they advocate using markets were possible to allow the impartial gales of competition to discipline market behaviours and benefit consumers

TO BE NOTED: From Adam Smith's Lost Legacy:

"Markets as a First Choice “There’s a real distinction between being in favor of free markets and being in favor of whatever business does”, from a heading in Death and Taxes Blog reporting a lunchtime talk and subsequent Q & A session between Milton Friedman and the audience HERE: http://politics.randomplayground.net/2009/06/02/theres-a-real-distinction-between-being-in-favor-of-free-markets-and-being-in-favor-of-whatever-business-does/

Comment
It’s not clear if Milton Friedman actually put it that way, but it is pretty clear from his talk and answers to questions that he did not exempt businesses from criticism for their actions in practice.

How could he? He already had the excellent example of Adam Smith noting almost unanimously in Wealth Of Nations the scheming monopolistic tendencies of ‘merchants and manufacturers’, small groups of tradesmen in the town Guilds system seldom meeting even for merriment and diversion and ending up conspiring to raise prices, and he knew how legislators and those who influenced them proposed legislation that benefited their business sponsors by curtailing supply with tariffs and prohibitions to widen their markets and raise prices.

In short, for over 250 years businesses pursued their individual self-interests precisely in their self interests. The antidote was not, is not, nationalisation or regulation; it was and remains extending competition through freer markets.

I remember listening in astonishment to an MP, shortly after Mrs Thatcher’s government deregulated the exchange in foreign currencies so that licensed people could open little Bureau du changes in the high street to compete with local banks. The MP complained that in his constituency these new licensed exchange bureaus were charging much more to trade foreign holiday currency than the local banks. ‘It is a rip-off’, he cried, and wanted legislation to stop it. And this was a Conservative Party MP!

The answer, instead’ surely was to publicize the higher prices and the profits. That’s all it would take to induce new entrants into the exchange rate business in pursuit of the alleged ‘high’ profits, and let competition do its work (which is what happened, eventually).

Freer market advocates do not defend all, or any specific actions, of business entrepreneurs; they advocate using markets were possible to allow the impartial gales of competition to discipline market behaviours and benefit consumers.

You don’t need to introduce battalions of inspectors (and their plus premises, supervisors, pensions, and expenses) to patrol the country looking for ‘excess profiteering’ – and battalions of lawyers to be engaged in prosecuting and defending alleged profiteers. Nor does it require business personnel to meet in lobbying organisations – with their expensive staffs and insider contacts – to look after their interests, monitor legislation proposals, and generally subvert the independence of the legislature (and compromise the integrity of 'insiders'. Competitive markets are the best available instrument.

In that prescription, Lost Legacy and Milton Friedman are in agreement with Adam Smith."

He suggested what amounted to a substantial public investment in public works

TO BE NOTED:

"Adam Smith's Lost Legacy

Adam Smith on State Intervention

Confessions of a Bipolar Virgin (31 May) HERE:

“First, let's analyze some of the things that happened to people during the Great Depression. Unfortunately, when this awful event in U.S. history happened, there was no unemployment compensation, no FDIC, no SEC, and none of the fiscal and monetary policies we now have in place. In a sense, it was a total free market system, guided by Classical Economics (i.e. Say's Law and Adam Smith). The most prominent economic work of this time frame was Adam Smith's book "The Wealth of Nations" that introduced the theory of "The Invisible Hand." This theory states that the market is governed by an "invisible hand," and less interaction by the government in the market, the better (i.e. laissez faire). This proved to be a disaster (at the time) and Keynesian Economics quickly became the new "economic theory" in place (long story-LOL!). Keep in mind that this is a very SIMPLE description and I am keeping a LOT of IMPORTANT facts out of play here (note: we still have Classical Economics in place today, as it does serve a purpose).’

Comment
The author self-describes himself/hereself as ‘bipolar’ (a modern term for depressive) and I am commenting in the hope of lessening the load by explaining what Adam Smith actually wrote in Wealth Of Nations (1776) and its difference from what he is alleged to have written, with a view to elucidate the controversy about what to do in the current situation.

‘In a sense, it was a total free market system, guided by Classical Economics (i.e. Say's Law and Adam Smith). The most prominent economic work of this time frame was Adam Smith's book "The Wealth of Nations" that introduced the theory of "The Invisible Hand." This theory states that the market is governed by an "invisible hand," and less interaction by the government in the market, the better (i.e. laissez faire).”

What Adam Smith actually advised was that the wrong interventions in a commercial market by government should be, first, reversed and secondly those wrong interventions should be avoided, and other interventions of governments should be encouraged. This is not the same thing as being against government intervention as a whole. He wasn’t of the opinion ascribed to him by modern economists since the 18th century. In fact, Adam Smith advised that certain interventions, not in his time undertaken with much consistency by government, should be undertaken as soon as possible.

For example, besides government expenditures on defence against foreign invasions (not defence expenditures to intervene in European dynastic quarrels and wars for trivial ends, including defending loss-making colonies) and on the provision of systems of justice, minimally such as independent judges, jury trials, Habeas Corpus, and the rule of law, not men.

He suggested what amounted to a substantial public investment in public works, such as roads (Britain’s roads were appalling, right into mid-19th century), public bridges, safe harbours, and canals, as well as public investment in a national educational system through a ‘little school’ in every parish (about 60,000 of them!) to educate all boys between 6 and 14 (at the time the mode was not to educate girls in public schools, only at home), in ‘reading, writing, and account’, with a smattering of geometry and such skills useful for earning a living and be productive.

Public expenditure was to be paid for initially from taxation on the richer sectors of the population and their maintenance financed by charging tolls or user-charges of public facilities for the costs of repairs to roads and bridges, plus subscriptions according to potential means to pay for teachers, books, and school prizes, and to pay for palliative care for sufferers from ‘leprosy and other loathsome diseases’.

Government also should develop the postal service for public use (it was originally set up by government to monitor control of the nation’s territory by regular contact with its farthest reaches), it should provide assay officers to determine hallmarks on gold and silver bullion, and on quality standards of woollen goods, cloths and paper. It should also run an official mint to guarantee the purity of the coinage. He also was in favour of a central bank (the Bank of England) to manage government debt and to introduce necessary regulations to stop drawing and redrawing bills of credit and over-trading, to set maximum interest rates, and the minimum amount denominated on the promissory paper notes issued by private banks.

Altogether, this is a formidable list even for the 18th century, contrary to his modern image of him being against government intervention on some sort of laissez-faire (incidentally, a term Smith never used) principle. What then did Smith consider inappropriate for government intervention?

The list is quite specific and is wrongly interpreted as being directed at all government interventions. Smith’s Wealth Of Nations is not a textbook of economics as we understand it today. It was a critique of the mercantile political economy of British governments from the 16th century, which still dominated public policy making in the 18th century (and in many respects still does so today in various forms).

Legislators and those who influence them are susceptible to all kinds of erroneous ideas about how commercial societies work; fads and fancies are spread with conviction that have no scientific basis, much as the everyday observation that the ‘sun rises in the east and sets in the west’ led people to believe that the sun (and the planets) orbited the earth. Indeed, for millennia it was an article of religious faith, against which those who questioned it were dealt with severely (think of the famous case brought against Galileo).

Among mercantile fallacies were such notions as the balance of trade required to be positive in favour of exports, so that a nation could accumulate stocks of gold and silver (which the King could use to fight wars against neighbours - you can see why kings were easily converted to the nonsense!).

From this fallacy, policies of protection against imports were developed, supported by tariffs and prohibitions, even though this meant that large numbers of goods cost domestic consumers much more from higher prices (and profits) than importing them would have allowed – you can see why many ‘merchants and manufacturers’ were enthusiastic true believers in this fallacious idea, and still are!

Moreover, the obsession with high bullion stocks led to ‘jealousies of trade’, in which nations adopted hostile stances to neighbours, some of it spilling over into wars, unofficial piracy and destruction of foreign shipping and ports – you can see why the 18th-century military and navy were enthusiastic proponents of ‘national glory’ from heavy investment in war-making!

Smith opposed such government interventions because they held back mutually advantageous trade from which peaceful trading countries could increase the opulence of their peoples. Many of the trade items added to the long lists (which grow ever longer) of protected trade were derived, not from economic principles or national secureity but from the lobbying of legislators and the hiring of influencers (with not a little bribery) on behalf of domestic ‘merchants and manufacturers’, who profited by narrowing the supply and widening the higher-priced market for their goods.

The richest countries in the world today still engage in such fallacious policies, not just against each other, but also against the poorest countries, for which the richer countries' taxpayers spend small fortunes each year in subsidies, gifts and donations, not to make them richer but the ameliorate their poverty induced by less trade than they could otherwise enjoy.

At the time, Smith observed that certain domestic laws also made matters worse, such as the award of monopolies to the chartered Guilds in towns for the production and processing and selling of scores of goods, and which prohibited outsiders in nearby towns from competing in the markets and fairs of other towns with better goods at lower prices.

These Acts were supported by the Statute of Apprentices which required ‘skilled’ tradesmen to serve 7-year apprenticeships in the town where they wished to trade, keeping out equally good tradesmen from elsewhere by law. James Watt, an apprenticed instrument-maker was not allowed to ply his trade in Glasgow because he had served his apprenticeship elsewhere (fortunately Adam Smith persuaded the university senate to appoint Watt to the University where he worked for several years and began his researches on steam power, essential for the future industrialisation of the world).

Perhaps the worst example of government intervention were the Acts of Settlement preventing labourers from moving from their home parish to another one in search of work.

Altogether, Smith considered these government interventions a breach of natural liberty, introduced originally for arguably good reasons (the development of trade in Britain), but through time generating unintended consequences. In fact, they became major obstacles to the development of free trade in goods and work opportunities in Britain, which together would have fostered the emergence and extension of a commercial society and the spread of opulence through to the majority of the very poorest families in society earlier than happened, for which, of course, the poor paid the highest price.

From experience of legislators and those who influenced them – and Smith met and conversed with, and listened to, members of this exclusive club, from opinionated individuals through to Cabinet ministers and Prime ministers – and he did not think highly of their business judgement and acumen.

He observed that the complexity of the detail in any business decision was formidable at any level beyond the most basic – if demand rises for your products make more of them; if it falls produce something else – and such decision-making was best left to the dispersed individuals involved who profited if they were right and lost if they weren’t, and should not be assumed by any ‘single person [or] no council or senate whatever, and which nowhere [would] be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it’ (WN IV.ii.10: 456).

It is that passage which exponents of the distorted view that Adam Smith opposed all interventions of governments across the board base their enthusiastic convictions upon, forgetting (or not being aware of – not all ‘expert’ quotation-spreaders read Wealth Of Nations) how specific Smith was about the important and necessary role of well-managed State in providing support for the working of a commercial society, which today is bound to be larger than in the 18th century, though not as large as most modern state sectors have become.

In so far as Bipolar Virgin recognises that there is a role for State interventions in certain specific areas - private enterprise where possible, state interventions only where necessary - we may find agreement in a truly Smithian manner.

[Note: I have not taken up the mythical metaphor of the 'an invisible hand' on this occasion: see my paper: Adam Smith and the invisible hand: from metaphor to myth HERE

posted by Gavin Kennedy "

a region, town, or locality would benefit if it shut-out trade with neighbouring regions, towns, or localities

TO BE NOTED: From Adam Smith's Lost Legacy :

"Fallacies of Freidrich List and his Adherents

Christopher_Quigley in The Market Oracle, (1 May) HERE writes on:

‘The Fallacy of Free Trade’

“The causes of wealth are something totally different from wealth itself. A person may possess wealth i.e. exchangeable value; if, however, he does not possess the power of producing objects of more value than he consumes, he will become poorer. A person may be poor, if he, however possesses the power of producing a larger amount of valuable articles than he consumes, he becomes rich.

The power of producing wealth is therefore infinitely more important than wealth itself; it insures not only the possession and the increase of what has been gained, but also the replacement of what has been lost. This is still more the case with entire nations (who cannot live out of mere rentals) than with private individuals." (Freidrich List – author the National System of Political Economy)

Any serious national economist who objectively reviews the reality of free trade must eventually come to the conclusion that it is ruinous to a nation. Granted it may seem to work short term in providing "cheap goods" but in the longer perspective it destroys the productive wealth-creating base of a community.

The British Empire knew this fact, and while it ostensibly lauded the teachings of Adam Smith and his "Wealth of Nations", under no circumstances did it carry out Smith's doctrine in its actual trading policy. The mandarins from the East India Company, that owned and ran the Empire, had no time for economic nonsense. Whatever they produced in England could not be imported, yet it shoved lower cost goods from India and the Indies onto the new American Colonies, thus destroying fledging industry in the new territories.

List: “"England was unwilling to found settlements in Asia in order to become subservient to Asia in manufacturing industry. She strove for commercial supremacy, and found that of two countries maintaining free trade between one another, that one would be supreme which sold manufacturing goods, while that one would be subservient which could only sell agricultural produce. In her North American colonies, England had already acted on these principles in disallowing the manufacture in the colonies of even a horseshoe nail, and still more, that no horseshoe, made there, could be imported into England."

Comment
Freidrich List never understood Adam Smith, a characteristic often shared by his modern acolytes.

Wealth Of Nations was a critique of the mercantile political economy that dominated England (and Scotland) from the Elizabethan era. Economic activity had begun to recover from the 1,000 years interregnum following the Fall of Rome in Western Empire in the 5th century.

Fallacious ideas about ‘wealth’ and how it was increased were prevalent (a country was rich by the amount which it gold and silver bullion increased, tariff protection and outright prohibitions of trade facilitated a gold surplus if exports were larger than imports, and the sovereign could increase national wealth by offering Royal Charters to its nationals who would invest and trade locally in specific products (and places).

State-supported commerce was the supposed 'solution' both to the imbalance of trade with foreign countries and domestic tardiness in setting up trading ventures. By the 18th century the effects of such policies were evident. They were inhibiting the natural growth trajectory of a slowly reviving commercial society.

In fact, they were also endangering is future successes, because along with the mercantile fallacy of the sources of true wealth creation there was the inevitable major error of all mercantile political economy; their proclivity for political errors, summed by David Hume and endorsed by Adam Smith, of ‘jealousy of trade’, an error, sadly, manifested clearly in the work of Freidrich List and those who fall for his ultra-nationalistic prose.

The seven-years war alone cost £125 million, to which treasure must be added the blood of the victims. Similarly, ‘The mandarins from the East India Company, that owned and ran the Empire, had no time for economic nonsense’ and not a lot of time for the blood and treasure of the people of India, either. Both tragedies undertaken in the spirit of ‘jealousy of trade’.

And the fallacy can easily be appreciated in considering a thought experiment: if it is beneficial for a nation-state to shut out the trade of foreign countries, it should follow, but manifestly doesn’t, that a region, town, or locality would benefit if it shut-out trade with neighbouring regions, towns, or localities. In the extreme, households should cease trading with neighbours; indeed, in ludicrous pomposity, List should have also demanded that individuals become self-suffient. ( NB DON )

Consider: ‘The power of producing wealth is therefore infinitely more important than wealth itself’. Well, Adam Smith defined wealth as the annual production of the ‘necessaries, conveniences, and amusements of life’. Everything else is sterile. It’s the output of the ‘necessaries, conveniences, and amusements of life’ that is produced which represents wealth, some part of it which is exchanged for other sources of ‘necessaries, conveniences, and amusements of life’, produced elsewhere by others (Smith called this the 'Great Wheel of Circulation').

Note how List slips in the [wealth] “insures not only the possession and the increase of what has been gained, but also the replacement of what has been lost.” What does this mean exactly? Adam Smith explained that productive activity, using the factors of Land, Labour and Capital Stock, earns revenue, which repays the costs of producing output, plus a profit, which in turn, if not wasted in prodigality, produces more output of the necessaries, conveniences, and amusements of life, and so on into successive rounds. But, and this is List’s error, exchange accelerates these processes by small percentage amounts continuously, by exchanging things that a person, a household, a locality, town or region, or nation, produces which others want for the produce of those many others which would cost them more land, labour, and capital to produce for themselves.

Nobody exchanges higher-priced necessaries, conveniences, and amusements of life for ‘necessaries, conveniences, and amusements of life’ which they could produce cheaper themselves. Neither should ‘persons, households, a localities, towns, regions, or nations’ produce for themselves at higher costs than these same items can be exchanged from other ‘persons, households, a localities, towns, regions, or nations’!

The final error of Freidrich List was to see Wealth Of Nations as a manifesto of policies that were actually adopted by successive British Governments. Politics doesn’t work like that. Much of Adam Smith’s description of the then current mismanagement of Britain’s commercial society fell on deaf ears. Having lost the British colonies in North America, instead of aligning British policies to the ‘real mediocrity of her circumstances’ (WN: last paragraph), British governments chased a second empire, in India, Canada, the Caribbean, Australasia, and Africa, incurring all the costs in blood and treasure of the first empire (only more of them), starting with the long war with revolutionary/Napoleonic France, and drained off revenues from productive to unproductive activities, precisely the same policies that Adam Smith observed and wrote about so critically in Wealth Of Nations.

Only the surprising events associated with what is called the industrial revolution made this affordable (like an inheritance fuels the delusion of a profligate prodigal) for Britain. Similarly, the vast lands of North America which developed at a furious rate in the 19th century that staved off a reckoning with its mercantile policies, as mimicked by Hamilton.

In the 21st century there is no likely ‘unexpected’ bonanza about to come that will suspend the reckoning if the world resorts to protectionism, hostility to neighbours, and jealousy of trade. To ruin nations by abandoning the prospect of freer trade – for manifestly we do not have free trade at present, and, so far, never have – would be an act of folly of no small proportion, which, unfortunately is no assurity that it will not be imposed.

Don said...

"And the fallacy can easily be appreciated in considering a thought experiment: if it is beneficial for a nation-state to shut out the trade of foreign countries, it should follow, but manifestly doesn’t, that a region, town, or locality would benefit if it shut-out trade with neighbouring regions, towns, or localities. In the extreme, households should cease trading with neighbours; indeed, in ludicrous pomposity, List should have also demanded that individuals become self-suffient."

This is the argument that I have always used. The problem, based on my observation, is that we want the citizens of our country to prosper, but not necessarily the citizens of other countries, or, let's say, their governments. What we want in trade with other countries, is an exchange that leaves us better off, while either harming the other country or, at least, making sure that we get the better of the deal. We're in competition with other countries, and want to increase our wealth relative to them.

This also occurs within a country. The automaker's bailout showed this clearly, as states that had subsidized certain auto makers in order to lure them to their state, objected to helping the citizens of other states. This goes on all time, as certain states or regions attempt to lure investment to their areas, by outbidding other areas. This is done through subsidies, regulations, property, etc.

To the extent that the best argument for free trade is that it is beneficial for everyone, it will have a tough time convincing anyone of its use or desirability. As Gore Vidal said:

It is not enough to succeed. Others must fail.

Don the libertarian Democrat