Adam the Smith (1723-90) - A Journey of Enlightenment
caution !! this is an initial draft of a story ... these notes are on my server for safe keeping!
Evolutionary Economics & The Industrial Revolution.
- Moral Sentiments & Immunity from Parasites & predators.
- Wealth Creation & Synergies from Specialisation & Scale.
- Biological History & Genetic Costs & Benefits.
Let's get one thing straight from the start, folk had no idea what was really going on. Human behaviour was limitlessly complex, always changing, regularly conflicting & good behaviour was horribly scarce ... but folk always learned.
Some friends thought our own time on Gilmore Hill in the late 1950s early 1960s was spent learning about the intricacies of Chemical Engineering ... but our education proper didn't really start until we were underneath the soap pans in Apapa where we realised our enlightened tutors at Glasgow University were Jimmy Watt and Adam Smith ... both long dead but in the 1960s both were still tuning the brains of naive undergraduates who asked awkward questions.
Why were some economies rich and some poor?
Why was it that folk could get both excited & fearful and then flip flop between the two? Why was it that some folk wallowed in the splendour of riches while others sank into the abject pain of poverty?
Xenophanes (BC 570-475) thought about these why questions years & years ago ... but he copped out and concluded it was really all just 'a woven web of guesses' ... but then some guesses seemed to turn out much better bets than others and in that way ... if they looked ... some folk learned -
‘The Gods did not reveal, from the beginning, all things to us, but in the course of time through seeking we may learn & know things better. But as for certain truth no man knows it, for even if by chance he were to utter The Final Truth, he would himself not know it: for all is but a woven web of guesses'.
... Xenophanes was a smart cookie ... read that paragraph again ... think about it?
And a bit later Socrates (BC 470-399) also had a go at ignorance -
'admitting one's ignorance is the first stage in acquiring knowledge' ...
But even before these sages exposed the truth about ignorance, Solon (BC 638-558) had had a glimpse of enlightenment and Delphic cooperative synergies ... way way before before ... it seemed folk had always been learning -
'Men keep their agreements when it is an advantage to both parties not to break them; and I shall so frame my laws that it will be evident to the Athenians that it will be for their interest to observe them'.
The Scottish Enlightenment of the 18th century, which we fortuitously joined in 1958, involved two burgeoning cities, Edinburgh & Glasgow and two giant intellects, David Hume (1711-76) & Adam Smith (1723-90), these guys thought about things over a convivial pint in their own 'social clubs'; The Select Society & The Poker Club. In these splendid establishments the sages 'put the world to rights' as they goaded each other into debates about the real tricky questions ... like the morality & science of human behaviour, or what was called on Gilmore Hill; 'Moral Philosophy' & 'Natural Philosophy'.
From this fray, over the next 250 years, emerged some 'enlightened' economic principles which inextricably linked -
'Moral Philosophy' and moral sentiments
'Natural Philosophy' and wealth creation
Ancient History and biological history
... although at the time, of course, science was an infant and the science of moral sentiments, wealth creation & biological history quite meaningless ... economics was a popular fallacy; a creed called Mercantilism.
Adam Smith changed everything economic and, perhaps, both economics and evolution could claim birthrights 250 years ago around the University on Gilmore Hill in Glasgow?
For sure we were biased this was our own alma mater ... but day by day the evidence mounted ... Adam the Smith was the inspiration for Charlie Darwin's imagination.
When we arrived at The University of Glasgow in 1958, hot for wisdom about thermodynamics & a degree in Chemical Engineering, we were enrolled in a class grandly titled 'Natural Philosophy'. We enthusiastically got stuck in but there were others around who called themselves 'Moral Philosophers' and the ghosts of Adam Smith & his mates seemed to be conspicuous in every brick of that ancient establishment. It was these spirits from the past that prodded us to ponder about the two great interwoven branches of the Gilmore Hill curriculum, 'Natural Philosophy' and 'Moral Philosophy'. Why had we chosen to study nature rather than morality?
Much later we realised that at the Adam Smith Forge on Gilmore Hill 'morality' & 'nature' had been welded into one and the same. Our route to epiphany came when we cottoned on to the dramatic insights that emerged 100 years later in 1859. Charles Darwin did all the heavy lifting and explained how natural selection had constructed just one system; everything was interconnected to everything else ... one whole throbbing shebang & caboodle.
The insights of Adam the Smith & David Hume were an astonishing anticipation of Charles Darwin ... confirmed by the man himself and by three eminent boffins from later times which were well worth noting; Kenneth Boulding, Daniel Dennett and Paul Krugman ...
Charles Darwin (1809-82) was the man who was rightly credited with the definitive description of the work that went on at the Smith Forge.
Darwin was sure that his theory of natural selection applied to human folk, they were included in, why else would Darwin delay publication of his book for 20 years and fear the wrath of the church and his wife? -
'It is an awful stretcher to believe that a peacock's tail was thus formed, most people don’t get it. I must be a very bad explainer'.
‘In the distant future I see open fields for far more important researches. Light will be thrown on the origins of man and his history’.
'I fully subscribe to the judgement of those writers who maintain that of all the differences between man and the lower animals, the moral sense or conscience is by far the most important'.
Here was the confirmation that Adam the Smith had the nature of man spot on with his 'Theory of Moral Sentiments'. The Smith had got wise to the unifying theme which was only later more fully described by Charles Darwin.
Darwin focused on the death of what didn't work rather than the design of what did work! Moral sentiments worked and survived.
Kenneth Boulding (1910-93) was a Quaker economist from Liverpool who founded General Systems Theory and the guy who identified Adam Smith as the smith who first forged the science of economics. Adam the Smith based his work on 'the nature of man' and 'a natural course of things'; a whole interactive system of systems of happenings ... which was all underpinned by morality -
'Economics as a Moral Science' by Kenneth E Boulding, 1968 -
'Adam Smith, who has a strong claim to being both the Adam and the Smith of systematic economics, was a professor of Moral Philosophy'.
Then, tongue firmly in cheek, in 1971, Kenneth Boulding posed a question about the misunderstandings of modern neo-classical economic science: 'After Samuelson; who needs Adam Smith?' -
'Samuelson's mathematics of efficient markets and production functions involving only land, labor & capital never worked and never explained economic development'.
'It is clear that we must look at pure science, technological change, and social invention as parts of a single pattern of development in which each supported the other'.
Adam the Smith suggested that it was 'moral sentiments' which distinguished folk from more primitive animals. Economic 'know how' was a 'genetically inherited total system' underpinned by 'moral sentiments'.
Boulding championed Adam the Smith as the pioneer who taught the economic relevance of human capital and the misunderstanding of physical capital -
'Without hard work, honesty & thrift ... land, labour & capital were mere trinkets of frivolous utility'.
In 1997 'New Labour' led the English 'socialists' to victory with a resounding endorsement of Adam Smith. Gordon Brown, Hugo Young Lecture 2005 –
‘Coming from Kirkcaldy, as Adam Smith did, I have come to understand that his Wealth of Nations was underpinned by his Theory of Moral Sentiments’.
Some folk had learned but understanding was still 'an awful stretcher'.
Daniel Dennett (1942-) was an American cognitive scientist from Harvard who wrote a compelling account of Darwin's insights in a brilliant book which explained how 'the natural course of things' constructed the whole shebang & caboodle of human behaviour.
'Darwin's Dangerous Idea' 1995 -
'The giraffe's long neck was the result of the death of the short necked variety'.
'David Hume could not see how the curious adapting of means to ends throughout all nature could be due to chance, but if not chance what? What could possibly account for the high quality design if not an intelligent God? Was there a system, an order, and economy of things, by which matter could preserve perpetual agitation and yet maintain a constancy in the forms which it produced? There certainly was such an economy. Hume had glimpsed the Darwinian alternative around 1750'.
At that time David Hume was arguing against knowledge as divine revelation ... the 'God told me so in a dream' merchants held that 'mind' was the first cause in the 'argument from design'.
Hume had no truck with the supernatural and in this way there was a breathtaking anticipation of Darwin -
'what surprise we entertain when we find a stupid mechanic, who imitated others, and copied art, which, through long succession of ages, after multiple trials, mistakes, corrections & deliberations, and controversies, had been gradually improving? Many words might have been botched and bungled, throughout eternity, ere this system was struck out: much labour lost: many fruitless trials made: and a slow but continued improvement carried on during infinite ages of world making'.
But in the end David Hume just couldn't imagine that the story he had facetiously described was the Darwinian truth ... 'mind' or 'intention' was an effect not an initial cause!
Adam the Smith concurred, he recognised the intricate design in the universe, but refused to accept that it was the work of an intelligent designer -
'In every part of the universe we observe means adjusted to the ends which they are intended to produce; and, in the mechanism of a plant, or animal body, admire how everything is contrived for advancing the two great purposes of nature, the support of the individual and the propagation of the species'.
'They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species' .
100 years before 'The Origin of Species' was written here was the Darwinian alternative to intelligent design ... Smith & Hume had almost got it!
Paul Krugman (1953-) was a 2008 Nobel Lauriat in economics who explained the difficulties of grasping the counter intuitive complexities which emerged from very simple processes.
'Ricardo's Difficult Idea', 1996 -
'Comparative advantage, like natural selection, is an idea that seems simple and compelling to those who understand it, but about which intelligent people somehow manage to get confused time and time again and find this particular idea impossible to grasp. Of course they say that they understand it but they regard it as oversimplified or invalid in the modern world. It is a harder concept than it seems, because like any scientific concept it is actually part of a dense web of linked ideas. It is truly, madly, deeply difficult. But it is also simple & compelling to those who understand it, utterly true, immensely sophisticated ... and extremely relevant to the modern world'.
Both Adam Smith and Charles Darwin had the same problem; most folk just didn't get it!
Krugman was not being arrogant nor patronising ... the ideas were really really 'truly, madly, deeply difficult'.
Silvan Sam Schweber (1928-17), Brandeis University, Waltham, Massachusetts - a grasping summary -
'Darwin, by August 1838, came to study, among others,
Hume, Burke and Adam Smith. It was his study, in particular of Adam Smith which reinforced his focus on the individual as
the central element and unit in his theory and led him to adopt the Scottish
view of trying to understand the whole in terms of the individual parts and
I believe that by July 1839 Darwin had a unitary evolutionary view of everything around him: the planetary system, our own planet, its geology, its climate, its living organisms and their social organizations. More important, he had convinced himself that the mechanism of this evolutionary process was accounted for by the invariable laws of physics and chemistry and the principle of natural selection, without the necessity of divine intervention at any stage or level.' The Origin of Origin Revisited, 1977.
We first met the bust of Adam the Smith in 1958, staring down on us from a secure pedestal in the university library on Gilmore Hill as we wrestled with the perplexities of thermodynamics and the 2nd law. We were to discover that the big bonus of a Chemical Engineering Degree was a necessary understanding of the 2nd Law. At the start Adam the Smith was just an old guy with stony eyes from the deep mists of the past who had no idea how to help us with Boltzman's micro states and entropy ... but later we realised that he knew a thing or two about human behaviour.
So to the questions asked under the soap pans in Apapa there were some tentative answers offered by our memories of the ghosts on Gilmore Hill ... and then much later strangely confirmed by the tales told by ancient Eda about great grandpa Edward Hindley and his shenanigans ... we learned very slowly but we eventually got to know this chap Smith ... we got inside his head ... not easy but 'getting inside the heads of others' was the subject of his writings.
His experiences were ours ... you should know that we knew that he knew, for certain, that he knew that we knew that even The Banjo Player also knew about love & hate, excitement & fear, happiness & sadness, fairness & cheats ... this Smith became a life long friend ... it was clear to us that we shared the same flip flopping emotions from the same gene pool of Homo Sapiens ... we shared the same Biological History ... and in 2018 we had our DNA analysed to prove it ... this was exciting!
To 'get it', both of Adam Smith's books must be read in the context of biological history, the scientific & industrial revolutions and the history of the 18th century Edinburgh & France where he did much of his thinking. There was a path dependent history associated with the differential survival of inherited variants; a continuity which led to the Scottish Enlightenment.
Adam Smith 'got it' before Darwin, and he told the story his own way, he was deeply suspicious of top down design and was a champion of Joe Sixpack building from the bottom up and influencing the environment. Subsequently Darwinian scientists have fleshed out the process of evolution and rubbished the whole idea of history as written ... as a chronological orchestration of human behaviour by Bishops, Princes, Generals & bureaucratic ... biological history was different ... very different.
Human behaviour was always a quest to discover & accumulate more survival value for the cost incurred than competing alternatives.
Folk experimented & learned; it was social cooperative behaviour that secured the synergies of specialisation & scale ... but only if the cheats were consistently confronted.
The Context of History & a Timeline to Understanding Evolutionary Economics.
But where to start the story ... there was a before before?
4.5bn years ago - Biological History, Idyllic Rural Pasts - From history as wrote, from the Garden of Eden and Adam's Apple onwards there were never, ever, no, idyllic rural pasts. Folk happenings had always been more like endless cycles of infant mortality as famine & disease decimated populations and the tyranny & oppression of early feudal systems smothered agricultural and scientific innovations ... one after the other the Bishops, Princes, Generals & Bureaucrats weighed in ... the arrogance of intelligent design was all the rage.
Cycles it seemed were everywhere. Evolutionary processes involved causation that was iterative; the mathematics was non-linear and novel structures emerged. Effects were causes as surviving effects ... produced by interactions in emergent systems ... became causes of subsequent interactions ... everything depended on everything else, cycles on cycles within cycles and all the happenings were confusingly -
and novel emergent happenings were also contemporaneous & interconnected & interactive & interdependent & emergent!
Such were Complex Adaptive Systems and became the focus of a few scientists who latched on to Evolutionary Economics. Natural selection guaranteed self consistency as uneconomic ideas died out ... how else could novelty survive? Human intention itself was a product of natural selection it was not the driver of natural selection ... but it did speed things up ... it enabled trial & error in the imagination to save some time.
The ebb & flow of trials & errors produced the inevitable cycles. Cycles where each step forward created some stocks which were immediately devoured by parasites & predators ... but there was some discernable progress 'cos folk learned.
Then, for sure, something big happened in parts of Western Europe around 1700 ... an industrial revolution ... what was all that about?
Wealth creation was not luck, nor providence, but rather a process of natural selection ... a process of technological & institutional innovation involving the generating & testing of a diversity of ideas which led to the discovery & accumulation of more survival value for the costs incurred than competing alternatives.
Read that paragraph again because in times past everybody thought they knew that 'all things bright & beautiful' were the handiwork of God ... even though that miraculous handiwork always seemed to include the evil parasites & predators?
Folk never knew what was going on.
1215 - Changes over Deep Time - we supposed many folk started economic history in 1215 when things got so bad that King John was ambushed by the Barons at Runnymede and forced to sign away his elitist powers that be ... whatever they were?
Then in 1976 Richard Dawkins described the real story of happenings in Evolutionary Economics, a history which started much earlier than the Magna Carta -
'What really happens is that the gene pool becomes filled with genes that influence bodies in such a way that they behave 'as if' they made complex, if unconscious, cost/benefit calculations'.
'It was Darwin who first spotted that you don't have to have a choosing agent. The choice can be made automatically by failure to survive. Only survivors reproduce and pass on the genes that helped them to survive'.The Selfish Gene (1976), The Extended Phenotype (1982), The Blind Watchmaker (1986), River Out of Eden (1995), Climbing Mount Improbable (1996), The Ancestors Tale (2004), The Greatest Show on Earth (2009).... all were history books ... biological history books.
History as Biological History & Natural Selection of Synergies
Darwin had led the way in the sceptical understanding of history and put his finger on the arrogance of the megalomaniacs & theft. Reality involved the progress of adaptation by natural selection and the discovery & accumulation of synergies which required diversity, choice, failure and frequency growth in populations.
But folk didn't think that way until after 1859 ... and even then most folk just didn't get it. Folk never knew what was going on. Although Adam the Smith glimpsed the essential truth that universal 'moral sentiments' were the result of natural selection.
Vilfredo Pareto (1848-1923) further sussed it out a bit later later in 1906. He defined progress in some free markets as essentially economic, as Pareto Efficient, when interacting folk perceived improvements which avoided harm to others ... and harm could be avoided every time that synergies were involved.
Social institutions; the custom & practice of every day life, spontaneously emerged in free market communities and they tended to exploit this Pareto Optimal – churches, clubs, societies, associations, co-ops, partnerships, companies and everywhere folk got together in the burgeoning cities.
The diversity & choices enabled the discovery of Pareto Efficient synergies as the inefficiencies died out. The successful synergistic behaviours tended to increase in frequency and size ... if ... and it was a big if ... if they were protected from those damned parasites & predators ... it was naturally evolved Tort Law that helped with that job ... nobody liked cheats ... everyone like fairness of shares.
If only folk stopped fighting over the spoils there were mutual benefits available for all from trade ... synergies!
Natural selection favoured synergies ... evolution was intensely economic ... the genes did cost / benefit analysis. The statistical dice of random mutations was loaded! There was an evolutionary certainty; explained much later by Darwin's insight, cooperation led to synergies and mutual benefit ... a strategy which would always eventually beat primitive theft. The merchants were after the win win synergies associated with torts, trade & technology that led to mutual betterment.
However as soon as there were more stocks from fruitfulness there were more parasites & predators. The activities of the pirates led to the zero sum of war and the enrichment of a few kings.
Did biological history intimately involve the distinction between synergies and theft? ... the difference between trading and raiding? Perhaps trading didn't start with the great trade routes of Mesopotamia 3,000 years BC or the silk road from China around 200 AD, perhaps it started when the genes did cost/benefit analysis ... way back?
For sure trade had a fillip around 1500 AD when the long sea routes proved more efficient that the alternative camels trains across the desert.
1500 - Voyages of Discovery - as the oppressive bureaucracies of the feudal system collapsed in a heap of chaos, a roller coaster of diversity & enterprise was unleashed ... a self sustaining process which discovered & accumulated more survival value for the costs incurred than competing alternatives ... economic growth?
Free men were around and they had a go at survival with their own wits & nous; they were no longer enmeshed in the protective but stultifying embrace of their Bishops with tablets of stone, their Lords with Manors nor their Generals with guns. Folk had a chance to go for it themselves and discover their own survival strategies ... perhaps some of the new opportunities would be better? If they managed a useful discovery it seemed they differentially survived and had more surviving children ... the alternative was early death.
Progress via the early death of alternatives was difficult to get your head around?
Folk never knew what was going on.
Portuguese merchants didn't worry about an early death, they got on with the job. Led by Prince Henry the Navigator (1394-1460), they unwittingly started something with the voyages of discovery. The merchants became famous for their efforts to get to grips with sea exploration and the problems of navigation and financial funding. But this was Royal patronage with funding from plunder and tribute. Perhaps the Jews gave Portugal a flying start as they were involved in the stars & navigation for religious reasons ... and they also knew a bit about money and credit. The stars were studied to establish a fix on the calendar for God's festivals ... and the Jews were traders and they understood how capital accumulation could fund the up front costs of voyages in return for a share of the profits later.
Portugal also had a further fillip from Spanish excesses in 1492 when the Jews were expelled from Spain.
Hugging the coast of Africa the Portuguese ventured south and ... as the northern pole star disappeared below the horizon ... just imagine the panic as that one stable guiding light disappeared from view? That was real risk!
Spain soon realised that the small upstart country Portugal was dominating exploration and everybody noticed that the ships always returned full of rich spices and good goodies. King Ferdinand & Queen Isabella charged a young Italian sailor named Christopher Columbus with the task of discovering an ocean route to India so that God's word could be spread and maybe he could also bring back riches.
In 1492 Columbus went west and came back with stories of a New World and gold & silver ... and, perhaps, the disastrous idea of plunder?
In 1498 Vasco da Gama went east and found India by sea and came back with palatable pepper ... and, perhaps, the idea synergistic trade?
Wine & olive oil from Europe were food & drink for the east and were traded for pepper & spices which made salt cured meat more palatable during European winters. This was win win and the benefits of the synergies of trade grew the populations.
But in the west things were different. From 1530 to 1600 the local Indian population in the New World was decimated by disease and colonisation. Sponsored by the Holy Roman Emperor as many as 250,000 Spaniards searched for treasure and tried for gold ... and then came sugar with the help of slaves. This was more like theft than trade.
It seemed east or west there were opportunities for synergies and that meant stocks accumulated which immediately presented opportunities for parasites & predators. Betterment or an early death ... it all depended on how the cookie crumbled. But for sure there seemed to be a big difference between stealing gold and trading for peppers?
Unfortunately there was no user manual ... and no one ever said it was easy. Some folk didn't even try for betterment ... they stayed at home and succumbed ... infant mortality was the norm ... before before ... think about it?
In this way curiosity & desperation for survival spawned the voyages of discovery and stimulated the start of scientific methodology which eventually led to Charles Darwin.
In was years later in 1859 when Darwin explained what was going on. He called the process natural selection, a strange inversion of reason; improvement was not designed by a designer it was the result of the death of poor alternatives. But at the time it was just called suck it & see, trial & error or if you were more sophisticated, experimental pioneering and learning from empirical failure. Interestingly the system seemed to work without orchestration by Bishops, Princes, Generals & Bureaucratic Despots ... as it always had done ... way back.
In the face of all this mind boggling ignorance and complexity folk did the only thing they could, they trialed & errored, hoping for better happenings as they chased profits and cut losses ...
Folk never knew what was going on. So what else could ignorant folk do?
But as the problems of navigation were solved and the stories of new discoveries were told, it was the political & economic creed of Mercantilism that was the new gospel; the Bishops, Princes, Generals & elite bureaucrats were all intent on getting rich quick by accumulating the yellow metal.
And it was the winners of the wars and the Bishops, Princes, Generals & elite bureaucrats who wrote the history ... such were the only ones who could write.
Henry the Navigator was Royally elite but Francis Drake was not a royal puppet, he funded his own ventures and established a supremacy at sea which was vital for the development of free trade and the merchant advance in the face of the armies of plunder. Clearly some of the Spanish thought Drake was a pirate & a slaver, a plunderer of gold, but some of the English knew him as the guy who made the seas safe for trade ... but raiding tended to wane as someone always lost while trading tended to wax with the mutual benefits ... perhaps Sir Francis was both raider & trader at the same time?
1588 - Sir Francis Drake (1540-96) of Plymouth Sound was a discoverer, a privateer, a raider and a trader, much beloved by Queen Liz l. He defeated the Spanish Armada, gave the Mercantilists a shock and gave the traders a chance.
Sir Francis Drake pushed the boundaries, he didn't stay at home to succumb to famine & disease he ventured forth in search of a better crumb.
Daniel Whelan was born by Plymouth Sound in 2010, and just like everyone else he had many of the Drake genes ... would he be like Sir Francis? ... would he fight over the spoils ... or would he go hell for leather for the trade synergies?
Men like Drake 'simply' followed their guts, their moral sentiments and their self interest ... wot else could they possibly do if they wanted to survive? ... and then some of the different others, long after the happenings, wrote history and did a lot of pontificating and post rationalising about the greatness of Sir Francis and his deeds. But if they had known then what they knew later they would have rewritten history ... differently ... was history to be rewritten in the light of current 'know how'? ... if you get my drift?
After the happenings, most history as wrote suggested that the whole edifice of activities was all about the intelligent design of the Bishops, Princes, Generals and bureaucrats ... a sort of deliberate, rational, purposeful, intentional, planning of history ... as Elizabeth l confronted Philip ll ... but was history as wrote all a myth?
Sir Francis had no grand plan ... he seized opportunities ... the night before the defeat of the Spanish Armada was not spent on erudite matters of analytical naval warfare ... Sir Francis was playing bowls, he didn't know which way the wind would be blowing the following day.
The significance of Drake has long been confused ... and Daniel Whelan was to agonise over the same choices after 2010. Was Sir Francis fighting over the spoils of war or was he pushing the boundaries of production possibilities? Was he focused the Mercantilist yellow metal ... like some of the Spanish ... or was he trying for longevity and more grandchildren ... like some of the English? There was an important distinction between some of the people ... and some of the people some of the time.
Was Sir Francis a raider or trader? ... or both?
Trader or Raider?
Drake was a pivotal figure in the evolution of the industrial revolution and the path dependency of history.
The Portuguese were the first to go 'below the line in the sky' and went East hugging the coast of Africa ... but they ended up bankrupt as they dissipated their wealth from spices on religious wars which could not be funded ... as taxing, borrowing & printing all failed to cut the mustard.
The Spanish went west and found gold.
Pepper or gold?
Gold and pepper were very different beasts; the very first 'money' illusion? But such distinctions were irrelevant when Mercantilism was the creed.
In the east pepper was often found rotting valueless in the dirt but in temperate Europe it possessed the exciting capacity to transform salted winter meat into tasty nourishment. In the tropical Spices Islands stocks for over wintering were unnecessary ... there was no winter ... this was arbitrage trade.
In the west gold was treasure and could be stolen.
But as the ships ventured forth it seemed not everybody was a pirate intent on thieving private property. There was no such 'thing' as Portuguese or Spanish 'society' ... just different happenings as different folk at different times in different places behaved differently.
For sure raiding was the primitive instinct; rats did it all the time. But some folk, sometimes were trading not raiding. And as some folk traded some folk learned about mutual benefit. And those who protected trade synergies from thieves statistically waxed and had more surviving babies.
100% of cooperative traders gained modestly from synergies, but only 50% of violent thieves gained anything at all ... think about it? The process of evolution statistically guaranteed the spread of synergistic trade as specialisation & 'know how' grew at 3% compound ... this was a positive sum game as if the genes themselves did cost/benefit analysis ... or died out.
Those traders that didn't focus on the 'know how' went bankrupt and left space for others to grow.
Of course as soon as there were stocks there were parasites & predators ... for sure. Violent theft always threatened survival stocks ... but it was a mugs game ... a zero sum game.
This was not luck but rather natural selection ...
By 1588 it was becoming increasingly important to unravel this conundrum and distinguish between the synergistic gains from trade and the zero sum of pirates & theft?
The paradox: wealth creation & economic growth came from the cooperative synergies of trade which were initially secured by state licensed monopolies but it was the violent naval supremacy of the privateer Drake that made the seas safer for his chums & trading diversity ... and The East India Company ...
Drake? A merchant or pirate? A trader or raider? Some conundrum?
After Drake established the rule of the waves some of the London merchants went into trade big time and grabbed the opportunity of arbitrage in the spice trade which had been previously been dominated by the Portuguese and the Spanish.
But around the same time Drake's cousin, Sir John Hawkins (1532-95) was on the prowl. He was another reprobate privateer from Plymouth. He followed the Portuguese into the existing and dastardly slave trade. This, of course, made him infamous. But was Hawkins involved in financing the gains from trade or the immoral destruction of human souls? Or both?
Folk never knew what was going on.
It was the establishment of free overseas trade that led inexorably to the industrial revolution as the creation of new stocks of goodies and new immunities from parasites & predators gathered pace.
But we get ahead of ourselves ... after the Portuguese, Drake showed the way, the East India Company followed ...
1600 - The East India Company & Trade Synergies.
The ancient traditions of the Hanseatic League and the wool trade provided fodder for the great trading companies of the 17th century. These companies began to thrive by seizing the new trade opportunities that followed the voyages of discovery.
Folk learned from, and built on, the old traditions but perhaps a new impetus came from the Portuguese in 1557 with their trading outpost at Macau? There they plugged into existing trade networks pioneered by Arab, Chinese, Indian, and Japanese traders in an exciting intra-regional exchange.
The Portuguese traders worked to bring the exotic luxury goods from the east into European markets; peppers, spices, silks, cottons, tea, coffee. This was arbitrage trade but Portugal had little money to finance the trades ... like most of the despotic regimes of the time the Portuguese were in debt, big time ... their Mercantilist wars were expensive.
In 1602 The Dutch East India Company were quick off the mark & grew rich on a share of the trade arbitrage but they ... just like all the other players, had trouble protecting their stocks from the pirates, particularly the rival English East India Company. The eastern trade routes were undoubtedly crowded and all the companies needed to protect their cargoes from pirates and plunder of all shapes and sizes. Belligerent stances and bloody fighting was rampant but violence was seldom directed against the innocent locals who were eager to packaged their goodies and swap them for the exciting and mysterious trinkets from Europe. The win win synergies of trade lubricated the mutual benefit deals between companies and the natives. But as soon as there were stocks of concentrated goodies on the high seas there were parasites & predators everywhere ... pirates ... why bother to trade when you could plunder with alacrity?
The trading companies were forced to invest in naval armies and secure outposts to survive as they confronted rival trading companies for access to markets and protection of cargoes. It was significant that the Dutch settlements; Goa, Malacca and Hormuz were all strategically located to dominate and protect the sea routes of trade. Land routes along the old silk road were controlled by the Arabs and offered nothing but trouble ... and small beer. The sea routes were busy and the ships much bigger than the plodding camel & mule trains ... and the ships didn't need a supply of fodder and drink ... only God's wind.
