Stumbling and Mumbling

Reading Carlyle

William Rees-Mogg laments the fact that Thomas Carlyle "remains almost unread even by well-read people."
If you want to know why he's unread, try this, his Occasional Discourse on the Nigger Question, in which he asserts the inferiority of blacks:

Our interesting black population, equalling almost in number of heads one of the Ridings of Yorkshire, and in worth, in (quantity of intellect, faculty, docility, energy, and available human valor and value) perhaps one of the streets of Seven Dials, are all doing remarkably well.

And defends slavery:

No black man who will not work according to what ability the gods have given him for working, has the smallest right to eat pumpkin, or to any fraction of land that will grow pumpkin, however plentiful such land may be; but has an indisputable and perpetual right to be compelled, by the real proprietors of said land, to do competent work for    his living...
If the black gentleman is born to be a servant, and, in fact, is useful in God’s creation only as a servant, then let him hire not by the month, but by a very much longer term.

In saying this, Carlyle was not merely expressing the views of his age. He begins his drone by saying his readers "probably...will not in the least like it."
But here's a queer thing. Rees-Mogg goes on to praise this biography of John Locke, saying that lovers of liberty will find it indispensable. Which raises the question. Why does Rees-Mogg fail to see that lovers of liberty will also find Carlyle utterly repellent?

Marx: wrong and unoriginal

Alan Johnson writes:

I think the special theory of Marxism - the theory of the capitalist mode of production - was wrong from the start, and is now, 150 years on, definitively falsified. So there is no objective basis for the proletarian revolution.

He's right. But what's not sufficiently appreciated is that Marx's theory here was not particularly original. Underneath the sectarian wibble - much of which came from Marx himself - his analysis of capitalism followed his predecessors. For example:
1. The theory of the "increasing misery" of the working class is evident not only in Marx but in Malthus. The idea is that the supply of labour would rise to offset increasing demand, keeping real wages down; Marx and Malthus differed mainly upon the cause of the supply of labour.
2. The tendency for the rate of profit to fall comes straight from Ricardo - it's just the law of diminishing returns. Ricardo - and indeed Smith before him - thought this would lead to a "stationary state (pdf)" in which economic growth ceased.
3. The notion of ever-increasing severity of capitalist crises follows directly from (2), allied to increasing operational gearing, caused by the rise in the capital-labour ratio which Marx thought a central feature of capitalism.
But why were Marx and his predecessors wrong on these points?
Mainly, it's because they all failed - arguably, Marx less so than the others - to foresee the speed and extent of technical progress. Economic growth is a race between technical progress and diminishing returns. And technical progress has won.
However, the classical economists, of whom Marx was just one, shouldn't be criticized too harshly for this. Standard neoclassical economics had little idea about technical progress either: in the Solow growth model which economists of my age were brought up on, technical progress was exogenous "manna from heaven."
It's only quite recently - in endogenous growth theory and in books like this (and I hope this) - that we've begun to understand the origins of technical progress. Marx was refuted long before people knew why he was refuted.

Smith on growth and companies

One of the delights of this handsome new edition of Smith's Wealth of Nations is a wonderfully fatuous preface by George Osborne, who shows no sign of ever having read Smith, or indeed of ever having spoken to someone who has.
Osborne says that Smith's answer to the question of how to increase prosperity was "universal": "He recognized that it is the freedom to trade and compete that promotes individual interests and which also generates the wealth of nations."
The problem is, Smith's account of this process gives no place for Osborne's paymasters, companies.
The first sentence of the Wealth of Nations is:

The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour.

In turn, the division of labour is the result of a natural human impulse. It is "the necessary, though very slow and gradual, consequence of a certain propensity in human nature...; the propensity to truck, barter, and exchange one thing for another." For example:

In a tribe of hunters or shepherds a particular person makes bows and arrows, for example, with more readiness and dexterity than any other. He frequently exchanges them for cattle or for venison with his companions; and he finds at last that he can in this manner get more cattle and venison, than if he himself went to the field to catch them. From a regard to his own interest, therefore, the making of bows and arrows grows to be his chief business, and he becomes a sort of armourer.

Here we have an account of how men, given freedom, will develop the division of labour, markets and hence prosperity.
But there's a problem. In the real world the division of labour is mediated not merely by market exchange but by hierarchically-ordered companies. In Smith's famous pin factory the drawer of the wire does not sell his product to the straightener of wire, but is ordered to hand it over.
What's more, Smith gives us two reasons why this variant of the division of labour might not promote prosperity.
One is that companies, when owned by external shareholders, are wasteful:

The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail. (Book V ch 1.107 here)

Secondly, in companies, we lose one of the benefits of the division of labour - that in focusing men's knowledge upon a single object, they are more likely to "find out easier and readier methods of performing their own particular work."
It's easy to see how self-employed artisans have an incentive to improve productivity. But workers employed by others need not have such an incentive, or indeed the freedom to find such methods.
Smith's story of how freedom promotes prosperity, therefore, gives no place to companies - quite the opposite.
Now, there are several possible reactions to this. One is that Smith's account is incomplete, and that companies can promote growth. But then we weaken the link between freedom and growth, and Smith's prescriptions cease to be "universal."
Another is that Smith was in fact (partly) right, and firms can impede efficiency, growth and freedom.
But that's not what Osborne wants to read.

The trap of historical ignorance

There was much to like about Adam Curtis's The Trap last night - any programme featuring James Buchanan and New Order can't be all bad. But there was one big problem - as intellectual history, it was tosh.
Curtis began from the view that:

A simplistic model of human beings as self-seeking, almost robotic, creatures led to today's idea of freedom. This model was derived from ideas and techniques developed by nuclear strategists during the Cold War to control the behaviour of the Soviet enemy.

As Maddy put it:

Mathematicians such as John Nash developed paranoid game theories whose equations required people to be seen as selfish and isolated creatures, constantly monitoring each other suspiciously – always intent on their own advantage. 

But Nash's was not a theory of human nature - his view of people as isolated rational maximizers was a mere assumption, as his PhD dissertation (pdf) makes clear.
The view of people as selfish and paranoid was, of course, classically put by Thomas Hobbes.  But as Leviathan pre-dated the cold war by 300 years, this doesn't fit Curtis's template.
And this, from Maddy (fairly summarizing Curtis) is just tosh:

John Nash...developed the Nash equilibrium, which argued that the rational pursuit of self-interest by human beings could lead to a kind of social order. Selfishness didn't have to lead to social breakdown. For the economist Friedrich von Hayek (Thatcher's inspiration) this was vindication of his belief that individual selfishness creates, spontaneously, "a self-directed automatic system".

The first problem here is that the idea of self-interest generating social order wasn't established by Nash. It even pre-dates Smith's invisible hand by 60 years; it's to be found in Mandeville's Fable of the Bees (1714). Nothing to do with the cold war.
The second problem is that the defining feature of Nash equilibrium, at least as applied to  the prisoners' dilemma game discussed in the programme, is that it is a sub-optimal outcome. Far from vindicating Hayek, this undermines him - or at least it would, were it not the for the fact that in the real world, one-shot dilemmas are rare, so tit-for-tat strategies (not discussed in the programme) can lift us to the optimal equilibrium.
This use of tit-for-tat strategies means selfish people can co-operate. This is one reason why Maddy is a little glib here:

This reading of human nature has ended up destroying the legitimacy of the political class that has espoused it, hollowing politics and all collective life out with the cynicism that we are like billiard balls bumping into each other without any common interest or capacity for collaboration.

But this passage raises a key omission in Curtis' programme. Economists' scepticism about the possibility of a common interest doesn't just arise from a cynical view of human nature. It stems also from the problem of aggregating preferences - as Kenneth Arrow a showed in his impossibility theorem. But then, Arrow was no rightist cold warrior, so he doesn't fit Curtis's template.
There's a predictable pay-off here. Maddy concludes:

It's an ideology of freedom that has also created violent chaos. In Iraq, the US believed it had only to remove Saddam Hussein and liberate the people, and order would spontaneously emerge.

However, to ascribe the chaos in Iraq to Hayekian ideology, as Maddy implicitly does, is just gibberish. For Hayek, the essential feature of the "extended order" generated by self-interest is that it:

resulted not from human design or intention but spontaneously; it arose from unintentionally conforming to certain traditional and largely moral practices.

Anyone who got past the first page of The Fatal Conceit would have seen this. To get from here to defending the Iraq war is a mighty step - one which Hayek, with his aversion to constructivist rationality, might well not have made. But again, this wouldn't fit the template, would it?

Why aren't there more co-ops?

Why aren't there more co-ops? Tyler Cowen says:

It is naive to think that liquidity problems [the difficulty of raising finance] are the major issues preventing workers from enjoying greater control rights.

He might be right. I reckon there are at least six other reasons why we don't see more co-ops.
1. Risk-aversion. A worker who owns part of his own company is putting all his eggs - his human and financial capital - into one basket. Risk-averse people will be reluctant to do this, even if they can borrow freely. External owners, however, can spread risks easier.
2. Demand for cash. Even where a co-op is thriving, its members might be happy to sell up for a few thousands. This isn't necessarily because of short-termism or a lack of desire for autonomy. They might think that paying off the mortgage or moving nearer to early retirement better increase their freedom.
3. The status quo bias. Unless things get really bad, people prefer the devil they know. So if capitalist ownership is mildly inefficient and repressive, there'll be little demand for radical change.
4. The myth of leadership. For centuries, we've been led to believe that we need leaders; as Joseph Schumpeter said, the feudal mindset can give ideological support to capitalism. Almost all political and managerialist discourse bolsters this belief. There's therefore a huge ideological weight against worker control.
5. Adaptive preferences. People want what they can get. So if they believe worker control is infeasible, they won't want it, whatever its actual merits. 
6. Markets in control are imperfect. Whatever your view about Tyler's claim, there's one area where we must agree that markets in control just don't work - state-owned organizations. But there might be a case for turning schools and hospitals into worker co-ops.
My hunch is that efficiency considerations aren't sufficient to explain why co-ops aren't more common.
That said, we mustn't under-estimate just how widespread they are. Quite a few people in London work in law firms, shop at Waitrose and Peter Jones and invest in hedge funds, and believe capitalism is wonderful.

Brown the Ricardian

Gordon Brown likens opponents of free trade (such as the European Union) to the Luddites who opposed technical progress:

The ideologies that support protectionism offer no positive or credible alternative of how all the world can prosper and are little more than the modern equivalent of Luddism.

The analogy is a good one. Free trade is just like technical progress, as both are ways of getting goods more cheaply.
And it's an old one. David Ricardo explicitly made the point at the end of his Essay on Profits:

If the interests of the landlord be of sufficient consequence, to determine us not to avail ourselves of all the benefits which would follow from importing corn at a cheap price, they should also influence us in rejecting all improvements in agriculture, and in the implements of husbandry; for it is as certain that corn is rendered cheap...by such improvements, as by the importation of corn.

This raises two questions. Was this the first use of the analogy between technical progress and free trade? And is Brown dropping a hint here that he's a neo-Ricardian? Well, I can dream...

The Bank celebrates stupidity

Here's the new £20 note featuring Adam Smith. What puzzles me here is the note's celebration of the division of labour. Smith, of course, had mixed feelings about this. Yes, it increases output. But it also dehumanizes and stupefies us:

The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. (Book V part 3)

Should the Bank really be celebrating Smith's view of the division of labour?

Adam Smith on duty

In Thursday's speech, Gordon Brown invoked Adam Smith to argue that we have responsibilities as well as liberties:

It was seen [by the Scottish Enlightenment] as a mark of British citizenship that people accepted they had responsibilities, as well as rights, that British people felt they had duties to discharge, as well as liberties to demand....
While [Smith] wanted to remove...arbitrary constraints on citizens, he did not seek to remove all social bonds. The truth is that he wanted people freed from the old commands of the state, but civic responsibilities were a very different matter. Total freedom from them could diminish freedom. Civic duty mattered “whenever we feel the fate of others is our personal responsibility, we are less likely to stand idly by,” he wrote.

I'm not sure Brown should follow Smith - as there's a lot in the Theory of Moral Sentiments he wouldn't like.
For one thing, Smith did not think our sense of duty rested upon benevolence:

It is not the love of our neighbour, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own characters. (TMS, Part III ch 3)

This phrase "superiority of our own characters" hints at what Smith saw as the origin of virtuous behaviour - the "impartial spectator, "the great inmate of the breast." It's this higher self, Smith thought, that restrained our base selfishness.
But in this sense, our duty is just another form of selfishness - it arises from our desire to placate "this judge within." It's the fear of suffering his opprobium that keeps us honest:

There is no commonly honest man who does not more dread the inward disgrace of such an action, the indelible stain which it would for ever stamp upon his own mind, than the greatest external calamity which, without any fault of his own, could possibly befal him.

What's more, Smith did not think our responsibilities extended to consider the poor our equals:

The mere want of fortune, mere poverty, excites little compassion. Its complaints are too apt to be the objects rather of contempt than of fellow-feeling. We despise a beggar; and, though his importunities may extort an alms from us, he is scarce ever the object of any serious commiseration.

Nor did Smith believe the state should impose duties upon us. Quite the opposite. It should instead adapt itself to the morality of the people.
He contrasts the public-spirited ruler to the "man of system". The former, he said, "will accommodate, as well as he can, his public arrangements to the confirmed habits and prejudices of the people."
The "man of system, by contrast, is dangerous and arrogant:

Some general, and even systematical, idea of the perfection of policy and law, may no doubt be necessary for directing the views of the statesman. But to insist upon establishing, and upon establishing all at once, and in spite of all opposition, everything which that idea may seem to require, must often be the highest degree of arrogance. It is to erect his own judgment into the supreme standard of right and wrong. It is to fancy himself the only wise and worthy man in the commonwealth, and that his fellow-citizens should accommodate themselves to him and not he to them. It is upon this account, that of all political speculators, sovereign princes are by far the most dangerous. This arrogance is perfectly familiar to them. They entertain no doubt of the immense superiority of their own judgment. (TMS part VI, section 2, ch 2)

Is Brown really a good Smithian? Should he be?

Ricardo, trade and inequality

Chris invites economists to have a pop at this effort by Mark Braund. Life's too short to give it a  full fisk. But there's a beautiful irony in it.
Mark says we need another theory of economics, one based upon Ricardo's theory of rent:

Ricardo explained the tendency of free markets to promote inequality rather than inclusion in the largely agricultural economy of the early nineteenth century....Ricardo showed how those individuals whom, for whatever reason, start out with the best land, inevitably end up owning most of the land, and thus holding great economic power over the rest of population.

His theory of rent was most clearly set out in his 1815 Essay on Profits, not the Principles to which Mark links. Ricardo writes, apparently vindicating Mark:

In a progressive country, rent is not only absolutely increasing, but...it is also increasing in its ratio to the capital employed on the land...The landlord not only obtains a greater produce, but a larger share.

This happens because of diminishing returns to land. As the population grows, so does demand for food. That means worse quality land must be cultivated, so profits in the agricultural sector tend to fall. This in turn raises demand for the best quality land, and so raises rents.
You can generate a theory of inequality from this.
But here's the irony. What did Ricardo see as the solution to this problem?
Free trade, that's what. If we could import cheap corn, he said, demand for quality land in the UK would fall, as would rent:

If corn can be imported cheaper than it can be grown on [British] land, rent will again fall and profits rise.

In this sense, free trade is a way of preventing inequality rising.
Did Mark really mean to say this?

Kaletsky's ignorance

Anatole Kaletsky inserts a factual claim into his string of opinion - and gets it wrong:

Almost since its inception in the late 18th century, economics has been nicknamed “the dismal science”.

Error one - the study of economics did not begin in the late 18th century. Has Kaletsky forgotten William Petty, Francois Quesnay or Richard Cantillon, not to mention late Scholastic thinkers?
More scandalously, he's forgotten that John Locke was an economist - sufficiently a good one to come up with the quantity theory of money, MV = PT:

This shews the necessity of some Proportion of Money to Trade: But what Proportion that is, is hard to determine; because it depends not barely on the quantity of Money, but the quickness of its Circulation. The very same Shilling may at one time pay Twenty Men in Twenty days, at another, rest in the same Hands One hundred days together....
The lowering of Interest will raise the value of all other Things in proportion. For Money being the Counter-ballance to all other Things purchasable by it, and lying, as it were, in the opposite Scale of Commerce, it looks like a natural Consequence, that as much as you take off from the value of Money, so much you add to the price of other Things.

Error two - the phrase "dismal science" was not used soon after the late 18th C. It's thought that it was coined by Thomas Carlyle in this essay in defence of slavery written in 1849:

Not a "gay science," I should say, like some we have heard of; no, a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the  dismal science.

So, even if we date the "inception" of economics to 1776, the subject went 73 years - an entire human lifetime - before getting the nickname "dismal science." That's 31.7% of the history of post-Wealth of Nations economics.
This is no mere pedantry. Any educated economist knows that economics did not begin in 1776. And all good economists know the origin of the phrase dismal science. And we're proud to use it, as it identifies us with the friends of liberty and logic such as John Stuart Mill against obscurantists slavers like Carlyle.
That Kaletsky is ignorant of this suggests he is not a proper economist.