Essays on Classical and Marxian Political Economy

Samuel Hollander

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135072612
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

Samuel Hollander's work has been provoking debate for over four decades. This book brings together key contributions of recent years, in addition to some brand new pieces. The essays are introduced by a Preface in which Hollander reflects on his past work and reactions to it.

Highlights include two issues of particular current relevance. Conspicuous is an extensive chapter regarding Adam Smith's often neglected arguments for government intervention in the economy to correct market failures, and his critical view of the business class as an anti-social force. Important economists considered in relation to Adam Smith's position on the role of the state include Jeremy Bentham and the Scottish-Canadian John Rae. Similarly of high present-day interest is a re-examination of Karl Marx's theory of exploitation, or the notion of profits as "embezzlement, " demonstrating Marx's effective abandonment of this perspective in the case of the small active businessman as distinct from the major joint-stock corporation.

Other papers demonstrate the close intellectual relationship between David Ricardo and Thomas Robert Malthus; the extensive common ground between the British school and the French under the leadership of Jean-Baptiste Say; the failure of a so-called anti-Ricardian opposition in Britain represented by Samuel Bailey; and the denial of a sharp discontinuity between "classical" and later "neo-classical" economics.

Finally, several biographical essays are included as well as an extension of the autobiographical account appearing in Collected Essays II.

Part I

Adam Smith

1 Adam Smith

Market-failure pioneer and champion of “Natural Liberty”

Some conservatives believe that the depression is the result of unwise government policies. I believe it is a market failure. The government's myopia, passivity, and blunders played a critical role in allowing the recession to balloon into a depression, and so have several fortuitous factors. But without any government regulation of the financial industry, the economy would still, in all likelihood, be in a depression. We are learning from it that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails. The movement to deregulate the financial industry went too far by exaggerating the resilience — the self-healing powers — of laissez-faire capitalism.

(Posner 2009: xii)

Play it again, Sam.

(Humphrey Bogart [misquoted] 1942)

I Introduction: economists on Smith's theory of economic policy

General knowledge regarding Adam Smith is no further advanced than it was in 1868 when John Stuart Mill famously referred in Parliament to Robert Lowe as “an enemy of political economy” for his attribution to Smith of a simplistic laissez-faire doctrine (Hollander 1985: 923–5). An outpouring of misinformation regarding Smith during the course of the financial crisis and its aftermath, ascribing to him such an uncompromising position — in contrast with Keynesian interventionist wisdom — is evidence of the hardiness of what Lord Robbins (1952: 34) described 60 years ago as the “popular mythology” of an Adam Smith prescribing, in Carlyle's terms, “anarchy plus the constable”. The phenomenon may be illustrated by a review in the International Herald Tribune which complains of the book in question that it provides “little discussion of Adam Smith and his Laissez Faire philosophy, which stands in such contrast to Keynes's belief in the often necessary role of government” (5 December 2011), or by an article in the same newspaper (18 May 2012) asserting: “Mandeville believed the individual pursuit of self-interest could rebound to public benefit, but unlike Adam Smith, he did not think it did so on its own. Smith's ‘hand’ was ‘invisible’ — the automatic operation of the market”. Robert Skidelsky (2010: 77), Keynes's biographer, furnishes a more formal instance:

[Adam Smith] claimed that individuals, pursuing only their own self-interest, would be led by an “invisible hand” to act in ways which benefit the whole society…. Under the powerful influence of this theologically-inspired metaphor, government interferences in the free market came to be condemned as impious impediments to the growth of wealth.

This perspective is “in direct contrast” with that of Keynes. Skidelsky does not claim to be a professional economist; so I shall cite Nobel Prize winner Joseph Stiglitz, whose Freefall refers to Adam Smith's “famous treatise The Wealth of Nations in which he argued that the pursuit of self-interest would lead to the general well-being of society”, and furthermore asserts that “what was required for Smith's insight to be correct” only emerged 175 years later with Arrow and Debreu, at which time “the circumstances under which markets failed to produce efficient outcomes were referred to, quite naturally, as market failures” (Stiglitz 2010: 241).

Only an unedifying spectacle such as this, at a time such as the present, can justify yet another review of Adam Smith's theory of economic policy. I propose then to set down systematically and in some detail — for in this case the devil is very much in the detail — the textual evidence justifying a rendition of Smith that properly recognizes him as a pioneer market-failure analyst ahead of J.S. Mill temporally and, in some respects, substantively. Failures of self-interest and the advantage taken of such failures by alert businessmen to social disadvantage — in effect the problem of asymmetric information — and irresponsible consumption and investment behaviour in reaction to high returns, are far too pervasive for the corresponding corrective interventions to be adequately conveyed by representing them merely as “exceptions” or “modifications” to a general principle of non-intervention, which is the practice in much of the professional literature. Moreover, the interventions justified by Smith we shall find to be in significant cases “discretionary”, rather than rules built into the institutional and legal “framework”, although a preference on Smith's part for rules over discretion cannot be doubted.¹ In any event, these categories are by no means watertight, while the introduction of any new set of rules, or modifications to the rules, entails what might be designated “active” intervention (see Samuels 2011: 192). A presumption against government provision, as distinct from various forms of regulation and control, is also apparent.