Now ... there was a rub. The foundations of the early Dutch trading success lay in the legal & financial institutions in Amsterdam ... the Dutch learned how to finance their trading voyages ... they had solved the problem of usury and credit. At the time interest rates in Amsterdam were 4%, in London 10% ... only slowly did London catch up with the Amsterdam. Perhaps the English Bishops were slow learn as they wrestled with the Usury Acts of 1571-1624 ... brilliantly described by Norman Jones in 'God and the Money Lenders', 1989 ... a reinterpretation of history that everyone must read?
But don't get it wrong ... innovative financial instruments; credit, profit, investments returns were not new to Amsterdam ... the City States of Northern Italy had done much of the pioneering work ... nevertheless the Dutch had established an effective 'niche of trust'.
In the case of East India trade it was the second mouse that got the cheese, as the English slowly overhauled the Dutch. The Dutch & the English always seemed to do better when they stopped fighting wars and focused their efforts on trades not raids. The Dutch East India Company's eventual demise followed the Anglo/Dutch wars. These Wars went on and on ... First 1652-74 & The Navigation Acts, Second 1665-67 & The Raid on The Medway, Third 1672-74 & Restoration hubris .... perhaps there was a Fourth war in name from 1781-1810 as Dutch hegemony succumbed to the industrial revolution in England ...?
At the core of the wars was misguided Mercantilism and 'control' of the trade routes. At the time the positive sum trade benefits were not fully understood, despite the lessons Sir Francis Drake had learned ... trade beat raid every time!
Of course there was no grandiose scheme for trade hegemony; folk were just experimenting with simple rules of thumb, chasing profits and cutting losses ... in any case, however hard folk tried to figure it out, it was the genes that did the cost benefit analysis not the intelligent designers?
But don't get it wrong these monolithic trading companies were state sponsored licensed monopolies and suffered from the twin problems ignorance & intrigue. They stumbled across the synergies of trade just as they succumbed to corruption and thievery.
In 1600 The East India Company of London had obtained from the Queen a Royal Charter and a monopoly for trade to the east. The government owned no shares in the company, it was funded by merchant privateers, initially finance came from private subscription but later the enterprise became self sustaining through reinvestment of accumulated profits. The idea of an exploitative monopoly was a Mercantilist myth, once round the Cape the competition for trade shares was intense ... and the so called monopoly could only be confined to sales of goods back in England ... and that was not where the wealth was created ... the value the privateers owned was in the ships loaded with spices ... and they were valuable anywhere in Europe ... wherever the cargo was sold.
Another revealing question underlying the success of The East India Company was -
What did the company 'trade'?
Steeped in Mercantilist philosophy the folk in the east only wanted silver & gold, they were self sufficient in most goodies at this time. So what was the exchange deal?
Portugal & Spain had thieved gold & silver from their American colonies and had been able to pay for the spices from the east in bullion.
The Dutch & the English had little access to gold ... but they did have access to trade synergies!
The less obvious solution to the shortage of gold involved understanding the mutual synergies of trade ... for sure gold could be secured by theft ... but also from trade?
The Dutch & English secured their gold & silver from a trade surplus in textiles & metals with other European countries.
In this way The East India Company used the profits from trade in Europe to finance more trade in the East. The magic of compound interest! This, of course, was the reality that the merchants of Leeds had stumbled across during their trade with the Hanseatic League ... and the honeypot that Edward III had his eye on in 1345 ... a honey pot which failed miserably to materialise!
In the absence of Royal patronage getting the Eastern trade started was traumatic, it was necessary to fund the large working capital needed for overseas trade. There were impossible gaps between the initial upfront outlay on ships, victuals & crew, costs which were incurred long before the goodies returned to Europe to be sold. The long supply line in time and distance demanded up front capital long long before returns flowed back. This was investment risk, not undertaken lightly ... trust and track records were key elements of the mix. And, needless to say excitement at the prospect of riches often overcame the fear of bankruptcy ... and con men had a field day ... Tulip Mania 1646/7 and the South Sea Bubble 1720 ... were only understood with hindsight ... but some folk learned ... trust had to be earned.
Amsterdam & London came of age as financial centres where savings from an enterprising body of merchants were invested in joint stock companies in return for profits later ... or catastrophic bankruptcy. This was risk, nobody knew how the cookie would crumble.
Goods from the east particularly Chinese goods, silk, spices & tea, were in luxurious demand in Europe. But there was no demand for Western goods in the east! China was self sufficient. In 1647 the Ming Emperor had no need for trade and yet again banned commercial exchange with the barbarians & aliens from overseas as imbalances loomed ... and that was that ... but the significant restraint on trade simply resulted in a short supply of gold & silver in the Chinese coffers ... funny that ... wealth creation involved synergies ... Mercantilism was a dead end ... think about it?
Opium Wars of the 19th Century
Back in the Indian villages they grew opium, a product with an apparently insatiable demand in China. Of course this too was banned ... Emperors did it all the time ... but after the bans came inevitable smuggling; it was rampant. Arab traders had been dealing in opium since before 1000 AD but the opium trade had intensified by the 17th century.
Remember the infamous trades in opium were existing trades ... just like the trades in slaves ... what was new was the way the Dutch and the English were able to finance trade and secure a share of the synergies.
Folk never knew what was going on.
So was there a moral problem for original exporters in India? At that time, in China, opium was in general use for rituals and pain relief ... and the recreational use of opium began way back in the 15th century ... melancholia had always been a universal drag on life, no wonder happy pills were tried out. Just like alcohol, opium was a social lubricant.
Opium prohibition in China didn't begin until 1729, before then it was just another 'trade' ... but by 1729 opium was on the dark side of social intercourse and was a lethal addiction.
Later it was all explained by an enlightened Scottish philosopher, no good ever came from immoral trading ... immorality was expensive, harming others was a cost, such trade was a con trick because there were no mutual benefits associated with immorality ... by definition! These con tricks were rumbled sooner rather than later by interested folk with nous & wit ... folk weren't daft they had worms in their heads ... clearly it was profitable to cooperate again and again ... clearly there was no profit harming other folk you could only do it once ... there were good gotten gains and there were ill gotten gains ... there were synergies and there were steals.
But clearly hindsight was not available to folk without foresight at that time.
The problem for Indian opium producers was not a moral issue but a financing issue; how were the producers to finance that impossible gap between increased production and increased sales?
Perhaps the Jews were the first ... 'cos they were banned from other trades ... but the bankers and the financiers understood how the traffic on the silk road worked ... and later they understood how the lucrative trade in opium from India for China worked ... and how it led to the infamous opium wars.
During the wars the Chinese discovered they needed European trade after all ... they needed the tools for winning wars ... and the Brits longed for more delectable tea. The alert Indian farmers also discovered a lucrative alternative to lethal opium ... they could trade much more of a much 'better' social lubricant ... 'char' ... tea became a much better prospect than opium.
What was traded? Such was irrelevant to success, the East India Companies had a competitive advantage in finance.
The secret of the success for these companies lay in the financing of the existing intra Asiatic trade in commodities; cotton, silk, indigo dye, salt, saltpetre, tea and opium ... and they used the profits from the Asian trade to finance the spice trade with Europe. The Dutch & English traders sought to generate profits to pay for their purchases to be sent back home. Making the need for gold & silver from South America redundant.
No longer would adventures have to be funded by Royal patronage or stolen gold (the same thing in any case!) ... economic growth became self sustaining.
The East India Companies made their mark up as 'a middle men'. The Dutch & English discovered the way to fund working capital from the synergies of trade. Finance was the specialisation. Compound interest from trade solved both the voyage funding problem and the working capital problem.
They were selling services not exploiting the colonies.
The powers that be in India, Japan & China were in no way subservient to sea born raiders from afar. Going 'inland' was not on, the natives became troublesome and disease was rampant ... the traders stayed on their ships ... as they did much later in West Africa ... if the traders did venture inland it was to help to fund and organise increased production.
The key lay in the mutual benefits of trade. Both buyer and seller gained value, as wealth was created. This reality was counterintuitive and far from clear even after Adam the Smith explained it all in 1776. Such was the confusion that in 1788 Warren Hastings of The East India Company and Governor General of Bengal was impeached for mismanagement, corruption & conflict of interest. The trial lasted for 10 years as Edmund Burke and the Whigs wrestled with the conundrum of morality and exploitation? The truth was that trade & war did not mix very well. The traders wished for nothing more than to be left alone to get on with the job. It was the Mercantilist 'powers that be' who sort the advantage of gold which seemed to emerge from the traders who had an strange gift ... they accumulated gold without the hassle of panning.
This was a lesson that the Dutch & English learned ... and this was the mistake the Darién Company made when they thought they understood international trade as colonial exploitation ...
Folk never knew what was going on.
This was path dependent history. The Dutch and then the English succeeded where the Portuguese failed ... the Dutch and then the English had access to capital ... they didn't need Royal patronage as they could secure the wherewithal to finance the impossible gaps between the initial upfront outlay on ships, victuals & crew, costs which were incurred long before the goodies returned to Europe to be sold ...
But what did the Darién Company bring to the party? Like everybody else at the time, they were blinded by Mercantilism. The Darién Company had nothing of value to trade ... only worthless trinkets ... and they had no access to funding for their risky adventure in Panama ...
Biology was path dependent, for sure, it was the only way the science could work, after all variants were inherited ... from the past ... where could they come from? And it was from biology that behaviour emerged ... and trade was synergistic behaviour. History was path dependent and path dependency was fundamental to the interpretation of history!
From the Portuguese we learned the real difference between spices & gold ... between synergies & zero sum games
From Drake we learned the real difference between trading & raiding ... between wealth creation & theft.
From East India Company we learned the real difference between capital investment & odious opium ... between networks of trust & organisation of production.
But what did we learn from the Darién fiasco? The nature of value? The nature of exploitation?
By 1695 the folk of Scotland were under the influence of the long dismal 17th century associations with the French and the angst of religious wars & Mercantilism. They were in awe of stupendous wealth of The East India Company. Everyone thought that Mercantilism was the grand plan and that the company riches came from exploitation of lands overseas, piracy and conquests by force. The norm was pillage, plunder and theft. Was the EIC a licensed monopoly for bloody violence? Was it nature red in tooth & claw and endless cycles of death & destruction? This was the belief of the day; Mercantilism.
The ambitious Scots wanted to secure riches and emulate the East India Company but they misunderstand how the EIC made its money. This wasn't surprising ... nobody understood the gains from trade until Adam the Smith explained it all in 1759 and 1776 ... trust was involved!
Scotland had missed out on the spoils from East India. What was to be done?
As usual politics was polarised, and Scotland was no exception. In 1695 the Scottish economic policy debate raged over two options -
establish a mercantile company &
overseas colony to rival The East India Company; a sort of hubristic 'me
join in a Union with the gravy train down south in London, after all the two countries had shared a king from 1601 ...
William Patterson (1658-1719) was the architect of option one; a highly ambitious grandiose scheme which eventually won the day north of the border. So in 1695 Scotland went balls down for their very own colonial trading company in the New World, in Darién, Panama. This vain attempt to emulate the East India Company was much preferred to the alternative wheeze of joining the evil Sassenach trading merchants in London & Amsterdam, who were, after all, just a bunch of crooks.
William Patterson had been a founder of The Bank of England in 1694 but he couldn't persuade the London merchants to invest their hard earned money in the crazy Darién scheme? Unsurprisingly the Londoners were sceptical of Patterson's naive scheme and they refused to come up with the wherewithal ... trust was the missing ingredient ... no trust no money.
The project finance had to be raised on the back of nationalism & optimism in Scotland.
Patterson had grasped the idea that trade made money and a trade route through Panama would be lucrative ... but the existing trade was dominated by the Spanish ... and had been for sometime. Tragically the new Darién company didn't have a robust business plan ... what was it that they could do better than the Spanish to establish their market? The Company didn't have anything of value to 'trade' with the sparse Indians who populated the Spanish malarial swamp! The blind led the blind into a quagmire. The ships sailed to Panama with only trivial trinkets, mirrors & combs on offer ... there was no gold on offer for trinkets ... the project didn't cut the mustard.
With hindsight, of course, the naivety of the project was unbelievable? But at the time everybody thought the East India Companies were plunderers.
Quite quickly disease and the Spanish rubbed out the Darién project. Although Patterson was sacked, almost inevitably the Scots 'blamed' the Sassenachs for their nemesis; after all it was the Sassenachs who had selfishly failed to support the bankrupt project and bankrupted the nation!
The failure of the Darién Company had a profound effect on lowland Scotland and the effect on morale was devastating and eventually led from national bankruptcy to the 1707 Union with England.
The trauma of Darién and failure was still being discussed years later when Adam the Smith and his mate David Hume mulled it all over in their Edinburgh Clubs over a convivial pint. Adam Smith's great contribution to understanding was that trading against the grain of 'moral sentiments' never came to anything but trouble ... trade & exploitation, synergies & theft, cooperators & parasites were very different beasts ... ask the Spanish about stealing gold, or quiz William Wilberforce about the immoral slave trade, or William Jardine about the illegal Opium Wars?
There were always plenty of enormous happenings to think about ... and always plenty of enormous opportunities for trade.
Folk were slow to learn and The South Sea Bubble in 1720 reinforced the message of failure from Darién. Hundreds of bubble companies issued their bogus prospectus and dreams of riches without a mention of hard work, honesty & thrift.
The 1720 Bubble Act was not repealed until 1825 - for 100 years the jsc had been indictable as a common nuisance but now at a stroke regulation could no longer inhibit legitimate creativity and innovation, although, of course, fraud & theft & con tricks remained illegal ... Balance Sheets must balance -
investment scale increased as savings from larger numbers of smaller folk were mobilised
investment flexibility increased as investments could be freely transferred to others
In 1834 the jsc became a Legal Entity and there were opportunities for legal remedies -
companies could sue for the recovery of debts through the courts
companies could be sued for the recovery of debts through the courts
Bankruptcy sifted out the rubbish ... hard work, honesty and thrift became the only sustainable policy.
From the Darién Scheme we learned the real difference between the nature of value & the nature of exploitation ... between good gotten gains and ill gotten gains.
But folk never knew what was going on. So what else could ignorant folk do? ... or ... what else should ignorant folk do?
The difference between could and should involved learning ...
Understanding the mysteries of trade synergies & economic growth was fraught with difficulties ... and still is, ask Paul Krugman.
The growth of 'know how' which was accumulated by the navigators during the voyages of discovery, was all very counterintuitive ... surely God never designed the Pole Star to do a disappearing act?
In 1645 learning given a boost by Francis Bacon (1561–1626). A systematic methodology emerged which discovered & accumulated knowledge & understanding of the world by a relentless process of generating & testing ideas first in the imagination and then in reality.
Over generations science discovered models of reality ever closer to the truth?
NB The systematic methodology was not deliberate, rational, purposeful, intentional planning ... it was simple trial & error, experimenting ... learning from empirical failure.
Folk looked into the telescope and saw beyond their wits & nous ... and learned ... they learned from observing the outcomes of their experiments ... this was 'empirical' science.
Francis Bacon described the methods of English empirical science in 'The New Atlantis' which spawned the learned societies at Gresham College & The Philosophical Society of Oxford and culminated in the formation of The Royal Society in 1660 ... and The Select Society in Edinburgh in 1754 where Adam the Smith was socialising with his mates. It became very clear that knowledge grew from within cooperating communities as new discoveries built on the previous discoveries of others.
The necessary causes of the scientific revolution were hotly debated during the Scottish Enlightenment -
breaking the grip of established authority
opening up diversity and choice
emerging cooperative institutions
establishing scientific method
rewarding successful innovators directly
enabling economic growth from tort law, trade and technology
defending stocks of wealth from internal parasites and external predators
... but the necessary causes were not necessarily sufficient?
The Industrial Revolution followed ... it was not planned ... it just happened ... folk never knew what was going on.
A convenient start point for the industrial revolution was 1688 (but others suggested it started with the defeat of the Spanish Armada in 1588?). After the feudal system of rival Lords collapsed, the law of the land, English Common Law, emerged as a cost effective alternative to bloody violence. In this way the institutions of Common Law emerged as folk went about their work and got on with the job instead of squabbling.
For sure folk had always believed and behaved differently, at different times, in different places ... and girls had always danced backwards ... that's why there was tyranny & oppression ... if every one was the same there'd by no need for tyranny & oppression ... think about it?
In the long history of human activity, the interference of the Bishops, Princes, Generals & bureaucrats in the natural world was tops. Hierarchical command & control systems were the norm and continued to cause, often insurmountable, political difficulties which often hindered economic improvement. Sure there was an insatiable desire for betterment of the human condition, but whenever experiments involved top down impositions there was always restless resistance and simmering crowd trouble ... particularly irksome were national boundaries imposed by irrelevant lines on maps.
So after the dire civil war between supporters of rival Bishops about the imposition of a creed from above there was a Glorious Revolution where folk had an opportunity within the Common Law of England to believe what they wanted to believe & behave as they wished to behave ... as long as they didn't harm others.
As Edmund Burke suggested later this was a 'revolution' ... just imagine what such freedoms meant to folk!?
But underpinning it all there seemed to be a universal golden rule which seemed to work; 'do unto others ...'
Happenings were not 'a free or all' or 'laissez faire' rather there was a common characteristic which seemed to distinguish folk from rats ... good manners, common morality ... but don't get it wrong, there was a Glorious Revolution but the trouble was, as well as free men, there were also parasites & predators ... eternal vigilance was required.
Later Darwin explained that bottom up was natural diversity and top down was natural selection ... not the whims of kings.
1689 - Bill of Rights - checks & balances on the arbitrary power of kings, in matters of succession, taxation & defence. Toleration of different beliefs, within the law. Parliamentary scrutiny of the king. Judicial independence. Non violent cooperation.
1690 - John Locke published 'Two Treaties on Government' - To administer the law of the land, power was given on trust, from the people to the government.
1693 - ongoing financial crisis - taxes, debts, and coin clipping. The Bank of England was formed to lend £1.2 million @ 8% to the government.
1705 - Bernard de Mandeville (1670-1733) published 'The Fable of the Bees - Private Vices, Public Benefits'. Tells of the appalling plight of a prosperous community when citizens take it into their heads to abandon luxurious living in the interests of saving.
1707 - Act of Union - followed the economic success of the 1600 East India Company and the economic bankruptcy of the 1695 Company of Scotland.
1720 - South Sea Bubble. A typical cycle of euphoric excitement followed by desperate fear.
1723 - Adam Smith was born into troubled economic times.
Inspired by the scientific revolution there was a new wave of economic activity, of discovery & accumulation; an industrial revolution.
New 'know how’ emerged and generated technological & organisational innovations everywhere - labour productivity, infrastructure, education, health & poverty alleviation ... something had been unleashed ... a whole interactive shebang & caboodle of economic activity.
But, as always, the folk groped their way forward out of their ignorance ... slowly by learning from their mistakes. It was a hit & miss affair, everybody was guessing, nobody knew what was happening, there was excitement & fear, booms & busts, 'Kondratieff Waves' as well as Business Cycles, runs on banks, stock market crashes, asset bubbles, currency crises, sovereign defaults ... and lynch mobs, riots and crowd trouble ... how many cycles? ... all cavorting in a mad dance one on another, one with another ... crazy bewilderment ... in different places with different outputs at different times at different speeds ... as cycles interacted there were amplifications and suppressions, combinations and displacements ... big booms & busts and small booms & busts ... overshoots of euphoric experimental discovery... undershoots of odious experimental failure ... one damn cycle after another ... prices of coffee influenced prices of tea ... and some even suspected the price of potatoes influenced the price of holidays in Benidorm ... prices seemed to be all over the place ... especially after a failure of the rain dances ... and what of the stupendous puzzle of money itself, and credit, and new cowry shells and coin clipping inflation? ... no wonder it all went wrong so often?
Scientific discovery fed technological innovation which worked its magic on existing capital stock & new capital -
obsolete technology was scrapped in an evolutionary process of ‘creative destruction’
innovative technology applied state-of-the-art knowledge to the quantity & quality of investments
Entrepreneurs in the trading companies were driven by the 'animal spirits' of excitement & fear. Exciting perceptions of where the future technological and market opportunities might be discovered and the fearful prospects of failures ... and the ever present, insidious parasites & predators.
Empirical science was motoring on the back of cooperative efforts & exchange of know how but there was also an intriguing development; some immunity from parasites & predators. The scientific system called for the publication of ideas & patents and peer review ... thus eliminating some of the baleful influence from above of the Bishops, Princes, Generals & bureaucrats. The oppressive atmosphere of the old scholastic traditions began to be superseded by the free thinking institutions where it 'all began with observation'.
Hand in hand with the advancing project technology there was also advances in project funding. The industrial revolution confirmed that finance was central to the dynamic innovation process in companies, not only to fund the impossible gap between discovery and revenue but also to overcome resistance to change spurred by an innate ‘loss aversion’ bias of the folk that stayed at home.
Investment in profitable projects created the surplus which spurred savings and future investment. Everything was connected to everything else, and there was a natural self consistency; if discoveries didn't fit in they died out.
But the whole shebang & caboodle was inherently unstable. The business cycle cycled because of the unknowable innovation process & obsolescence and the fickle financial perceptions of hubris, nemesis & catharsis ... which were just posh words for excitement, fear and learning ...
Folk learned that happenings were not always zero sum cycles of predator & prey but rather often they were synergistic cycles of creative destruction ... the difference was slow to dawn on ignorant folk ... who were always wary ...
Folk never knew what was going on. So what else could ignorant folk do? They were both excitable and fearful ... often at the same time!
The cycle of hubris, nemesis and catharsis was well known to historians but the lessons seemed impossible to learn and every time excitement got a grip ... folk always seemed to suggest 'this time it was different' ...
It was only in the 1750s that some men in Edinburgh began to understand all about the political hubris of the Darien disaster, and nemesis of blame & shame on the London merchants, but there was to be a catharsis and progress from a Union with England ... or was it 'colonisation'?
Wot was going on? Elizabeth Gaskell told a splendid yarn ...
In 'Mary Barton - A Tale of Manchester Life' Elizabeth Gaskell told about the urban trek in search of prosperity & high wages in the mills and the escape from the famine & disease of rural poverty ... ask Watt Tyler, he knew about rural poverty?
Elizabeth Gaskell was close to risk as the Whittakers of Ardwick Green who went bankrupt in 1793 were 'family' ... and she knew about the population explosion, the middle class bulge and the risks of abject poverty.
She vividly described the social affluence of the new middle class which gained from trade -
'Then came a long whispering and the clinking of money that all related to the preparations for hospitality ... run, Mary dear, just around the corner, and get some fresh eggs at Tippings, and see if he has any fresh cut ham, that he would let us have a pound of, and Mary, you must get a pennyworth of milk & a loaf of bread, mind you, get it fresh and new, no that's not all, get six pennyworth of rum to warm the tea, get that at The Grapes next door ... '
But she also described the acidic hatred of poor unemployed John Barton -
'He was a changed man, his gloom became permanent instead of occasional, aggravated, without ever forgetting or forgiving those whom he believed had caused all this woe. He had spent all he got and when his master suddenly failed and all hands in the mill were turned back, Barton had only a few shillings to rely on. He was soured to mankind as a body and the rich in particular. The most deplorable and enduring evil that arose out of commercial depression was this feeling of alienation between the different classes of society as vindictive feelings exhibited themselves in rabid politics. John and The Chartists could not believe that Government knew of their misery, they rather chose to think that men could be legislators who were ignorant of their real state.
John was taking messages to Parliament but pretty Mary took her own way, her beauty should make her a lady.
Machines is th' ruin of poor folk but th' inspector won't let Ben work in the factory because he's not right age though he's twice as strong as Sankey's little ritling of a lad.
So class distrusted class and their want of mutual confidence wrought sorrow to both. There was a strike in Manchester. Then a murder. Motives of revenge. But how in the world can we help it? They know not what they do. God has given men feelings and passions which cannot be worked into the problem, because they are forever changing and uncertain'.
The Chartists and the Luddites were political movements fighting against tyranny & oppression perpetrated by the Bishops, Princes, Generals & Bureaucrats ... and the businessmen & toffs who had stolen their jobs?
But John Barton was surely right, the powers that be were ignorant ... folk never knew what was going on. But evolutionary outcomes were not to be remedied by intelligent designs in Parliament ... but rather by experimental failure ... something new needed to be tried ... blaming the politicos and the businessmen led to hatred not betterment ... last time we looked, happenings were a tad more complicated than that ... and what about parasites & predators? ... everybody hated them but it seemed folk did not distinguish between good gotten gains and ill gotten gains ... between synergies and theft?
Folk never knew what was going on ...
Politicos persistently peddled personal possibilities
Scientists discovered & accumulated effective evidence
... and always remember Politicos were seldom Scientists.
The new problems of the industrial revolution were problems resulting from economic growth -
populations exploded & life expectancy escalated as famine & disease claimed fewer lives - but then came congestion, pollution, inequality, poverty and unemployment ... and there was always change, conflict, scarcity and complexity.
technological & organisational 'know how' created agricultural surpluses which fed the cities - but it was The Corn Laws which made food expensive for the innocents at Peterloo ...
Some investors risked capital and learned from failure in the same way as the short necked giraffes learned from failure.
Some experimenters thrived on trade synergies and invested profits in production which funded economic growth.
Of course others tried thieving ... but they tended to go bankrupt ... thieving was an unsustainable strategy ... all of the people can be conned some of the time, some of the people can be conned all of the time but all of the people cannot be conned all of the time ... other thieves tended to be thrown out at the next election.
But slowly the evolutionary sequence over deep time became a little clearer as nature red in tooth & claw was modified by social folk who discovered cooperative synergies from trade ...
Did inclinations for cooperation eventually became hard wired as moral sentiments? Worms in the head nagged away at evil as more and more understood what was going on in other's folks heads ...
Chapter 12 'Nice Guys Finish First' of 'The Selfish Gene' in 1976 ... but was Sir Francis Drake predilection for trade over raid a thoughtful anticipation of natural selection and Richard Dawkins ... or did it just happen!?
Things were different in France, that was certain. But did it all go wrong in France?
From around 1700 enterprising free folk started to accumulate more & more stocks with their ingenious ideas & experiments; the agricultural, scientific & industrial revolutions were underway.
But amongst the euphoria there were inevitable problems; wherever there were stocks, there were parasites & predators.
Stocks had to be defended, there was no choice about the matter; no defence, no stocks for winter.
Bloody wars were everywhere -
1700 War of Spanish Succession - Louis XIV & Marlborough - from absolutist Sun Kings to an independent 'island nation' as described by Winston Churchill.
1750 Seven Years War - Louis XV & elder William Pitt & his annus mirabilis - from Mercantilism to Trading Empires, Special Relationships & Whig Principles.
1775 American War of Independence - from Tea Taxes to international trade & Thomas Jefferson.
1800 Napoleonic Wars - Louis XVI & younger William Pitt - from Continental Systems & Cade Napoleon to Free Trade & David Ricardo.
Tort Law was mighty slow to be established but folk began to learn that it was mighty cost effective ... much cheaper than bloody violence.
The wars were raging when Adam Smith was born ... why didn't the rule of law catch on sooner?
During the 18th century changed religious, political and cultural differences had polarised societies. The road from Rousseau (1712-78) & The Terror to Peterloo 1819 & the Free Trade Hall 1846 had been well trodden by political historians and usually described as a them & us confrontation, written by which ever Bishop, Prince, General or Bureaucrat happened to be favoured in the religious or political battle of the moment. But what was really really going on?
There was another history which was not written down; a biological history. This was the history at the coal face where Joe Sixpack and his mates were busy building an industrial revolution as the long reach of the genes themselves did cost / benefit analysis. A revolution which was not fired by a polarised, petty, religious or political power grab for the levers of command & control by deliberate, rational, purposeful, intentional planning ... but rather by a natural cooperative effort as Joe and his mates created synergies from specialisation & scale. As the elites pontificated Joe, at the coal face, carried on continuing ...
But the history was fraught; folk continued to fight their wars as the 'blind watchmaker' groped for understanding through heuristic trial & error ... learning from empirical failure. From 1976 Richard Dawkins wrote mind boggling books on biology but really they were history books ... read them!
Folk never knew what was going on. So what else could ignorant folk do?
As Adam the Smith learned his trade there were two rival economic theories emerging; Mercantilism and Capitalism.
Mercantilism - economic activity orchestrated by the powers that be.
Mercantilism was state organised trade by 'intelligent design'. The powers that be were intent on getting rich by accumulating the yellow metal in the national coffers.
In 1700 Mercantilism was the only game in town, the well established route to wealth acquisition was through the spoils of wars, the expropriations of feudal lords and the land grabs as rival Bishops, Princes, Generals & bureaucrats slugged it out. The old Mercantilist world was shaped by the primacy of 'wars, lords & land' which led to the economic rivalry and bloody violence of the squabbling elites lording it within their national boundaries. Mercantilism suggested plausible human behaviour ... nature red in tooth and claw ... exploitation, colonisation & settlement ... rather than the productive hard work, honesty & thrift associated with trade synergies.
Royal sponsorship financed by the spoils of war.
A zero sum game. What a mess!
