Economics

Adam Smith and the Propensity to Truck, Barter and Exchange

Ronald Reagan’s speechwriter, Peggy Noonan, wrote a delightful book on her experiences at the White House, What I Saw at the Revolution, in which she remarks: 

 

Everyone wore Adam Smith ties that were slightly stained from the mayonnaise that fell from the sandwich that was wolfed down at a working lunch on judicial reform. The ties of the Reagan era bore symbols—eagles, flags, busts of Jefferson—and the symbols had meaning. I had a dream: The ties talked; they turned to me as I walked into the little symposium. “Hi, I’m a free market purist!” said the tie with the little gold curve. “Hello there, I believe in judicial restraint!” said the tie with the liberty bell. “Forget politics, come fly with me!” said the tie with the American eagle.

Adam Smith became a hero for the Reaganites. This was not surprising, because Adam Smith and Thomas Jefferson were closely linked in friendship and ideas, and Smith’s influence amongst the Americans who fought the British for independence was strong. When the bicentenary of The Wealth of Nations took place in 1976, it was American money and enthusiasm that organised the statue of Smith which was erected in Edinburgh.

At the bicentennial celebration of the book at Glasgow University, George Stigler, the Nobel laureate from the University of Chicago, was happy to declare: “I bring you greetings from Adam Smith, who is alive and well and living in Chicago.”

As I began to delve into the literature on Adam Smith—and there is a lot of it—I realised that it was a much more complicated story than I first thought. The first point that has to be made is that Adam Smith was not the “founder of economics”. The Austrians are particularly tough on him in this regard. The most outspoken is Murray Rothbard, who wrote a book titled Economic Thought before Adam Smith and condemned Smith in these words:

The problem is not simply that Smith was not the founder of economics. The problem is that he originated nothing that was true, and whatever he originated was wrong; that even in an age that had fewer citations and footnotes than our own, Adam Smith was a shameless plagiarist, acknowledging little or nothing and stealing large chunks from Richard Cantillon. Far worse was Smith’s complete failure to cite or acknowledge his beloved mentor Francis Hutcheson, from whom he derived most of his ideas.

Margaret Thatcher’s death brings to mind the following story about economists and her 1981 budget. She was elected to office in 1979 when Britain was in a dreadful state. Rubbish was not collected, corpses were not buried, electricity was in short supply and a three-day working week was established.

By 1981 she was moving with all deliberate speed to restore Britain, morally and economically. She and her economics adviser, Alan Walters, put together a budget which defied every Keynesian nostrum of the time. When it was presented to the Parliament, 364 economists, from every university in the land, signed a letter to the Times denouncing the budget and predicting increasing unemployment, increasing inflation, and increasing impoverishment throughout Britain as a consequence.

When this letter appeared she was asked in the House of Commons if she could name just two economists who supported the budget. She immediately named Alan Walters and Patrick Minford. She told her aide as they were returning to 10 Downing Street that it was just as well she was asked for only two economists. She couldn’t think of any others.

That budget was the beginning of the restoration of the British economy. Sadly Britain is now back on the familiar path of Tory socialism, a government led by Tory wets who are the heirs of the regicides who threw Thatcher out of office because she had become hostile to the European project, which was their light on the hill. But her example remains, and it will continue wherever freedom is cherished.

The point of this story is that although Adam Smith is often incorrectly described as the founder of economics, that letter to the Times reminds us that economics is an inheritance which has its serious downside.

The title to this article is from the introduction to The Wealth of Nations:

This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter and exchange one thing for another …

 

     The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education. When they came into the world, and for the first six or eight years of their existence, they were perhaps very much alike, and neither their parents nor play-fellows could perceive any remarkable difference. About that age, or soon after, they come to be employed in very different occupations. The difference of talents comes then to be taken notice of, and widens by degrees, till at last the vanity of the philosopher is willing to acknowledge scarce any resemblance.

 

     But without the disposition to truck, barter, and exchange, every man must have procured to himself every necessary and convenience of life which he wanted. All must have the same duties to perform, and the same work to do, and there could have been no difference of employment as could alone give occasion to any great difference of talents.