It is my contention that had an accurate appreciation of Smith taken firm hold of the public mind, and manifested itself by way of the advanced education system in public policy, we might have been saved the debacle of 2008.² And it is scarcely water under the bridge. The regulatory mechanisms being now belatedly put in place — and at the time of writing under grave threat — should also be understood as having Smithian pedigree. Our opening citation from Judge Posner provides a further instance of the general ignorance of The Wealth of Nations in this regard, for not a word is said about Smith and market-failure in his A Failure of Capitalism. The history of economic doctrine can, and should, have social relevance. Historians of economics lost the opportunity back in the 1920s to call upon Ricardo's authority against a return to gold at par. We should not miss the bus once again.

My reading turns almost entirely on The Wealth of Nations where Smith is largely concerned with the anonymous market place; and although even within this limited frame of reference one might envisage — at least in an ideal world — a role for the social sentiments, Smith takes men as they are, warts and all, when laying out his theory of economic policy.³ It is precisely the presence of behavioural warts that renders the work so relevant a guidebook for us today.⁴ There are interesting “new voices” to be heard regarding Adam Smith, drawing from a wide range of his writings (see, in particular, Montes and Schliesser 2006: 1–2). There is, therefore, all the more reason to insist on an authoritative Smith speaking on the theory of economic policy from The Wealth of Nations.

Why interpretation of The Wealth of Nations on economic policy has proven so difficult an endeavour will be considered in the Conclusion. A preliminary question that I address now relates to Jacob Viner's famous lecture “Adam Smith and Laissez Faire” published a full 85 years ago. How is it that this contribution failed to generate a firm consensus amongst economists and historians of economics regarding Smith's profound appreciation of market-failure? One answer seems to be that Viner himself hesitated to grasp the nettle. Let me justify this assertion.

Troubled by the extensive interventionism actually countenanced in The Wealth of Nations, Viner (1958 [1927]: 232) asked: “How can [Smith's] adherence, notwithstanding, to a policy of narrow limitation of the functions of government be explained”, alluding to the three “duties” formally allowed the state, namely defence, justice and public works. His answer is that Smith was primarily concerned to see terminated the specific forms of intervention relevant in his day, and rather less with the “exceptions” to his general argument for laissez-faire; but had he been brought face to face “with a complete list of the modifications to the principle of laissez faire to which at one place or another he had granted his approval, I have no doubt that he would have been astounded at his own moderation”. Viner evidently intended by “moderation” Smith's rejection of any extreme version of laissez-faire reflecting a presumptive belief, as a matter of principle, in the iniquity of government interference. He does not say whether Smith, had he been made aware of his “moderation” would then have stepped back to correct the weighting or whether he would have been happy to confirm it; but apparently the former is intended considering the conclusion that “there is no possible room for doubt … that Smith in general believed that there was, to say the least, a strong presumption against government activity beyond its fundamental duties of protection against its foreign foes and maintenance of justice” (p. 233) — notice that even the public-works allowance is absent in this summary — or again that, despite the numerous qualifications, there remains a “general presumption against government intervention” (p. 234).

Smith's “adherence to a policy of narrow limitation of the functions of government” seems therefore to be confirmed notwithstanding the “astounding” list of exceptions to the rule.⁵ In a later lecture on “The Intellectual History of Laissez Faire”, Viner (1960: 45–6) commits himself unmistakably to a minimalist interpretation:

I will in general use the term to mean what the pioneer systematic exponents of it, the Physiocrats and Adam Smith, argued for, namely, the limitation of government activity to the enforcement of peace and of “justice” in the restricted sense of “commutative justice”, to defence against foreign enemies, and to public works regarded as essential and as impossible or highly improbable of establishment by private enterprise or, for special reasons, unsuitable to be left to private operation. Both the Physiocrats and Adam Smith gave some sanction to the limited expansion of governmental activity beyond these limits.

Of all people the least infected by ideology, Viner must nonetheless take some responsibility for the minimalist weighting. For all that, his message (at least the 1927 version) is not unambiguous. For it closes on a note which scarcely suggests adherence to a “narrow limitation” of governmental functions:

Adam Smith was not a doctrinaire advocate of laissez faire. He saw a wide and elastic range of activity for government, and he was prepared to extend it even farther if government, by improving its standards of competence, honesty, and public spirit, showed itself entitled to wider responsibilities…. He did not believe that laissez faire was always good, or always bad. It depended on circumstances, and as best he could, Adam Smith took into account all of the circumstances he could find.

(Viner 1958 [1927]: 244–5)

Had this version taken hold there would have been no need for the present contribution, or that of a host of others, trying to get Smith right.

My perception of a serious ambiguity in Viner's conclusion to the 1927 lecture — I shall refer to the two versions as Viner-A and Viner-B — is not a figment of a lively imagination. Thus Skinner commended the first, or “minimalist”, summary (see Note 5), whereas Rashid (2009: 217–18) objects that Viner's long list of exceptions and “the brilliance of his prose can easily mislead” readers into believing that he has established a major case by Smith for intervention, although “on the whole, the traditional view that Adam Smith justified only that economic development which arose through the market is correct”. And West (1990: 83–4) charged Viner with “fail[ing] to appreciate that the thrust of most of Smith's prescription for new public works was the extension of private provision by way of public companies enjoying new privileges of joint stock and limited liability”. Alec Macfie (1967: 9), basing himself on Viner's list, found that Smith's recommendations “add up to suggest a formidable state autocracy: a socialist spread of controls which would make some modern socialists’ eyes pop”. (It is pertinent that Skinner (1996: 205) — champion of Viner-A — should have insisted that Macfie was “indulging his dry ironic wit”, implying that Macfie did not intend to be taken seriously).

Unfortunately, several distinguished economists either make no reference to the so-called “modifications” to the rule of laissez-faire that Viner enumerated, or choose to dismiss them as unrepresentative of Smith's position which is somehow known to them, thus further diluting Viner-A. Schumpeter (1954: 172) provides a striking example of the first approach. In an unflattering comparison of Smith with the “Cameralist” J.H.G. von Justi, Schumpeter neglects Smith's interventionism entirely, and describes Smith's allegedly unqualified laissez-faire position as “nonsense”. I can offer no explanation for this performance, which in effect identifies Smith with the later Manchester School, other than to suggest that Schumpeter's well-documented dislike of Smith must have erased all memory of the Viner paper since it is inconceivable that he had never encountered it.

Schumpeter stands ideologically apart from those who adopt the second stance, and whose ideology seems to have played a role in governing their interpretations. A very brief selection illustrates the manner in which at least some of Smith's “exceptions” are noted, only to be summarily dismissed.

George Stigler (1982 [1965]: 120) asserted that “where the individual does not know, or does not have the power to advance, his own interests, Smith feels remarkably free to have the state intervene”. The term “remarkably” speaks volumes — the interventions are “remarkable” only to one who reads Smith as wholly committed to the market: “The main burden of Smith's advice, as you know [sic], was that the conduct of economic affairs is best left to private citizens — that the state will be doing remarkably well if it succeeds in its unavoidable tasks of winning wars, preserving justice, and maintaining the various highways of commerce” (p. 119). We are given to understand that the laissez-faire principle stands supreme, the “remarkable” allowance for intervention to correct failures of self-interest constituting a sort of regrettable excrescence. This is amply confirmed when, after providing a detailed list of instances of failures of self-interest in the sphere of economics, Stigler (1982 [1971]: 145) nonetheless concludes: “One could make a fair case, I believe, that every alleged failure was nonexistent or of negligible magnitude. The high priest of self-interest, like all other high priests, had a strong demand for sinners”.

Milton Friedman (1978: 7) recognized the “exception” of public works, writing of the “elementary functions” of government — defence, justice, and certain public works — “that Smith regarded as alone compatible with the ‘obvious and simple system of natural liberty’ ”, but insisted that “Smith himself did not regard his third duty as providing extensive scope for governmental activity” — which was fortunate because of its “mischievous” open-endedness (p. 13). He accordingly concluded (pp. 16–17) that

through Smith's eyes we see that [the market] is a finely ordered and effectively tuned system, one which arises out of men's individually motivated actions, yet is not deliberately created by men. It is a system which enables the dispersed knowledge and skill of millions of people to be coordinated for a common purpose.

Ronald Coase writes (1994 [1976]: 87), much in the same manner, of Smith's seeing “the necessity ...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Dedication
• Contents
• Preface
• Acknowledgements
• Part I Adam Smith
• Part II The Classical Canon: Ricardo, Bailey, Say and Sraffa
• Part III Malthus
• Part IV Marxian Political Economy
• Part V Biographical Perspecties
• Notes
• References
• Index