English Mercantilism was well established, the infamous 'triangular trade' -
goods were moved which were abundant in one location to another place where the goods were scarce
government intervention and legislative control was rampant in the 13 America Colonies
trade policies favored the flow of wealth from the colonies to the mother country
colonies were exploited to enrich the mother country
the Spanish Armada was challenged because of its stranglehold on overseas trade in the New World
a positive balance of trade was the target as exported goods earned money but imported goods cost money
production within the mother country was protected with economic policies which encouraged exports but discouraged imports by restraint of trade through taxes & quotas.
Wealth was 'money', gold (either expropriated?, stolen? or taxed?), gold was 'spending power'.
But in England the worst excesses of national 'control' of commerce were mitigated after The Glorious Revolution by the Common Law which gave individual trade exchanges unrivalled protection from arbitrary interference by the powers that be.
Like everybody else, the French and the folk in the highlands of Scotland thought the English success lay in exploiting and colonising resources from overseas ... a land grab.
French Mercantilism was well established, the infamous Jean Baptiste Colbert (1619-83) was the all powerful financial lackey of the all powerful absolutist king Louis XIV and he promoted the enrichment of the country through wars, lords & land ... and the taxation of commerce -
'The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing'.
In France Mercantilism was called 'Colbertism' and involved a mighty bureaucracy of 'intendants' and rampant dirigisme to 'control' every nook & cranny of trade and manufactures for export -
overseas trade was designed to increase state power at the expense of rival national powers
selling exports and minimising imports resulted in accumulations of gold ... and gold was wealth
national 'control' of these gold flows through exploiting colonies, by taxes, trade monopolies, export subsidies, import tariffs, shipping & navigation restrictions, price fixing ... every device under the sun
the military might of the state was focused on increasing the flow of wealth from overseas to the mother country.
If trade was such a zero sum game of winners & losers ... no wonder the emphasis was on wars, land grabs and 'control' by the Lords. How else was it possible to control the loss of gold from the state coffers?
Therein was the misunderstanding which gave sustenance to the 'regulation' of trade by a 'virtuous' elite.
What Simon Shama called 'bureaucratic despotism'.
Simon Sharma produced a short note in 2015 which summed up all the problems associated with Napoleon, the French Revolution, Mercantilism ... & cultural France ... note the meaningful Sharma phrases -
'Soldiers I am going to lead you into the richest plains of the world where lie all of your glory and fortune'
'a united Europe becomes the wholly owned subsidiary of a militarist dynasty, a vast autocratic empire run by bureaucrats'
'habits of centralisation and the unquestioned superiority of elites died hard and was the mortal enemy of freedom'
'there was absolute uniformity of curriculum'
'but liberty had to die so that equality might live'
'there was an absence of some sort of breathing space'
'in 2015 glowing television tributes championed the Napoleonic legend which refused to lie down'
'so lament what ought to be lamented but celebrate what should be celebrated'.
Napoleon's method was a plausible conspiracy theory but the reality was that the 'wars, lords & land' of Mercantilism didn't solve survival problems.
And things got worse. It seemed that whenever the elites were pushed out by wars or revolution, a new elitist group took over the reins of command & control and became embroiled in a new religious and political cycles of accumulation through taxes, borrowing & default ... and even when a new 'elected dictatorship' emerged it soon led to more squabbling & crowd trouble.
Such problems were being addressed at the coal face by Joe Sixpack in the 'puny island nation of shopkeepers'!
The evolution of international trade never did & never could respect artificial blue lines of national boundaries penned on the maps by some bureaucrat after some ancient war ...
It was physically impossible to stop the flow of ideas across national boundaries.
Mercantilism didn't explain the lifeblood of economics, the synergies of specialisation & scale which underpinned the agricultural, scientific and industrial revolutions.
Trade was not a zero sum game after all ... there were mutual benefits to be had from exchange, why else did folk trade?
Old ideas die hard, the ideas behind Mercantilism linger on in modern economic policy -
nationalisation - 'best practice' - an alternative to diversity (variation) & bankruptcy (natural selection)
protectionism - 'price fixing' - an alternative to competitive free trade (WTO)
rewarding bad behaviour - 'appeasement' - an alternative to natural law confronting parasite & predators (UDHR)
tax discrimination - 'state spending' - an alternative to private saving & investment in imitation and innovation (evolution)
money printing - 'coin clipping' - an alternative to balanced Balance Sheets
A much better theory was needed ... Mercantilism ended with the inexorable evolution of Capitalism as the whims of the elites gave way to free lawful enterprise ... free lawful enterprise which was first described by Adam Smith in 1759-76 ...
Capitalism - economic activity described by Adam the Smith.
Capitalism was a description of Darwinian natural selection; a process which grew a complex adaptive economic activity systems which shaped the world environment, and with perplexing feedback, then went on to shape human behaviour. An industrial revolution emerged.
A positive sum game. What a joy!
During the 17th & 18th centuries happenings were misunderstood as Mercantilism in action, orchestrated by the demagogues. But after the dramatic events of the agricultural, scientific & industrial revolutions a new understanding about the nature of man emerged which explained economic behaviour much better than the flawed ideas of Mercantilism.
New opportunities were unleashed by the freedoms confirmed in The Glorious Revolution of 1688. The power of kings to tyrannise & oppress were tamed by the checks & balances of a representative parliament ... leaving free men with choices about specialisations and trade exchange ... and choices about the 'clubs' that they joined.
Capitalism was a natural system driven by the synergies of specialisation & scale and technological 'know how' where wealth was 'productive resources' and value was determined by folk in undistorted self regulating free exchange markets. More deals, more synergy, more specialisation, more scale, more wealth creation & more economic growth ... all this was a far cry from the Mercantilist gospel of the time where there was competitive rivalry as gold was accumulated at someone else's expense in a zero sum game.
The economics of capitalism suggested that salvation for folk lay in doing cooperative deals with their mates as everybody depended on everybody else and everybody tried to imagine & secure mutual benefits ... real productivity growth in the real world, real wealth creation, real economic growth as billions of deals all over the world were sealed in the hope of discovering synergies.
This new idea crystallised in Edinburgh in the lowlands during the Scottish Enlightenment where Adam the Smith stressed freedom within the law, no one, not one, not no one was free to harm others. Moral sentiments drove capitalism through a natural love of cooperative improvement. The Smith was the first to weld together this moral & natural philosophy, morality & economics were inseparable, but his free market exchanges were never truly free because of the destructive interference from parasites & predators ... immunities were needed ...
A new viewpoint. Not from the shenanigans of the Bishops, Princes, Generals & bureaucrats but from the cooperative synergies of specialisation & scale, with institutional immunities from parasites & predators and discovered & accumulated by we the people ...
The erosion of the ancient pecking order, perhaps, started with Greek democracy?
Plato suggested that free democracy was not about the impositions of hierarchies of elitist Bishops, Princes, Generals nor bureaucratic majorities and he raised the killer question -
'who guards the guardians'? ...
but neither was democracy about -
'mob rule and emasculation of the wise'
... it was a conundrum?
John Locke (1632-1704) then suggested a rival idea that in the 'natural state of nature' folk enjoyed natural freedoms protected by natural laws of behaviour & morality.
Bernard de Mandeville (1670-1733) in 'The Fable of the Bees, Private Vices, Public Benefits' described a bee community which thrived on the hard work of hive building and specialisation ... things were fine until the bees became honest & virtuous and their economy of do gooders reverted to austere contentment in a hollow tree with no drive for betterment. Without the motivational desire for personal gain the economy collapsed; without private vices there were no public benefits. This grumbling hive was generally understood as an attack on Christian values; this was a cynical system of morality.
Mandeville believed it was 'vicious greed', not 'moral sentiments', which led to invisible cooperation. He called for political action to control and orchestrate betterment -
'Private Vices by the dexterous management of a skillful politico may be turned into publick benefits'.
Later the same idea was alive and well when John Maynard Keynes invoked the insufficiency of the propensity to consume (private vices), a condition known as the paradox of thrift, as central to his theory of 'effective demand' (public benefit).
It was the Mandeville suggestion that vicious greed had to be managed by direction from above that aligned him with Hobbes & Keynes and distinguished his philosophy from that of John Locke & Adam Smith who held that public benefit was the natural course of cooperation which was underpinned by the innate moral sentiments.
Montesquieu (1689-1755) was a French lawyer and political philosopher who was famous for his articulation of the theory of separation of powers to tame the whims of Leviathan. He believed that there were no checks & balances on The Terror nor the Napoleonic Code ... and there was no innate 'sense' of morality.
Voltaire (1694-1778) was around at
he was not an economist but a great advocate of freedom and was clear about
the economic problems of the Ancien Régime - the French bourgeoisie was too
small & ineffective, the aristocracy were parasitic & corrupt, the commoners
ignorant & superstitious, the Church static & oppressive.
Voltaire distrusted democracy and the idiocy of the masses! A polemicist and a lover of English freedoms which nurtured the hard work, honesty & thrift of a nation of shopkeepers.
Jean Jacques Rousseau (1712-78) suggested, to cap the lot, that in the 'natural state of nature' folk were neither good nor bad in a primitive condition without law or morality. In modern society expropriation of private property led to inequality which was blamed for crowd trouble. Rousseau suggested folk went through stages of development and education & equality required careful organising. 'On Education' described an idyllic age of innocence where children needed to be educated into citizenship; the solution to the reality of rural famine & disease. In 'On the Origin of Inequality' and 'On the Social Contract' Rousseau argued that private property was central to civilisation but the distribution required organising in line with an enforced general will ... again there was no concept of a 'sense' of morality.
Richard Epstein grasped the moral significance of property rights -
'The protection of private property does more than promote market efficiency; it enhances the level of human freedom in the most intimate and personal parts of our lives. Power and authority are deliberately divided'.
The expropriation of private property was theft. If the state 'organised' equality through the expropriation of private property thus putting equality before freedom the inevitable result was crowd trouble. The evolutionary economists confirmed that inequality was the diversity necessary for evolutionary change ... everybody was different for a reason?
Rousseau was a respected philosopher and these ideas were influential and inspired the French revolution, an idealism which assumed -
first that there existed a bottom up 'general will' and
second that it could be enforced by a top down 'Leviathan'
... a utopia which could not exist in a biological world of complex adaptive systems which involved diversity, imitation and natural selection?
Folk never knew what was going on. It was 1859 when Darwin led economists to understand that Rousseau's utopia was not consistent with a theory of evolution ... liberty and equality were impossible bedfellows.
Rousseau viewpoint was very different from that of John Locke who focused on natural law and natural freedom and natural selection which fed through and seeded Hutcheson's & Adam Smith's moral sentiments.
By 1789 the French had had enough of the Bourbons and Rousseau's 'Liberty, Equality & Fraternity' became the appealing cry of the French. It was to be revolution not evolution. But trouble in France was over a hundred years after The Glorious Revolution in England. The checks & balances on the new regime failed and the revolution was high jacked by new elites and The Revolution turned into The Terror. Had one dictator had been replaced by another in abject back sliding?
Of course there were many English radicals who were also fed up with the backsliding of the parasites & predators in England and they enthusiastically joined the French rally ...
Thomas Paine (1737-1809) followed Rousseau and in 1776 in 'Common Sense' and in 1791, in 'The Rights of Man', he promoted revolution and a reappraisal of English backsliding. Paine was goading revolutions in America & England and the detailed construction of utopia.
But all power corrupts in the end and replacing one dictator with another dictator was not on ... replacing a bad dictator with a good dictator was not thought through ... and 51% dictating to 49% was not the road to liberal democracy ... liberal democracy was about protecting minorities of free men against despots ...
'Authority' was the problem as Simon Shama suggested in his book 'Citizens' -
'a potent state and a community of free citizens looked like the impossible, freedom and authority didn't sit comfortably together'.
Sure there was political turmoil in England as everyone disagreed with everyone else, but they disagreed as shop keepers and Gentlemen who helped customers; the English had already had their civil war and revolution against imposition. There was no stomach for another revolution and yet another dictator ...
Thomas Paine insisted Joe Sixpack was capable with innate 'common sense' ...
Adam Smith insisted Joe was capable with innate 'moral sense' ... another dictator was not wanted.
Thomas Paine, jeered that Britain lacked a constitution altogether, for there was no piece of paper with that title. There were no checks & balances as corrupt rent seekers ran riot. But there were ideas embedded in the brains of men which were real & potent and defied transmission via a piece of paper ... and they were spreading ... like a virus ... there was an identifiable English culture.
Edmund Burke was Paine's main rival and in his 'Thoughts on The French Revolution' Burke articulated his fears about the ugly implications of revolutionary 'mob rule' and the divisive notion of 'them & us'. Burke cherished the factual custom & practice of the assemblies, courts, churches and commercial institutions & clubs of real people. Such institutions had been tested by the rigors of time since 1688 ... and way before.
Of course 'mob rule' and 'them & us' were ideas which rivaled Adam Smith's 'moral sentiments' and the economic reality of the industrial revolution and the cooperative synergies of specialisation & scale. Adam Smith was to reflect -
'Burke was the only man I ever knew who thinks on economic subjects exactly as I do, without any previous communications having passed between us'.
1793 - The French Revolution turned into The Terror
as new liberty returned to old repression ... and the English radicals as
the cheer leaders of 'Liberty, Equality & Fraternity' became critical and disillusioned victims.
Edmund Burke was vindicated, cooperation not divisiveness was the way forward. Plato had been right, democracy was never about 'mob rule & emasculation of the wise'; democracy, liberal democracy, was about human rights, freedom for creativity and checks & balances on parasites & predators.
1803 - The Terror turned into aggressive wars and
confrontation with the old enemies
in England, 'a nation of shopkeepers'. But
Napoleon misjudged and his hoped for supportive English rebellion never materialised.
Joe Sixpack wanted to get on with the job of building an industrial revolution, he had a family to support. Volunteers poured in to protect freedoms & the stocks of goodies and confront the old enemy.
Many of the English radicals suffered from the reaction against the French and met their own Waterloos ... Joseph Priestley ... Thomas Paine ... 'He had lived long, did some good, and much harm, death, almost his only friend'.
1815 - Joe Sixpack was there with his barrow at Waterloo. But wars didn't solve problems and reinvigorating the industrial revolution and associated cooperative synergies proved difficult as war & taxes had disrupted trade and an economic slump sapped confidence and the old Luddite 'them & us' hatreds reappeared.
Folk never knew what was going on. Folk found it difficult to distinguish between wealth creation and conspiracies of theft.
In 1835 Alexis de Tocqueville summed it all up.
Alexis de Tocqueville (1805-59) was a French historian & politico and in 1835 wrote about 'Democracy in America' and famously explained the not so subtle differences between the American & French revolutions -
1776 in America there had been a market revolution, there were no
aristocratic elites, folk got on with the job of hard work and money making,
there the common man enjoyed a level of dignity which was unprecedented,
where commoners never deferred to elites and market capitalism had taken
root to an extraordinary degree.
The success of the American Revolution came from decentralised and diverse market capitalism with a focus on freedom. The American Revolution led to Thomas Jefferson's Constitution and a decentralised Federation, 'checks & balances' and 'separation of powers' and '10th Amendment' and 'term Presidents'.
1789 in France there had been 'new forms of tyranny, as radical equality led
to the materialism of an expanding bourgeoisie and to the selfishness of
individualism which did not translate into the enlightened self interest of
cooperative synergies. In such conditions we lose interest in the future of our
descendants. Liberty is my foremost passion, but one also finds in the human
heart a depraved taste for equality, which impels the weak to want to bring
the strong down to their level, and which reduces men to preferring equality
in servitude to inequality in freedom'.
The failure of the French Revolution came from the new elitist enthusiasm for abstract Enlightenment slogans & ideals with a focus on contrived equality. The French Revolution led to 'The Terror' and centralised 'Napoleonic Codes' ... starting as a push towards decentralization but in the end, an extension / renewal of centralization
200 years after Waterloo Simon Sharma summed it all up in the middle of yet more bureaucratic crises ... the financial shenanigans in Greece and urban trekkers from North Africa and arrogant Brussels bureaucrats -
'What a tragedy liberty had to die so that equality might live. And 200 years later the habits of bureaucratic centralisation, uniformity of regulation, the unquestioned superiority of administrative elites do indeed die hard. Bureaucratic despotism'.
Following the American & French Revolutions there were soon to be two happenings in England in support of freedom within the law which were of gigantic moral & economic significance -
1834 - the abolition of slavery
Adam Smith noted -
'It appears, accordingly, from the experience of all ages and nations, I believe, that the work done by freemen comes cheaper in the end than that performed by slaves'.
Adam Smith was against slavery not only on moral grounds but also on economic grounds. A dramatic example of the convergence of moral and natural philosophy which he sort to weld together at his forge. Slavery was uneconomic ... and genes did cost/benefit analysis ...
1846 - the repeal of the Corn Laws
An economic as well as a moral matter, Adam Smith noted -
'By means of glasses and hotbeds, 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 bought from foreign countries. Would it be reasonable to prohibit the importation of all foreign wines merely to encourage the making of claret and burgundy in Scotland'?
Perhaps only a few, like the philosophers of The Select Society & The Poker Club in Edinburgh and the businessmen of The Lunar Society in Birmingham, understood that science & business took off because of cooperative synergies and crowd trouble emerged not from a 'them & us' conspiracy but rather from the unfairness of experimental failure ... 'the errors of the trials' ...
In this way neither the dictates of kings nor the dictates of petty party politics could orchestrate success ... success it seemed emerged from hard experimental work, honesty & thrift ... but then success was 'simply' natural selection ... was it not? What else could it be, 'intelligent design'?
Was defeat to be snatched from the mouth of victory through crass ignorance? Or was Plato's democratic conundrum still unresolved as the mob ruled and the wise were emasculated ... and nobody guarded the guardians?
It transpired that the different philosophies of Thomas Paine and Edmund Burke both claimed to be heirs of the Scottish Enlightenment? For sure there was no agreement about the politics ... the unimpeachable evidence of progress assembled during the Scottish Enlightenment was lost on many ... but there could be agreement about the science ... ?
Meanwhile during the trauma in France & America what was happening in England?
It was the folk they called 'Whigs' who set about British reforms with enthusiasm as they established their unimpeachable principles. Liberty was not sacrificed for equality. Folk were to be free from tyranny & oppression as the Whig Principles nurtured cooperation & synergies ... but there was still a strange deference to parliament & taxes?
Beware ... Simon Shama again -
'a potent state and a community of free citizens looked like the impossible, freedom and authority didn't sit comfortably together'.
And as the kings were neutered, did parliament itself start back sliding into authoritarianism as did Napoleon?
18th Century British Whigs.
Feudalism had finally collapsed after a fractious Reformation, an ignominious Civil War and the persistent demise of the elitist landed gentry and their Mercantilist creed.
'The natural order of things' identified by Adam Smith in 1753 became clearer after the Glorious Revolution but the Bishops, Princes, Generals & Bureaucrats still held sway in the minds of macho men (perhaps not so much in the eyes of women?). It was unsettling to see the credit for the prosperity of the industrial revolution given to the powers that be 'as if' their instructions guided Adam Smith's 'invisible hand'.
During the 18th century the 'mind first' mentality of Descartes (1596-1650) was still firmly in place despite the 17th century of revolution. 'I think, therefore I am' and the associated idea of 'intelligent design' was the only game in town. But history was now to be authored, not by Bishops nor Princes nor Generals, but by the new 'powers that be'; the British Prime Ministers and the Representatives in Parliament. But could they themselves resist the top down mentality of 'intelligent design'?
Following the Glorious Revolution of 1688 the new leaders became established who had witnessed the slow demise of the Feudal yoke of tyranny & oppression and famine & disease and the emergence of new institutional structures. These guys did the heavy lifting without the trauma of revolution but with continuous improvements; 'institutional reforms' ... today they would be called 'structural reforms'.
They called themselves Whigs, and they possessed enlightened principles which built on scientific and industrial revolutions.
The 18th century political background has been thoroughly recorded and written up ... 'as if' the political innovations were leading science rather than science coevolving with new political innovations and institutions.
Whig Principles were inspired by the Glorious Revolution of 1688 and were hatched in the minds of folks like John Locke, David Hume, Adam Smith, Edmund Burke, Thomas Jefferson, Lord Melbourne ... they involved a healthy scepticism of any arbitrary action by the powers that be.
John Locke's principle of freedom within the law -
'freedom to have a standing rule to live by, common to every one of that society, a liberty to follow one's own will in all things, where that rule prescribes not; and not to be subject to the inconstant, uncertain, arbitrary will of another man. Whoever has the legislative or supreme power of any commonwealth is bound to govern by established standing laws promulgated and known to the people and not by extemporary decrees. Even the legislature has no absolute arbitrary power, but is bound to dispense justice, while the supreme executor of the law has no will, no power, but that of the law. The ultimate aim is to limit the power and moderate the dominion of every part and member of that society'.
Unimpeachable ideas; the arbitrary power of elites, governments & monopolies to interfere with lawful behaviour was both immoral & uneconomic.
Alas there was no panglossian escalator to progress as in 'Whiggish History' but rather a constant biological struggle as moral sentiments flip flopped between the excitement of fairness of shares and the resentment of cheating parasites & predators ... but the Whigs felt that there was a glimpse of betterment? ... was there an indication of direction that could be discerned through the mists?
Robert Walpole (1676-1745) the first PM who served from 1721-42. Sir, the First Lord of the Treasury & 'Prime Minister'. Whig dominance was unshakeable as the obsolete Tories of privilege were purged and the principles of the Glorious Revolution reconfirmed.
In 1745 there was a Jacobite Rebellion. Scotland & France & the old Tories were still backsliding into the old authoritarian dictates; eternal vigilance was necessary.
Whig v. Tory Battles.
The Tories were mainly the landowners, Royalists, Church of England plus some Jacobites plus some Hanoverians but they lost out to the Whigs who were mainly the urban trekkers, the dissenters and the new commercial classes; the merchants & traders, of sugar, tea, coffee, tobacco & opium.
Old Tories of the 'Wars, Lords & Land' of Mercantilism had been discredited and slowly but surely disappeared during the scientific and industrial revolutions.
Old Whig v. New Whig Battles.
During the move from King v. Parliament to Government v. Opposition the Whigs split.
Old Whigs became the new conservatives with a small c. Champions of the inherited institutions of Parliament and the natural order of things. They were followers of the English Revolution of 1688 and the Scottish Enlightenment. David Hume, Adam Smith & British philosophers Bernard Mandeville and Edmund Burke ... they were sceptical empiricists who observed & marveled at English Common Law, traditions & institutions which had spontaneously and self-consistently evolved ... but these institutions of custom & practice were imperfectly understood.
New Whigs became new Liberals in 1859, champions of the French revolution, and still fearful of a resurgence of elitist conspiracies against 'we the people'.
The Radicals who cottoned on to Thomas Paine were also followers of the French Revolution.
Edmund Burke (1729-97) was Irish, the son of a Catholic mother and Anglican father but educated at Abraham Shackleton's Quaker boarding school in Baltimore, Co Kildare. Unsurprisingly he held fast to Quaker ethics when he was at Trinity College, Dublin and then he went on to join the London Whiggery. He was a Whig of 'Economical Reform' and wanted 'no meddling on the part of authority' ... his values reflected those of John Locke, and were described by Adam Smith (and perhaps restated after the insights of Charles Darwin by chaps like Austrian economists) ... it amounted to a rejection of the 'authorities' ... or Friedrich Hayek's 'fatal conceit'.
Burke's creed was the individual freedom of the old Whigs to 'do your duty to others' and nurture cooperation; freedom within the law. This reflected the innate 'moral sentiments' of Adam Smith which underpinned economic activity. The new Whigs supported individual freedom 'do your will to yourself'; a 'liberal' freedom to do your own will and fight the elitist imposition from above.
Burke focused on the difference between freedom & autonomy in moral terms and the contrived equality of the Bishops, Princes, Generals and Bureaucrats.
Such was an important moral distinction which split the Whigs ... a distinction which Tocqueville famously described in 1835 as a distinction between outcomes following the overthrow of 'the powers that be'. The French ended up with 'the terror' and centralised 'Napoleonic Codes' and the Americans welcomed Jefferson's Constitution and a decentralised Federation with 'checks & balances' and 'separation of powers' and 'term Presidents' and a '14th Amendment'.
This was all new stuff, ideas were buzzing around. Burke suggested that civilization was not the revolutionary creation of the reasoning mind, but the emergence of order as an unintended outcome of spontaneous natural activity ... 'natural selection' ... the interaction of innumerable minds within a Complex Adaptive System -
empirical tradition - the imperative of social experience over conscious reason - the political equivalent of empirical science and the Newton v. Descartes controversy.
inherited social institutions - cultures were the custodians of survival successes and had been tested by the rigors of reality & time
natural order of things - reason had no capacity to design a viable social order by deliberate, rational, purposeful, intentional planning ...
Darwin was to explain much later in 1859 'natural selection' as the design process of evolution of which man was a part not an orchestrator.
Adam Smith, a moral philosopher, remarked -
'Burke was the only man I ever knew who thinks on economic subjects exactly as I do, without any previous communications having passed between us'.
Winston Churchill was more eloquent -
'Burke's soul revolted against tyranny, whether it appeared in the aspect of a domineering Monarch and a corrupt Court and Parliamentary system, or whether, mouthing the watch words of a non existent liberty, it towered up against him in the dictation of a brutal mob or wicked sect'.
Edmund Burke was the true father of the 'one nation' Conservative Party. So why did he lead the impeachment trail of Warren Hastings of The East India Company and The Governor General of Bengal in 1788? Burke was clear about eternal vigilance and moral backsliding could result in mismanagement and corruption but there was no conflict of interest; the success of East India Company trading was in the interests of both the Company and Bengal.
William Pitt (1759-1806) was PM from 1783-1806, he called himself a Whig but was a old Whig, a new Conservative in all but name. Burke, a Whig, defected to Pitt in 1791.
The youngest PM ever Pitt coped with the French Revolution and the Napoleonic Wars. He raised taxes to pay for the great war against France but efficiently & effectively defended the independent liberal democracy, that had become the established British culture. He inspired and accessed this grass roots strength of independence against the terrifying top down revolutionary culture of France. The British change of order had happened over 100 years ago but it was Pitt who cemented it in place. Critical to his success in confronting Napoleon was Britain's new industrial and economic success. There was no call for further 'necessary' change -
'Necessity was the plea for every infringement of human freedom. It was the argument of tyrants; it was the creed of slaves'.
Pitt gathered around him important friends including William Wilberforce, Edmund Burke and the City of London ... and the people loved him.
But in 1815 some arrogance after winning the war against revolutionary France produced a 'permanent' income tax, The Great Reform Act & The Corn Laws ... it began to smell of top down centralisation ... perhaps a preview of similar arrogance after winning the war in 1945 which led to the top down orchestration of The Welfare State?
In 1832 Government business switched from defence & justice to education, health, housing & employment. From fear to excitement?
Earl Grey (-) was PM from (1830-34).
Lord Melbourne (1779-1884) was PM from 1835-41. An old Whig and Victoria's mentor who thought government should not interfere with cultural success -
'Why not leave it alone?'
But backsliding pressures were intolerable and a political cycle became well established - wars, taxes, borrowing & financial crisis ... businessmen had no voice ... and crowd trouble was always simmering ...
Robert Peel (1788-1850) was the first named Conservative PM from 1834-5 & 1841-46, a businessman who repealed the Corn Laws ... eventually.
Economic science gained a foothold with Adam Smith & David Ricardo! A glimmer of renewed hope? A major clash between politics and economics was resolved due to the determination of Robert Peel and the inevitability of economics trumping politics. The Corn Laws were repealed.
Although Peel knew repealing the laws would mean the end of his ministry and a split in the Conservative Party, he went ahead. As a business man he had been an intellectual convert to free trade since the 1820s and in 1836 when he found the economic arguments of Richard Cobden irresistible. Cobden was another business man and MP for Stockport. Stockport was a hot bed of the industrial unrest in east Cheshire ... paradoxically not far from the tragedy of Crewood Hall in rural mid Cheshire ... nobody escaped change.
Cobden's message was clear - cheap food from overseas would not only stave off the famine & disease, but quell crowd trouble and also give a further fillip to British business sales and the industrial revolution.
Such was the historical context; cycles of infant mortality, rural poverty, famine & disease, voyages of discovery, the demise of Mercantilism & Spain, East India trade & Darién colonisation, British empirical science, an agricultural revolution, interminable wars with France, the Glorious Revolution, the industrial revolution and Whiggery ...
In this way 'classical liberalism' became a retrospective construct, minimising the top down role of the state in compromise between 'left' & 'right' polarisation while maximising the bottom up role of the plc business in cooperation in free trade markets -
Differences were inescapable.
Power corrupted unpalatable binary choices.
Specialisation & Scale resulted in synergies.
Moral Sentiments guided good behaviour and restrained bad behaviour.
Adam the Smith first described the economics of 'British Values' associated with Edmund Burke & Thomas Jefferson and summarised by Winston Churchill in 'A History of the English Speaking Peoples' ... 'an island nation' ... 'a puny nation of shop keepers' which won wars and emerged as the custodian of 'liberal democracy' and 'human rights' ... helping to make the world safe for diversity ... with a robust system in the City of London for providing finance for the industrial revolution ... business was no longer dependent on elitist patronage ...
But we get ahead of ourselves, in 1759 Adam the Smith was the man of the moment ... he understood the power of empathy and introspection in the understanding of human behaviour. Folk had the capacity to put themselves in the position of others and think it through ...
To understand the Scottish Enlightenment we must put ourselves in the position of Adam Smith and contemplate?
So who was this guy? What was he thinking in 1759? What exactly were those enlightened Enlightenment ideas?
Adam the Smith (1723-90) and The Scottish Enlightenment.
The Family Man from Kirkcaldy.
Adam Smith was born in Kirkcaldy, just across the Forth from the Edinburgh buzz.
Kirkcaldy was an old trading port and long ago achieved some administrative independence from the powers that be and became one of Scotland's most ancient Burghs (Borough). Just as in many other cities in Europe, the freemen in the towns like Kirkcaldy had secured their independence from the cash strapped kings by swapping tax revenues for their freedom to trade.
The exchange trades in Kirkcaldy were in all manner of goodies with some specialisations in coarse cloth, nails, salt, hides, wool, herrings, salmon, coal & timber. Early on the sheltered harbour was a boon and the town was granted the right to trade with the Low Countries, the Baltic states, England and Northern France. The merchants cashed in and started prospering.
Inevitably there were the usual restraints on trade from the shenanigans of the craft Guilds & Town Councils and the 17th century religious wars of Cromwell and the later Jacobite rebellions resulted in heavy taxes and disrupted trade something rotten. Things were also complicated by land troubles and regular squabbles between the battling clans of the Highlands and Lowlands. Such altercations made the religious and trade disruptions from the Sassenachs in the south seem almost tranquil.
However in the 18th century the hard work, honesty & thrift of some of the improving landlords and the enterprising merchants propelled a new 'grass roots' prosperity as Kirkcaldy embraced the linen trade and joined the industrial revolution. Adam Smith witnessed the gestation of this industrialisation process.
Kirkcaldy, close to the Fife coalfields had a good industrial revolution; leather, bricks, tiles, cotton, linen & shipbuilding. A turnpike road came in 1790 & by 1896 the Kirkcaldy & District Railway had arrived and the Kirkcaldy port was revitalised. Trade grew with imports of flax, timber & hemp and exports of coal, salt & linen. Kirkcaldy became a centre for iron founding and linen manufacturing.
(Perhaps a pinnacle of Kirkcaldy success came in 1847 with the establishment of Michael Nairn & Co, and a new purpose built Scottish 'linoleum' factory at Pathhead Sands, famously nicknamed 'Nairn’s folly' with its 'queer like smell'. Made from cork, wood flour and linseed oil, linoleum met with worldwide success. Later linoleum was replaced by vinyl flooring and in 1974 Unilever took over the company.)
Adam was brought up by his mum who was from an Edinburgh political family and was plugged into the early trading heritage. Father Adam died before son Adam was born. Adam senior was a middling Presbyterian lawyer who matured in the critical period of learning between the 1688 Glorious Revolution and the 1707 Act of Union.
After the fiasco of the Darién scheme and trauma of the Union, Adam senior was involved in collecting the taxes & duties which had such disastrous effects on trade in Kirkcaldy. Problems which would have undoubtedly reverberated around the Smith household. Young Adam learned from his mum how easily the good gotten gains from Kirkcaldy trade could be squandered.
Kirkcaldy & the Smith family had lived through the transformation of a small town into a Capitalist industrial powerhouse but had also experienced the shenanigans of the wars, lords & lands of Mercantilism & taxes.
To understand the Smith, the man, and all that followed, a good place start was to reflect on his three substantial mentors -
Francis Hutcheson (1694-1746) was a Presbyterian Minister who believed in a fundamental revealed religious morality, and linked his teachings to 'a theory of mind' philosophy of John Locke (1632-1704).
Locke held that the solid ethical core of human behaviour was written onto a mind which was blank slate at birth (a tabula rasa) which made teaching and religious nurturing all important.
Hutcheson's theme of human behaviour was morality as a 'habit of mind' which underpinned economic exchange.
He had no truck with the fanciful intrigue of Bernard De Mandeville's cynical & selfish manipulations outlined in 'The Fable of the Bees'. In 1714 such selfishness was seen as a attack on Christian values.
Nor would he have accepted the later folly of Bastiat's 'Broken Windows' in 1850 which suggested a paradox of thrift and some benefit accruing from vandalism?
The stakes were high because Hutcheson's human nature enjoyed a high degree of self-organisation when moral sense underpinned cooperative behaviour. Organisation & order which was possible without the attentions of Bishops, Princes, General or Bureaucrats. This was dramatic stuff!
As usual the ancient Greeks had been there before before.
The Stoics were focused on the interaction between the way the cookie
crumbled and human freedom to make stuff happen.
Happenings were determined by fate and beyond human control. But individuals must actively experiment and confront the consequences of their own actions, and learn from outcomes through rigorous introspection. Action men rather than pontificators. Were The Stoics the fathers on English empirical science? Perhaps, but was learning the way of God the same as learning the way of the world?
The Stoic Epictetus suggested -
'take care then, not to die without ever being a spectator of these things'.
Hutcheson took a 'helicopter view' of economic behaviour which indicated that the more sociable, the more efficient. However the central human skill of empathy was easily perverted by natural & challenging differences & prejudices ... but certainly empathy was reinforced by good manners and politeness.
Hutcheson was Adam Smith's mentor at Glasgow and he urged the embodiment of philosophy into life; morality had real relevance. Moral sense, was the source of understanding of human behaviour. Behaviour was not a series of enforceable contracts of law with the powers that be.
Importantly Hutcheson hung on to a religious version of 'a special moral sense'; such was God's work.
In contrast the Smith held that 'nature' had implanted 'moral sentiments' into the human breast; such was not God's work.
The Smith's first lectures as a Prof at Glasgow were on inalienable human rights. His 'moral sentiments' depended on 'mutual sympathy' between the individual and others in society; empathy.
David Hume (1711-76) was born in Berwick, a Presbyterian lawyer, educated at Edinburgh University where he became a sceptic who focused on the science of man.
Hume denied Hutcheson's religious morality.
Hume's breakthrough was to suggest human social animals acquired a universal innate morality, which was the very nature of man. Thus he established the humanist, empirical & sceptical philosophy of The Scottish Enlightenment. Hume's morality was rooted in imaginations & emotions and the understandings which were acquired through learning habits, customs, education & experience of common life. Common life where trust & cooperation were vitally necessary for market exchange, prosperity ... and survival.
David Hume - Enquiry Concerning Human Understanding -
'The mutual dependence of men is so great in all societies that scarce any human action is entirely complete in itself, or is performed without some reference to the actions of others, which are requisite to make it answer fully the intention of the agent'.
Hume held that the role of government was to administer the rules of justice. The role of the individual was to use language and imagination for mutual benefit in social exchange.
Reason was the slave of passions. This was a devastating assault on Cartesian reason and Christian values with shattering implications; such was The Scottish Enlightenment.
Hutcheson suggested a religious 'moral sense' which underpinned the
edifice but friend Doubting David Hume suggested an innate 'moral sense' and 'a utility sense' which
the Smith picked
up as 'moral sentiments' and an imperative for 'improvement' or 'betterment'.
James Oswald (1715-69) was young Adam Smith's big mate in Kirkcaldy. His father, James the elder, was an 'improving' land lord and was appointed young Adam's guardian & tutor after Adam senior died. James junior had a profound influence on the Smith who was eight years his junior. James understood how the improvements of the agricultural revolution were a necessary precursor to the industrial revolution.
He became an MP who steered clear of petty party politics and studied commercial trade, business and government.
David Hume was also great admirer of James Oswald. James, the canny Scot, understood commerce and noted that antihero William Patterson was unremarkable and had no business acumen -
'the surest way of becoming remarkable here is certainly the application to business, for whoever understands it must make a figure'.
William Patterson (1658-1719) was the infamous architect of the Darién scheme and just didn't understand commercial trade.
the Smith had been intimately exposed to the business of business through his lasting friendship with James Oswald.
These three gentlemen became immersed in study & debate concerning the nature of business which resulted in a deep grasp of business synergies which inspired the Smith's intellectual project.
In addition to the family environment in Kirkcaldy, there were other places of significant influence which guided progress.
The contrasting & competitive environments of Glasgow & Oxford Universities and the free thinking clubs in Edinburgh provided the wake up call for Adam the Smith. He wrote 'The Theory of Moral Sentiments' in 1753 when Professor of Moral Philosophy at Glasgow. He wrote the 'The Wealth of Nations' on his return to Kirkcaldy after his years of first hand experience of the wrong headed Physiocrats in France. The latter tome was finished in London from 1773 where he mulled over the collapse of The Ayr Bank in 1772 and the American question and pondered yet again Hume's dilemma -
'how do modern governments with overstretched systems of taxation manage the ruinous public debts they had incurred as a result of their incessant wars and extravagant spending? Either the nation must destroy the public credit or the public credit will destroy the nation. The scramble for colonies had been driven by the absurd, superstitious belief that wealth was to be measured in terms of gold reserves and fostered by a monopolistically driven system of international trade'.
Glasgow University (1737-40) & (1751-63) was a hot bed of philosophical debate. Adam the Smith laid the foundations of his system of the science of man as Professor of Logic & Metaphysics and later as Professor of Moral Philosophy. Human behaviour was studied as an empirical science with the evidence from history. Glasgow was steeped in Presbyterian orthodoxy but understood and supported the happenings in the south; the Glorious Revolution & the Act of Union.
There were dangers & difficulties in a philosophy based on natural law rather than revelation. Everyone had to learn and an education fit only for elitist schoolmasters & scholastisists was plain wrong. Those who funded the universities were naturally supported by the universities but -
'be wary of the blandishments of the great for we have a greater regard for truth, virtue, piety and decency'.
Edinburgh excelled in law & medicine and its 'clubs' were second to none but Glasgow's philosophy was unrivalled ... and it did sport The Political Economy Club of the merchants.
Like Kirkcaldy, Glasgow was a trading centre; cattle, hides, leather, herring, coal were exchanged for wine, brandy, textiles, sugar & flax ... and by 1750 Glasgow had joined the industrial revolution with trade in tobacco as its lucrative flagship. There were other trades which boomed; iron, glass, brewing, dyeing, vitriol, printing ... and banks ... it was as if the merchants were taking over leadership from the Presbyterians. Glasgow trade was burgeoning as Calvinism declined.
As elsewhere there was a habit of the enriched merchants investing their profits into landed estates & conspicuous consumption rather than productive improvements ... there was a disturbing tendency to backslide into a repetition of the old Mercantilist misunderstandings?
Clearly a theory of trade was missing from the curriculum and Adam the Smith wrote it ... in two parts 'a theory of understanding' and 'the implications for policy' ... not only the nature of man but also the nature of value.
Baliol College Oxford (1740-46) endured a stifling atmosphere from the past. The intellectual revolution of 1688, had been a revolt against 'Aristotelian Scholasticism'; the philosophy of Aristotle as interpreted by the Catholic Christian church in Europe. But the old conventions still held sway at Baliol and contrasted with the exciting free thinking atmosphere at Glasgow. It seemed the Presbyterian Whigs hadn't reached Oxford and the Tory Jacobites were still ensconced.
the Smith hated it. Rent seeking elitist academics were independent of student fees, unaccountable and taught nothing that was useful. However, on the bright side there was unlimited time for private study and Adam the Smith taught himself; the Bodleian Library was renowned in Oxford and he read it. His passion was the books on human nature ... he knew his history.
Adam the Smith began to understand that scientific method provided an unimpeachable way of settling arguments - observation, general inductive theory, deductive testable hypotheses, experimental validation and peer review. There was a Cartesian error of the religious mind -
'I think therefore I am'
There had to be a confrontation ... later Darwin had the same problem; the Peacock's tail was an awful counter-intuitive stretcher.
Clearly communication and teaching against the grain of convention was going to be tricky. How was the Smith going to break the grip of conventional wisdom?
Edinburgh (1746-51) was the centre of the intense debates about the Darién Scheme and the 1707 Act of Union. In 1695 discontent had been rumbling in Scotland for some time; disease & famine of the 'ill years' were back again, the destructions of Religious Wars had taken their toll ... but meanwhile south of the border the English had completed their 'Glorious Revolution' and Francis Bacon's empirical science and the East India Company's trade were both taking off.
Access to English markets was a no brainer but there was disagreement about how to go about emulating the Sassenachs; particularly there was ongoing opinionated interference from the Kirk ... and soon there would be the thorny problem of how best to cope with Jacobite rebellions and Culloden in 1746? The damned & puny English were always winning wars!
Breaking free from the intrigues of Mercantilism and getting a grip on productive trade was the golden ball now in play.
Edinburgh was buzzing, and most of the buzz was in the clubs awash with debate and smart intellects.
In such an atmosphere David Hume and Adam Smith were developing a new sceptical understanding of human behaviour at The Select Society & The Poker Club. These clubs were important environments for convivial debates ... similar to the discussions held in the coffee houses in London ... and later in the taverns & ale houses in the 19th/20th century. What better environment for a get together 'to put the world to rights'?
A hilarious account of the club activities in Edinburgh can be gleaned from John Rae's 'Life of Adam Smith', 1895 ... instead of hatching a revolution the Government would be punished by denying them tax revenues! The 'Poker' club said it all. The name did not refer to gambling with cards which was a happy pastime for some, but rather it referred to the poking of a fire to stimulate a positive reaction! Hirst's biography of Smith suggested -
One cause to be agitated was the establishment of a Scotch militia, to be followed, as some of its radical members hoped, by a parliamentary reform which would 'let the industrious farmer and manufacturer share at last in a privilege now engrossed by the great lord, the drunken laid and the even drunker bailie''!
The task of unseating the landed gentry and rewarding the wealth creators was a priority?
Venues changed as prices of ale & claret were watched with a keen eye. One of the taverns frequented was 'Burns Tavern', an establishment that was frugal and moderate, as that for all clubs for a public purpose should be. The dinner was set soon after two o'clock, at one shilling a head, the wine to be confined to sherry and claret, and the reckoning to be called at six o’clock. Nothing was done without the assent David Hume so there was likely to be no bloodshed. Nevertheless lively discussions ensued on political topics and members were freely 'roasted' for their views.
Yes there were also convivial clubs in London where Adam Smith's mate Edmund Burke was mulling things over in distinguished company ... Boswell, Johnson, Reynolds, Pasquale Paoli ...
By 1751 Adam was ready to deliver his lectures on rhetoric & jurisprudence at Glasgow. Moral sentiments and the Law of the Land did not come from the whims of government & kings but from the nature of man and his habits, customs, manners & traditions ... the self conscious mind was ruled by passions not by impositions.
The exciting motivating atmosphere in Edinburgh inspired the Smith to start writing up his work at The Forge.
France (1763-66) The Seven Years War had just finished, France had lost its colonial empire and its economy was in ruins ... there were questions of governance around; how was 'the most incapable power by land & sea that modern times have exhibited' to be governed?
What a mess to observe as an impartial spectator from abroad?
In 1759 the ecstatic reception of 'The Theory of Moral Sentiments' in London & Edinburgh inspired English MP Charles Townsend (1725–67), The Duke of Buccleuth's step father, to offer Adam Smith a lucrative job; the private tutoring of the young Duke ... an offer too good to refuse ... and much of the tutoring was to be in France. (In 1766 Townshend became Pitt's Chancellor of the Exchequer).
Whether teaching the young Duke of Buccleuth, his students at Glasgow or participating in the discussions in the Edinburgh clubs, good manners & respect for others led to more effective communication.
Paris was a jewel, just as full of debate as Edinburgh, but in France Adam the Smith was confronted by the cul-de-sac of Mercantilism and the more interesting Physiocrats ... at least their creed was new.
But the French Physiocrats were fundamentally flawed as they believed productive wealth came almost entirely from the land. The merchants and artisans were a 'sterile class' part of a 'nation of shopkeepers' ... the French creed was don't follow the English and don't follow history, a new grand order was required.
The trouble was that puny England continued to win wars ... and an industrial revolution was underway!
Everybody agreed agricultural surpluses fed the cities where free exchange of goods & services satisfied the needs & conveniences of the folk. But French theory focused on revenues for the sovereign and the national glory of the territorial state which was maintained by 'a system of restraint & regulation'; Physiocracy was 'government of nature'. The productive output from land & territory determined tax revenues & national wealth. A circular flow of economic activity depicted in one page of explanation in 'Tableau Economique' 1759. Agricultural production from land fed tax revenues for the sovereign and reinvestment in agricultural improvements.
The physiocrats established their economic system in the agrarian & Mercantilist environment in France. This confirmed the supremacy in France of the sovereign and the land owning elites and entrenched inexorably to the old focus on the war, lords & lands if not Mercantilism itself.
The Physiocrats grasped the significance of productive work but confined its application to land.
The French were immersed in this top down philosophy of a precise, ordered system of human nature. The weak, frail, delusional & turbulent elements of human nature made virtue difficult without religious belief and made selfish Mercantilism more natural.
Morality was a religious affair and absent from the grandiose French economic philosophies of the Physiocrats.
In the end the failure of the Physiocrats led to an alternative revolutionary stream. A revolution was needed to unseat the landed gentry.
In France the landed gentry were to be unseated by bloody violence.
But in England they had been unseated by an industrial revolution!
Francois Quesnay (1694-1774) was a French Physiocrat.
Quesnay became a good friend of the Smith as they had much in common ... Quesnay was also developing a 'natural system'. Both friends were developing economic theories to replace the regulated Mercantilism where the measure of national prosperity was the hoard of gold stocks. Although science and free trade were championed, the Quesnay 'system' was very different from the English system which the Smith was formulating.
The Quesnay Smith discussion must have been fascinating. Quesnay implied artisans, merchants & manufacturers and their specialisations & economies of scale were unproductive!
This was the wrong end of the stick and had to be confronted and Adam the Smith was the man for the job.
Adam the Smith knew his English history which told a story of the malign effects of the feudal system and an inspiring industrial revolution. A non violent revolution where the landed gentry lost their status & power of tyranny & oppression because the merchants & manufacturers began to create rival pools of wealth in the cities.
Market trading required trust & cooperation where 'moral sentiments' were an underpinning prerequisite. the Smith was convinced that the natural way was bottom up continuous improvement not Quesnay & Rousseau's rather arrogant top down pessimistic theory of sociability where elites were in 'control' of nature which was red in tooth and claw ... and morality was a 'supernatural' preserve of religions.
More than anything it was the comparison between England & France that lit the fire at the Smith forge.
What a paradox! the Smith was teaching in Physiocratic & Mercantilist France where they did a lot of thinking but unlike the capitalist English there was little useful doing.
But the Smith did meet Voltaire in Geneva in 1765 and found a kindred spirit. In 'Letters on England' in 1733, Voltaire had noted, 'The Earl of Oxford's brother was in commercial trade' ... for Voltaire the penny had dropped!
How ironic that it was a Scot who explained the English industrial revolution to the English? The English themselves, of course, had no idea about the economic science, they just got on with the job ... and that was just the way the cookie crumbled it was not the genius of the powers that be ... and Adam the Smith noticed ...
A lot was happening around mid 18th century and as the happenings emerged things became clearer, there were two revolutions involved; an industrial revolution ... and a revolution of ideas; an enlightenment.
Politics was uninteresting tittle tattle, it always seemed to lag behind science and sooner or later 'truth was outed'. The real interesting stuff was at the pioneering end of economic science. And in 1759 & 76 some guys in Edinburgh were there at the front end ...
Adam the Smith came to the party stimulated by ideas from his three mentors; Hutcheson (from Locke), Hume (from scepticism) and Oswald (from commercial trade), and observations from four very different environments; Glasgow University (free thinking), Oxford University (moribund in Scholasticism), Edinburgh (full of convivial social clubs) and France (side tracked by Physiocrats).
New Battles of Ideas reverberated around Glasgow & Oxford and Edinburgh & France and exposed deep schisms which were hotly contested by the Enlightenment philosophers. The Edinburgh debates were particularly agitated as the club members surveyed how the cookie crumbled during the glorious revolution & industrial revolution in the south.
After all the endless discussion & disagreement perhaps most of the sceptics concluded that Xenophanes was right -
'it was all a woven web of guesses'.
But the battles continued ... as they had always done, forever ... how did happenings happen? The most fundamental of schisms was between those who believed in the 'intelligent design' of the world and those who believed in the unfolding of the 'natural laws of nature'.
But whatever, folk were learning all the time ... and the new battles were new ... with new opportunities to learn.
Perhaps the 'top down' and the 'bottom up' battles of intelligent design and evolution were both inseparable parts of a whole shebang & caboodle?
It certainly seemed that the 'bottom up' v. 'top down' battles of viewpoints were at the root of all altercations ... ?
Back at the coalface the pontificating in Adam's Forge seemed irrelevant to Joe Sixpack. Joe was desperately trying to put a crumb on the table for his family, the last thing he wanted was philosophy.
Nevertheless some things were stubbornly clear -
many of the French were influenced by misguided landed gentry and Physiocrats but they still boasted formidable enlightened thinkers; Descartes, Voltaire, Rousseau, Montesquieu, Quesnay ... and above all Diderot & his 'Encyclopédie'.
many of the English had moved from successful mercantile commerce and were immersed in an Industrial Revolution of imagination, genius & invention, building on Locke (1632-1704) & Newton (1642-1727).
many of the Scottish intellectuals were celebrating an enlightenment of sociability; the governing principle of commercial interactions.
Adam the Smith's triumph was to construct a general theory which coherently explained what was going on in a neat, clear, plain & clever manner -
human morality involved cooperative behaviour - social moral animals understood & responded to cooperative behaviour ...
human endeavour involved satisficing behaviour - betterment from synergies of specialisation & scale were discovered & accumulated ...
human diligence involved tit for tat behaviour - parasites & predators always evolved and immune & defence systems were necessary for survival ...
human economy involved emergent behaviour - a natural order of things emerged from the trial & error experiments of hoards of folk doing deals which involved hard work, honesty & thrift ...
The Smith had grasped the reality that the wealth of nations lay in transforming the agricultural revolution into a mercantile economy of mutual benefit and then into an industrial revolution ... and the source of the wealth was 'know how' ... know how which was dispersed throughout the population and nothing to do with the genius of the powers that be.
Adam the Smith was a moral philosopher and a scholar of the arts & sciences. He was a humanist and sceptical of any revealed truth as the work of God. He developed a new systematic theory of human behaviour based on scientific methodology. An understanding of enlightened cooperative self interest which came from the nature of man as a social animal. Together with his mentor & mate David Hume, he suggested there was an historical continuity of human behaviour, a path dependency, which was observed in habits & customs. Rules of thumb which were driven by emotions.
The total behavioural system was simply and convincingly explained as an interactive melee where cooperative synergies of specialisation & scale were discovered & accumulated ... and behavioural immune systems protected benefits from the inevitable parasites & predators.
All science started with observation and the Smith's observations of the depths of natural human behaviour & the study of history was all embracing ... the Smith was a polymath and covered everything -
history - folk developed from hunter gathers, to herdsmen, to cultivators & then to commerce
rhetoric - folk communicated through language enriched by an feeling of sympathetic understanding of others
justice - folk were free within the oversight of an impartial spectator
political economy - the state administered the natural law & received taxes
arts & sciences - moral philosophy & natural philosophy were integral parts of the system ... not two cultures but a whole shebang & caboodle.
At his forge the Smith hammered out this general theory, both moral & economic, in two perspicacious masterpieces -
1759 'The theory of Moral Sentiments' - A Theory of Understanding which explored the natural as an alternative to the supernatural - no trust, no cooperation = no deals !
1776 'The Wealth of Nations' - The Implications for Policy which explored Capitalism as an alternative to Mercantilism - no deals = no synergy, no wealth creation !
A coherent general theory, the significance of the theory was in two books, one complementing the other, each building block essential to understanding. Read either book in isolation and the theory was interesting but together they exposed limitless valued the Scottish Enlightenment.
Over the years readers have found in these books many aphorisms which have been quoted out of context. The books were intended to expose the errors of conventional wisdom but they often failed to cut the mustard ... it was a tough nut to crack, most folk just didn't get it ... after all everybody knew all things bright & beautiful were the work of God?
'The Theory of Moral Sentiments' was often forgotten and 'The Wealth of Nations' was often misunderstood.
There was much hot debate but the lasting ideas which emerged from Adam's Forge formed a remarkable unifying theme; folk had innate, natural, emotional propensities for survival which motivated improvement & betterment.
The theory involved six interlinked, lasting ideas -
1 Moral Sentiments
- 'sympathy'; empathy. Conscience.
An innate propensity to understand & respond to the feelings of others, a theory of mind which was a distinguishing human capacity.
Folk understood - property rights & evidence of science
Folk v. Primitive Animals.
Natural Law v. Supernatural Edicts.
Social Cohesion v. Divisive Tribalism.
Cooperation v. Violence.
Social production v. Selfish predation.
Love v. Hatred.
2 Justice -
'fairness of shares' & 'resentment of cheats'.
An innate propensity for natural tort law which mediated cooperative social behaviour.
Folk were cooperative & wary - impartial spectators & parasites/predators
Morality v. Ethics.
Freedom v. Equality.
Cooperative Synergies v. Parasites & predators.
Self interest v. Selfishness.
Good Gotten Gains v. Theft of Property Rights.
Customary Law of the Land v. Dirigisme of Bishops, Princes, Generals & bureaucratic despots.
Locke & the English v. Rousseau & the French.
Privatisation & morality v. Nationalisation & regulation.
3 Learning -
'rhetoric'; polite interactions. Good Behaviour.
A innate propensity for good manners, cooperation & tolerance which encouraged learning from others and cultural communication across the generations.
Folk learned the hard way - social experience & cultural inheritance
Propriety v. Arrogance
Emotional v. Rational
Trial & Error Experiments v. Imposition of Intelligent Design
Custom & Practice v. Edicts & Decrees
Observation v. Calculation
Unintended Consequences v. Naive Intention
- 'natural course of things'; adaptation.
A innate propensity for individual freedom from the impositions of arbitrary power of Bishops, Princes, General & bureaucratic despots.
Folk had minds of their own - invisible hands & men of system
Wisdom of Natural Selection v. Conceit of Men of System.
Invisible Hands v. Iron Fists.
Liberal Democracy v. Absolute Monarchies.
Privatisation v. Nationalisation.
Bankruptcy & Sifting v. Bailouts & Regulation.
5 Wealth Creation
- 'truck, barter & exchange'; social interaction. Synergies of
Specialisation & Scale.
A innate propensity for social interaction for betterment, improvement and gains from trade.
Folk cooperated & defended benefits - market coordination & supply/demand.
Trade Synergies v. Colonial Exploitation.
Capitalism v. Mercantilism.
Torts, Trade & Technology of Free Trade v. Wars, Lords & Lands of Religious Mercantilism.
Cooperation v. Theft.
6 Economic Science
- 'experiments'; observation, maths, hypotheses,
validation, peer review. Weed Out Failures.
A innate propensity to discover & accumulate know how.
Folk were curious & busied themselves - productivity, stocks, progress, .
English Empirical Science v. Descartes A Priori Knowledge.
Heuristics v. Deliberate rational purposeful intentional planning.
Everybody can respond to the Smith's words; 'sympathy', 'fair shares', 'resentment of cheats', 'rhetoric', 'a natural course of things', 'truck barter & exchange', 'observation' ...
Six overlapping & intertwined ideas which were intimately welded together into one unified system by the heat of Adam's Forge. Six statistical propensities which existed at different levels of intensity in everyone ... genetic emotional inheritances which distinguished folk from more primitive animals.
Such were the moral tendencies which nurtured cooperative survival synergies.
Simple rules of thumb; simple behavioural patterns resulted in the immense complexity of economic reality ... 'as if' profits were chased & losses cut ...
But don't get it wrong ... these ideas were often misinterpreted they had little to do with -
laissez faire nor
... and they were not an endorsement of the interference of 'the men of system' into 'the natural course of things'.
But don't get it doubly wrong ... there also always co existed the more primitive survival emotions of the parasites & predators; nature red in tooth & claw.
The innate 'moral sentiments' and resulting cooperative synergies were simply more developed in folk than in more primitive animals. Folk flip flopped between cooperation and cheating as they constantly searched for a better way to survive. But the dice were loaded
cooperation was a positive sum game
cheating was zero sum.
In this way, during the days of belief in philosopher kings and Mercantilism, Adam the Smith had forged a counterintuitive theory. Such theory had to be understood in the context of the history of the Scottish Enlightenment where sceptical debate focused on the Smith's social empathy and David Hume's social utility. Although folk were able to check out these ideas of the Scottish Enlightenment by simple observation and introspection ... the penny still had to drop.
