the decision to form a family for example, is explained in those rational economic terms. In a world reliant upon human muscle power to feed itself (ie, all of history until the tractor) there was obviously going to be a gender divide in who did what. And as the biologists tell us it really does take two to raise a family (historically one agricultural labourer could produce enough in a year to feed 1.7 to 2.3 people in total). So many other things about men and women only make sense if there is a division of labour (as Smith repeatedly pointed out, this is the basis of wealth creation) and trade in the subsequent produce. "Hunter Gatherer" as a decription of pre-agriculture societies is in itself a gender distinction of roles on the grounds of comparative advantage (which is all about David Ricardo).

We might also look at the work of Amartya Sen and Joe Stiglitz on the Sarkozy Commission. One of the questions they considered is what is the economic value of that unpaid household production that women tend to do? Given that it is undifferentiated labour (while there is that gender divide the specialisation and division rarely extends beyond two people) then it should be valued at the undifferentiated labour rate: minimum wage.

So two of the founding figures of economics address exactly this point, Smith and Ricardo, three Nobel Laureates point out the implications and then some journalist comes along to shout that of course economic rationality doesn't apply to women?

Yes, we'll probably file that under poppycock.

Quite apart from anything else it's impossible to explain the changes in society in the past century without using that structure of economic rationality. Why have fertility levels fallen so much? Because children now generally survive into adulthood, the name of the game is to have grandchildren, thus one needs fewer children to have them. Why have male happiness rates stayed largely static while female ones have fallen as they gain ever more choice over their lives? Because having more choices means that the opportunity cost of making any single one of them rises. Why have female paid working hours risen? Because automation has meant that the gender division of labour based upon muscle power is no longer useful.

You simply cannot explain this modern world without that assumption that we're all, men and women together, acting as economically rational beings to at least some extent. For, as Marx pointed out, the level of technology determines social relations: the inventions of the reasonable cooker, the microwave, the vacuum cleaner, the washing machine, the steam iron and so on quite killed off the servant class just as one example.

Sorry, but the concept that there's a male world which is economically rational and a female one that isn't is simply poppycock. Otherwise we wouldn't be in a world where one female journalist writes about a book by another one instead of them both being tied to the domestic treadmill in that game of producing grandchildren.

'Munibonds' and the national debt

Bad news from the Telegraph's daily email:
Local authorities are on the verge of issuing bonds in order to raise revenues and make up for further cuts to their government grant.... The "munibonds" will be issued by a new municipal debt agency, and are backed by 48 local councils and the LGA. Scotland will also acquired the powers to issue its own debt in what have been dubbed "kilt-edged bonds".

Why is it such bad news? Shouldn't government be allowed to borrow, for investment, like the rest of us? Few of us could buy a house from our savings: instead we take out a loan. So why should a local authority – or even a country – not borrow to fund its schools, roads and care homes?

I used to read eighteenth-century authors and economists like William Cobbett (of Rural Rides) and Adam Smith (of The Wealth of Nations) and chuckle to myself as they went on and on against the idea of the national debt. Much of the huge rise in prosperity of our times, I supposed, had been built on debt, much of it government debt taken out to fund market-enhancing improvements in roads, bridges, airports, schools, hospitals and housing.

Now I think the Cobbetts and Smiths were right and I was wrong. If we could rely on governments to make rational, objective decisions about the overall benefits and costs of infrastructure finance, then there might be a case for allowing them to borrow for public investment. But we cannot rely on governments to be so dispassionate and high-minded. The very power to borrow is itself too much of a temptation pulling them in the opposite direction. Consider, for example:

(1) It is impossible enough to measure the 'public' benefit of government spending, when there is no such thing as the 'public interest' – only a clash of opposing interests. (Think airports, and the convenience for travellers of extra flights and the distress of local residents over traffic and noise.)

(2) The problem is compounded when it is confused by electoral interests. (As Khruschev noted, "politicians will build a bridge, even where there is no river." All the more so, if there is an election coming up.)

(3) With electoral advantage in mind, it is too easy for those who control the public finances to segue from investment to spending. As Chancellor, Gordon Brown, to his credit, said he would confine borrowing to investment projects. But by his reckoning, anything spent on schools or hospitals was 'investment' for the future – even though much of it was patently simply consumption for today.

Such factors help explain why governments have growth so much, and spend money on so many marginal activities. It is too inviting to spend now, earn the applause of the public, and let the next generation, who do not yet have a vote, foot the bill for it all. Public Choice economists call it 'time shifting'. And in that, of course, the public themselves are complicit. With interest groups, from pensioners to patients, demanding more spending on themselves, and politicians happy to borrow, at little cost to themselves, to provide it, how can we ever expect prudence in the public finances.

It is a draconian answer to say that we should stop government borrowing at all. But actually, the eighteenth century thinkers were right.

This On Rock Or Sand book will be a bit of a disappointment


I'll not argue theology with the Archbishop of York, coming originally as I do from the tran- not con-substantiation side of the argument. But when said Archbish strays over into Adam Smith and economics I'm afraid that it really is incumbent upon both I and us to point out to him the errors of his ways. There's to be a new book out, On Rock Or Sand, telling us all what's wrong with our country. And as far as theology goes well, theologians sound like the right sort of people to be telling us all about it. However, it would be helpful if, when those same theologians decide to tell us about economics, they have some clue as to the basics of the subject. This illustrates the problem nicely:

The book characterises the welfare state as the embodiment of the Christian command to “love thy neighbour” and warns that people should not rely on what the founding father of free-market capitalism Adam Smith called the “invisible hand” of the market to create a fair society.

Smith never said anything so drivellingly stupid. The one reference in Wealth of Nations to "invisible hand" is during a discussion of the general propensity to invest capital at home rather than abroad. The modern day usefulness of this being that, even in a world of perfect theoretical capital mobility, some incidence of a corporate profits tax will always fall on shareholders. This is something that is useful to know but it's going to be a very minor footnote in the recipe for a just society.

Which is why, of course, Wealth of Nations and Theory of Moral Sentiments are such agonisingly long books. For they're largely an exploration of when markets cannot be left safely to handle the creation of a just and or efficient society. Which is something we would hope someone desiring to comment upon them would know.

For example:

Dr Sentamu adds that a post-war vision through which the welfare state and NHS developed has “given way to an individualist and consumerist vision, with public goods such as health … and education … increasingly becoming privatised, where society has become a market society, with everything going to the highest bidder and the poor being left behind in the unceasing drive to increase the nation’s Gross Domestic Product.”

Smith discusses the very point of non-market access to education. And backs it, at least at the basic level. On the grounds (not that the phrase existed then) that being part of a generally literate and numerate society was indeed a public good. And we can go on, using the same logical structure, and argue that much of traditional public health is similarly a public good. Sewage, drains, the control of infectious diseases, the effects of vaccination, yes, these are indeed public goods. But the treatment of your or my cancer might well be good for the public, good public policy, publicly good even, but it's not a public good. As your or my university degrees are not a public good.

What really annoys is that Christian churchmen will be the first to agree that thousands of very bright people have chewed over the intricacies of theological debate for millennia. Even, that as a result some truths have been uncovered. And yet when it comes to economics they're unwilling to similarly agree that some thousands of very bright people have chewed over the subject for some centuries now and have uncovered some truths. Or if they are willing to accept that in theory they've apparently not bothered to find out what those truths are.

I've no idea as to whether tran- or con-substantiation is actually correct. And I'm also not all that interested to be frank about it. But I would make the effort to understand it all before pronouncing upon the matter. We'd all rather wish the Archbishop would make the same effort when he steps outside his own specialist knowledge base, eh?

People of the same trade seldom meet...


It's very rare that new evidence overturns something Adam Smith wrote in the Wealth of Nations or Theory of Moral Sentiments, and a new paper on guilds, to which I was alerted by John Cochrane (read his post on it here), is no exception. Sheilagh Ogilvie's "The Economics of Guilds", in the latest issue of the Journal of Economic Perspectives, lays out a history of European guilds 1000-1800, explains why they rose and fell, and explains how the fit the classic profile of the rent-seeking interest group. In Cochrane's words:

The paper nicely works through all the standard pro-guild and pro-regulation arguments. If you just replace "Guild" with "regulatory agency" it sounds pretty fresh.

Ogilvie shows that guilds neither provided contract enforcement, a guarantee of quality, better training and/or qualifications, or innovation. They eventually declined because globalisation and competition rendered them redundant. She explains that guilds did not exist because they solved market failures but rather because they had obvious, concentrated benefits, and hidden, diffuse costs, and because they could use part of these benefits to bribe authorities.

Guilds were institutions whose total costs were large but were spread over a large number of people—potential entrants, employees, consumers—who faced high transaction costs in resisting a politically entrenched institution. The total benefits of guilds, by contrast, were small, but were concentrated within a small group—guild members, political elites—who faced low costs of organizing alliances to keep them in being. Guilds survived for so long in so many places because of this logic of collective action.

There is nothing new under the sun.

Adam Smith and distributive justice

Many libertarians are sceptical about the idea of social justice, citing Hayek's argument that social justice is a mirage. Indeed, recently David Friedman had a debate with Jason Brennan, John Tomasi and Matt Zwolinski of the Bleeding Heart Libertarians blog over whether the concept even had a clear meaning. My own view is that social justice is just justice writ large, with particular focus on distributive issues like equality, priority and sufficiency.

Many classical liberals were deeply interested in questions of distributive justice, including Adam Smith, who made his name as a moral philosopher, and often focused on the damaging effects mercantilist and other interventionist policies had on the worse-off. Barry Stocker has recently posted the text of three very interesting talks he gave in Istanbul on the subject of Smith and distributive justice. Stocker highlights the ways in which Smith laid the blame for unjust distributions of society's goods at the state's door:

The cause [of unjust distributions] is largely the activity of the state rather than the results of markets being left free of state legislation and government schemes. Smith sees injustice as resulting from collaboration between merchants in the same sector, but sees this as more the consequence of state intervention than of free commerce. The state enabling, encouraging and even requiring enterprises to form corporate bodies (such as local chambers of commerce in Britain) in the same sector is the biggest reason for merchants conspiring against the public. That is the source of the famous quotation about merchants conspiring against the public, though that quotation is often used to support demands for increased state regulation.

And Stocker also highlights how Smith's concern for social justice did not translate into calls for redistribution; he believed that a good overall institutional structure would generate desirable distributional outcomes:

One of the problems with Smith commentary is that admirable scholars and political theory thinkers, like Rasmussen and Fleischacker, who are disposed favourably to a theory of redistributive justice see it in those elements of Smith which express a wish for distributive justice. There is distributive justice in Smith in the sense that he favours the distribution that emerges from freedom in economic activities, and in the state measures he favours to benefit the poor rather than the rich. However, that is not the same as the kind of belief in a predetermined pattern of distribution of justice which Rawlsians, or egalitarian liberal favour, at the extreme a completely flat distribution as argued for by G.A. Cohen and which is in the basic assumptions of Habermas‘ thought on norms, ethics, and discourse.

Read the whole things: 1, 2, 3.

Why is Adam Smith the greatest economist of all time?

George Mason University economists Tyler Cowen and Alex Tabarrok, who run Marginalrevolution, one of the most popular and—in my opinion—best blogs on the internet, have recently made forays into online education. Their latest is on the history of economic thought, looking at great economists from Galileo up until the marginal revolution of the 1870s, tackling questions including "Why is Adam Smith the greatest economist of all time?"

Here is the introduction to their course: