Adam Smith

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The Wealth of a Nation: Institutional Foundations of English Capitalism – review

Published by Anonymous (not verified) on Mon, 08/04/2024 - 9:17pm in

In The Wealth of a Nation: Institutional Foundations of English CapitalismGeoffrey Hodgson traces the roots of modern capitalism to financial and legal institutions established in England in the 17th and 18th centuries. Hodgson’s astute historical analysis foregrounds the alienability of property rights as a key condition of capitalism’s rise to supremacy, though it leaves questions around the social dimensions of the free market system unanswered, writes S M Amadae.

The Wealth of a Nation: Institutional Foundations of English Capitalism. Geoffrey M. Hodgson. Princeton University Press. 2024.

Book cover of The Wealth of a Nation by Geoffrey Hodgson showing a painting of people, horses and a factory emitting smoke against a sunset sky.English capitalism was built on empire and slavery…State intervention and slavery are examples of impurities within capitalism. Impurities can be necessary or contingent for the system. Some state intervention was arguably necessary, but slavery was not. (13)

Countering conventional understandings of capitalism, Geoffrey Hodgson contends that “Secure property rights were not enough,” because “[m]ore wealth had to become alienable and usable as collateral for borrowing and financing investment” (119). Hodgson’s The Wealth of a Nation: Institutional Foundations of English Capitalism is a welcome contribution to heterodox economics that incorporates historical excavation and theoretical analysis to provide refreshing nuance to established accounts of the rise of capitalism. Hodgson provides historical details of Great Britain’s early modern property rights and finance institutions, building on his previous works and covering a dense corpus of theories and data going back to Adam Smith’s 1776 Wealth of Nations. Hodgson’s analysis of the financial origins of English capitalism focuses on types of property rights from 1689 to 1760 and varieties of financial credit supporting British industrialisation between 1760 and 1830. While readers can expect a perceptive analysis of the origins of British capitalism, they should not expect a critique of the social dimensions of the free market system.

The Wealth of a Nation […] incorporates historical excavation and theoretical analysis to provide refreshing nuance to established accounts of the rise of capitalism.

Part II, “Explaining England’s Economic Development,” including Chapter Three “Land, Law, War,” Chapter Four “From the Glorious to the Industrial Revolution,” and Chapter Five “Finance and Industrialization,” carries the brunt of Hodgson’s argumentation. Three aspects of the book stand out. The first is his overarching argument that the central institution enabling the rise of modern political economy in England was finance: the ability to alienate the ownership of land and other property to serve as collateral for investment loans. The second is Hodgson’s heterodox economic analysis emphasising historical contingency (as opposed to universal laws); Darwinian Variation, Selection, Replication (203-206); and the role of institutions. The third is Hodgson’s apparent embrace of capitalism. He celebrates the productive power of finance capital and industrial investment, but eschews a critical analysis of capitalism’s social consequences articulated by the likes of Karl Marx, John Maynard Keynes and Karl Polanyi.

[Hodgson] celebrates the productive power of finance capital and industrial investment, but eschews a critical analysis of capitalism’s social consequences

Hodgson engages the theories of Karl Marx, Douglass North and Barry Weingast and Deirdre McCloskey, criticising their arguments for being incomplete or flawed. Marx identified the exploitation of the working class by the bourgeoisie; he missed that changes in law preceded changes in the material base that ultimately consolidated bourgeois power. North and Weingast apprehend the importance of secure property rights but missed that these could encompass feudal property rights mandating primogeniture (oldest son inherits all property) and entailments rather than the new class of alienable property rights. McCloskey rightly focuses on ideas as a force for social evolution but misses the exigencies of paying for costly wars and the practical need for legal means to pay off sovereign debt.

The key underlying factor of the British Industrial Revolution from 1760-1830 was the ability to obtain finance.

Hodgson’s treatment is astute. The Dutch were leaders in public finance, and William III’s accession to the British throne in 1689 brought those practices into Britain (121). The period from 1689-1815 was one of “war capitalism” requiring that the state be efficient in raising taxes. The state gained the right to create money by decree, and debt itself could be sold along with contractual obligations to repay the debt. Hodgson dates the financial revolution to 1660-1760 (135) and associates the growing sovereign debt with the need to finance war efforts. The key underlying factor of the British Industrial Revolution from 1760-1830 was the ability to obtain finance. Hodgson challenges the conventional view that entrepreneurs obtained loans from family and friends. His argument rests on documenting that investors were able to stake collateral for their loans. He presents evidence on mortgages, such as for canals, and the rising ratio of capital existing as financial assets versus as physical assets. The British banking system had to adapt to offer credit for investment because the central bank was focused on financing sovereign debt for war efforts.

Hodgson redirects attention from the security of property rights to their alienability as the driving institutional invention critical for capitalism to emerge. Slaves represented a crucial category of this exchangeable type of property. Hodgson acknowledges that “By the end of the eighteenth century, slaves amounted to about a third of the capital value of all owned assets in the British Empire” (109). A sizeable category of alienable property in the early 18th century was that of slaves: £6.4 billion was land, buildings, animals, ships, equipment and other non-human assets, while £3 billion was slaves (2021 currency values, 149). Hodgson’s treatment of slaves’ contribution to the origins of what Adam Smith called the “system of natural liberty” is limited to their functional role as legally institutionalised property that could be alienated. Readers looking to heterodox economics to provide a critical stance on the origins of western free markets may seek more than Hodgson’s proposition that the institution of slavery was merely a contingent factor in the system’s rise. Hodgson acknowledges that the £20 million compensation paid to former slave owners for the 1833 Slavery Abolition Act stands as a historically unprecedented sum of liquid financial capital freely available for industrial investment in the 19th century.

The £20 million compensation paid to former slave owners for the 1833 Slavery Abolition Act stands as a historically unprecedented sum of liquid financial capital freely available for industrial investment in the 19th century.