In 1759-76 some 100 years before Charles Darwin, Adam Smith wrote two books about evolutionary psychology ... although at the time neither evolution nor psychology were part of natural philosophy!
Some 250 years after Adam Smith had identified his six themes of Moral Sentiments and Wealth Creation, the British Government, embroiled in a cultural tit for tat confrontation with Islamic fundamentalism, tried to identify British Values which were to be taught in the schools - emotional, moral, social & cultural values – individual creativity, the law of the land, liberal democracy, and respect & tolerance of difference.
Perhaps moral sentiments and empirical science were taken as read?!
However the more they wrote, the more they pontificated, the clearer it became that such values were becoming universal to homo sapiens all over the world ... after all they were naturally selected behavioural traits? ... and it was Darwin who first identified the essential behavioural traits copy / vary / select ...
Adam the Smith was there first ... was he the first biological historian?
But how many biological historians were teaching the youngsters to 'Live within your means; save for a rainy day; pay your bills on time'!
Hard Work - Honesty - Thrift
Moral Sentiments & trust underpin the Wealth of Nations & free markets
Trust is nurtured by Natural Law -
fairness of shares
resentment of cheats
Trust is destroyed by impositions of Bishops, Princes, General & Bureaucrats -
Restraints on Trade
The Theory of Moral Sentiments.
Theory of Understanding Moral Sentiments & Immunity from Parasites & predators.
1759 'The theory of Moral Sentiments' - A Theory of Understanding which explored the natural behaviour of social species as an alternative to the supernatural - no trust, no cooperation = no deals !
By 1748-51 Adam the Smith was ready to deliver his lectures on rhetoric & jurisprudence, important precursors to his first book and which crystallised out moral sentiments as the distinguishing characteristic of the nature of man.
The Smith was on the ball and motoring, his total system started with his writings as a moral philosopher. This predated the publication of his more famous book, 'The Wealth of Nations' in 1776. But remember sceptical understanding of economic science demanded attention to the ideas from both books; first the theory of understanding and then the implications for policy.
What a paradox. Perhaps the first book was forgotten because it challenged the revealed truth of God's word? And perhaps the second book was misunderstood because the first book had not been read!
But without doubt the output of the forge was described in two books.
In this way Moral Philosophy underpinned Natural Philosophy. Economic science, the subject of his second book, integrated the two great streams of education; the moral & the natural philosophies. The two streams of teaching at Glasgow University and C P Snow's twin cultures were one ... one whole shebang & caboodle. Morality & economics were inseparable.
Innate moral sentiments were the foundations of economic theory.
1 Moral Sentiments - 'sympathy' - empathy
The Smith forge hammered out the moral principles first.
But the Smith was mulling things over ... where did good manners come from? ... there wasn't a logical sequence from start to finish ... rather co-evolution was a better word. But, of course, at the time 'evolution' was a meaningless word to the Smith.
The behaviour of folk as social animals was motivated & underpinned by a moral urgency; there existed a universal moral imperative. Folk were not naturally depraved they understood the feelings of others. They were not primitive animals.
The Smith suggested that the nature of man hinged on what he called 'sympathy'. All else became interconnected with moral sentiments and included the creation of wealth, economic growth and the agricultural, scientific & industrial revolutions. An extravagant suggestion? Yes, and no wonder the Smith was misunderstood? Was he usurping the word of God?
Selfishness was often attributed to Adam Smith as his description of the nature of man ... and, for sure, an inevitable part of his total system were the ever present selfish parasites & predators ... there was no escape from that. However the opening paragraph of his first book demolished the selfishness myth and opened up a very different description of the nature of man -
'How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it'.
This was a good start for the Smith, particularly his use of the word 'evidently' ... this was to be no idle 'a priori' musing, he was determined not to put 'Descartes' before the horse!
'Sympathy' originated from the natural course of things in common life. Where the mutual benefits of cooperation nurtured self interest ... enlightened self interest ... this was very different from selfishness.
Perhaps a better word for 'sympathy' would be empathy; the imagined substitution of ourselves in the place of others. Empathy was an emotional affair, an innate, universal, unconscious instinct; 'an interest in the fortunes of others'.
Behaviour was driven by these instincts; ancient unconscious emotions, survival networks & circuits deep down in the skull were mediating decisions about social interactive deals & exchanges that necessarily involved trust & cooperation. The Smith's science of man explained how man survived & prospered by discovering & accumulating survival synergies through social interactions. 'Moral sentiments' underpinned 'justice', 'rhetoric', 'improvements' & 'betterment' by nurturing the cooperative synergies of specialisation & scale. Social behaviour enabled specialisation synergies & scale economies through free exchange. The synergies provided the mutual benefits and avoided harm to others as genuinely new wealth was created.
In this way moral & economic behaviour emerged from the necessity of social activity for survival. Behaviour came from emotional propensities in the imagination not from reason.
Behaviour did not result from any code of ethics drawn up by Bishops, Princes, Generals or bureaucratic despots following the whims of an elitist landed gentry. At best these were post rationalisations of adaptive behaviour from natural selection.
Wow! ... this was radical stuff in the mid 18th century.
The logic was emerging; no trust, no cooperation = no deals ... and ... no deals = no synergy, no wealth creation.
Empathy, the feeling of understanding how others ticked led to the universal golden rule of moral behaviour -
'do unto others as you would have them do unto you'
The golden rule was a superb survival aid because of the existence of the synergies.
Both sides of the exchange deal could benefit without harm to others.
Successful social behaviour involved positive sum deals, 2+2=5, and not the zero sum deals of cheats, 2-2=0.
But don't get it wrong ... beware, herein was an awkward schism ... there was an always an ongoing tension between social production which was synergistic and selfish predation which was immoral ...
Specialisation and exchange deals necessitated a instinctive acceptance of property rights. Without prior acceptance of property rights membership of the trading 'club' was impossible.
And there was more ... valuable property rights involved the hard work of learning a specialisation and this created differences & inequalities ... there was no escape from differences. Different folk, at different times, in different places behaved differently. Differences were part of the nature of man and it was the differences that made exchange synergistic.
There was no point in clones exchanging anything ... was there?
Specialisation & trade were meaningless without property rights? ... think about it?
The Smith hammered on relentlessly.
Property rights were a key to synergistic exchange, as the moral sentiments of sociability drove 'improvements' & 'betterment' in both necessities & conveniences, in both arts & sciences. Moral sentiments underpinned the farmers markets as agricultural surpluses were traded ... and moral sentiments underpinned the arts as ideas were traded. Innovative technological 'know how' from specialisation & scale produced the industrial & artistic surpluses which traded.
Productive interactions intensified; hard work, honesty & thrift multiplied and intertwined in a whole system of productive cities.
Work at the forge started to fix 'a natural course of things'; empathy, moral behaviour and cooperative synergies. The nature and causes of the wealth of nations was beginning. It was all part of the nature of man; one very neat, clear, plain & clever system.
However for Jean Jacques Rousseau property rights were a social problem because of the inequalities involved. Did Jean Jacques have a point? Property rights certainly loomed large in the natural course of things? And there was a lot of fighting over property rights ... particularly rights over territory and land.
But the Smith had challenged the conventional wisdom; it was not 'land' that was valuable but the 'know how' necessary to improve productive capacity.
Of course the Indian Chiefs, the Scottish Highlanders and the French Physiocrats thought otherwise -
'The land is our mother, nourishing all her children, beasts, birds, fish and all men. The woods, the streams, everything on it belongs to everybody and is for the use of all. How can one man say it belongs only to him'?
But the Smith's argument was that synergies involved mutual benefits ... with know how & cooperation the land produced abundance for everybody ... James Oswald's dad, the improving landlord on the enclosures, had done it all in Kirkcaldy ... and the Smith remembered how dramatically productivity had improved.
But there was a dark side. There was always a clamour for a free lunch and inevitably as soon as there were stocks the parasites & predators were around. Defence and immune systems were required for the protection of stocks and for the resolution of ownership disputes. Such systems necessarily became part of the whole inseparable shebang & caboodle and were written into the nature of man as emotional feelings of 'fairness' and 'resentment' which underpinned the rule of law and justice. Moral sentiments without justice were meaningless and it was justice that the Smith hammered out next, see below.
The trick to understanding was to distinguish between synergy and theft. There were good gotten gains and ill gotten gains. Wealth was not money but good gotten gains. There was 'wealth' and there was 'illth'.
Amongst all the hammering the ghost of a giant was around; John Locke. It was not Hobbes nor Rousseau, but John Locke who first led Hutcheson then Adam Smith & David Hume to The Scottish Enlightenment ... and it was Locke who also led Thomas Jefferson to the American Constitution ... although certainly Rousseau had a point about independence & liberty if not about property rights.
So it was John Locke who grasped the essential characteristic of the nature of man; a social animal exploiting cooperative synergies. Note Locke's own words -
'love, truth for regulating, social morality, education, gentleman, reading, good company, reflection'
Such was Adam the Smith.
But don't get it wrong ... Locke and Hutcheson both suggested moral sentiments were a revealed truth; God's work, and for sure it was easy to imagine the hand of God behind every tree ... and most folk did.
But it was the Smith who began to hammer out the natural science, he insisted the matter was -
'not concerning a matter of right, but concerning a matter of fact'.
Was the Smith forge fabricating an 'ought' from an 'is'?
This science of man was fundamental to understanding the Smith and distinguishing him not only from the ethical engineers like Hobbes, Rousseau ... but also from the revealed truth merchants like Locke and Hutcheson ... morality was a universal emotion.
Modern evolutionary economists have continued to unearth evidence to support Adam the Smith and his theory of moral sentiments.
Robert Axelrod (1984) – ‘The Evolution of Co-operation’, Basic Books.
Richard Dawkins (1996) - 'Climbing Mount Improbable', Norton.
Matt Ridley (1996) – ‘The Origins of Virtue’, Penguin Books.
Peter Singer (2011) - 'The Expanding Circle: Ethics, Evolution & Moral Progress', Princeton University.
Steven Pinker (2011) - 'The Better Angels of Our Nature: A History of Violence and Humanity', Viking.
Sam Harris (2011) - 'The Moral Landscape: How Science Can Determine Human Values', Random House.
Mark Pagel (2012) - 'Wired for Culture: The Natural History of Human Cooperation', Penguin.
Geoffrey M Hodgson (2012) - 'From Pleasure Machines to Moral Communities: An Evolutionary Economics without Homo Economicus', University of Chicago Press.
In 2014 the science underpinning cooperative synergies as a universal expression of biological cognitive & emotional phenomena was summarised by The Brights, and included 70 substantiating research studies.
All these guys were wrestling with the same mesmerising problem; was it possible that Darwin's process of natural selection could have resulted in moral sentiments? Had the universal feeling of empathy with mates which inspired cooperation and synergies ... evolved?
How can it be that folk loved & hated at the same time, why did they cooperate & thieve, get excited & become fearful ... how can life be both good & bad, happy & sad, charmed & cursed?
The Smith was hammering out a very simple, neat, clear, plain & clever system which hung together.
Individual freedom was within the law, no one, not one, was free to harm others.
So what about those damned parasites & predators ... there was more work to be done at the forge which involved justice.
2 Justice - 'fairness & resentment' - conscience
The Smith further developed his idea of 'sympathy' and built his theory of justice on inner feelings of 'fairness of shares' and 'resentment of cheats'.
Such feelings were readily recognised as universally felt emotions and such feelings spawned the idea of 'the impartial spectator'; as a conscience or a mediator. The Smith's 'enlightened' self interest was a survival instinct which involved an immunity from parasites & predators.
The Smith had his work cut out as he challenged the well established ideas of revelation and the insistence of Hobbes & Rousseau that intervention was required to 'control' bad behaviour. For sure selfishness & harm were not denied by the new ideas of justice but rather they became the focus of justice as feelings of fairness & resentment.
More recently Mark Pagel, University of Reading, in 'Wired for Culture', hit the nail on the head ... there was 'a police force' which was a genetic inheritance -
'Of all the emotions associated with getting acts of reciprocity to work, our expectation for fairness is perhaps the most intriguing & explosive. If forgiveness & generosity are like investments in keeping a cooperative relationship going, our sense of fairness is more like a police force. It is the emotion behind our belief that it is wrong for others to take advantage of us and it is wrong for us to take advantage of others'.
Intriguingly both altruism & violence emerged from these flip flopping emotions and simple introspection provided the evidence ... again the trick was to distinguish between synergies and theft ... good gotten gains were fair play ... ill gotten gains were cheats ... nobody tolerated cheats and survived ... immunity was required to survive.
But don't get it wrong ... 'fairness of shares' and 'resentment of cheats' were evolved emotions helping survival they did not eliminate the parasites & predators which inevitably evolved as soon as there were stocks.
The 'impartial spectator', the moral power of the imagination, became more relevant than friends, teachers & cultural ancestors ... or perhaps the 'impartial spectator' was the voice of ancient ancestors?
Nick Phillipson on Adam Smith -
'We may like to believe that the voice of the impartial spectator was the eternal voice of conscience or of the deity, but in reality his voice is that of the world to which we belong'.
The Smith's 'impartial spectator' was mediating human activity in the same way as the bad conscience of The Jews? Or the inner light of The Quakers? Or the twelve good men & true of the jury? ... perhaps 'the God delusion' was simply the result of folk trying to describe the natural universal moral emotions that were felt by everyone ... to a greater of lesser extent ... everybody was different?
But there was more. the Smith emphasised that parasites & predators were everywhere; there was no escape from the dark side of human nature.
The cheats were in business and in government!
Feelings of 'resentment' were just as strong as feeling of 'fairness', and the twain emerged in the social system of justice as 'sanctions & rewards' and 'obligations & rights' -
'Nature has implanted in the human breast that consciousness of ill desert, those terrors of merited punishment which attend upon its violation, as the great safe guards of the association of mankind, to protect the weak, to curb the violent, and to chastise the guilty'.
Statues and codified Laws were most effective when appealing to this innate sense of justice, learned from the rigors of reality, the necessity of social living for survival.
Solon (BC 638-558) had had a glimpse of this new more relevant philosophy yonks ago -
'Men keep their agreements when it is an advantage to both parties not to break them; and I shall so frame my laws that it will be evident to the Athenians that it will be for their interest to observe them'.
Punishment of cheats was a necessary foul predicament for social animals; no wonder 'moral sentiments' were learned the hard way. There was no future survival for any social animal who didn't confront infiltrating cheats ... think about it?
But there was more more. Confronting cheats using bloody violence was costly, sometimes lethal. Armies and police forces were cheaper more reliable than the 'do it yourself' option. But a generally accepted the rule of law was a much better & cheaper alternative to violence as a route to immunity from parasites & predators.
For eons the confrontation of cheats had involved bloody violence. The behavioural strategies involved Doves and Hawks, but the Doves lost 100% of bloody confrontations and the Hawks lost 50% of them ... there must be a better way?
Slowly throughout biological history the rule of law emerged from a typical tit for tat behaviour. A tit was involved for every tat that evolved. This natural law worked well with natural social interactions and slowly became widely acceptable as an alternative to bloody violence.
The battles of ideas exposed more & more schisms over the different routes to epiphany and the general acceptability of laws was not generally accepted -
natural law emerged, Justice was ancient custom & practice which worked, this contrasted with the words on tablets of stone revealed from above ... or was it that the only tablets that survived were the ones that worked?
English Tort Law was custom & practice which worked, this contrasted with Roman Civil Law was imposed from the whims of the Senate in Rome ... or was it that the only whims that survived were the one that worked?
English Common Law contrasted with the French Napoleonic Codes
The Smith was challenging conventional wisdom, he needed a big hammer.
Adam the Smith was alive to a real problem of governance ... it seemed clear that both cooperation and immunity were required for survival ... it was an evolutionary arms race.
The Smith concluded that human behaviour had nothing to do with 'elitist regulation' nor 'laissez faire'; human behaviour was mediated by the cement of social empathy which glued together simple rules of thumb. The system was misunderstood as 'laissez faire' because it was simply not responsive to command & control manipulation. Crowd trouble continually festered when arbitrary imposition was involved. But the alternative to command & control by the powers that be from above was not 'laissez faire' it was self control and self defence of benefits by moral sentiments and resentment of cheats.
The state existed as a stage of evolutionary history as an institution which administered justice. It was charged with maintaining 'fairness of shares' and 'resentment of cheats'.
There were other 'clubs' and evolved institutions which were just. The territorial state had the advantage of scale but as a local monopoly of violence it had power to impose and was itself infiltrated by parasites & predators. The ruling elites; the Bishops, Princes, Generals & bureaucratic despots could themselves become parasitic & predatory. So the state itself had to be subjected to the law of the land and required the checks & balances of justice associated with an impartial spectator.
In 1793 Dugald Stewart wrote his sensitive biography -
'In the last part of his lectures, Smith examined those political regulations which were founded, not upon the principle of justice, but that of expediency, and which were calculated to increase the riches, power and the prosperity of a state. What he delivered on these subjects contained the substance of the work he afterwards published under the title of 'An Inquiry into the Nature & Causes of the Wealth of Nations'.
The Smith's legacy was to show that the system of human behaviour was ordered by human behaviour; by moral sentiments and tit for tat immunity. The course of nature could not be changed by the imposition of an act of state ... command & control was an illusion.
The role of government was not to offer an alternative enlightenment but to nurture an existing, evolved, ordered system of customary laws and wealth creation -
'the rules of justice for fostering the social dispositions of its subjects'
There was a clear role for the state but it was limited to stabilising the environment, peace, easy taxes and tolerable justice' --
defend the country from foreign attack. The custom & practice of English Common Law, property rights, the army, policing and the courts. Checks & balances on international & local parasites & predators.
justice based on
'fairness of shares' & 'resentment of cheats' to avoid the alternative of
the expensive bloody violence associate with parasites & predators.
The courts persevered with a justice system based on rights & obligations. Your right to own property depended on the obligations of others not to resent it.
and then, if appropriate, the thorny issue of the maintenance of some large 'public works' ...
But the 'public interest' was a slippery idea, certainly too slippery to be held in place by the interests of the Bishops, Princes, Generals or bureaucratic despots.
It seemed there were lots of publics and lots of interests!
The Smith was clear about the dangers -
'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'.
Epicurus (BC341-270) had a go at good & evil but ... it was all very difficult. If God couldn't cope with evil, what chance had the Smith with his 'moral sentiments'?
Over evolutionary time the problem of how cooperating trusting groups coped with parasites & predators has been a constant focus of activity -
biology - came up with immune systems and moral sentiments, systems and moral sentiments,
religion - taught ethical codes and tablets of stone
culture - accumulated tried & tested habits from successful custom & practice and ritual ostracism& tested habits from successful custom & practice and ritual ostracism
politics - relied on decrees from men of system and the separation of powers from men of system and the separation of powers
psychology - explored good & evil flip flopping brainstorms and the natural selection of ideas ...flip flopping brainstorms and the natural selection of ideas ...
Happenings had always constantly involved experiments; nobody possessed the knowledge to design happenings, improvements had to be discovered. Furthermore biology, religion, culture, politics and psychology were never a chronological sequence of progress, rather each was part of a whole evolving shebang & caboodle ... where the latest experiments in psychology were biology.
Freedom for John Locke was always freedom within the law, it was never laissez faire; moral sentiments & empathy were natural brakes on harms to others.
Equality for Rousseau was always equality before the law, it was never equal endowments; differences & specialisations were natural diversities feeding synergies.
Later Darwin's insights supported the Smith's criticism of Rousseau more powerfully as it became clear that moral behaviour would never have become instinctive if it had no survival value. The intelligently designed 'control' of property rights & 'control' of inequality was a political misunderstanding about the role of diversity in evolution and a calamitous failure to distinguish between successful positive sum wealth creation synergies and zero sum theft & cheating.
Thomas Jefferson also added weight to the argument -
'all men are created equal with certain inalienable rights; life, liberty & the pursuit of happiness'.
But Jefferson's plea was not for Rousseau & organised equality but a plea for diversity & liberty and a deep understanding of the immoral nature of discriminating against individuals because they were different and belonged to a group which could be identified for persecution.
Darwin showed how natural diversity and inequality were the feedstock of adaptive & economic efficiency and how inequality was dynamic and not amenable to grandiose intervention by men of system. No one knew where the next good idea was coming from and at the top of the inequality distribution the forces of competition and flexible markets (structural reforms) fed dynamic change and at the bottom of the inequality distribution education & acquisition of trades (comparative advantage) fed the competition. The problem it seemed was the tyranny & oppression of the elites which put a spanner in the works. Often with admirable intentions the elites all too often stopped the coordinating markets functioning smoothly. Everyone was tempted to have a go at price fixing rather than the hard work of discovering & accumulating cooperative synergies. But every time prices were fixed costly gluts and queues emerged.
Freedom from the tyranny & oppression of the feudal system gave folk a chance to go for betterment and stocks of goodies. But as soon as there were stocks there were inequalities and issues of fairness of shares and resentment of cheats ...
Distinguishing between good gotten and ill gotten involved a system of justice.
The Smith was onto something which had reverberated around social behaviour throughout biological history ... his work at the forge continued to weld together morality & nature.
The Smith was now well on the way to hammering out the 'natural course of things' ... humanist, empirical scepticism confronted religious morality. But unlike Hume, Smith never ruled out religious origins, he simply never mentioned them. Smith's books sold well. He understood the value of good manners and respectful rhetoric.
The religious communication system had been honed over centuries; the Smith had a formidable communication problem which he thought about deeply and recorded in his writings on 'rhetoric'.
The welding together of morality and justice was the easy bit but how on earth were folk to learn when they were soaked in the glory of the creative miracles of God and the very plausible shenanigans of Mercantilism. There was more work to be done on learning and self organisation ...
3 Learning - 'rhetoric' - interactions
There existed a universal drive for survival by learning how to continuously improve by cooperating with others. This was a natural instinctive strategy but was itself the result of learning.
Much of the heavy lifting had been done by ancient ancestors and folk had a genetic inheritance, a trajectory, as moral sentiments smoothed the way to a propensity to learn from others ... as my mentor Mark Twain put it -
'Give me a child until he is 7 and I will show you the man. But when I was 14 my father was so ignorant I could hardly stand having him around. Now I'm 21 I'm surprised how much he has learned in 7 years' ... !?
Learning came from experience & introspection and from within cultural institutions ... perhaps they were the same thing?
Either which way language was vital for both; nobody seemed to be able to think without language ... think about it!
Language evolved firstly to enable thinking & creativity. A survival device for testing things out in the imagination prior to the risky rigors of reality. Usage in communication came later when social cooperation became necessary for survival.
There was much more to learning than good teaching.
Work at the forge was an learning endeavour by way of cultural inheritance, introspection, observation and discussions with respected friends over a convivial pint of porter ... with chaser.
But don't get it wrong ... learning was not a parcel of knowledge to be handed over it was the accumulated outcomes of trial & error experiments of many folk and their many ancestors ... learning from empirical failures.
Communication was an integral part of human social activity and communication was most effective when conducted with respect and good manners.
'Rhetoric' flowed from 'sympathy' as politeness. Ignorance was humbling and Aristotle had it spot on -
'admitting one's ignorance is the first step in acquiring knowledge …'
Folk had similar emotional experiences and naturally categorised & generalised their ideas, so when you knew how the other guy was feeling the best communication strategy was to push at open doors. Learning from stories was good, empirical science was better, oratory was OK but the language of communication was always most persuasive when used with a sense of propriety; propriety learned from the necessity of social interaction for survival.
Folk had little knowledge of and little time for the micro management of the rigors of reality where improvement depended on social interactions ... they did as best as could ... they coped. Calculation was impossibly complex, there was insufficient data and no one knew how the others would react. So folk adopted simple rules of thumb, they soon learned that a smile worked wonders and that command & control caused stress ... and all the girls always knew a hug worked?
The Smith emphasised that it was ineffective to verbally assault a hostile listener; slow simple rhetoric appealing to the emotions was the effective way ... and the girls knew how to appeal to emotions.
Herbert Simon later described how ignorant folk tackled the problem of survival; simple trial & error and learning from outcomes ... empirical failures. He called it satisficing ... everyone did it all the time?
The rules of thumb embodied in 'satisficing' and 'tit for tat' behaviour helped to explain both positive sum co-operation & 2+2=5 synergies and how zero sum parasites & predators were weeded out ... the rules of thumb were simple but not selfish, not laissez faire and not automatically beneficial ... they were all tested by the rigors of reality ... hard work, honesty & thrift were simple rules of thumb which resulted in an emergent economic system which was immensely complex and physically uncontrollable ...rules of thumb embodied in 'satisficing' and 'tit for tat' behaviour helped to explain both positive sum co-operation & 2+2=5 synergies and how zero sum parasites & predators were weeded out ... the rules of thumb were simple but not selfish, not laissez faire and not automatically beneficial ... they were all tested by the rigors of reality ... hard work, honesty & thrift were simple rules of thumb which resulted in an emergent economic system which was immensely complex and physically uncontrollable ...
The Smith remembered Occam's razor and always kept things very simple; neat, clear, plain & clever as he built up his behavioural norms from the foundation of empathy. Simplicity was good thinking which Einstein was later to endorse in a hard nosed mathematical way; but the Smith's was there first; very simple rhetorical behaviour came from 'sympathy'.
Learning across the generations came from within cultural institutions and was key to the rather counterintuitive idea of biological history.
In England the nature of man and his culture was reflected in The Glorious Revolution of 1688 ... Joe Sixpack became independent & free, unhindered by Bishops, Princes, General and bureaucratic despots.
The whole system of moral sentiments, justice and learning was interlinked. Joe Sixpack not only learned from experience, he also learned from his mates ... and now there was more, he also learned from his long dead ancestors ... learning was not lost, it accumulated.
Everything it seemed revolved around the nature of man and the natural course of things ... but was there a difference between innate morality and ethical systems; the ideas were not interchangeable? Google 'The Trolley Problem' ... and think?
The golden rule of Tort Law was an example of how ethics from cultural codes could be both reinforced and in conflict with the morality of exchange.
There existed an intractable moral maze ... there was always a profusion of 'ethical taxes' for 'immoral purposes' ... the ethics of Mercantilist nationalism were often at odds with the morality of Capitalist exchange?
In 2002 Daniel Kahneman earned a Nobel Prize for his work on prospect theory which built on the Smith's ideas about innate emotions driving decision making and the difficultly of educating folk when their emotions led them astray.
Irrational emotional biases were almost impossible to counter ... folk couldn't seem to help themselves ... how to stop yourself falling in love? An age old dilemma ... 'rational' decisions always seemed to be post rationalisations of decisions already taken ...
Folk had help through the moral maze from education, enlightenment, science ... & cultural institutions.
Moral sentiments and feelings of justice were the foundations of a theory of human behaviour based on emotions rather than rationality. Although the Smith was hailed as the father of economic science it was surprising that so much neoclassical economics was based on rational expectations. Homo sapiens was not homo economicus.
As Darwinian survivors why should folk seek to be rational calculators? Folk had evolved to cope, human emotions were survival aids ... why else were they universal?
So if folk were not rationally designed what was this 'natural course of things'? There was more work to be done on self organisation?
4 Self Organisation - 'natural course of things' - adaptations
Things were happenings that just happened; and some happenings appeared quite miraculous as folk pondered Darwin's entangled bank.
There existed a universal 'natural course of things'. The world was not randomly chaotic. Who taught the birds built nests? The bees stored honey for winter ... and economic institutions emerged?
A battle of ideas raged; was the order in the universe the result of intelligent design or the laws of nature?
Moral sentiments underpinned exchange trade and justice & learning secured the synergies of specialisation & scale and the fairness of shares & resentment of cheats provided some immunity from parasites & predators ... but such feelings were subjective and in the minds of men, understood from introspection from within cultures.
Moral sentiments didn't seem to come from intelligent designers.
The Smith's 'improvements' & 'the natural course of things' were a staggering anticipation of Darwin's differential survival of inherited variants. The Smith's 'nature' was Darwin's 'natural selection'. Natural variants didn't survive unless they were improvements. Natural variants didn't survive unless they were improvements.
Adam the Smith hammered away; free markets went wrong because macho men meddled and thought they knew better ... intentions didn't build the world as there were always unintended consequences.
So don't get it wrong ... self organisation was not intelligently designed it was natural selection.
Something was going on and Adam Smith & David Hume were onto it; 'the natural course of things' had nowt to do with intelligent design ... nevertheless there was a strange and bewilderingly complex match between moral sentiments and happenings -
'They are led by an invisible hand to make nearly the same distribution of the necessities of life, which would have been made, had the earth been divided in to equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interests of the society, and afford means to the multiplication of the species'.
The Smith had 'got' Darwin's insight; moral sentiments, not intentions, yielded social survival advantages.
Adam the Smith never mentioned religion nor God's will ... but if the free market was not ordered by God's will nor human intensions what was going on? ... Darwin himself didn't write his opus until 1859.
Yet the Smith described a total interlinked system which was not designed by intelligent intent but arose from simple behavioural rules of thumb and customary laws which were evolutionary stable and very different from the imposed edicts of elites following the rape & plunder of war -
'a natural order of things, implanted the seeds of moral sentiments in the human breast'.
The impartial spectator within, was a conscience regulating economic decisions and awakening the 'feelings' of justice and weeding out cheats. Synergies emerged from interactive social affairs, there were two sides to every interaction and the instinctive moral sentiments associated with rights & obligations were a vital part of every deal. And when trust was reinforced by a generally accepted system of Tort Law, folk seemed to have an insatiable tendency 'to truck barter & exchange' ... folk did deals ... they did not intend -
Cultural institutions and stable Tort laws which checked & balanced the arbitrary power of elites and 'the men of system'. The top down ethics from God's tablets of stone and the edicts from the 'men of system' constantly generated unintended consequences.
'The man of system is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder'.
There was a natural order of things which the foibles of 'the men of system' generally messed up when they interfered. The whole system was increasingly interlinked as justice and education now seemed to revolve around moral sentiments which emerged from the universal feelings of empathy ... and it all happened as 'the natural course of things by habit, custom & learning' played out.
Trouble always seemed to come from the impositions of 'the men of system' who interfered in the natural course of things and generated unintended consequences ... regardless of intentions. The stark & troublesome social problems found everywhere were usually the result off intentional interventions (after wars?)... feudal regulation, tribute, taxes, subsidies, licensed monopolies, price fixing, protectionism & bailouts ... all such interventions undermined free trade, due diligence, caveat emptor and bankruptcy.... the only justification for the powers that be was to administer natural justice as an alternative to bloody violence not to intelligently design a justice system ... nor the deliberate, rational, purposeful, intentional, planning of history ... economic history ... biological history.
The 'men of system', the bureaucrats as 'the powers that be' had no chance.
The Smith was on to something big; the message was new and dramatic. His targets were the Physiocrats & Mercantilism; the hard work of acquiring 'know how' created wealth not the accumulation of Mercantilist gold or the agricultural output orchestrated by 'the men of system'.
The work was a far cry from earlier economic thought of Bernard de Mandeville and Quesnay, which appeared to rule out 'moral sentiments' and rely on 'the men of system' ... and revolution.
The Smith recognised universal moral sentiments as the quality which distinguished social animals from rats ... as his economic science was fabricated at the forge.
Moral sentiments were just one piece of a jigsaw puzzle of intertwining coevolution -
justice = an emotional feeling of 'fairness' of shares & 'resentment' of cheats which became embodied in customary law
learning = efficient communication & education of the youngsters through language and cultural accumulation
self organisation = simple rules of thumb of custom & practice which had survived the rigors of reality ...
A natural course of things emerged ...
The Smith recognised universal moral sentiments as the quality which distinguished social animals from rats as his economic science was fabricated at the forge. It was an 'endogenous' affair not orchestrated from above ... and it all happened as folk busied themselves and got on with the job. There was a double whammy of survival aids; some encouragement for the discovery of social synergies and some immunity from parasites & predators.
It was all very difficult to grasp; exquisite order all around us without the connivance of a God?
The Smith had pin pointed the two big problems with 'the powers that be' and their 'men of system' who orcestrated from above -
ignorance and unintended consequences ... folk and businesses constantly experimented until they found something that 'worked'
tyranny & oppression and bribery & corruption - all power corrupts and absolute power corrupts absolutely ... rent seeking bureaucrats feathered their own nests
After Darwin the science became clearer; feelings of empathy survived, and became hard wired in the brains of men and inspired simple behavioural rules of thumb which 'worked'. Darwin's science of natural selection confirmed that self consistency was a necessity for survival. The constructions which emerged all over the entangled bank only existed because they were beneficial (or neutral) to the survival of the whole shebang & caboodle. Such was the very nature of change and betterment.
In 1988 Friedrich Hayek in 'The Fatal Conceit' exposed the immense calculation problem faced by the Messiahs and 'the men of system' as they tried to construct utopia.
In 2003 Daniel Dennett in 'Freedom Evolves' exploded the myth of 'the intentional stance'.
In 2018 Dharshini David in 'The Almighty Dollar' entertained with a fun story; 'fundamentally economics is a story about how the global economy really works. It's a story about us, billions of us around the globe whose interactions and decisions underpin our fates' ... a fun story about how the men of system tried to fix prices and failed.
'The Theory of Moral Sentiments' acclaimed hard work, honesty & thrift which was mediated and guided by an innate morality. Adam the Smith then went on to explain the principles of economic growth based on his system. The behavioural rules of thumb which were involved in commercial action was the theme of the Smith second book ...
'The Wealth of Nations' acclaimed the real happenings which produced the ordinary woolen coat and the real action in the Pin Factory.
The Wealth of Nations.
Implications for Policy. Wealth Creation & Synergies from Specialisation & Scale.
1776 'An Enquiry into the Nature & Causes of the Wealth of Nations' - Implications for Policy which explored Capitalism as an alternative to Mercantilism and the Physiocrats - no deals = no synergy, no wealth creation !
After writing 'The Theory of Moral Sentiments' in 1759 Adam the Smith continued to refine his thoughts on moral philosophy right up until his death in 1790. But this major work on the nature of man had serious implications for behaviour and governance, now now.
Having bagged his magnum opus on theory, the Smith went on and critically observed & reflected on the shenanigans in France and his native Scotland. He now turned his attention to the problem of the strongly held but erroneous Mercantilists beliefs which were inhibiting betterment. The practices of wars, lords & land were the entrenched priorities of governance all over the world ... and yet south of the border in England there was a dramatic revolution taking place. Entrepreneurial capitalists started to secured new benefits of cooperative synergies and some immunity from inevitable parasites & predators ... there was real progress in 'betterment'.
What, why ... how? What was going on? Was 'the natural course of things' sorting out the cul de sac of Mercantilism? Was economics bound to triumph over bad governance in the end?
It seemed that natural biological and cultural systems were emerging among social animals as they did their own thing and tried for 'improvements'. Some productive minorities with their specialisations thrived and some economies of scale were achieved as folk voted with their feet & joined activities in 'clubs' of their choice.
All folk clubs had rules of behaviour mimicking biological systems ... or were they biological systems? -
clubs were cooperative groups, no one joined a club where folk were fighting amongst themselves - universal innate moral sentiments nurtured cooperation, politeness and polished manners
clubs were self organised, disruptive members joined other clubs or were ostracised - tit for tat innate immune systems rewarded cooperation and sanctioned parasites & predators
The best clubs & companies were in the cities, that's where the action was, where economic interactions intensified ... so folk followed their instincts ... there was a determined urban trek towards jobs and 'betterment' ... if they were free so to do.
This humanist, empirical scepticism from the fertile environment of the convivial clubs in Edinburgh now confronted the conspiracy of Mercantilist elites where wealth was assumed to be the spending power of accumulated gold acquired from others; either stolen from the Spanish or expropriated by the kings ... in a zero sum game.
But old ideas were entrenched and the Smith now had a lot of explaining to do about the creation of wealth ...
5 Wealth Creation - 'propensity to truck, barter & exchange' - synergies of specialisation & scale
There were a lot of questions ... Why were thousands of different folk involved in the production of the ordinary woolen coat? Why was the division of labour linked to the productivity of mass production in pin factories? Why did specialisation lead to exchange trade? Why was the 'natural' price different from the 'market' price? Why were competitive markets needed for lowest cost production? Why did expensive gluts and queues disappear with market prices? Why was the division of labour limited by the extent of the market? Why did the men of system mess up the competitive markets? Why were there counterintuitive unintended consequences of all intentions?
And, perhaps most important of all, why did observed reality so often differ from theory? And what to do about those ubiquitous parasites & predators who seemed to lack 'moral sentiments'? Was the administration of the rule of law the job of governments and taxes?
The Smith at the forge hammered out the wealth creation principles.
Perhaps the start point was that folk busied themselves. There existed a universal propensity to truck, barter & exchange, folk loved doing deals. Markets were not designed by the council.
The theme was not selfish 'self interest' nor divisive 'them & us' but social cooperative synergies from specialisation & scale. There were mutual benefits involved in exchange. But repeating the mantra did not work, communication was hard hard work as all this trust & cooperation was new and counterintuitive. It seemed folk were steeped in believing in the diminishing returns from land but the same cycles of increasing returns which the Smith had seen in The East India Company and in the Pin Factory were underpinning economic activity in the systems of science, imitation, innovation and investment ... increasing returns were widespread and established in custom & practice; in institutions.
Adam the Smith grasped two key ideas, although they were probably different versions of the same thing? -
The East India Company made money from trade not from exploiting the colonies and arbitrage trade was synergistic
Increasing Returns from Investment in Pin Factories blew a hole in the old idea of the primacy of land and decreasing returns.
But don't get it wrong ... it was not all hunky dory... as soon as there were stocks there were parasite & predators! Folk were always on the fiddle.
The Smith hammered again, there was a natural tendency to seek synergies from innovative interactions -
'The natural effort of every individual to better his own condition. The natural propensity to truck, barter & exchange'.
This was nowt to do with the reserves of gold & silver acquired by Bishops, Princes, Generals and bureaucrats, nothing to do with wars, lords & land ... it was not polarised tribal divisiveness & hatred, nor the perpetual myth that opulence was 'money'. Something else was going on.
Wealth was the consumable fruit of simple hard work, honesty & thrift which resulted from simple rules of thumb -
human morality was cooperation
human endeavour was satisficing
human diligence was tit for tat
human economy was emergent
'As if' a control loop ...
But don't get it wrong ... the wealth creation control loop was not designed by Bishops, Princes, Generals or bureaucrats, rather it was that behaviour which led to the destruction of wealth tended to die out.
Wealth was measured by the stream of valuable marketable goods & services; the flow of production & consumption, from the technological 'know how' embedded in 'productive resources' ... and value was determined in free exchange markets ... an idea which became a powerful analytical tool; the free exchange market was an effective control loop.
In 'free exchange' both sides of the bargain were better off; mutual benefits were involved ... otherwise why would folk exchange?
The folk markets were a buzz of accountable human beings facing the consequences of their exchange deals and their investment deals ... regulated by innate universal moral sentiments.
And even in the most difficult and corrupt environments they functioned and thrived because it was in everybody's interest that they functioned and thrived.
Carole bought scrumptious bananas and delectable coconuts in Ajegunle market ? She was pleased and Olugbo happily accepted her dollars in return.
But don't get it wrong ... of course there were problems of parasites & predators ... social costs, adverse selection & moral hazard ... but those feelings of justice & associated tort law provided a alternative to bloody violence and due diligence & caveat emptor were a natural part of market exchange which provided some immunity from the pests & beasts ... the con men. Easily available in Ajegunle market was cold tea masquerading as the best Scotch whiskey for relaxation in the sun ... but there were never any repeat purchases!
The free market provided a natural alternative to bureaucratic inefficiency as clearance prices reduced the costs of gluts & queues.
Adam the Smith did not dwell on supply & demand and clearing prices; he stuck to the cost of production theory of prices. But he cottoned on to the incentive structure built into any divergence of the 'market' price from the 'natural' price. Others built on his ideas in the 'marginal revolution' in economic science; they described 'marginal utilities' and 'opportunity costs' which further explained the invisible hand of supply & demand which was 'not part of intention'.
The exchange markets involved the collaboration of millions of folk and defied 'control' by corruptible elites. Trade & commerce provided formidable natural checks & balances on bureaucrats. The exchange system was self regulated by instinctive cooperation.
Inefficient companies like incompetent bureaucrats tended to bankruptcy. And the price fixing con men were certainly inefficient, think of all those gluts & queues!
The important point was that as the genes did cost/benefit analysis so the supply & demand clearing prices reduced the cost of gluts & queues. Uneconomic prices tended to die out, none one was prepared to bear the unnecessary costs of gluts & queues.
Just as short necked giraffes died out ... so inefficient prices and inefficient companies died out.
With hindsight the Smith's anticipation of Darwin was mind boggling. At the time, of course, nobody had thought about the short necked giraffe, nor the peacock's tail.
Everything economic before the Smith (and most economics after!) involved what Friedrich Hayek called 'The Fatal Conceit' ... because happenings were immensely complex and the future unknowable ... who did the calculations?
The nature on man was best understood through empirical science: observation, induced general theory, testable deductive hypotheses, validating experiments and peer review ... why pontificate if it all started with observation ... wake up and smell the coffee ... so who did the calculations?!
For sure all folk wanted to survive and long ago it became characteristic of human nature to be uncomfortable when unable to make sense of the world, especially when happenings seemed to repeat themselves. Failure to understand was scary but recognising patterns was an opportunity for betterment.
And the only big pattern that the Smith observed was the failure of Bishops, Princes, Generals and bureaucrats to orchestrate wealth creation from Mercantilism ... all intentions had unintended consequences.
Perhaps the rearrangement of neural connections provided the possibility of a new interpretation of complexity which worked better.
The Smith rearranged the theory of the growth of scientific knowledge and applied it to the economy through his fundamental proposition that by a focus on different practices, the division of labour generated both stronger and more innovative social interactions & cooperative synergies. This had such a powerful effect on the growth of knowledge that it became the primary instrument of economic growth; wealth creation from the synergies of specialisation & scale.
It was a short distance in thought from Smith to Darwin and then Baldwin's insight that moral sentiments were not necessarily Lamarckian acquired characteristics but could become hard wired instincts in the gene pool ... things were getting interesting.
Human activity was contemporaneous, interconnected, interactive, interdependent & emergent, a whole shebang & caboodle, perhaps, conveniently studied as 10 disciplines -
Thermodynamics - Non-Linear Emergence - Evolutionary Computer Simulation - Molecular Biology - Neuroscience - Evolutionary Psychology - Economic Anthropology - Game Theory - Biological History - Complex Adaptive Systems.
Complex Adaptive Systems were everywhere. Nonlinear mathematics was to be the science behind human activity systems and modern evolutionary economics.
If you were lucky 38 principles may have been involved ... but no one really knew, it was 'all a woven web of guesses'?
But we get ahead of ourselves ... the Smith did not delve into nonlinear mathematics; such hadn't been invented!
But don't get it wrong ... as time went on economic science became progressively closer to the truth about an evolving reality but economics could not reveal the truth ... economists always disagreed ... and there were always potent critics of the Smith's economic science.
Folk were learning and it looked like Adam Smith's system was a remarkably prescient & propitious place to start ... so let's went!
Five Books of The Wealth of Nations -
1. Productivity - specialisation - increasing returns - human capital - endogenous growth?
2. Stocks - impossible gaps - opportunity costs - risk & uncertainty?
3. Progress - scale - globalisation - the urban trek - diversity & bankruptcy?
4. Politics - institutions - funds - money - WTO?
5. Sovereign Revenues - tax burdens - lethal debt - printing?
Economic activity, doing deals, was the norm for social folk as different folk with different specialisations, different opportunity costs, different individual aptitudes & skills beavered away and tried for betterment by producing specialised goods & services which were then traded.
Specialisation and Total Factor Productivity were linked to the idea of human capital; the acquisition of skills and the learning of 'know how'.
Folk learned from the outcomes of their activity. Those neural associations in the brain which helped ignorant folk to cope with the rigors of reality were used time and again and ended up as custom & practice and then eventually became hard wired in the human genome. A process that was so far fetched that it hurt the brain ... an idea that no one understood properly ... but slow slowly more folk cottoned onto hard wired 'moral sentiments'.
Thousands of folk were involved in the production of the ordinary woolen coat and in the pin factory productivity increased. Different skills & aptitudes were combined in increasing returns. No point in specialising if you couldn't trade your trade ... was there? Nobody was self sufficient. Specialisation, division of labour, required trade. Better specialised skills came from deeper knowledge & practiced dexterity without time consuming changes of thoughts & tools ... habit, custom & learning ... familiarity also led to innovation ... ask those kids who played The Blues !
Practice made perfect acquisition of skill. Success was 10,000 hours of smart practice and one moment of opportunity for applying niche nous.
But don't get it wrong ... of course practice also made perfect mistakes ... no use practisin' useless things. There was never ever no shortage of ideas or business balls ... but some ideas were good and some ideas didn't cut the mustard ... it was natural selection that weeded them out.
Simple rules of thumb; hard work, honesty & thrift -
hard work in acquiring a time consuming specialised 'trade'
honesty in complex cooperation and exchange between many different people
thrift for the accumulation of scarce capital for investment in productive resources.
The Smith identified the necessary behavioural traits and institutions present in human nature for the accumulation of capital -
moral sentiments - an innate sense which mediated decisions and stimulated trust for different social interactions; 'there are evidently some principles in his nature, which interest him in the fortune of others' - Theory of Moral Sentiments 1759.
competitive markets - social exchange required a 'trade' to trade; 'a propensity to truck, barter and exchange ... it is not from the benevolence of the butcher that we expect our dinner but from his regard to his own interest' - Wealth of Nations 1776.
The good news was that everybody was different and thus everybody had different opportunity costs and different opportunities for exchange. Activities moved from self sufficiency to surpluses and new space for new specialisations.
But don't get it wrong ... opportunities for specialisation also brought opportunities for theft of stocks. Profitable specialisation was only possible after trust & confidence in exchange had been painfully established over time. Moral sentiments became hard wired but such sentiments were very tempting for parasitic & predatory alternatives!
What intrigue ...
The idea of the evolution of know how came late in the day and presented some conceptual difficulties. 'Know how' was useful knowledge discovered in individual brains through cooperative interactions & resultant synergies ... it was accumulated over the generations in distinctive cultures nurtured in the institutions, clubs and universities in the cities ...
The relentless process continued wherever & whenever it wasn't stifled at gun point by the powers that be ... but guns couldn't stop folk thinking and learning.
Robert Solow identified Total Factor Productivity during his work on growth accounting. He discovered from observation of the data that output growth was not accounted for by the growth in inputs of the traditional factors of production; land, labour & capital. Something else was involved.
Total factor productivity highlighted the overwhelming dependence of economic growth and wealth creation on the process of technological and institutional innovation; the discovery & accumulation of 'know how'.
Solow received a Nobel prize in 1987.
Such was counterintuitive; total factor productivity was a measure of the ignorance of the growth accountants.
The implications were important; it was the synergies from trade in technological and institutional 'know how' which determined the value of 'resources'.
In the 1980s Paul Romer (1955-) took Solow's insights further and demonstrated in Endogenous Growth Theory how technological and institutional 'know how' in commercial companies drove economic growth and how real wages were determined by productivity.
Wealth creation and economic growth were generated by cooperative synergies of specialisation and scale within the social institutions of Capitalism and not by the external manipulations of the men of system involved in the state orchestration of trade to swell the gold coffers of Mercantilism.
In the 1970s Ram Charan (1950-) had taken the Smith's notion of specialisation and 'know how' and made it the central pivot of business success. Ram Charan was a giant who assailed his students in 1975 at The Unilever General Management Course at Four Acres in the Surrey -
Strategy Position - what was it that we did better than competitors?
Helicopter Viewpoint - what were the global patterns of change which drove the external environment?
Social Groups - who was in and who was out of the social system of the business which drove the internal environment?
High Flyers - who were the future leaders of innovative change?
Synergies of Specialisation & Scale - were the leaders and the social groups moving in the desired direction into high-energy, high-powered, high-ego working teams which were more than the sum of their parts?
Tactical Objectives - were realistic plans balanced with activities of competitors so the fight was on your territory with laser-sharp priorities in a road map to destination strategic objectives?
Adapting to Environmental Feedback - was the business responding to inevitable external environmental change; creatively, positively, speedily & knowledgably? Was the business adapting?
My mate at Four Acres in 1975 was Ashok Ganguly who summed it all up brilliantly in 1999!
The Smith would have been pleased with these developments which were built on his insights into the nature of man.
Folk were social animals and naturally extended their innate moral sentiments and the exchange of love ... even to strangers ... after all, love was the most productive deal of all!
Book II: Of the Nature, Accumulation & Employment of Stocks - Property - Capital Accumulation - Comparative Advantage
The industrial revolution involved the discovery new technology and new institutions by more & more interacting strangers; providing more & more opportunities for innovation within the path dependency of the institutions. Innovation fed off itself because the knowledge base grew as division of labour specialisations and economies of scale were coordinated by the market exchange of property rights.
In the pin factory there were new demands for circulating capital and fixed capital.
Adam the Smith stressed the scarcity of the capital accumulation required for the productive process. Scarcity resulted from the pain of sacrificing consumption for accumulation ... and that took real guts & optimism.
Large scale production and economies of scale required capital accumulation for the investment to bridge the impossible gaps and implement the comparative advantage.
But don't get it wrong ... as the knowledge base grew the size and very success of the new institutions presented new problems ... problems of congestion, pollution, waste, bureaucracy ... new problems which required fixing ... fixing before blame and hatred emerged ... John Barton blamed the failure of his master for his own predicament ... the Luddites hated the new machines in the Pin Factory ... blame easily turned into hatred ...
Solutions to these problems required 'know how' ... and capital.
Capital Accumulation - impossible gaps
The increasing returns in the pin factories where were the result of specialisations but -
'the division of labour was limited by the extent of the market'
To get the cooperative synergies in the pin factory off the ground there was the problem of scale. Coordination of specialisations required the organisation of scale and finance ... capital.
Finance was required for -
Fixed Capital - necessary for the systems of buildings, plant & equipment and for the investment in distribution channels & communication in the markets
Working Capital - necessary to cover the impossible gap between procurement & sales. As expenses mounted, there was a gap between the immediate costs of production and the delayed inflow of sales revenue
Human Capital came in all manner of sizes ... and a new one ... the organisational skills needed to coordinate the non-market management hierarchies of the firm, where entrepreneurs confronted the difficult principal/agent problem.
Then there was a second, and often overlooked, impossible gap which had to be financed; the gap between the creative ideas of invention and the product innovation process - the thinking, experimenting, testing, improvement, debugging and redesign.
Who was going to pay the milk man whilst all this was going on?
All this malarkey of capital accumulation was very difficult; it required the delaying of delightful consumption, but it was essential, as Peter Mathias pointed out, for -
'supporting that great but expensive instrument of commerce, by means of which every individual in society has his subsistence, conveniences and amusement, regularly distributed to him in their proper proportions'.
No wonder the entrepreneurs struggled to attract capital for their risky, often hair brained projects; Peter Mathias again succinctly noted technology & finance were the terrible twins -
'most technical change took place in a commercial context where profitability was a condition of existence. Advance therefore became analogous to a process of 'commercial Darwinism' as well as 'technological Darwinism'.
Was there a shortage of capital or was there a shortage of profitable projects? Or were they both the same thing?
Certainly it seemed that -
'those with the ideas didn't have the money and those with the money didn't have the ideas'.
Technology and commerce were inextricably intertwined ... Peter Mathias again pointed out -
'expensive machinery and large plant increased fixed costs which were incurred whether goods were produced or not. Industrialists with expensive machinery therefore had rising incentives to keep their plant running at as near full capacity as they could. The increased output from the machines increased the flow of goods; but so also did this new commercial incentive. Both led to the need to extend the market, and to cut prices to sell more'.
The industrial revolution was all about mass production in factories ... productive output did not involve luxuries for the elites but goodies for the masses ... and mass production required technology ... and capital.
The industrial revolution was an intensely cooperative effort with universal benefits for the masses from the start ... the banks didn't get into top gear until 1750 ... but long before that folk were cooperating in commerce.
Comparative Advantage - opportunity costs
During the natural course of betterment, increased synergies flowed from more specialisation and greater scale.
Different folk, at different times, in different places had different skills & different 'know how' to ply their trades & contributions. Wealth creation was optimised when each person specialised and then traded their contribution.
Specialising in what folk were best at was a no brainer; absolute advantage.
But specialising in goods & services where folk had a comparative advantage proved to be a road block to mortal understanding. Folk didn't have to have an absolute advantage at anything. If they specialised in things that they were comparatively less rubbish at they could still be productive and trade.
Because everybody was different, everybody had different skills & aptitudes; different opportunity costs. Thus everybody could specialise in what they had a comparative advantage in and trade with others, thus maximising productive output.
There was no advantage in self sufficiency ... it was uneconomic.
With no absolute advantage in anything there were still opportunities for everyone!
In 1817 David Ricardo wrote his classic - 'On the Principles of Political Economy and Taxation'. Perhaps fruitlessly, he tried to explain the difficult concept of comparative advantage -
‘a country possessing very considerable advantages in machinery and skill, and which may therefore be enabled to manufacture commodities with much less labour than her neighbours, may in return for such commodities, import a portion of the corn required for its consumption; even if its land were more fertile and corn could be grown with less labour than in the country from which it was imported’.
A simple theory easily demonstrated with simple maths ... but ...
In 1969, Nobel Laureate Paul Samuelson was exasperated about ignorance; comparative advantage was -
'one proposition in all of the social sciences which was both true and non-trivial'
'logically true need not be argued before a mathematician; that is is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them'
It was always worth repeating. Specialising in trades with an absolute advantage over competitors was a no brainer. But what about the others, the majority with no absolute advantage in anything? Such folk with their comparative advantages could still produce and trade and benefit as total output would increase. This was wonderful motivation and folk could still innovate and discover betterment ... everybody was included in.
A dense web of linked ideas were involved in Ricardo's Theory of Comparative Advantage -
everybody did their deals only if they were happy with the price which was greater than the cost. Transport/distance was a cost always in the mix. Currency exchange rates were always in the price mix.
prices were determined in markets by supply & demand. If prices were 'fixed', gluts or queues added to costs and reduced output.
opportunity costs were always different for different people and different groups of people. If everybody produced marketable goods & services where costs were lowest and traded output would be optimised.
all goods & services were paid for, there was always a 'balance' for trade at market prices. Real wages were determine by output productivity.
The pattern was familiar. In the 19th century comparative advantage slowly ebbed away from Cheshire farming as the new industrial revolution focused innovative attention on mass production of high value manufactured products. At Crewood Hall the old innovations; selective breeding, enclosures, drainage & recovery of wastes, new cropping systems, turnips, clover, rotation, wheat & barley and manures, and even cheese making technology & mechanisation, were now old hat, everyone was in on the act ... especially overseas.
The Great Agricultural Depression of the last quarter of the 19th century was a consequence of the dramatic rise of real wages in the cities which were determined by the growing value of production ... but at the same time the price of corn was falling as determined by supply & demand in world markets and the strength of the pound sterling.
The know how of skilled English farmers had emigrated to the Empire where real wages were lower and agricultural profits higher ... corn was now produced in the new world ... and Irish cattle were arriving in Liverpool in droves ... how else could those overseas afford to buy English manufactured output?
Farm employment fell as productivity rose. Local production declined as imports rose ... in the end folk just found there were more better paid jobs in the cities ... so they enrolled. The industrial revolution required higher paid jobs in the factories ... otherwise folk would have stayed put in farming.
Of course it was the repeal of the Corn Laws in 1848 that exposed the farmers to falling prices but for sure, the customers everywhere loved it, their high wages went so much further!
In exactly the same way Edward Budd was exposed to higher costs and falling prices in the copper smelting business in Hafod.
The English success in the mass production of high value manufactured products sold overseas required a decline in local agriculture. A quid pro quo ...
This difficult concept was at the root of the repeal of the Corns Laws in 1836. Clearly it was quite possible that England had an absolute advantage in the cultivation of corn and the manufacture of cotton but a comparative advantage in cotton. The economic choice, reflected in market prices, was to specialise in cotton and trade with others in corn production. The demise of British agriculture after the industrial revolution was nothing to do with lack of expertise but rather a problem of productive success during the industrial revolution reflected in high real wages and a comparative advantage overseas in corn where there was no mass production of cotton reflected in low market prices for corn.
Paul Krugman was not being arrogant nor patronising ... the idea of comparative advantage was really really 'truly, madly, deeply difficult'.
Most folk just didn't get how everyone could benefit.
Smith, Ricardo and Krugman were adamant, every economist agreed there were two misunderstood LAWS of economics, not just 'theory', but 'universal' as they were applicable to individuals, firms, regions and countries -
Comparative Advantage - jobs lost through high opportunity costs will never come back
Supply & Demand - price fixing will always result in increased costs of gluts or queues
It was always the politicos who broke the laws, interest group lobbying & bribery in return for block votes was a way to re-election. There was a huge political benefit in terms of votes for subsidies, bailouts and intervention.
politicos could count on the economic illiteracy, 'buy British Union Jack underpants', 'British housewives can't be trusted, they don't really want plastic tulips'.
But the arguments against free & fair trade were unacceptable distractions -
Mercantilism - trade was a zero sum game, imports bad, exports good and must be protected - folk thought importing was unpatriotic and exporting was patriotic and must be protected - trade deficits were a sign of economic weakness, trade surpluses were a sign of strength and must be protected
Fixed Prices - cost to consumers was dispersed & disorganised, benefit to producers was concentrated & organised and must be protected
Unemployment - jobs gained from trade were difficult to identify, job losses must be protected
Inequality - loss to all consumers was small & in the future, benefit to each producer was high & immediate and must be protected
infant industries must be protected
strategic industries must be protected
industrialisation must be protected
diversification must be protected
anti-dumping must be protected
Although 'superficially plausible' all were flawed economics, free & fair trade helped everybody, every consumer, because of trade synergies and avoidance of unseen & unmeasured deadweight losses. Not a Panglossian pinnacle just better than the alternatives which have been tried from time to time.
