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Posts Tagged ‘Adam Smith’

THE GOLD SPOT: RICARDO ON GOLD AS VALUE

Sunday, June 2nd, 2013

The Gold Spot is a regular feature in which Mark Rogers excerpts a passage from his reading as the Text for the Day and then comments on it.

Extracts from ON THE PRINCIPLES OF POLITICAL ECONOMY AND TAXATION by David Ricardo, from the collected Works and Correspondence edited by Piero Sraffa with the collaboration of M.H. Dobb, published for The Economic Society by Cambridge University Press, Cambridge, 1951

Adam Smith, after most ably showing the insufficiency of a variable medium, such as gold and silver, for the purpose of determining the varying value of other things, has himself, by fixing on corn or labour, chosen a medium no less variable.

Gold and silver are no doubt subject to fluctuations, from the discovery of new and more abundant mines; but such discoveries are rare, and their effects, though powerful, are limited to periods of comparatively short duration. They are subject also to fluctuation, from improvements in the skill and machinery with which the mines may be worked; as in consequence of such improvements, a greater quantity may be obtained with the same labour. They are further subject to fluctuation from the decreasing produce of the mines, after they have yielded a supply to the world, for a succession of ages. But from which of these sources of fluctuation is corn exempted? [Chapter I On Value, Section I]

It has therefore been justly observed, that however honestly the coin of a country may conform to its standard, money made of gold and silver is still liable to fluctuations in value, not only accidental and temporary, but to permanent and natural variations, the same manner as other commodities.

By the discovery of America and the rich mines in which it abounds, a very great effect was produced on the natural price of the precious metals. This effect is by many supposed not yet to have terminated. It is probable, however, that all the effects on the value of the metals, resulting from the discovery of America, have long ceased; and if any fall has of late years taken place in their value, it is to be attributed to improvements in the mode of working the mines.

From whatever cause it may have proceeded, the effect has been so slow and gradual, that little practical inconvenience has been felt from gold and silver being the general medium in which the value of all other things is estimated. Though undoubtedly a variable measure of value, there is probably no commodity subject to fewer variations. This and the other advantages which these metals possess, such as their hardness, their malleability, their divisibility, and many more, have justly secured the preference every where given to them, as a standard for the money of civilized countries.

If equal quantities of labour, with equal quantities of fixed capital, could at all times obtain, from that mine which paid no rent, equal quantities of gold, gold would be as nearly an invariable measure of value, as we could in the nature of things possess. The quantity indeed would enlarge with the demand, but it value would be invariable, and it would be eminently well calculated to measure the varying value of all other things. I have already in a former part of this work considered gold as endowed with this uniformity […] In speaking therefore of varying price, the variation will be always considered as being in the commodity, and never in the medium in which it is estimated. [Chapter III On the Rent of Mines]

Comment: Apart from the importance Ricardo attached to machines cropping up in this discussion (his famous Chapter XXXI On Machinery), the interesting thing to note in these passages is that the argument with Adam Smith about sources of value devolves on gold as having the least variability when compared to other possible sources. Smith laid so much stress on corn, partly because it is a staple foodstuff and people must eat, and partly because the labour used to plant and harvest it was an easily quantifiable volume of work; Smith’s theory of value ultimately depended on labour, because the fact, the necessity of labour is an everyday constant.

Ricardo took exception to both corn and labour as measures of value, because the fact that both are necessary does not therefore bar them from continual accident and misfortune: exceptionally bad weather before a harvest destroys not only the crop but the need for labour at all, and has almost the same complete effect should bad weather occur during the harvest. The resulting famine may cause seed prices for next year’s crop to go up. That people must work for a living may be a constant, but their ability to work at any given time is contingent. Similarly, improvements in machinery may have a longer term effect on labour even as these improvements increase the harvest in a good year.

Therefore, these cannot be units of measurement of value: they fluctuate, or are capable of fluctuating too wildly.

The subject was to crop up again in Ricardo’s “Notes on Malthus”, where he takes issue with the gloomy Mr Malthus’s misreading of the points Ricardo makes above, in particular Malthus’s overlooking the qualifications about gold being “nearly an invariable measure of value” and his consequent assumption that Ricardo meant that as things stood, here and now, gold was such a measure. Indeed, Ricardo gets so hot under the collar in pointing out to Malthus that he had not been so simple as to claim this that he practically reverses himself as expressed above, almost implying that gold has no such intrinsic virtue! But indeed, he was quite cross with Mr Malthus all round; he did, in correspondence, express himself as being even less pleased with Malthus’s book on his second reading than he had been on first reading it, his further disgruntlement with Malthus leading to the “Notes”.

What is important about Ricardo’s quarrel with Adam Smith is that it is a very early rebuttal of the notion of labour as the source of value, and an equally important claim for precious metals as that source, as being the closest thing we are ever likely to possess for the purpose. That this claim is hedged with qualifications demonstrates two things: a prudent mind, and, secondly, that the major and long term experiments with paper money lay, of course, well in the future, i.e. the Twentieth Century. What Ricardo was doing was to estimate which of all possible sources of value, supposing such a measure to be desirable (and he concludes that it is), would best serve. There are obvious attractions in Adam Smith’s approach: it is practical, deals in vital constants of human action, and is empirical. But in the end it is insufficient. There is a discussion of paper currency in Ricardo’s book but it is fairly narrowly focused, as the experience of it in his day was narrowly focused, primarily on its promissory nature in terms of specie. Nothing like what we have experienced in the Twentieth Century was available to the political economists of the Eighteenth Century.

Nowadays, while accommodating the arguments to prudence as is always desirable, a stronger case for gold as “nearly an invariable measure of value” can and must be made because the realities foisted upon us by the advocates and practitioners of paper have been so dire.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

PAUL SAMUELSON ON SELF-INTEREST

Friday, December 14th, 2012

By Mark Rogers

In Paul Samuelson on the Trouble with Economies, I suggested that Samuelson’s understanding of self-interest was bizarre; this is what he said:

“The self-interest that the early economists counted on as a balance leads, in a modern economy, to collusion among the self-interested groups.”

It is a little difficult to fathom quite what Samuelson understands either by self-interest or what he thought the “early economists” meant by it on the basis of this assertion. After all, Adam Smith’s description is unambiguous – that it is not from any eleemosynary impulse that the baker and the butcher put bread and meat on our tables, but the pursuit of their self-interest. That self-interest is coterminous with providing customers with what they want, just as the self-interest in appeasing our and our families’ hunger leads us to pay the baker’s and the butcher’s prices: mutual benefit naturally flows from the self-interest on both sides.

And nor was Smith blind to the fact that those in business enter into collusions that may not be in the public interest; he was quite clear that whenever two or three are met together, they conspire, for example, to force prices up. This was the basis of his criticism of the medieval guild system. But such conspiracies in a free economy are by their nature limited; in such an unchecked economy they may cancel each other out. It is precisely in an economic system based on Keynesian arrangements, with the government being a central and distorting player in and above the market, that “collusion among the self-interested groups” becomes more widespread and entrenched, and therefore morally and economically damaging.

The extremes of this entrenchment are discussed in Hunter Lewis’s Where Keynes Went Wrong (discussed here and here), where he points out that when an industry or service is top-heavy with regulation, those who are regulated gradually subsume the regulators and co-opt the regulations to suit their own purposes, which is what happened with the banking crisis, and in an earlier epoch with the Trade Unions – indeed, in the latter case, the politicians simply threw in the towel. In The Mess We’re In this problem of banking regulation is dealt with in an illuminating way, as discussed in my review. It is almost inevitable that this should happen as businessmen actually understand economic realities in ways that most academics and civil servants are incapable of, an elementary point that ought to have sounded the alarm over regulation.

Calvin Coolidge in his Autobiography affirmed that nine-tenths of those who called on the President at the White House “want something they ought not to have. If you keep dead still they will run out in three or four minutes.” (Quoted in Paul Johnson, A History of the Modern World from 1917 to the 1980s.) Would that the political classes on both sides of the Atlantic study the Coolidge presidential style, to our profit…

Perhaps Samuelson’s puzzlement is that a Keynesian system was meant to sweep away the habits of the period in which the early economists wrote, self-interest, collusion and all. But how on earth is it possible to believe that, with the government being courted on all sides, collusion should somehow fade away? This is just one of the many ways in which a Keynesian lens distorts the observation of what is actually taking place, in both an unregulated economy as well as a Keynesian one; the latter distorts information in such a manner that even the Keynesians themselves cannot read it!

Artistic Integrity?

A useful way of looking at Keynesian economics is as a branch of aesthetics, a subject to which I shall return. It was aesthetic distaste, after all, that inspired Keynes against the “early economists”, as I pointed out here. He inveighed against them thus: “When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years.”

During the Thatcher years this disapproval of “self-interest” induced a very peculiar species of posturing amongst the aesthetes. In his book The Strange Death of Tory England (Penguin Books, London, 2005), Geoffrey Wheatcroft dissects this disdain.

“The novelist John Fowles complained about ‘the self-centred notions of the new conservatism’. He was shocked by ‘this rightward and selfward tendency in most of the electorate since the 1950s’, a cult of personal advantage made worse now by ‘the ethos of the grocer’s daughter’.” These sentiments were generally echoed and endorsed by the artistic elite throughout the 1980s; for the novelist and playwright Michael Frayn the free trade Tories were “barbarians”; the philosopher A. J. Ayer voted for the SDP on the grounds that they were not “philistines”, and the novelist Julian Barnes echoed Fowles in thinking that Thatcher’s achievement had been “the legitimization of self-interest as a public and private virtue”.