In a twist of prevailing perception that the burden of debt is a form of bondage (eg David Graeber’s Debt, 2012), Hodgson frames indebtedness as the means of liberation to finance capital, which in turn drives economic growth. Hodson effectively defends Hernando De Soto’s property rights institutions to increase the welfare of the destitute by issuing land titles as a means to obtain credit. In a similar inversion of conventional sentiment, we can recall Adam Smith’s admonishment, counter to contemporary American libertarians, that tax, including poll tax, “is to the person who pays it a badge, not of slavery, but of liberty” because tax payers are subjects of government.

Hodgson adopts a Darwinian-inspired methodology based on variation, selection, and replication (the “V-S-R” system, 204).  The section “Applying Darwinism to Scientific and Economic Evolution,” (206) is conjectural. He observes that, “Some individuals were more successful than others, affecting their chances of survival and procreation” (207). He rejects either a material account or a mental account of agency. The latter refers to “folk psychology” which attributes action to individuals’ desires and beliefs. Hodgson follows the school of thought holding that human action occurs before intention is conscious or rationalised (189-190). He holds that habits and dispositions, rather than deliberately formed intentions, govern action and form the bedrock of institutions.

[Hodgson] holds that habits and dispositions, rather than deliberately formed intentions, govern action and form the bedrock of institutions.

How, then, do we assess the merits of, or the underlying affirming conditions for, either the institution of slavery or alienable property and financial capital? Hodgson observes that,

People often obey laws out of respect for authority and justice, and not because they calculate advantages and disadvantages of compliance. Dispositions to respect authority have evolved over millions of years because they aided cohesion and survival of primate and human groups (201).

Hodgson’s argument that alienable property and appropriate financial institutions for investment were a condition for the rise of capitalism in Britain is convincing. However, without a clear conceptualisation of effective human agency, other than that driven by dispositions and habits, we are left with the stubborn question of the extent to which capitalist institutions are either emancipatory or the best means to better the human condition.

Note: This post gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics and Political Science.

Image: The painting Coalbrookdale by Night by Philippe Jacques de Loutherbourg depicting the Bedlam furnaces at Coalbrookdale in Shropshire, England. Credit: The Science Museum, London.

In the Long Run: The Future as a Political Idea – review

Published by Anonymous (not verified) on Mon, 26/02/2024 - 10:21pm in

Jonathan White‘s In the Long Run: The Future as a Political Idea examines how changing political conceptions of the future have impacted democracy, arguing that contemporary challenges like economic slowdown and climate change have led to reactive politics and short-termism. Though the book proposes ways to revitalise democracy, Aveek Bhattacharya suggests we may need to seek beyond our political institutions for strategies to build a more open future.

You can read an interview with Jonathan White about the book here. On Monday 11 March at 6.30pm White will speak at an LSE panel event, The politics of the future – find details and register here.

In the Long Run: The Future as a Political Idea. Jonathan White. Profile Books. 2024.

In the Long Run: The Future as a Political Idea is a book about the history of the future, and what it means for the present. More precisely, it describes how the way people think about the future has evolved over time, and the impact of these changes on democracy. Jonathan White’s central argument is that while optimism for the future once helped build democracy, economic slowdown, climate change, new technology and geopolitical tension mean that “the future no longer seems its [democracy’s] friend”.

For democracy to function, White observes, it is critical that people believe an “open future” is possible: that there are alternatives to the status quo, that society can evolve in a range of different ways, and that the people can choose between them. One of the key defining characteristics of democracy – the peaceful handover of power – is premised on changeability of the future: election losers believe that they will get their chance to achieve their vision of society again.

For democracy to function, White observes, it is critical that people believe an ‘open future’ is possible

In the present, White says, it is harder to maintain that patience and faith. The future is regarded with fear and claustrophobia. At various points he describes the future, far from being open, as “closing in”. Catastrophe – societal decay, conflict, environmental collapse – feels hard to avert. Insofar as there are options, they involve deferring to technocrats. There is a “now or never” urgency about politics, and a fear that waiting your turn means leaving it too late because the other side will destroy everything.

Via a tour of historical political thinkers, White sketches the ideas of the future that make for the most vibrant democratic system. Political and social outcomes must seem open, but not in such a destabilising manner as to trigger counter-revolution from those attached to the present. A strand of utopianism can be energising but must be linked to near-term political tactics to be practicable. Efforts to limit uncertainty, to render the future predictable, through calculation and technocracy risk squeezing out the necessary imagination and mass participation of vibrant democracy. At the same time, chaotic impulsiveness and pure disregard for expertise risks descending into fascism. Trying to control the future by keeping it secret is likely to generate conspiracy theories and discontent. Consumerism individualises the future and means we no longer share in it – we move from valorising Victorian steam trains to wanting our own personal cars.

Our perpetual state of emergency, while creating unpredictability, produces reactive politics, designed mainly to return things to the way they were.

The conception of the future we have arrived at today is not, in White’s opinion, sufficiently conducive to democracy. Our perpetual state of emergency, while creating unpredictability, produces reactive politics, designed mainly to return things to the way they were. Short-termism dominates – most notably, through the election cycle, but even longer-term threats like climate change are tractable only by converting them to benchmarks and deadlines. Managerialism and secrecy dominate, empowering organisations like the European Central Bank and the International Monetary Fund and triggering impulsive populist backlashes.

White’s proposals for rebuilding a more positive conception of the future and revitalising democracy are somewhat surprising. He is sceptical of direct democracy – while more referendums might give ordinary citizens more chance to shape the future, they raise the stakes and perpetuate the “all-or-nothing” politics he thinks is so baleful. Small-scale councils are too small-scale to create significant change, citizens’ assemblies too short-lived to pursue a persistent vision.

White calls for ‘radical representative democracy’, with mass participation in the development of party policy and party members having greater opportunity to recall politicians who fail to deliver on those agreed goals.

Instead, he puts his chips on political parties as the crucibles of a more inclusive, compelling and hopeful vision of the future. He calls for “radical representative democracy”, with mass participation in the development of party policy and party members having greater opportunity to recall politicians who fail to deliver on those agreed goals. It’s an argument with echoes of Peter Mair’s Ruling the Void, which also claimed that the disengagement of ordinary members and politicians from their political parties had led to “the hollowing of Western democracy”.

White’s rebooted party system sounds good in theory, but invites scepticism about its practicality. His central assumption is that citizens’ disempowerment is the root cause of our current democratic malaise, and that the opportunity for greater influence will suffice to tempt enough people to give up their evenings and weekends to political causes. It is not encouraging that the existing parties that have done most to engage with mass movements and improve participation with things like online platforms – Podemos in Spain and the Five Star Movement in Italy – do not seem to have restored democratic confidence in their countries.

The Victorian capitalists who built the factories and railroads may not have been personally attractive, but they inspired progressives and socialists to dream about how their innovations could be used to benefit all.

White is oddly dismissive of the pockets of optimism that do exist outside the political system – most notably Silicon Valley, where ideas like “Effective accelerationism”, the view that technological progress is likely to obviate many of our deepest societal challenges, has taken root. For White, they display the wrong sort of optimism: too consumerist and individualistic, too inclined towards anti-system chaotic thinking, tendencies encapsulated in the figure of Elon Musk, presented as fascistoid, if not fascist. Setting aside whether that is a fair characterisation of Musk, the question it raises is why the confidence of tech companies seems so divorced from the sentiments of wider society. The Victorian capitalists who built the factories and railroads may not have been personally attractive, but they inspired progressives and socialists to dream about how their innovations could be used to benefit all. There are some – figures like Aaron Bastani on the far left and Derek Thompson on the centre left – that are trying to do something similar today, but White does not recognise them as such.

White assumes that the problems of democracy are endogenous: that they are caused by political institutions and must be resolved by them.

Most fundamentally, White assumes that the problems of democracy are endogenous: that they are caused by political institutions and must be resolved by them. But there are more straightforward explanations for the modern morosity. Stagnant economic growth, and the failure of new technologies to demonstrably improve living standards, would naturally be expected to undermine confidence that things will improve. The demographic shift to an older population in rich countries may also have contributed to a lack of vitality and enthusiasm, and a tendency to look back with nostalgia rather than forward with hope. Even among the young, we should not necessarily take perceptions at face value. Phenomena like “climate anxiety” seem to reflect anxiety at least as much as they reflect the climate, and as such will often be psychological, not just political in nature.

That’s not necessarily a comforting thought. Maybe technological abundance is around the corner, maybe the economy will turn around, maybe the mental health crisis will abate – whether by sheer luck or unusually effective action – and people will start to feel better about the future. But In the Long Run suggests that fixing democracy’s problems, renewing our faith in the open future, is a much bigger task than tweaking its institutions.

This post gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics and Political Science.

Image credit: Ryan Rodrick Beiler on Shutterstock

Q and A with Jonathan White on In the Long Run: The Future as a Political Idea

We speak to Jonathan White about his new book, In the Long Run: The Future as a Political Idea, which investigates how changing political conceptions of the future have impacted societies from the birth of democracy to the present.

On Tuesday 30 January 2024 LSE staff, students, alumni and prospective students can attend a research showcase where Jonathan White will discuss the book.

In the Long Run: The Future as a Political Idea. Jonathan White. Profile Books. 2024.

Find this book: amazon-logo

In the long run book cover showing a tortoise on a cream backgroundQ: What is the value of examining democracy in terms of its orientation towards, or relationship to, the future?

My book tries to show how beliefs about the future shape expectations of who should hold power, how it should be exercised, and to what ends. The emergence of modern democracy in Europe coincided with new ways of thinking about time. In the 18th and 19th centuries, emerging ideas of a future that could be different from the present and susceptible to influence helped to spur mass political participation. Movements of the left cast the future as the place of ideals, and “isms” such as socialism and liberalism provided the basis on which strangers could find common cause. Conversely, authoritarians have used the future differently to pacify the public and keep power out of its hands. Projecting democracy, prosperity and justice into the future is one way to seek acceptance of their absence in the present.

In the 18th and 19th centuries, emerging ideas of a future that could be different from the present and susceptible to influence helped to spur mass political participation.

Q: Why is an emphasis on continuation beyond the present essential to the operation of democracy?

Modern democracy is representative democracy, and that gives the future particular significance.  Why should people accept the results of elections that go against them? “Losers’ consent” is generally said to rest on the notion that victories and defeats are temporary – there will always be another chance to contest power. The expected future acts as a resource for the acceptance of adversaries and of mediating institutions and procedures. One of today’s challenges is that this sense of continuation into the future is increasingly questioned. Problems of climate change, inequality, geopolitics and social change are widely viewed as so urgent and serious that they remove any scope for error – waiting for the “next time” is not enough. Every political battle starts to feel like the final battle, to be won at all costs. This year’s US presidential election will be fought in these terms and will make clear the stresses it puts on democracy.

One of today’s challenges is that this sense of continuation into the future is increasingly questioned. Problems of climate change, inequality, geopolitics and social change are widely viewed as so urgent and serious that they remove any scope for error

Q: You credit liberal economic thinkers like Adam Smith with “pushing back the temporal horizon”. How did their ideas around the free market treat the future?