Most were blinded by lost jobs for folk or in sectors with no comparative advantage. Many were unhappy with retraining and education, education, education ... moving into new high value jobs was a pain. Particularly when the benefits were constantly distorted by price fixing. Market prices avoided the costs of gluts & queues and delivered 'fairness of shares'. The powers that be invariably fixed prices and rigged the markets and they were 'resented as cheats' as crowd trouble inevitably brewed. The usual suspects were -
Regulations and non tariff barriers (NTB)
Foreign Exchange (FX) manipulation
Environmental and Health and Safety costs
Intellectual Property theft
... making a mockery of 'free & fair trade' ...
If trade shaped the better world; Why tariffs? Why barriers? Why subsidies?
The conception of free trade pioneered by David Hume, Adam Smith and David Ricardo which lay at the foundation of the economic science remained totally relevant to changing conditions ... however -
mercantilism and protectionism remained ingrained common practice
price manipulation prevented the automatic adjustment of market prices which avoided gluts & queues and chronic trade imbalances
Tragically available synergies of trade were lost.
Controversy exploded as progress made with GATT and ongoing 'Kennedy Rounds' & 'Doha Rounds' was formalised with the WTO in 1999.
1999 World Trade Organisation - The Battle of Seattle
The WTO signed everyone up but nobody did anything about productivity in case there wasn't any.
The case for business rested on the opportunities for profitable projects which created the mutual benefits of lawful free & fair trade. It was profitable to cooperate; lawful trade at market prices was in everyone's best interests. Businesses thrived in an environment of freedom & democracy in the cities, but if free trade was such a no brainer ... why did the WTO always seem to end up in the political quagmire of 'negotiated managed trade'? Negotiation was the wrong word for the discoveries & accumulations of natural selection?
Was the WTO a club which was 'open for business'? Or perhaps the WTO became just a collection of polarised politicos who disagreed?
The machinations of the World Trade Organisation and other global economic institutions exposed the difficulties faced by the men of system in business policy implementation. Sooo ... the 29,000-page treaty, reflected the bureaucratic dream of tariffs, regulations & quotas to protect interest groups against competitive value for customers?
But, of course, the intelligent design of evolution didn't work ... in 1999 there was a battle in Seattle ... could evolution be stopped by violence?
It should have been easy -
'all trade between consenting adults and their companies of choice must be lawful free & fair trade to maximise efficiency'.
'groups of motivated people thinking in novel ways about organising impact at scale by being pragmatic and non-dogmatic'
WTO Free & Fair Trade - the five rinciples were agreed -
Free Trade - no restrictive practices, no discrimination, internationally and local & expatriates
Fair Tade - no restraint of trade, lowering trade barriers, gradual Doha Rounds, opening up markets
Enforcement - no arbitrary interference, binding promises & transparency, surveilance of national policies & practices
Competition - more fair competition, no tax distortions, no subsidised zombies
Structural Reforms - transition to markets, help others to trade through education and dispute resolution
Such principles of economics proved almost impossible to implement by bureaucrats who disagreed. Such was a foul predicament, perhaps business and free & fair trade did the men of system out of a job? It was very difficult for the bureaucrats to be pro-business and pro-free & fair trade? No one could expect turkeys to vote for Christmas.
Following the lead of Walter Bagehot, in 2014 the Bank of England reiterated the WTO principles; a strategy of confronting 'lethal debt' with continued path dependent evolution. A process which rode on the ongoing inevitable cycles of the boom & bust of human emotions. The central bank was to specialise in the provision of high growth, high value, financial services in cahoots with economies of scale from global time zone synergies with the USA & China -
global commercial banks were to be diversified equity capitalised institutions with failure absorbing capacity so they didn't become zombies but evolved as risk taking innovators seeking to discover profitable projects for the investment of rainy day savings ...
global competitive markets were to be based on transparent asset valuations of profitable projects, avoiding the costs of gluts & queues and avoiding fake money created out of nothing ...
global central bank services were to orderly administer transparent market failures, to back diversified currencies & risk taking banks funding profitable technological innovation projects for customers everywhere ... encouraging folk to save & invest and restraining tax & spend ...
Tort Law, Trade & Technology drove data dependent policy - no bailout schemes, no ponzi schemes, no job creation schemes, no money printing, no moral hazard, no restraint of trade, no restrictive practices, no barriers to business but deep structural reforms freeing up clogged markets, diversified privatisation, enabling technological business cycles which created real jobs ... and if they didn't businesses went bankrupt.
Education and simple rules of thumb - chase profits and cut losses, celebrate diversity, think the unthinkable and go for hard work, honesty & thrift, expose the myth of promises & manipulation of the instinctive emotions of the business cycle and invest personal rainy day funds in the innovative technology of choice.
Sure social folk get excited & frightened together, that is the only way economics ... & sex ... worked ... think about it?
But perhaps the stirrings of adaptation appeared after the latest crisis ... the next time would be different ... the baby survived ... the rhetoric started to change? But there was crowd trouble and frustration & impatience with the men of system as arroganece, bribery & corruption set in and Doha was cancelled ... and folk started Trumpeting Brexit in an attempt to 'drain the swamp' and go balls down for 'structural reforms'.
But different folk at different times in different places had different ideas and behaved differently ... and although girls happily danced backwards, few celebrated diversity the feedstock of evolutionary change ... they knew bestry. Diversity in social animals was mediated by universal biology and innate empathies. Adam the Smith's 'moral sentiments' underpinned the vast scale of human productive interactions.
Global social and economic interactions were so diverse, dispersed & unknowable that it was physically impossible for Bishops, Princes, Generals or bureaucrats to mediate effectively through incorporation, regulation, interest group bribery and commands & controls on productive endeavour ... all in the name of unwanted solidarity, security & stability. Such hubris, never achievable, would stop evolution in its tracks. Evolution didn't work that way.
Insights from biology led inexorably to understanding economics ... not in impossibly complex detail but as a process of change ... genes did cost/benefit analysis.
Risk & Uncertainty?
Adam the Smith knew nothing of 'natural selection' and 'comparative advantage' as we know the terms today. But the output of his forge was preparing the way for the penny to drop as he described an industrial revolution and a new general theory of evolutionary economics.
The Smith was a moral philosopher not an economist ... sure he was into production, trade & a natural course of things ... but although, plain, neat & simple some of his ideas were difficult.
A modern confirmation of the Smith's 'sympathy' were the ideas later embedded in Theory of Mind. Theory of mind was an innate capacity in folk which coevolved with experience of social activity over biological history. Empathy was a related concept enabling recognition and understanding of the mind of others. But it was the 'Theory of Mind' which indicated why the vast interacting mess, the intricate web of competing ideas, could not be easily grasped by the human brain. Folk were reasoning about what was going on in the mind of others at the same time others were also reasoning about what was going on in the original mind ... an endless iteration ... 'I know that you know that she knows that I know that ...'
Complexity, change, conflict & scarcity in the real world often make reason and experience poor guides to decision making and we fall back on emotional guidance as fear or excitement take over. Normal behaviour involves 'rules of thumb' which tend to produce economic results otherwise they wouldn't have survived to become normal behaviour? Sure we develop a 'Weltanshaguung', a worldview point which has served us well in the past ... but this is a 'box' ... a bias where top down conspiracies replace counterintuitive natural selection ... where losses loom larger than gains ... creative innovation demands thinking outside the box, a 'helicopter' view of Darwin's 'entangled bank'.
Folk acted as if folk had intentions even though their intentions were determined by the intensions of others ... in this way the intentions don't structure reality ... reality was a risky mess ... ugh!
The risk associated with accumulation/investment of capital was immense.
The Smith, directly & indirectly, had a major influence on the development of Darwin’s ideas and, like Darwin, he was well aware that unhoned arguments were misunderstood. Adam Smith ordered his executors to destroy all unpublished manuscripts ... he left only the two major contributions to understanding ... his two books.
Much later, in 1996, two guys had another go at the road blocks to understanding -
Peter Bernstein - 'Against the Gods: the remarkable story of risk' ... the title said it all -
'Like Prometheus, our heroes defied the Gods and probed the darkness in search of the light that converted the unknowable future from an enemy into an opportunity'.
Paul Krugman despaired at the ongoing, and almost universal ignorance & misunderstanding of natural selection and comparative advantage -
'Ricardo’s idea is truly, madly, deeply difficult. But it is also simple & compelling to those who understand it, utterly true, immensely sophisticated ... and extremely relevant to the modern world. Any scientific concept is actually part of a dense web of linked ideas'.
The internet a dense web of linked ideas where complex problems have simple, easy-to-understand wrong answers. The problem was discovering those few and far between profitable projects ... investment risk.
Perhaps little understood but from the 18th century natural selection in England resulted in comparative advantage ebbing away from agriculture into manufacturing ... even today over 150 years later economic reality remains a mystery as the natural selection of comparative advantage has now ebbed away from manufacturing in Manchester towards the services offered in London ...
Misunderstanding 'natural selection' and 'comparative advantage' remained disruptive road blocks for students of neoclassical economics & political economy ...
Just a diminutive few recognised that the know how which led to the industrial revolution was a measure of our ignorance?
Book III: Of the Different Progress of Opulence in Different Nations - Market Size - Economies of Scale - Cities
The size of the market was important for economies of scale and defence against foreign predators.
Morality coevolved with wealth creation in commerce and trade. In the teeming cities good manners coevolved with social necessity. Division of labour, trade & capital accumulation coevolved with liberty, as free men in cities discovered & accumulated synergies of specialisation & scale which were embodied as survival 'know how' in cultural institutions. Opulence, betterment or improvement came from the speed along the trajectory of the natural course of things.
The speed of discovering & accumulating know how came from the intensification of social interactions in companies & cities.
Know how, companies & cities traveled and grew across national boundaries ... nobody could stop the flow of ideas but territorial states could nurture or stifle such progression ...
Once again the Smith was there long before Jane Jacobs acknowledged his contribution in the title of her book. The historical evidence was clear; free men in cities secured their freedom from the powers that be in return for tax revenues. Freedom from this quid pro quo brought diversity & innovation in the cites at the same time as the serfs on the land were still tied to the land owners. The city states of Northern Italy, Genoa & Venice, had led the way and cities in Holland, England & France followed the pattern. Elsewhere almost invariably the wealth creation in the great cities was snuffed out by the powers that be ... the feudal powers that be.
China, India, Portugal, Spain, and even France never achieved the status of self sustaining productive growth. They were undone by a feudal focus on -
primacy of diminishing returns from agriculture
predation by the powers that be ...
The cookie crumbled a different way in England.
Did an island nation have lower defence costs and lower predatory taxes? Or did maritime supremacy and overseas trade nurture capital accumulation and funding solutions? Or did the English Reformation and civil war result in a toleration of diversity? Or did the industrial revolution nurture and stabilise the middle class bulge as everyone was included in as populations exploded? ... so many possibilities all necessary but not sufficient?
The Smith, perhaps, misled his students with the title of his book ... the Nation was not the creator of wealth ... wealth was created by the technological & institutional innovations of freemen in the cities.
A natural course of things led from hunter gatherers, feudal agriculture, to surpluses to free production, to cities, manufacturing, industrialisation and global trade ...
As feudalism broke down individual freedom was a vital element in learning & creativity. Some nations went faster than others, but the trend was clear ... increasing market size.
Global populations were projected to peak at 10 billion in 2100 plus with 8 billion in the cities. Paul Romer -
'The urbanization project is building an integrated social system in which people, spread across the globe, can cooperate. In this system, cities are both locations that facilitate local cooperation and nodes that channel the flows of goods and people that facilitate global cooperation'.
This was a continuation of the intensification which started when hunter bands first settled and cultivated crops & domesticated animals. A spurt in the process resulted from agricultural surpluses when folk had the time to acquire artisan skills where the products of specialisation had to be traded in busy markets. A giant leap resulted from the industrial revolution as mass production was centralised in factories. Folk stopped dying of famine & disease and populations exploded as more production problems were solved. Folk started to focus on the quality not quantity of kids and populations began to stabilise.
It seemed, just like the human body itself, there was an optimum size for cities where synergies & increasing returns balanced diminishing returns.
The economics of the pecking order and the top down imposition of arbitrary power was a distraction for industrialised economies where synergies emerged from social interactions.
Things were slowed down by the powers that be. The landed gentry with 'primogeniture' hung onto the status quo and privileged access to land which did not lend itself to improvement.
Nevertheless an increasing number of free men were trading surpluses in the towns & cities. Cities became linked to political freedom, stability and equality under the law. The law became separated from political power of the landed gentry. Capital accumulation became protected from thieves. Populations exploded.
It was a slow movement as synergies progressed and cheats were weeded out. Sovereigns themselves became accountable to natural Tort Laws and trading bankruptcies weeded out the cheats.
Why Europe? Why an agricultural revolution? Why an industrial revolution?
Europe was first to the industrial revolution, but the urban trek and growth of cities was a global affair. Unless stopped by guns and tanks folk got out their barrows and flocked to the action downtown. This was no conspiracy of the powers that be, it was folk voting with their feet and joining a club of their choice.
Global Cities were the engines of economic growth, cities were all about folk interacting, markets were all about folk exchanging ... cities & markets emerged from intensified interactions of folk, the process was evolutionary and the evidence was in history. The Mercantilist theories of the primacy of land were debunked by the urban trekkers and the rise of intensified interactions in the cites. The urban trekkers flocked to the cities.
Intensified trade in Towns & Cities provided three benefits -
markets for exchange of surpluses
new wealth for investment in land for improvement broke down the feudal system
more cooperation and less violence as wealth ebbed away from the landed gentry.
In this way city dwellers were forces of wealth creation in trade & industry, while the estates and the lifestyles of landed gentry involved economic stagnation, political oppression and prEdation.
The growth of the cities clearly identified their wealth creating potential and the mutual benefits of hard work regardless of tribalism and social class.
But don't get it wrong ... all too often the wealth creation in the cities was stifled by the rent seeking parasitic nature of the landed gentry and the powers that be.
Adam the Smith didn't focus on cities his attention was the Nation State and the coordination of policy.
But in 1985 Jane Jacobs reconfirmed the credentials of the cities
Successful cities attracted smart people with a mix of skills who cooperated in a pro-business atmosphere.
Cities, vast networks of billions of individual deals where interactions produced wealth creating institutions which were far too complex for mere folk to understand let alone manipulate. There were real jobs in the cities for the youngsters and they paid well so they joined the urban trek. This was evolution where some random innovations emerged which seemed to work and were chased, and others which didn't work were cut ... the where, when, what, who and how were only grasped with hindsight sometime somewhere in the future. Just like the termites in Africa, beavering away at the coalface, making their contributions to survival, but with each individual having no understanding of the physical structures that were emerging.
Economic behaviour was unstoppable the jobs & the girls were in London in the cities. This was not utopia, all too often there was squalor, unemployment & subsistence, but it was better than the alternative? Why stay put with rural famine & disease where the idyllic past was a myth. The excitement & pleasure of niche construction in the cities contrasted with the fear & pain of dependency on the land. The cities constantly evolved, they had a life of their own and Nation States appeared moribund. Artificial lines on maps and violence didn't stop folk voting with their feet and experimenting with their own clubs & behavioural rules.
The city states of Greece traded olives & wine for grain from the north. Along the silk road from Bagdad to Canton trade synergies made letters of safe passage profitable. Bruges and the Hanseatic League made it with wool. From Genoa & Venice to the east, cities dominated trade. Perhaps the greatest urban trek of all was to North America ... there Thomas Jefferson and his mates demonstrated that there were genuine alternative choices.
The future was no longer zero sum and competitive red in tooth & claw but positive sum cooperation in global cities with a life of their own with evolving institutions & technology ... perhaps Palo Alto & London were more relevant than the Washington & Westminster bureaucrats? Governments sponsoring wars, lords & land couldn't solve the problems of bad behaviour but perhaps innate moral sentiments and new 'know how' had a chance?
To protect minority specialisations & secure economies of scale, social animals voted with their feet & joined clubs of their choice in the cities where economic interactions were intensified.
All folk clubs had rules of behaviour involving biological systems -
universal moral sentiments nurtured cooperation and
tit for tat immune systems rewarded cooperation & coped with parasites & predators.
This was not analogy this was ontology!
Some of the great clubs like the Lunar Society were spawned in the cities. But why was the success of the business clubs so often resented, even hated? Was there a tendency in liberal democracies for an anti business culture and suspicion of accumulation from exploitation?
Perhaps the only
answer to resistance to social change was education ... understanding enterprise,
risk and bankruptcy ...
Betterment resulting from weeding out the many failures associated with many experiments was a strange idea ... it ran against the grain. The teeming diversity in the cities involved many casualties. In the markets most ideas failed, being second best was up against the best and it was a no brainer for the customers.
Nobody enjoyed failure, but in the absence of the knowledge about the future, 'know how' had to be discovered by trials ... and consequently errors always proliferated as there were many more ways of being dead than alive.
There was no necessary shame in bankruptcy ... failed experiments were a natural course of things? And folk learned from failures.
The whole complex complexity was complicated because no one was in control ... and as the cookie crumbled nobody knew in advance -
which deals produced the most synergies
which deals ended up bankrupt and
which deals involved the treachery of parasites & predators
And inevitably more complexity, more change, more conflict, more scarcity ... but, of course, nobody said it was easy -
always heinous predators & parasites ... as moral sentiments were never straight forward and there were always plenty of folk around who tried to secure wealth by theft ...
always arrogant Bishops, Princes, Generals & bureaucrats who thought they knew better ... as tax was paid for protection ... moral hazard escalated as failures were bailed out ...
always expensive gluts & queues ... as folk persistently tried to fix prices ...
always hopeless trust busting failures ... as the best laid plans of mice and men go oft awry ...
And keeping track of all the myriad exchange deals and synergies was a nightmare ... who owed how much of what when to whom and where how? ... and who benefitted? ... where was the synergy? ... how was it measured? ... who trusted who?
The Smith vigorously attacked antiquated government regulations which hindered industrial expansion. Particularly Mercantilism & protectionism. Wealth was gained from trade it was not found in money. Money facilitated exchange, it was a measuring system. Money had no intrinsic value, value involved labour doing deals.
Meanwhile, back at the coal face, business men were wrestling with the industrial revolution ... one of the many possible routes to epiphany for the businessmen was Adam Smith's new science of economics.
Mercantilism was a misunderstanding. The Smith suggested success was best explained by synergies of free trade.
How ironic that it was a Scot who explained the English industrial revolution to the English? The English themselves, of course, had no idea about the economic science, they just got on with the job ... and that was just the way the cookie crumbled ... they were trying to feed the kids.
The key idea was that savings from todays consumption funded tomorrows productive investments and geared growth as compound interest.
The history of the industrial revolution was usually written as a description of the exploitation of innovative technology. However, perhaps, the technology was the 'easy' bit ... the sobering reality was that however brilliant the technology, mass production systems always needed capital up front ... capital accumulation -
wool merchants of Leeds provided capital for the farmers to cover the gap from clip to cloth and the natural seasonal bursts of production on the farms which were matched by an infuriating boom & bust in the markets as trade itself always seemed to ebb & flow.
John Freame of Barclays Bank, provided capital for The London Lead Company where the locals had the ore from the mines but not the capital for the smelters.
John Brunner organised the capital for the partnership with Ludwig Mond at Brunner Mond where debugging and scale up of complex chemistry took time & patience.
The forgotten men of the industrial revolution were the providers of risk capital ... capital accumulation was painfully difficult, it required a double whammy -
margin & speed ... marketable products & services with value in excess of costs
saving ... delayed consumption
... ask Edward III, he had lots of alternative wheezes for the accumulation of capital like taxes, debts & coin clipping; but such predation & rent seeking always failed to cut the mustard?
In 1836, James Wheeler, was amongst the many who had another go at explaining what was going on. The changes associated with the industrial revolution produced dramatic increases in wealth. But an inevitable consequence of trade and market choices was a log normal distribution in incomes ... and inequality and crowd trouble, always produced fertile ground for interest group pressure on politics.
In spite of the free trade breakthrough in repealing the Corn Laws in 1846, the powers that be were always tempted to respond to powerful interest group pressure by protectionism and price fixing; tariffs, import & exchange rate controls and subsidies were routinely offered in exchange for votes. All were desperate attempts too halt the inevitable decline of farm incomes as manufacturing incomes rose. Rigging the market was always problematic because distorted prices & regulation always produced expensive gluts & queues, costs and more costs ... who was going to pay? ... how were the books to be balanced? ... how was moral hazard avoided?
It appeared that England was a fast learner and 'won' all the free trade political battles ... against the East India Company's monopoly in 1813, against Napoleon's 'Continental System' in 1815, and against the Corn Laws in 1846 ... but it seemed the battle of viewpoints still raged on as restraint of trade reappeared at every opportunity and state monopolies continued to appear ...
Crewood Hall was a terrible casualty of free trade ... and copper smelting also succumbed in Hafod ... and later in rural India, Mahatma Ghandi built a national movement out of the plight of the rural cotton workers when confronted with imports from Manchester. Nevertheless there was always opportunity for everybody as everybody always had different 'opportunity costs' ... and that was the kernel of the misunderstanding ... the questions were -
What was your specialisation, what was your trade, what was your comparative advantage?
Who was stopping you learning & trading?
The decline in agriculture provided salutary lessons and tragically the same lessons had to be painfully relearned with the decline in manufacturing during the 20th century which energised new vested interests and confrontations with the new comparative advantage in financial services ... the old Luddites smashed machines, the new Luddites screwed the banks ...
However in the WTO and a few specialised financial folk in the global Banks were getting excited, because they knew, for sure, that it was debt that was lethal not the banks ... the banks knew the difference between a Bill of Exchange and a mortgage? The difference between funding profitable projects through reinvestment of surpluses and funding through lethal debt.
Perhaps the problem was not with the machines nor the banks, but perhaps the problem was with the parasites & predators who devoured the wherewithal to fund the profitable products which balanced the Balance Sheets of the commercial banks?
The commercial bank Balance Sheets said it all; it was the profitable projects assets that balanced the money and debt.
Just before the publication of 'The Wealth of Nations' the Smith had been mulling over the failure of the Ayr Bank. The Ayr Bank had been founded in 1769 as Douglas Heron & Co and it expanded rapidly to Edinburgh and Dumfries. It succeeded in wrestling a significant chunk of Scottish banking business from the Bank of Scotland and the Royal Bank of Scotland. By 1772 the Ayr Bank supplied 25% of Scotland's bank notes and deposits. In June 1772 one of Ayr's largest customers absconded from London for Paris to avoid debt repayments. A run on the Ayr Bank began ...
Douglas Heron & Co 'promised to pay' ... but they ran out of the wherewithal ... and they couldn't.
Business risk was a problem, compounded by parasites & predators; often good intentions, confidence & trust, due diligence & caveat emptor couldn't deliver ... there was no necessary shame in bankruptcy ... failed experiments were a natural course of things?
Failure was not always dishonest fraud, many times projects ended up on the wrong side of risk.
Just before publication of 'The Wealth of Nations' in 1772 the Smith was questioned by Hume about the Ayr Bank debacle -
'Do these Events any–wise affect your Theory? Or will it occasion the Revisal of any Chapters'?
In the revised chapters the Smith reaffirmed the philosophy of the Scottish Enlightenment; sceptical understanding and a natural course of things. The Smith and David Hume had developed their understanding together. Hume was remembered as a philosopher but David Hume was an economist. He came from John Locke and extended Locke's philosophy into economics.
Hume's writings in 'Of Commerce' & 'Of Money' were an amazing display of how he was able to cope with the levels in 'Theory of Mind' and was able to grasp the many & varied interconnected parts of the whole economic system - trade, money, interest, taxes and international trade. Hume & Smith were on the same wavelength as they put the world to rights during their debates. They began to understand savings & investments, the way money measurements distorted capital allocation, the role of time in the production process and the role of credit in bridging the impossible gap. Central to Hume's writings on economics were -
rights - private property was not a natural right, but a necessary fairness
Private property existed because valuable goods & services which resulted
from specialisation of labour were scarce.
Folk traded their surpluses and trade was mutually beneficial, both parties gained. Free trade benefited everybody ... including the state. In the absence of money the exchange of surpluses would be 'very much clogged and embarrassed in its operations'. Prudent men always held, as an intermediary, a quantity of money that, 'few people would be likely to refuse in exchange for the produce of their industry'.
If there were unlimited goods there would be no need for private property. (Anticipating the mistake of Marx who later assumed the problem of production had been solved!)
Overconcentration of power, resulted in income disparity and impoverishment of the poor and the discouragement of
The labor theory of value included mental as well as physical labour. (It was not until the 1870s that the marginal
utility doctrine superseded the labor value theory)
An unequal distribution of wealth was natural as individuals specialised and honed their skills as they tried for betterment. This was a double whammy not only did individuals fulfill their potential but also society benefitted from innovation and productive output of goods & services.
Men of system striving for equality tended to destroy hard work, honesty & thrift which led to impoverishment.
a quantity of money theory - there was a correlation between money in
circulation and price levels.
'Balance' applied to a monetary theory of value -
'The prices of every thing depended on the proportion between commodities and money, and that any considerable alteration on either has the same effect, either of heightening or lowering the price. Increase the commodities, they become cheaper; increase the money, values rise. As, on the other hand, a diminution of the former, and that of the latter, have contrary tendencies. Money is not, properly speaking, one of the subjects of commerce; but only the instrument which men have agreed upon to facilitate the exchange of one commodity for another. It is none of the wheels of trade: It is the oil which renders the motion of the wheels more smooth and easy'.
Money supply increase did not increase output it was a neutral lubricant,
but created a temporary stimulus because there was a time lag. Dynamics,
time and psychological expectations became important variables in economics.
Wealth increases faster than money because of 'change of customs and manners' or productivity. (Anticipating Solow and Total Factor Productivity)
Interest rates were determined in real commercial trade and the supply of profitable projects which demanded funding.
Public debt was harmful because it raised costs and reduced consumption. (Anticipating 'dead weight burdens')
an international theory of the balance of trade - one nation's gain was not
another's loss, international trade involved larger differences in
counterparties from differences in natural endowments and larger arbitrage
trade opportunities. When a country went for a mercantilist policy of trade,
the steady inflow of gold resulted in inflation, a self adjusting price
mechanism, which made the country less competitive.
Economics was about balance.
If central banks did not intervene trade flows had to come back into balance because goods & services were paid for. Free trade created much more wealth than Mercantilism.
A nation's wealth was not determined by the amount of gold it had stashed away but by the marketable goods and services it produced.
Countless other later economists, revisited, revised & denounced these straight forward theories or rules of thumb ... but the fundamental economic principles in 'Of Commerce' & 'Of Money' & 'The Wealth of Nations' remained intact.
The Smith cottoned onto the vast cost of funding the impossible gaps and maintaining, 'the wheel of circulation'. He suggested replacing gold, 'a very expensive instrument of commerce with one much less costly, and sometimes equally convenient'; the 'judicious operations' of the commercial banking system ... promissory notes for the future! But for 'industrious' purposes not 'prodigality'!
There were 'liquidity costs' of holding reserves of gold; opportunity costs as the banks assets were not 'working'. There were also replenishment costs of over issue in excess of 'the needs of trade', because any over issue would not add to production and 'there would immediately, therefore, be a run on the banks to the whole extent of the superfluous paper'.
The Smith suggested that banks should be vigilant to avoid bankruptcy, advocating the 'real bills doctrine'. Banks must verify collateral and ensure that the bills of exchange upon which they issued credit were the result of real economic transactions between 'real creditors' and 'real debtors'; due diligence and caveat emptor ... and a 'water pond' analogy, 'a stream is continually running out, yet another is continually running in, fully equal to that which is runs out'. In this way 'vast and expensive projects' could be undertaken. But fictitious bills of exchange whose provenance was obscure were to be treated with skepticism, 'the stream which is in this case continually running out from its coffers is necessarily larger than that which is continually running in'!
For 150 years the study of Economics has wrestled with the 'mechanics' of the Smith's 'water pond' and particularly the nature of value and the balancing of both sides of the Commercial Bank Balance Sheets. The last time I checked happenings monetary policy became a tad more complicated than Hume and the Smith's brilliant exposition of the basics; instead of a 'water pond' perhaps there was a complex adaptive system.
Say's Law, business cycles, and 'causes' of imbalances were hotly debated but the idea of 'balance' was never disputed. For sure The Ayr Bank (and countless others since!) had fallen victim to 'chimerical projectors'!
Money could not be created out of nothing! Commercial Bank Balance Sheets must balance! Banks who lent 'fictitious money' were in trouble!
The key was the selection of profitable projects for investment by maintaining underwriting standards and avoidance of fake money to fund consumption (inflation) and asset prices (bubbles).
All was a perception of value and in this way bankruptcy was a sifting process to make room for 'improvement' ... guaranteeing 'fictitious' money didn't upset the apple cart.
Adam the Smith's insight was dramatic ... synergies were the key to understanding ... wealth creation was an evolutionarily stable survival strategy where positive sum deals involved cooperative synergies of specialisation & scale, 2+2=5. The rich made work for the poor, that's why they were rich; everybody depended on everybody else ... think of the pin factory.
Customers in cities needed nourishing protein and Cheshire farmers wanted to exchange their surpluses of scrumptious cheese for Wedgwood porcelain, Darby pots and Arkwright cottons ... the industrial revolution was built on self funding synergistic win win deals. Folk cashed in on specialisation & scale ... everyone beavered about doing deals as they learned more & more specialised skills and lived in larger & larger groups ...
But don't get it wrong ... parasites & predators were inevitable, there was always a counter party risk to every deal. Them & us conflict and rigged prices didn't clear the markets. The Wars, Lords & Land of Mercantilism were happenings of the past but they were still around and persisted as scams, cons, adulterations, price gouging & all manner of exploitations ... everywhere.
But diversity & choice gave folk a chance; cooperators were around as well as con men. If Cheshire cheese was not up to the mark there was a rich diversity of alternatives; Cheddar, Wensleydale, Caerphilly, Double Gloucester, Stilton, Red Leicester, all farmers were eager for satisfied customers.
Folk simply voted with their feet (and their shillings), they rejected things that didn't work, there were no flies on Joe Sixpack. 'caveat emptor' & 'due diligence' were behavioural norms ... 'would you buy a second hand car from that man'? ... the con men went bankrupt ... it was the discovery & accumulation ... and funding ... of profitable projects that mattered.
Book V: Of the Revenue of the Sovereign - Tax, Borrow or Print
The bane of 'the powers that be' was revenue raising for essentials which were often impossible for Joe Sixpack and his mates to provide by social interaction. However those claiming impossibilities were often rubbished by new innovative know how.
Adam the Smith agued against arbitrary power but he did not argue against the state. There was no doubt in his mind that the state was necessary for the battle against predators & parasites of all shapes & sizes -
defence - the problem of external predators
administration of justice - the problem of internal parasites
public works from earmarked tolls - the problem of free riders
natural monopolies & asymmetric information - the problem of adverse
'Would you but a second hand car from this man?'
help for the poor - the problem of
'If it's free put me down for two please'
Everything else organised by the men of system, including merit goods, health & education services, were best sourced from private institutions carrying their own costs born by consumers.
Mostly protection from 12 good men and true in independent courts were a better bet than the men of system.
The Smith argued that the track record of the top down organisation of human economic activity by the men of system was appalling ... not only was the 'watchmaker blind' but 'power corrupts and absolute power corrupted absolutely' ... and although moral sentiments were universal ... different folk at different times in different places had their own ideas about how to cut the mustard and they always resented imposition by the powers that be who ever they might be ... and for sure, the powers that be came in many different guises ... Bishops, Princes, Generals & bureaucratic despots ...
Folk woke up and smelt the coffee ... there was a healthy mistrust of governance. The only thing everybody agreed about was that checks & balances were needed as Montesquieu opined.
The Smith criticised the arbitrary state but he also criticised the industrial system and the new problems of congestion, poverty, pollution and waste which degraded of the quality of life. However the exercising of arbitrary power by elites and the new industrial problems were best confronted by competition and natural justice.
The Smith did not emphasise the dramatic power of technology to solve problems ... even though James Watt was a friend & neighbour in Glasgow. But he did believe in education, education, education ... and problems were to be confronted by productive jobs, jobs, jobs ... all of which required the buttressing of moral sentiments to avoid the alienation & hatred which came from misunderstanding.
The task of the sovereign was not authoritarian but to lead the troops with dignity, protect an independent judiciary and clarify consistent, predictable, non discriminatory, customary law.
The heart of good governance and the golden rule was 'fairness of shares' and 'resentment of cheats'.
In 1948 The Universal Declaration of Human Rights had an Article 30 caveat - freedom was protected but no one was free to harm others. The Rawlsian 'veil of ignorance' also took justice back to the golden rule.
The state provision of defence, justice & public goods required viable tax revenues that reflected the distribution of protected property and was cheap & easy to understand & collect. The Smith accepted taxation was unavoidable but he was an advocate of 'simple' and 'easy' taxes.
Taxes should avoid the double whammy of -
immoral discrimination from bribery & corruption in exchange for political votes
costly inefficiency from distortions of choice (Impossibility Theorem) & productivity (Dead Weight Burdens).
The Smith suggested four principles -
proportionality - 'fair' and proportional to income but not discriminatory.
Under the protection of the state some folk created more wealth than others.
The Nile flood plain tax was not
discriminatory and not influenced by interest group pressure.
transparency - certain & predictable not arbitrary.
The flat rate poll tax was easy and involved no discrimination, where the incidence was passed on to others.
convenience - simple & convenient to pay
Land & houses were easy they stayed put, but profit was mobile and income from capital fugitive.
efficiency - simple & economic to collect
Unintended consequences of discrimination, marginal & average tax rates -
marginal distortions, introduced costly imbalances of gluts & queues, which demotivated productivity improvements.
average burden, introduced costly reductions of output & growth, which reduced cooperative synergies.
But at the end of the day nobody liked the tax system as it grew in complexity because of disagreements about 'fairness of shares' and 'resentment of cheats'.
Rousseau justified sovereign taxes as a 'social contract' where taxes were paid in return for the protection of property ... but there was no 'general will' of the people because everyone disagreed ... just listen to them!
The Smith promoted the idea of moral sentiments underpinning natural law and a justice system backed by 12 good men and true ... a better bet at protecting property from parasites & predators than the whim of potentially corrupt sovereigns.
The Free Traders and Commercial Banks in the cities were so successful in creating wealth during the industrial revolution that surprise, surprise, the powers that be became interested ... wealth created in the factories became a target and source of tax revenues. And by a con trick the taxing of companies avoided taxing voters? Some 'enlightened' sovereigns encouraged commercial trading activity so they could fill their coffers. This was a clear confirmation that the Physiocrats had it wrong when they held that land was the only source of wealth.
Although factories went bankrupt quite regularly during the sifting process, long since forever, nation states also went bankrupt ... ask Edward III ?
Continually after the industrial revolution nation states imposed their taxes on the factories and the on-costs reduced output & growth ... or worse.
Taxing production was not an easy way out ... there was a dead weight loss.
Institute of Fiscal Studies in 2015 -
'The burden of taxes ultimately falls on people rather than companies, with a substantial part falling on workers. Lower corporation tax may feed through into higher wages. Furthermore companies should not be encouraged by the tax system to use debt, instead governments should consider a tax break for the cost of equity finance. There was no economic reason to require revenue to be raised from corporation tax, instead it would be best to reform the tax base to remove distortions'.
Perhaps the biggest con of all was the delusion that taxes could or should be paid by 'someone else' ... usually the rich or companies ... but companies ultimastely must to pay their bills for the production of better mouse traps otherwise they went bankrupt. Tax transparently reduced the production of better mousetraps ... a drag on economic growth ... a drag on innovation ... a drag on discovery & accumulation of 'know how' ... a cost ultimately paid for by Joe Sixpack as a customer, employee or investor/saver ... a drag on the growth of real income ... 'someone else' never paid?
Problems abounded - church and state were rivals for tax revenues. But both were themselves vested interests? Interest group lobbying was rife? Bribery & corruption ramapnt? Avoidance & evasion normal? There were gluts & queues in public institutions? Market prices eliminated gluts & queues and price fixing cost, so who was going to pay? ... and more ...
It appeared as soon as there was discrimination in the tax system there was crowd trouble ... and the only tax that was not discriminatory and did not result in distortions and losses was the poll tax ... and most folk thought the only non discriminatory tax was 'unfair'!
But hindsight was not available to folk who thought they had foresight?
Laffer examined the strange difference between tax rates & tax revenues. There was an obvious limit to taxation ... so sovereigns borrowed instead.
The ambitions of the powers that be whether parasitic or benevolent were always grandiose. Tax revenues were always insufficient -
supply of funds - folk always avoided tax it was both an imposition and a cost burden
demand for funds - grandiose schemes always outstripped tax revenues, resources were scarce
When tax revenues inevitably ran out, borrowing started. But David Ricardo suggested an 'equivalence'; tax now or tax later. There was no free lunch.
Think about macho men meddling in natural justice as 'fairness of shares' and 'resentment of cheats' became a matter for legislation rather than a matter of biological history -
'Just as it is right to ensure that every benefit is fully justified, so we must ensure that every tax bill is paid in full. There are some people who believe that not paying their fair share of tax is a lifestyle choice that is socially acceptable. Just like the benefit cheats, they take the resources from those who need them most. Tax avoidance and evasion are unacceptable in the best of times but in today's times it is morally indefensible' ... debate 2015.
But what was a fair share and who were the cheats? And was borrowing a way out of the funding conundrum?
Way before The Usury Acts, and the remorseless battles for credit, debtors tended to be favoured over creditors ... after all there were more debtors than creditors and everybody had just one vote ...
The State always seemed to borrowing, and debt was even encouraged as risk free. Interest could be paid out of future tax revenues ... so debt was relieved and equity risk was taxed ... but the results were predictable!
The scrambling to avoid unavoidable risk made no economic sense.
As both lender and borrower accepted risk and both hoped to benefit was Polonius and 'neither lender nor borrow be' ... sensible advice?
The impartial spectator was understandably perplexed ... the problem of funding the industrial revolution had spawned many successful institutions ... and the unsuccessful institutions went bankrupt ... such was the natural course of things.
The Smith was clear debt was at its most lethal when funding the grandiose wars of the sovereigns. Understanding was needed to avoid default -
market prices avoided the imbalances of gluts & queues
business diversity avoided the monopoly of too big to fail
debt write offs avoided the unbalance Balance Sheets
economic growth was a process of creative destruction, bankruptcy was an essential part of the process.
Did government borrowing involve 'fairness of shares' & 'resentment of cheats' or arbitrary discrimination in favour of debt and inflation by the men of system?
Ronald Coase had another answer to social costs ... which no one understood ... property rights were the solution to what Rousseau thought was the problem! Regardless of ownership title Coasian bargain deals resulted in efficient solutions.
Following tax burden discrimination and lethal debt what was left to do but to print money?
But real money cannot be created out of nothing! Balance Sheets must balance!
The Smith stated that the wealth of nations did not consist of 'money' but rather of real output production of marketable good & services.
The real bills doctrine required that the commercial bill was based on a real income stream from marketable production.
But, of course, there was nothing that could stop the banker from malevolence or misjudgment from getting the value wrong and over paying for the bill ... it was the safeguard of bankruptcy that weeded out the problems regardless of the root cause.
Adam the Smith 'got' money long long before the Marginal Revolution and Quantitative Easing confused the minds of ignorant folk ... and folk were not as ignorant as the con men who printed & pretended with their fake money ... folk just knew money could not be 'created out of nothing' ... it was all a matter of trust in exchange ...
Listen to the Smith -
'All money is a matter of belief'.
'The things which have the greatest value in use have frequently little or no value in exchange; on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it'.
Sceptical folk in Edinburgh knew things could be made worse by financial innovations where making money out of money was directed outside the sphere of production & trade. The the buying and selling of risk was economically beneficial as market prices removed imbalances ... but ultimately every trade had to be underpinned by a income stream generated from production. If the income stream dried up, for whatever reason, the institution went bankrupt ... just like the short necked giraffe.
Adam the Smith had now built the foundations of understanding; moral sentiments, justice, learning, self organisation and wealth creation ... and balanced Balance Sheets ... simple rules of thumb.
He had then applied scientific method and started to build up the framework principles of economics. Basic principles which others have since built on ... and often misinterpreted.
After the 2008 crisis many economists reappraised their previous thinking, but there was little from The Scottish Enlightenment & Adam Smith that needed change. No doubt the Smith would have re-emphasised his mantra -
why on earth did the banks lend on such doubtful unverifiable collateral, most of which was entirely fictitious?
why on earth did the men of system guarantee the debt, when unintended consequences were bound to follow?
The corrupting unintended consequences of ignorance!
After 2008 there was a revolution in Scotland; it was Adam Smith turning in his grave! Adam the Smith was not mentioned in the Scottish independence debate in 2015? And in 2015 my Scottish mate David Bruce sensed the power of the 'moral sentiments' of Adam the Smith as he chastised the 'men of system' -
'You will appreciate that I have instructed my MP that it is every citizen’s moral duty to avoid tax to the maximum extent legally possible in order to deprive worthless & cash strapped politicos of the where-with-all to squander our hard earned, honestly acquired & thriftily saved wealth on their grandiose ego trips; wealth that they, the politicos, have proved incapable of creating themselves'!
The key economic decision was the selection of profitable projects for risk investment by maintaining underwriting standards and avoidance of creating fake money to fund consumption (inflation) and asset prices (bubbles) and zero sum gambling.
Each and every one of us needs sunny day savings for the rainy day winter that's sure to come!
Karl Marx (1818-83)
The Nature of Grip. Who was in control?
'the powers that be'? 'squeezed the rich till the pips squeaked'?
Perhaps the most contentious idea emerging from the Scottish Enlightenment was the Smith's suggestion of a 'natural course of things' which the 'men of system' messed up. No one was in control. Bottom up adaptations just happened and started to rip.
Ruminate on the history of the emergence of companies & cities all over the world ... and ruminate on the nature of grip on political and economic activity. The Nation State was not the creator of wealth. When ordinary folk were freed from tyranny & oppression they busied themselves ... they trucked, bartered & exchanged and trekked to the cities to intensify social interactions and create wealth. The urban trek was not orchestrated by the powers that be; folk constantly searched for improvement.
Adam the Smith described what was happening, above all he had a natural explanation for the industrial revolution and capitalism. Karl Marx described a man made utopia, no where near to any reality.
In 1688 The Glorious Revolution which broke the grip of the feudal kings in England and dispersed the creation of wealth which led inexorably to the industrial revolution.
1789 The French revolution & Napoleon broke the grip of the incumbent landed gentry and replaced them with new despots and bureaucracies; more top down orchestration.
In 1848 Marx suggested that during the industrial revolution the production problem had been solved but a problem of the fairness of shares had been created as the capitalists stole all the gravy. Revolution was required to break the grip of the powers that be. But Marx and his ideas had 'progressed', the revolution no longer targeted the old hierarchical guard, the nobility, but the new guard who had the new capital, the Bourgeoisie.
Marx, from Hegel (1770-1831), understood history as process of progress akin to evolution, but each new capacity had contained within it the seeds of its own destruction; thesis, antithesis, synthesis. Folk strived for improvement yet were continually confronted by conflict and theft of the fruits of their labour.
Was this another interpretation of the contradictions of the arms race between cooperative synergies and parasites & predators?
But there were fatal flaws in Marxist revolutions, an arrogance which was exposed in 1859 when Darwin outlined his insights.
Five Myths of Marxism -
class conspiracies impoverished the poor - rather unintended consequences destroyed intelligent design by men of system
labour theory of value - rather value was discovered & accumulated as know how in cultural rules of thumb
The State acted in the public interest - rather one dictator was replaced by another all power corrupted and became parasitic & predatory
revolution was the solution - rather free diversity led to liberal democracy adaptations and cloned equality was physically impossible
justified by a priori science - rather empirical science was the methodology which speeded up discovery & accumulation of benefits
A new top down imposed new order was an impossible solution to economic improvement, the world & human behaviour was the result of a bottom up process of evolution -
social folk were cooperative by nature, but in the absence of a natural justice system some folk became antagonistic parasites & predators
power corrupted and absolute power corrupted absolutely, in the absence of checks & balances on arbitrary power all revolutionary elites eventually became parasitic & predatory.
Like everyone else Marx based his solutions on top down impositions, similar in process to the tablets of stone from Mount Sinai and 'the opium of the people' he so despised ... but ideas that don't work die out ... just like prices that don't work ...
Why did Marx demand a revolutionary route to communism when
'Hegel's Dialectic' was so close to Darwin's insight of adaptation to the
current changing environment? Hegel's progress involved political ideas that
were in conflict & competition, where over time they reached the needs of
everyone. Progress toward this utopia helped explain human history.
But in Darwin’s theory, species were not evolving towards a universal, but rather adapting to the current local environment ... which itself was constantly changing.
Adam the Smith was a counter intuitive voice in the wilderness everybody believed in top down power. And Darwin didn't help until 1859.
1848 was the 'year of revolution' throughout Europe. The revolutions were essentially bourgeois democratic in nature with the aim of removing the old feudal structures and the creation of independent nation states ... run by the revolutionaries. There was widespread dissatisfaction with political leadership; the Chartists of Manchester and Elizabeth Gaskell made the running in England. There was a common thread of assumption; the replacement of the existing powers that be ... with new ruling elites.
The continent was riven by impositions from above as the landed gentry appeared to hang on after Waterloo. Elizabeth Gaskell admitted she knew nothing of political economy nor the theory of trade but she felt the agony of the poor in Manchester and said it all -
'The rich know nothing about the agony of the poor'.
The Chartist solution for the Manchester poor was more top down interference from the powers that be. John Barton led representations to parliament; he believed, like everybody else, that corrective action was in the hands the elites and not in a natural justice of individual human rights and the innate human feelings of 'fairness of shares' and 'resentment of cheats'.
But in England things had already changed, the incumbent landed gentry had been out wealthed by the new wealth of the industrial revolution.
Adam the Smith was clear, both a top down conspiracy of exploitation and a revolutionary new dictator amounted to a ham fisted interference by the men of system into the natural course of things. The replacement of one parasitic dictator with another was not on. Revolutions killed off the old parasites ... but revolutions also killed off the freedoms necessary for discovering & accumulating cooperative synergies.
Biology had developed far more efficient systems of human behaviour eons ago; immune systems which 'weeded out' the parasites without killing off hosts who were inclined to cooperative synergies. Moral sentiments and synergies were behind the distinction between good gotten gains and ill gotten gains. And good gotten gains were good.
The substantial point was that prior to the Smith and his mates (and a long time after!), economic theory was based on orchestration from above by the landed gentry as the powers that be. After Marx economic theory was based on orchestration from above by revolutionaries. But all this top down power was fugitive, the economic process described by the Smith was a bottom up emergence of wealth as know how.
Things were getting real complicated ... but, of course, that's what evolution did, it always made everything more complicated ... and such complexity beggared belief ... the crunch was that nobody knew the best deal in advance ... the best deal had to be discovered.
Nobody knew the 'right' price that cleared the markets ... clearing prices had to be discovered by trial & error, clearing prices emerged from local market activity ...
After all, the giraffe grew a long neck because all those giraffes with short necks died out ... a new economic science was underway ... value had to be discovered.
After the Cold War a much maligned 'Washington Consensus' contained 10 specific policy recommendations for economic efficiency -
fiscal discipline - no imbalances
public infrastructure investment - no grandiose ego trips
low marginal tax rates - no incentive traps
market interest rates - no gluts & queues
market foreign exchange rates - no imbalances
deregulation - no red tape
free trade market exchanges and the WTO
foreign direct investment and mutual benefit technology transfer
privatisation and innovation
property rights and diversity
The 'Washington Consensus' got a bad press and some economists relabeled the policy recommendations 'structural reforms' -
Policy errors were in the rational neo-classical interpretations of these structural reforms rather than a Marxist rejection of the behavioural economics of Adam the Smith and moral sentiments ...
Adam the Smith, Evolutionary Economist - Coda
Adam the Smith at his forge in 1759 and 1776 explained the evolutionary nature of human behaviour and founded economic science.
In 1859 Charles Darwin's theory of natural selection confirmed that the Smith's insights were spot on.
When all was said & done (and much more was always said than done!) ... there was no alternative credible evidence to challenge these fundamental insights of Smith & Darwin and the sceptical understanding of the moral synergies of specialisation & scale which led to the industrial revolution. - very simple, neat, clear, plain & clever ideas explained the incomprehensible complexity of human endeavour -
Adam the Smith - Moral Sentiments / Fairness of Shares / Resentments of Cheats,
the hard wired emotions which underpinned Property Rights.
Property rights were learned skills,
essential prerequisites for the
self organised cooperative
synergistic behaviour of social animals in pin factories & in free exchange markets
for woolen coats.
The world was made safer for diversity and associations in 'clubs' of
choice. The was no such thing as 'laissez faire', all 'clubs' had rules of
folk voted with their feet.
The simple rules of thumb of human behaviour and moral sentiments underpinned economic synergies of specialisation & scale.
Charles Darwin - Evolutionary Economics explained how natural differential survival of inherited variants led to adaptive efficiency and genetic cost/benefit analysis -
Pre-existing inherited variants with survival advantages in the local environment will always increase in population frequency because alternative variants die out, this changes the environment which then inevitably feeds back and influences the survival chances of all new variants.
The theory of natural selection explained why economic efficiency was adaptive efficiency which was impossible to intelligently design.
Thomas Jefferson - Liberal Democracy
and Human Rights in Tort Law made the world
safe for diversity which enabled specialisation synergies and economies of scale to thrive and
provided some immunity from costly
conflict & violence.
The ancient problem of political cycles of tax, borrow & default eroded scale and required a system of checks & balances to counter the impulse for intelligent design.
Richard Dawkins -
The Selfish Gene (1976) /
The Extended Phenotype (1982) / The Blind Watchmaker
(1986) / River out of Eden (1995) /
(1996) wrote a series of biological history books which
identified the science of natural selection in the context of
parasites & predators.
Gene teams in the gene pool 'designed' the natural behavioural survival strategies of cooperation, satisficing, and tit for tat immunity which resulted in the emergent economic institutions. The genes acted in their own self interest but the were totally dependent on cooperative efforts.
Adam the Smith started it all as he wrestled with the two fundamental of problems of system design - inevitable existence of human ignorance and parasites & predators ... the Smith did not advocate selfishness, laissez faire nor automatic progress as his detractors suggested. Rules of thumb coped as folk trialed & errored and discovered & accumulated 'know how'; how to chase profits & cut losses - very simple, neat, clear, plain & clever.
human morality was cooperation
human endeavour was satisficing
human diligence was tit for tat
human economy was emergent
Amazingly precocious; the Smith faithfully described human behaviour and the economics of capitalism in terms of Darwin's vary, copy, select -
vary - individual diversity resulted in 'improvements' & 'betterments' through specialisation synergies
copy - social exchange cohesion, language & justice & culture, resulted in economies of scale
natural selection of human behaviour - social synergies AND immunities from 'parasites' & 'predators' tended to survive, because synergies AND immunities helped survival, that's why they survived ... and became dominant in populations during the natural course of things.
The insights were not tautology; all other alternative explanations of the nature of man have not survived the test of time and the rigors of reality -
A process of technological & institutional innovation was unleashed by generating & testing a diversity of ideas which discovered & accumulated more survival value for the costs incurred than competing alternatives. The evidence suggested that it could be adaptive efficiency that defined economic efficiency ... think about it?
Folk experimented & learned that it was social cooperative behaviour that secured the synergies of specialisation & scale ... but only if cheats were consistently confronted ...
Adam the Smith was not alone on Gilmore Hill but his work displayed an enlightened mind purged of myths, magic & mirrors and steeped in empirical science.
Wake up and smell the coffee, he rejected the roadblocks of tyranny & oppression and obsolete alchemy of the Bishops, Princes, Generals and bureaucrats and contributed to the feedstock of 'know how' which grew inexorably at 3% compound as folk learned and cultures inherited.
Moral philosophers became natural philosophers when they observed & learned from an occasional success amongst many abject failures. Don't get it wrong ... not only were there inevitable failures but also there were the less glorious but inevitable unintended consequences of the creation & defence of stocks; the parasites & predators, congestion & pollution. There was no such thing as society, an imagined community, rather there was the empirical substance of reality, the clutter of failed experiments. There was no Panglossian escalators but rather an eddy of progress in the slow dissipation of the whole shebang & caboodle. An eddy nurtured by strange feelings of moral sentiments, fairness of shares and resentment of cheats ...
However on not all moral philosophers became natural philosophers ... on January 20th 2016 Pope Francis told members of the world's business elite at Davos that money was 'the dung of the devil' and businesses must acknowledge their role in creating poverty ... ?
Adam the Smith - Adam Smith Institute -
1793 - Dugald Stewart, 'Account of the Life & Writings of Adam Smith', Transactions of the Royal Society of Edinburgh, 1793.
1895 - John Rae, 'Life of Adam Smith'.
1938 - J M Keynes, writing to Harrod on July 16th 1938 -
'I want to emphasise strongly the point about economics being a moral science'.
1976 - Richard Dawkins, 'The Selfish Gene' -
'What really happens is that the gene pool becomes filled with genes that influence bodies in such a way that they behave 'as if' they made complex, if unconscious, cost/benefit calculations for survival'.
1984 - Robert Axelrod, 'The Evolution of Co-operation', described evolutionary 'tit for tat' strategies from the Prisoner's Dilemma game.
‘The key to doing well lies not in overcoming others but in eliciting their cooperation. Individuals don’t have to be rational; the evolutionary process alone allows successful strategy to thrive, even if the players do not know why or how. No central authority is needed, cooperation is self policing’. The Evolution of Cooperation, 1984.
1989 - Norman Jones, 'God and the Money Lenders', morality changed between 1571 and 1624, credit became of great benefit to national well being.
1998 - The Open University, 'Economic Behaviour', emphasised that Adam Smith was a moral philosopher who wrote first about moral sentiments in 1759, an essential prerequisite for 'The Wealth of Nations' in 1776.
2007 - William J Bernstein, 'A Splendid Exchange: How Trade Shaped the World', the evidence of history.
2011 - Nicholas Phillipson, 'Adam Smith: An Enlightened Life'.
2008 - World Bank, 'Spence Growth Report', reconfirmed the reality of ignorance and The Washington Consensus which was an economic summary developed by John Williamson an English economist after the 'Fall of the Berlin Wall' in 1989. The financial crisis rocked world trade and the economic consensus was turned into a political football as folk reacted against Liberal Democracy and Markets ... and forgot about the parasites & predators.
2018 - Steven Pinker, 'Enlightenment Now: a case for reason,
science, humanism and progress'. A splendid update on The Smith's
optimistic view of the Enlightenment and anticipation of Darwin. A broadside
against all pervading cultural pessimism. Humans are wired for nostalgia;
time heals all wounds, so we remember the past as greater than it was. The
BBC and the 'serious press' systematically overestimate the amount of bad
news. Differences as 'inequality' are riled against, yet the Darwinian
argument, inspired by libertarians, is simply that synergies require
differences. It is not such a big deal if folk choose to pay Sky
... or China cheats ... globally & historically China is rampantly
better and more equal than
Unfairness & cheating is the problem for everyone ... cartels of self-dealing chief executives go bankrupt, political influence is limited to experiments. Profits of doom create a 'gravitas market' but in the end problems basically solve themselves as failures are discarded and society advances funeral by funeral.
Drain the swamp as 'moral sentiments' guide behaviour not oppressive Bishops, tyrannical Princes, dictatorial Generals & corrupt Bureaucrats
more 'know how' & empirical science
more 'checks & balances' for diversity & liberal democracy
more 'global' free & fair trade
more 'natural selection' and 'creative destruction' ...
not 'destruction of cultural values' not 'conventional wisdom of political
= excitement not fear = cooperation not compromise = freedom and equality are not alternatives ... perhaps the beer glass is half full not half empty
Intractable Policy - hard work, honesty & thrift fails at the ballot box
Evolutionary economists from Adam Smith to Nobel prize winners have suggested that if folk & groups specialise on what they themselves do best & trade, everyone benefits, 2+2=5 -- David Ricardo
The mathematical logic is overwhelming and the real history of happenings demonstrates how trade has shaped the world -- William Bernstein
Petty Politics easily destroys these trade benefits. To get elected politicos exploit the deep bias in human nature; the aversion to loss far outweighs the benefit of gain -- Daniel Khaneman
Evolution and Trade always create some losers amongst the more winners. The losers will be obvious, vocal and militant. The gains require intractable counterfactuals and will not be attributed to the synergies of specialisation & trade.
A closed factory or abandoned farm generates more voters than successful specialist traders ... even though we all trade all the time. Political anti trade bias is a vote winner ... blame the specialists & the foreigners for our misfortunes rather than ourselves ... hard work, honesty & thrift fails at the ballot box.
Economists perpetually recommend cushioning the blow to losers by transfer funds to re-train or move losers to the work ... but policies never cut the mustard like hard work.
All change is a Darwinian process; the 'Natural Selection' of 'Random Mutations' energised only by the 'Laws of Nature' ... one outcome is the physical genes & imaginary memes of Homo Sapiens ... behaviour & culture.
Liberal Democracy is an evolving economic institution of custom & practice
with immunities from arrogant 'Auctions of Promises' which are at odds with
the reality of 'Intentional Impotence' of 'Powers that Be' to effect change
in 'Complex Adaptive Economies'.
Not the best just better than the less economic alternatives available at the time in the local environment.
Less economic variants tend to die out, a statistical reality and an explanation for everything we see.
Adam the Smith would have loved Evolutionary Economics?
Any corrections and additional information gratefully received contact john p birchall