 

     As it is this disposition which forms that difference of talents, so remarkable among men of different profession, so it is this same disposition which renders that difference useful.

Here we realise that Smith knew nothing about children. He never married and perhaps never had any dealings with children. For him nurture explained everything and nature made no contribution. To anyone who has experienced bringing up a family, such a position borders on the lunatic.

After the tremendous upheaval in Germany during the war, a study was undertaken which was based on finding identical twins who had been separated soon after birth, and had been brought up in different circumstances. If I remember rightly, twenty-one sets of such twins were discovered.

The results demonstrated the overwhelming power of genetic inheritance. Careers—including criminal careers—marriage partners, likes and dislikes, everything matched. This extraordinary finding is rarely discussed. I think the reason is that there are big interests who are dependent on the idea that nurture is more important than nature. The education industry comes to mind.

Another important issue where Adam Smith got it wrong, and which had serious implications for the future, was his theory of value. Smith ascribed the value of anything, artefacts, commodities, concerts, to the amount of labour that had been used to produce whatever it was that was being valued. We call this the labour theory of value. It is complete nonsense, as only a moment’s reflection will testify. But Marx picked it up and deduced from it that capitalism was inherently unstable, since the labourer did not receive the full value for his efforts, and inevitably this systemic imbalance would lead to collapse.

We still see this theory in a residual form manifest in our labour market institutions, such as “Fair Work Australia”. The very title gives the game away.

Where Smith was right was about the size of the market and the capacity for the division of labour to increase prosperity as the size of the market increased. As cities grew, or as transport links between cities became much cheaper, as in the canals which were then spreading all over England, then the capacity for increasing specialisation grew as well.

Jane Jacobs has pointed out that Smith accepted without question the mercantilist belief that the nation-state was “the salient entity for understanding the structure of economic life”. This is explicit, she says, “not only in the title of his work, but in its first sentence”:

The annual labour of every nation is the fund which originally supplies it with all the necessities and conveniences of life which it annually consumes, and which consists always either in the immediate produce of that labour or in what is purchased with that produce from other nations.

Jane Jacobs is a truly original thinker and I cannot recommend her books too highly. She grew up in Scranton, Pennsylvania, which was then, and may still be, a city in secular decline. Her first book, The Death and Life of American Cities, is a sustained and effective attack on the city planning dogmas of the time, and sold over 250,000 copies. Her fundamental point is that it is the city which is the mainspring of economic life, and as the city prospers or declines, so does the region surrounding the city, together, ultimately, with the nation which depends upon the city for its well-being. Further she argued, any attempt to “plan” the life of a city will result in its economic decline, stagnation and eventual demise.

This is such an important insight into economic and political life that it cannot be emphasised enough. Centralists such as John Howard have never understood it, and the never-ending attempts to trash the federalist core of our Constitution, on both sides of the political divide, have to be opposed tooth and nail. Australia is a federation, not so much of states, but of cities; Sydney, Melbourne, Brisbane, Perth, Adelaide and Hobart. Two of these cities are in decline, but the others are growing. A book titled The Death and Life of Australian Cities would be a worthwhile exercise.

The word politics comes from the Greek word polis, meaning city. Our understanding of politics comes to us from the Greeks who wrote about the struggles between the two great rival city-states, Athens and Sparta, in the fifth century BC. They were Thucydides, Herodotus, Pericles and their contemporaries. The life of politics in those times was the life of those city-states and we still can learn much from them.

Scotland and England were united in 1707, but Scotland remained poor and stagnant whilst England grew in wealth and prosperity. It was a common complaint in London during the eighteenth century that the Scots were coming to London and taking over the city. Lord Bute served briefly as Prime Minister in 1763, but much more important was William Murray, Lord Mansfield, who travelled from Scotland to England at the age of thirteen, became Chief Justice in 1754, brought an end to slavery in Britain in Somersett’s case, and was the founder of British commercial law, notably the law of contract and the centrality of property and its inviolability. This enabled Britain to become the centre of the world’s commercial activity.

As an aside let me quote President Calvin Coolidge (arguably the greatest US president of the twentieth century) from a speech in New York in 1925. He said:

The prime element in the value of all property is the knowledge that its peaceful enjoyment will be publicly defended. Without this legal and public defence the value of your tall buildings would shrink to the price of the waterfront of old Carthage, or corner lots in ancient Babylon.

Why did Adam Smith achieve such lasting fame? In my view his fame is based on his writing skills. He was gifted at writing aphorisms, many of which stand out as gems of their kind. For example:

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.

A lot of things are taken for granted in that sentence. Most particularly a tolerable administration of justice.

Let me quote some of his best known aphorisms:

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

By means of glasses, hotbeds, and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland? 

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices … But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary. 

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

If justice is removed, the great, the immense fabric of human society, that fabric which to raise and support seems in this world if I may say so has the peculiar and darling care of Nature, must in a moment crumble into atoms. 

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. 

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 nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

In thinking about Adam Smith and his contribution it is difficult to put ourselves back in the eighteenth century, and to understand the state of opinion which he was challenging. Smith’s great contribution was his devastating attacks on the mercantilist doctrine which held sway in the minds of the political leaders of his day. Mercantilism held that trade, particularly international trade, was a zero-sum game, and that in any exchange across a national border, one party must win and the other party must lose. This led to extraordinary attempts to increase exports through subsidies of all kinds, and to prevent imports to the maximum possible extent. Tariffs and duties of all kinds on imports inevitably followed. Smuggling became an industry that provided essential services to economic life, and the attempts by the authorities to prevent smuggling absorbed very large resources and, of course, promoted widespread corruption.

The nearest parallel in our own times is the prohibition era in the USA, from 1919 to 1932, where illegal distilling and smuggling across the Canadian border were major industries. It was the death toll from drinking “moonshine” which finally persuaded the politicians to draw the curtain on prohibition.

This episode in American history gave us the Baptist–bootlegger theory of political life. The Baptists, who were champions for prohibition, were in an unrealised coalition with the bootleggers, who were making fortunes out of prohibition. On Sunday mornings the politician in the corner would welcome the bootleggers, accept their campaign contributions with gratitude, and assure them that he was solid for prohibition. On Sunday afternoon he would receive the Baptists, and without any need for political donations, assure them likewise that he was solid for prohibition.

In Book IV of The Wealth of Nations Smith wrote: 

The modern maxims of foreign commerce, by aiming at the impoverishment of all our neighbours, so far as they are capable of producing their intended effect, tend to render that very commerce insignificant and contemptible …

 

A nation that would enrich itself by foreign trade, is certainly most likely to do so when all its neighbours are all rich, industrious and commercial nations. A great nation surrounded on all sides by wandering savages and poor barbarians might, no doubt, acquire riches by the cultivation of its own lands, and by its own interior commerce, but not by foreign trade.

In particular Smith ridiculed the trade barriers between France and England, trade barriers put into place by conspiracies between politicians and local tradesmen. The history of protectionism in Australia shows that nothing has changed.

That trade is not a zero-sum game, but that it leads to the betterment of both parties, is Smith’s most important contribution. Jim Buchanan and Gordon Tullock from the University of Virginia summarised it thus: “in normal trade all parties gain; there exist mutual gains from trade. The great contribution of Adam Smith lay in his popularization of this simple point.” 

I want to finish up on a discordant note. One of Smith’s finest passages from The Wealth of Nations is his description of the harm done to a nation by the imposition of barriers to trade, and the corruption which takes place when an army of customs officials are employed to stamp out smuggling.

Smith’s father has been in charge of customs at Kirkcaldy, and it as a sad reflection on Smith’s honour that he accepted that post in later life. He did not need the money; he was well provided for by the Duke of Buccleuch, whose son he had tutored in his teens. Ed West remarks that he worked diligently in that post, which if true, compounds the damage to his reputation.

It is proper to recognise the good things Adam Smith did for his contemporaries and for us as their descendants. But we can learn from his mistakes, and we should not hesitate to do so.

This is an edited version of a talk Ray Evans gave to the Adam Smith Club in Melbourne in April.

 


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