In the early Enlightenment, defenders of free trade and commerce tended to emphasise the dividends that could be expected in the short term – peace and stability, for example, and access to goods. But the legitimacy of the market order would be hard to secure if it rested only on immediate benefits. What if conditions were harsh, or wealth was concentrated in the hands of the few? Pioneers of liberal economic thought such as Smith started to promote a longer perspective, allowing them to cite benefits that would need time to materialise, such as advances in efficiency, productivity and innovation. The future could also be invoked to indicate where present-day injustices would be ironed out. What we now know as “trickle-down” economics, in which returns for the rich are embraced on the idea that they will percolate down to the many, entails pointing to the future to defend the inequalities of the present. By invoking an extended timeframe, one can seek to rationalise a system that otherwise looks dysfunctional.

Pioneers of liberal economic thought such as Smith started to promote a longer perspective, allowing them to cite benefits that would need time to materialise, such as advances in efficiency, productivity and innovation.

Q: You cite the 20th-century ascendance of technocracy, of “ideas of the future as an object of calculation, best placed in the hands of experts”. How has this impacted democratic agency?

One way to think about the future is in terms of probabilities – what outcomes are most likely and how they can be prepared for. You find this outlook in business, and in government – especially in its more technocratic forms. It brings certain things with it. A focus on prediction and problem-solving often means focusing on a relatively near horizon – a few years, months, weeks or less – as where the future can be gauged with greatest certainty. And that in turn tends to go with a consciously pragmatic form of politics, less interested in the longer timescales needed for far-reaching change. In terms of the democratic implications, a focus on probabilities tends to elevate the role of experts – economists, for example – as those able to harness particular methods of projection such as statistics. If you turn the future into an object of calculation, it tends to favour elite modes of rule.

An emphasis on prediction is also something that has shaped how politics is covered in the media. Consider the use of opinion polls to narrate change – increasingly prominent from the 1930s onwards – which encourage a spectator’s perspective. Or consider a style of reporting quite common today, whereby a journalist talks about “what I’m hearing in Washington / Westminster / Brussels”.  Its focus is on garnering clues about who seems likely to do what, and what they think others will do. The accent is less on the analysis of how things could be, or should be, or indeed currently are, and more on where they seem to be heading. It is news as managers or investors might want it – and politically that often amounts to an uncritical perspective.

Q: You discuss how desires to calculate the future through military forecasting took hold during the Cold War. What are the legacies of this in governmental politics today?

One of the main functions of military forecasting during the Cold War was to second-guess the actions of enemy states – where their weaknesses lay, where they might attack, and so on. That was true in both the West and the East. But forecasting was also applied to the control of populations at home, and not just with an eye to foreign policy. Fairly early on, national security experts started to get involved in public policy and urban planning – think of initiatives such as the “war on crime” launched by US President Lyndon Johnson in 1965. The outlook of the military forecaster began to transfer from the realm of geopolitics to public policy, counterinsurgency and the management of domestic protest, bringing methods of secrecy with it. Today’s forms of surveillance governance are the descendants of these forecasting techniques. And so too are conspiracy theories, which are often based on the idea that some have more knowledge of the future than they let on. Theories of 9/11 that suggest the US government saw the attack coming and deliberately let it happen, or even assisted it, are emblematic.

Q: Why is reducing social and economic inequality important to enable future-oriented political engagement from as many people as possible?

Democratic participation requires the capacity to see the present from the perspective of an imagined better future. But that presupposes the time and capacity for reflection. Those living in insecure conditions typically lack the resources and inclination to turn their eyes to the future. In exhausting jobs, the focus tends to be on getting through the day (or night): the present dominates the future. In precarious jobs or unemployment, people lack control of their lives: the future can look too unpredictable to bother with. Political engagement also depends on a sense that the problems encountered are shared with others. A workplace centred on short-term contracts on the contrary presents individuals with a constantly changing cast of peers. Other things can also undercut a sense of shared fate – personal debt, for instance, or algorithmic forms of scoring (eg, in insurance) that focus on the particularities of individual lives.

In exhausting jobs, the focus tends to be on getting through the day (or the night): the present dominates the future.

This is the sense in which the social and economic changes of the last few decades have fostered the privatisation of the future. The choices of political organisations like parties and movements are crucial in this context. They can either challenge these tendencies, developing that critical perspective on the present and a sense of shared fate – think eg, of a movement like the Debt Collective. Or they can reproduce these tendencies – eg, by treating voters as individuals who want only to maximise their own interests.

Q: What effects can crises have on how governments and citizens conceptualise and act on the future? Are current democratic political systems capable of addressing the climate crisis, the great future-oriented challenge of our time?

Crises tend to engender a sense of scarce time, and in the contemporary state that tends to bring a managerial approach to the fore. Emergencies are governed as one more problem of calculation, with a focus on concrete outcomes that can be traced from the present. The risk is that questions of justice and structural change get marginalised, as considerations that distract from the immediacy of the situation and open too many issues. Emergency government tends to prioritise short-term goals over long-term, and those which are concrete and quantifiable over those which are not.

Climate change too tends to be turned into a problem of calculation in policymaking circles. One sees it with the targets and deadlines invoked. By making net zero carbon emissions an overriding objective, authorities can marginalise considerations no less relevant to human wellbeing and environmental protection – biodiversity, global health and economic equality, for example. This is why some climate scholars see such methods as counterproductive. By emphasising a particular set of variables within a delimited timeframe, targets and deadlines get us thinking more about the near future, crowded with specificities, and less about the further horizon and the more general, incalculable goals that belong to it.

Taking the future seriously meant not hemming oneself in with false precision but setting out clear principles and organising in their pursuit.

The pitfalls of exactitude are something I try to highlight in the book. Not only is it hard to make predictions in a volatile world, but a focus on quantified targets can be counterproductive, since the facts at any moment can be bleak. As the socialists of the late 19th century understood, if the future was to be about radical change pursued over the long term, one could not afford to get lost in the details of the moment. Taking the future seriously meant not hemming oneself in with false precision but setting out clear principles and organising in their pursuit. I think this is a message that still applies. Climate change requires science and precision to grasp, but climate politics requires balancing this with a sense of uncertainty, open-endedness, and the possibility of radical change.

Note: This interview gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics and Political Science. The interview was conducted by Anna D’Alton, Managing Editor of LSE Review of Books.

 

What's the deal with The Smiths

Published by Anonymous (not verified) on Fri, 29/12/2023 - 12:54pm in

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Adam Smith

 

 With friends like this...

This is NOT a review of the Smiths (the band), and neither of (or at least not a full one) of Glory M. Liu's (relatively) new book Adam Smith's America: How a Scottish Philosopher Became An Icon of American Capitalism. For a proper review go read Kim Phillips-Fein's one. In a sense, the book remind me of Bernard Shaw's famous saying that UK and the US were two countries divided by the same language. Here the gap is between fields, and there are two gaps, one within economics, modern mainstream economics and old classical political economy. Liu is a political scientist by training, and what she takes as economists views, including the understanding of the history of the discipline, are fundamentally from a mainstream perspective.

The phrase by Sraffa, that I have cited before fully applies here. He said:

"The classical economists said things which were perfectly true, even according to our standards of truth: they expressed them very clearly, in terse and unambiguous language, as is proved by the fact that they perfectly understood each other. We don’t understand a word of what they said: has their language been lost? Obviously not, as the English of Adam Smith is what people talk today in this country. What has happened then?" [Sraffa, Nov. 1927, D3-12-4, front page, 14]

In particular, the continuity in what has been aptly referred to as the surplus approach from William Petty to Smith, and the well documented trajectory from the ideas of Petty to Cantillon, to Quesnay, and then to Smith is lost in her relatively thin discussion of political economy aspects of Smith. The book by Tony Aspromourgos, On the Origins of Classical Economics: Distribution and value from William Petty to Adam Smith, is required reading on this subject. Smith clearly builds upon the core of the surplus approach, as developed by Petty-Cantillon-Quesnay, in particular on the question of the notion that manufacturing activities are productive. That is certainly an important aspect associated to the disputes between agrarian and industrial views of society.

But while there are differences in their views with respect to what might be termed the model of development (agrarian vs manufacturing), there is clear analytical continuity between Smith and the Physiocrats. They are all concerned with the material reproduction of society, in which the surplus (and, hence, profits and distribution) is a residual, and wages are at the level of the socially and institutionally determined (not merely physiologically) by the needs of survival of the working class. Smith saw distribution as conflictive. That's an analytical point that cannot be dismissed, and is not discussed in Liu's book at all.

This matters to some extent, because the general argument in Liu's book -- which is for the most part correct, that Smith ideas have been used by different groups to promote agendas that were not originally part of Smith's arguments, and that he was a complex author with more depth than often transpires in these several versions of reinvented Smiths (hence, the Smiths) -- misses the actual point of the original Smith. In her view, the nuance is provided by the fact that Smith was a moral philosopher and that in his other major work (and in his Lectures on Jurisprudence, based on students notes, and published posthumously), The Theory of Moral Sentiments (TMS), a Smith different from the one of The Wealth of Nations (WN) appears. Smith cannot be seen as a defender of selfish behavior, since he is clearly critical on TMS (the so-called Das Adam Smith Problem, about which Liu makes more than one should), neither an unqualified supporter of unregulated capitalism, since he qualified it, including in the WN (for example, with his approval of the Navigation Acts; I would add of the Bank of England). That's fine, but displays a limited understanding of the relation of Smith's and the surplus approach with modern economics.

Smith is misread by modern economics NOT because he was not an unqualified defender of unmitigated, unregulated, laissez-faire capitalism (which he wasn't), but because theoretically his economic system did not imply that markets produced optimal outcomes. His defense of laissez-faire and of commercial societies was not based on the allocative efficiency of markets (neither then intervention could be supported as a way to preclude inefficiencies), but simply as needed break with the remnants of feudal institutions that hampered the process of accumulation. As Marx noted in his The Poverty of Philosophy (Works, vol. 6: 176): "The Classics, like Adam Smith and Ricardo, represent a bourgeoisie which, while still struggling with the relics of feudal society, works only to purge economic relations of feudal taints, to increase the productive forces and to give a new upsurge to industry and commerce."

Of course, to sort this out one has to get into the theory of value.* The labor theory of value (LTV) (in an early and rude state of society) meant that the long term (natural) prices were determined by the relative amounts of labor, and supply and demand only determined short term market prices. This theory implied that profits were determined as a residual, for a given level of output and with real wages given, for historical and institutional circumstances, at the level of subsistence. The implication is that the theory did not imply the full utilization of labor, and that distribution is conflictive. So Smith's policy defense of laissez-faire was not based, like modern neoclassical versions (in particular the Chicago School that Liu's discusses in more detail, including Stigler, pictured above), on markets producing the optimal allocation of resources, including the full utilization of labor.

It is clear that Smith is not a forerunner of Marx, something that the latter understood. Marx shared an analytical framework with the classical authors, but rejected their a-historical categories. He argued that:

"Economists like Adam Smith and Ricardo, who are the historians of this epoch, have no other mission than that of showing how wealth is acquired in bourgeois production relations, of formulating these relations into categories, into laws, and of showing how superior these laws, these categories, are for the production of wealth to the laws and categories of feudal society." (Ibid.).

But it is also clear that the theoretical foundations of his policy views was very different than those that were built from the developments of the Marginalist Revolution, and closer, in fact, to Marx's own analytical framework. On that Milgate and Stimson (2009), in their very useful After Adam Smith, are also clear. They say:

"Indeed, if the contemporary economic case for liberty is ultimately made in terms of the language of the market, which if left unimpeded by the state is capable of solving a static problem of allocating a fixed supply of resources, then we have moved well beyond these eighteenth-century thinkers such as Smith. In this sense it might be reasonable to ask whether what we understand today as free market theory—against which a modern form of nationalist- led trade policies might be said to operate—is different in important ways from the eighteenth-century political economy from which it is said to have originated. It might also be well to ask just how that transformation of the conceptual framework of political economy and its relationship to politics that came about after Smith took shape" (2009: 32).

Without an understanding of the changes in political economics (and its transition to economics) after Adam Smith, one is left with the puzzle noted by Sraffa almost a century ago.

* On the reasons for the need for a theory of value go here. For more on the limits and problems of the LTV see this and this.

PS: I should note that Liu tells the story of Stigler's T-Shirt that read Adam Smith Best Friend (Nathan Rosenberg's paper on that here). Back when, my PhD students in Utah, did a T-Shirt on my suggestion that there should be an alternative to Stigler's one. The Heterodox Students Association (HESA) T-Shirt read: I read Adam Smith and Understood it. Enough said. Old post on that. A recurring theme around here.

Hijacked: How Neoliberalism Turned The Work Ethic Against Workers and How Workers Can Take It Back – review 

In Hijacked: How Neoliberalism Turned The Work Ethic Against Workers and How Workers Can Take It BackElizabeth Anderson argues that neoliberalism has perverted the Protestant work ethic to exploit workers and enrich the one per cent. Magdalene D’Silva finds the book a compelling call to renew a progressive, socially democratic work ethic that promotes dignity for workers.

Hijacked: How Neoliberalism Turned The Work Ethic Against Workers and How Workers Can Take It Back. Elizabeth Anderson. Cambridge University Press. 2023.

Find this book: amazon-logo

pink and yellow cover of the book Hijacked by Elizabeth AndersonElizabeth Anderson’s excellent 2023 book Hijacked was published the same month Australian multi-millionaire Tim Gurner said:

“Unemployment has to jump … we need to see pain … Employees feel the employer is extremely lucky to have them … We’ve gotta kill that attitude…”

America’s Senator Bernie Sanders rebuked Gurner’s diatribe as “disgusting. It’s hard to believe that you have that kind of mentality among the ruling class in the year 2023.”

Ironically, Gurner’s comments favouring employees’ objectification and employer coercive control show just what Hijacked says is: [T]he ascendance of the conservative work ethic… (which) tells workers … they owe their employers relentless toil and unquestioning obedience under whatever harsh conditions their employer chooses …”(xii).

Indeed, “neoliberalism is the descendant of this harsh version of the work ethic … [i]t entrenches the commodification of labor … people have no alternative but to submit to the arbitrary government of employers to survive.” (xii).

Anderson defines neoliberalism as an ideology favouring market orderings over state regulation […] to maximise the wealth and power of capital relative to labour

Anderson defines neoliberalism as an ideology favouring market orderings over state regulation (xii) to maximise the wealth and power of capital relative to labour (272) where the so-called “de-regulation” of labour and other markets doesn’t liberate ordinary people from the state; it transfers state regulatory authority to the most powerful, dominant firms in each market (xii).

Hijacked follows Anderson’s prior writing on neoliberalism’s replacement of democratically elected public government by the state, with unelected private government by employers. Like other work ethic critiques, Hijacked explains how Puritan theologians behind the work ethic dismissed feelings with contempt for emotional styles of faith worship (3).

Hijacked explains how Puritan theologians behind the work ethic dismissed feelings with contempt for emotional styles of faith worship

The original work ethic proselytised utilitarianism (19) but with inherent contradictions between progressive and conservative ideals (14). Early conservative work ethic advocates included Joseph Priestley, Jeremy Bentham, Thomas Malthus and Edmund Burke (Chapters 2 and 3) who aligned with the new capitalist, manager entrepreneur classes and “lazy landlords, speculators and predatory capitalists” (65) who claimed they exemplified the work ethic (127).

The work ethic split into conservative and progressive versions which Anderson distinguishes by class-based power relations, rather than competitive markets

The work ethic split into conservative and progressive versions which Anderson distinguishes by class-based power relations, rather than competitive markets, as conservatives “favour government by and for property owners, assign different duties to employers and employees, rich and poor” (while expecting) “workers to submit to despotic employer authority” (and) “regard poverty as a sign of bad character … poor workers as morally inferior” (xv).

Progressives like Adam Smith (130-135) supported “democracy and worker self-government. They oppose class-based duties … and reject stigmatization of poverty” (xvi). Anderson traces this “progressive” work ethic to classical liberals like John Locke (Chapter 2), Adam Smith (132-135), John Stuart Mill (Chapter 6) and progressive, socialist thinkers like Karl Marx (Chapter 7) who stressed how paid work should not alienate workers “from their essence or species-being…” (209) but express their individuality, as “[t]he distinctively human essence is to freely shape oneself…” (209).

Marx applied Mill’s emphasis on the importance of individuality, which Anderson links to the Puritan idea that our vocation must match our individual talents and interests (206) whatever our economic class.

Furthermore, Locke “condemned the idle predatory rich as well as able-bodied beggars” (65). Marx applied Mill’s emphasis on the importance of individuality, which Anderson links to the Puritan idea that our vocation must match our individual talents and interests (206) whatever our economic class.

Yet our worthiness now had to be proved (to God) by ‘work’ that entailed: disciplining drudgery (9), slavery (10, 259), racism (97-99), exploitative maltreatment of poor people (106) and industrious productivity (52) which became conspicuously competitive, luxury consumption (170).

Conservatives (Chapters 3, 4) secularised these ideas so the “upper-class targets of the Puritan critique hijacked the work ethic … into an instrument of class warfare against workers. Now only workers were held to its demands … the busy schemers who … extract value from others cast themselves as heroes of the work ethic, the poor as the only scoundrels” (65).

Anderson doesn’t idolise Locke, Smith, J. S. Mill and other early progressive work ethic advocates like Ricardo (Chapter 5) by highlighting harsh contradictions in their views. For example, within Locke’s pro-worker agenda were draconian measures for poor children (61) such that Anderson says Locke’s harsh policies for those he called the idle poor, contain “the seeds of the ultimate hijacking of the work ethic by capital owners” (25).

[Anderson’s] scrutiny of both left and right-wing support of the neoliberal conservative work ethic complements other critiques of the left-wing origins of neoliberal markets.

Anderson criticises the perversion and reversal of the work ethic’s originally progressive, classical liberal aspirations “and successor traditions on the left” (xviii). Her scrutiny of both left and right-wing support of the neoliberal conservative work ethic complements other critiques of the left-wing origins of neoliberal markets. Anderson also says the conservative work ethic arose in a period of rapidly rising productivity and stagnant wages, “when market discipline was reserved for workers, not the rich” (108).

Yet it was the progressive work ethic that culminated in social democracy throughout Western Europe by promoting the “freedom, dignity and welfare of each” (242). Marx was so influenced by the progressive work ethic espoused by classical liberals, his most developed work on economic theory apparently quotes Adam Smith copiously and admiringly (226). Anderson thus contends that criticism of social democracy as a radical break from classical liberalism – is a myth, as ideas like social insurance “developed within the classical liberal tradition” (227).

However, “Cold War ideology represented social democracy as … a slippery slope to totalitarianism … the title of Friederich Hayek’s … Road to Serfdom, says it all” (226).

Social democracy declined worldwide in the 1970s and 1980s when neoliberalism arose and the conservative work ethic returned with the elections of Ronald Reagan and Margaret Thatcher

Social democracy declined worldwide in the 1970s and 1980s when neoliberalism arose and the conservative work ethic returned with the elections of Ronald Reagan and Margaret Thatcher (Chapter 9). Social democratic centre-left parties like the US Democrats and the UK’s Labour Party (293) didn’t counter neoliberalism’s conservative work ethic, as “the demographics of these parties shifted… from the working class to the professional managerial class” (257), seduced by meritocracy ideology in a competitive race for (their own) superior status (257). Anderson’s observation complements Elizabeth Humphry’s research on how Australia’s Labor Party and labour union movement introduced vanguard neoliberalism to Australia against workers, in the 1980s.

[Anderson] argues the focus on efficiency and aggregate growth neglected workers’ conditions and plight as neoliberal work (for welfare) policies degrade people’s autonomy and capabilities

Anderson recognises the success of some neoliberal policies in the US’s economic stagnation in the 1970s, like trucking deregulation, emissions reduction trade schemes and international trade liberalisation (285-287). However, she argues the focus on efficiency and aggregate growth neglected workers’ conditions and plight as neoliberal work (for welfare) policies degrade people’s autonomy and capabilities because “the most important product of our economic system is ourselves” (288).

Hijacked’s last chapter recommends social democracy renewal and updating the progressive work ethic “to ensure … every person … has the resources and opportunities to develop … their talents …  engage with others on terms of trust, sympathy and genuine cooperation” (298). Employees could be empowered through worker cooperatives (297).

A gap in Hijacked’s analysis is a lack of clear definition of “work.” Anderson doesn’t  distinguish between “employment” in a “job,” and rich elites’ voluntary, symbolic “duties,” like those of Britain’s “working royals” who call their activities “work”.

Another dilemma is whether economic class power struggles can change peacefully, noting Peter Turchin says we’re facing ‘end times’ of war and political disintegration because competing elites won’t relinquish power.

Nevertheless, Hijacked is compelling reading for everyone on the left and the right who needs employment in a paid job to survive, so today’s neoliberal conservative work ethic no longer gaslights us to believe our dignity demands our exploitation.

This post gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics and Political Science. The LSE RB blog may receive a small commission if you choose to make a purchase through the above Amazon affiliate link. This is entirely independent of the coverage of the book on LSE Review of Books.

Image Credit: Daniel Foster on Flickr.

Central Banking and the Real-Bills Doctrine

Published by Anonymous (not verified) on Sat, 09/12/2023 - 5:04am in

            Robert Hetzel, a distinguished historian of monetary theory and of monetary institutions, deployed his expertise in both fields in his recent The Federal Reserve: A New History. Hetzel’s theoretical point departure is that the creation of the Federal Reserve System in 1913 effectively replaced the pre-World War I gold standard, in which the value of the dollar was determined by the value of gold into which a dollar was convertible at a fixed rate, with a fiat-money system. The replacement did not happen immediately upon creation of the Fed; it took place during World War I as the international gold standard collapsed with all belligerent countries suspending the convertibility of their currencies into gold, to allow the mobilization of gold to finance imports of food and war materials. As a result, huge amounts of gold flowed into the US, where of much of those imports originated, and continued after the war when much of the imports required for European reconstruction also originated there, with the US freely supplying dollars in exchange for gold at the fixed price at which the dollar was convertible into gold, causing continued postwar inflation beyond the wartime inflation.

Holding more than half the world’s total stock of monetary gold reserves by 1920, the US could determine the value of gold at any point (within a wide range) of its own choosing. The value of the dollar was therefore no longer constrained by the value of gold, as it had been under the prewar gold standard, because the value of gold was now controlled by the Federal Reserve. That fundamental change was widely acknowledged at the time by economists like Keynes, Fisher, Robertson, Mises, and Hawtrey. But the Fed had little understanding of how to exercise that power. Hetzel explains the mechanisms whereby the power could be exercised, and the large gaps and errors in the Fed’s grasp of how to deploy the mechanisms. The mechanisms were a) setting an interest rate at which to lend reserves (by rediscounting commercial bank assets offered as collateral) to the banking system, and b) buying or selling government securities and other instruments like commercial paper (open-market operations) whereby reserves could be injected into, or withdrawn from, the banking system.

In discussing how the Fed could control the price level after World War I, Hetzel emphasizes the confusion sewed by the real-bills doctrine which provided the conceptual framework for the architects of the Federal Reserve and many of its early officials. Hetzel is not the first to identify the real-bills doctrine as a key conceptual error that contributed to the abysmal policy mistakes of the Federal Reserve before and during the Great Depression. The real-bills doctrine has long been a bete noire of Chicago School economists, (see for example the recent book by Thomas Humphrey and Richard Timberlake, Gold, the Real Bills Doctrine and the Fed), but Chicago School economists since Milton Friedman’s teacher Lloyd Mints have misunderstood both the doctrine (though not in the same way as those they criticize) because they adopt a naive view of the quantity theory the prevents them from understanding how the gold standard actually worked.

Long and widely misunderstood, the real-bills doctrine was first articulated by Adam Smith. But, as I showed in a 1992 paper (reprinted as Chapter 4 of my recent Studies in the History of Monetary Theory), Smith conceived the doctrine as a rule of thumb to be followed by individual banks to ensure that they had sufficient liquidity to meet demands for redemption of their liabilities (banknotes and deposits) should the demand for those liabilities decline. Because individual banks have no responsibility, beyond the obligation to keep their redemption commitments, for maintaining the value of their liabilities, Smith’s version of the real-bills doctrine was orthogonal to the policy question of how a central bank should discharge a mandate to keep the general price level reasonably stable.

Not until two decades after publication of Smith’s great work, during the Napoleonic Wars that confusion arose about what the real-bills doctrine actually means. After convertibility of the British pound into gold was suspended in 1797 owing to fear of a possible French invasion, the pound fell to a discount against gold, causing a general increase in British prices. The persistent discount of the pound against gold was widely blamed on an overissue of banknotes by the Bank of England (whose notes had been made legal tender to discharge debts after their convertibility into gold had been suspended. The Bank Directors responded to charges of overissue by asserting that they had strictly followed Smith’s maxim of lending only on the security of real bills of short duration. Their defense was a misunderstanding of Smith’s doctrine, which concerned the conduct of a bank obligated to redeem its liabilities in terms of an asset (presumably gold or silver) whose supply it could not control, whereas the Bank of England was then under no legal obligation to redeem its banknotes in terms of any outside asset.

Although their response misrepresented Smith’s doctrine, that misrepresentation soon became deeply imbedded in the literature on money and banking. Few commentators grasped the distinction between the doctrine applied to individual banks and the doctrine applied to the system as a whole or to a central bank issuing a currency whose value it can control.

The Bank Directors argued that because they scrupulously followed the real-bills doctrine, an overissue of banknotes was not possible. The discount against gold must therefore have been occasioned by some exogenous cause beyond the Bank’s control. This claim could have been true only in part. Even if the Bank did not issue more banknotes than it would have had convertibility not been suspended, so that the discount of the pound against gold was not necessarily the result of any action committed by the Bank, that does not mean that the Bank could not have prevented or reversed the discount by taking remedial or countervailing measures.

The discount against gold might, for example, have occurred, even with no change in the lending practices of the Bank, simply because public confidence in the pound declined after the suspension of convertibility, causing the demand for gold bullion to increase, raising the price of gold in terms of pounds. The Bank could have countered such a self-fulfilling expectation of pound depreciation by raising its lending rate or otherwise restricting credit thereby withdrawing pounds from circulation, preventing or reversing the discount. Because it did not take such countermeasures the Bank did indeed bear some responsibility for the discount against gold.

Although it is not obvious that the Bank ought to have responded in that way to prevent or reverse the discount, the claim of the Bank Directors that, by following the real-bills doctrine, they had done all that they could have done to avoid the rise in prices was both disingenuous and inaccurate. The Bank faced a policy question: whether to tolerate a rise in prices or prevent or reverse it by restricting credit, perhaps causing a downturn in economic activity and increased unemployment. Unwilling either to accept responsibility for their decision or to defend it, the Bank Directors invoked the real-bills doctrine as a pretext to deny responsibility for the discount. An alternative interpretation would be that the Bank Directors’ misunderstanding of the situation they faced was so comprehensive that they were oblivious to the implications of the policy choices that an understanding of the situation would have forced upon them.

The broader lesson of the misguided attempt by the Bank Directors to defend their conduct during the Napoleonic Wars is that the duty of a central bank cannot be merely to maintain its own liquidity; its duty must also encompass the liquidity and stability of the entire system. The liquidity and stability of the entire system depends chiefly on the stability of the general price level. Under a metallic (silver or gold) standard, central banks had very limited ability to control the price level, which was determined primarily in international markets for gold and silver. Thus, the duty of a central bank under a metallic standard could extend no further than to provide liquidity to the banking system during the recurring periods of stress or even crisis that characterized nineteenth-century banking systems.

Only after World War I did it become clear, at least to some economists, that the Federal Reserve had to take responsibility for stabilizing the general price level (not only for itself but for all countries on the restored gold standard), there being no greater threat to the liquidity—indeed, the solvency—of the system than a monetarily induced deflation in which bank assets depreciate faster than liabilities. Unless a central bank control the price level it could not discharge its responsibility to provide liquidity to the banking system. However, the misunderstanding of the real-bills doctrine led to the grave error that, by observing the real-bills doctrine, a central bank was doing all that was necessary and all that was possible to ensure the stability of the price level. However, the Federal Reserve, beguiled by its misunderstanding of the real-bills doctrine and its categorical misapplication to central banking, therefore failed abjectly to discharge its responsibility to control the price level. And the Depression came.