How amiable, then, of these people to claim to have political motives loftier than “the ethos of the grocer’s daughter”. Wheatcroft quotes the composer Sir Michael Tippett on his voting intentions: “As an artist I’m impelled to vote Labour, since it’s the only party committed to doubling the arts budget.” And actor Antony Sher: “As a member of the arts [sic] I am heartened by [Labour’s] pledge to double the arts budget.”

Perhaps artistic self-interest takes place on a more exalted plane than the base motives of those who merely wish to feed their children.

What these variously fatuous “members of the arts” fail to see, or perhaps wilfully ignore, is that state subsidy of the arts inevitably means a very obviously self-interested transfer of wealth from the poor to the rich, another of those moral grotesqueries of the Keynesian and welfare state.  (It should be remembered that Keynes was Chairman of the Arts Council, overseeing such transfers.) Not only are they driven by self-indulgence but also by self-interest – but then, as the “early economists” and the Austrian School understood, we are all driven by self-interest, it cannot be otherwise.

The plea is often made that human life is more than just survival, that we are cultural and intellectual beings with other than literal hungers to assuage. I agree – it is hardly difficult to do so, the facts being what they are – but not by taking the bread out of the mouths of our children.

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

ADAM SMITH’S ERROR (Part One)

Friday, November 23rd, 2012

By Mark Rogers

In my review of The Mess We’re In, amongst the many admirable qualities of the book I drew attention to is the way in which the author traces the evolution of the idea and meaning of value from Adam Smith to the Austrian School (see section headed “Value”). Rather than finding fault with Smith’s original conception, the author rightly contended that an idea of such complexity would go through several major evolutions before all the streams of thought that went into it would produce a meaningful and useful concept . Indeed, here I point out that there is growing realisation amongst some economic thinkers that we are only just beginning to come to an understanding of what money itself is.

In this spirit I offer some very interesting observations by Jane Jacobs in her book The Economy of Cities (I have already cited the work of Jane Jacobs here and here).

The Division of Labour

“Adam Smith, who identified the principle of the division of labour and explained its advantages, seems not to have recognized that new work arises upon older divisions of labour.” She analyses Smith’s famous description of the divided labour in a pin factory, and goes on to comment that Smith, having described the processes visible in the contemporary factory, drew a fundamentally inaccurate conclusion: he “assumes that this same principle also accounts for the existence of pin making itself. He called pin making simply a larger division of labour.”

However, the type of pins that Smith was observing had originally been manufactured as part of the task of making carding combs. The wire bristles for these combs were occasionally made in the same manufacturies as the frames, but often they were made in independent shops which sold them to the cardmakers. “Bristle makers, engaged in making a tool for the textile industry, were almost making pins. But when some of them actually did so, they were not further dividing the labour of making carding combs. Nor were they further dividing the labour of making bristles. They were not dividing at all. They were adding a new complexity, pin making, to an older simplicity, bristle making. From this addition came the rest of the divisions of labour in pin making” that Smith then went on to describe.

Smith’s Mistake

This unwarranted inference from observation she calls a mistake that was “subtle and casual”: “Smith gave to division of labour unwarranted credit for advances in economic life.”

Note that the mistake takes the form, not of misdescribing what he saw, nor of being inaccurate about what it could achieve, but rather of giving it an exaggerated influence in the rest of economic life. Yet, “[d]ivision of labour is a device for achieving operating efficiency, nothing more. Of itself, it has no power to promote further economic development.” She goes on to point out that this being so, it is even limited in its scope to improve this operating efficiency because further developments in efficiency, after extant work has been suitably divided into separate functions, “depend upon the addition of new activities”.

Another interesting observation is that division of labour is by no means a hallmark, as so many thinkers have assumed, notably Karl Marx, of an advanced economy. A moment’s reflection will show this to be true. But here one must defend Smith because it must be remembered that Smith was describing a developing economy in The Wealth of Nations, something new in economic life in the wake of the industrial revolution, which may explain why he made the incorrect inference: so much was new and unexpected as those in the extra-legal economies of the time were forcing the old medieval guilds onto the back foot.

How Jane Jacobs arrived at her conclusions in the light of her study of cities will be examined in Part Two. Suffice to say here that this work of hers is able to throw considerable light on the problem of the division of labour, and if in this instance we can say that Smith was mistaken, rather than simply incomplete, in the hands of Jane Jacobs the mistake turns out to be a fruitful one. It is also important to note that the complexity involved in the idea of value is of a different order from a mistaken assumption about how economic activity comes about: the latter is amenable to empirical observation, while value, though having intrinsic empirical implications, is also a complex philosophical issue.

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST