Was Adam Smith the 18th-century’s Paul Krugman?

by Don Boudreaux on March 21, 2011

in Adam Smith, Books, Man of System, Myths and Fallacies

Here’s a letter to The American Conservative (HT Ross Mohan):

Reviewing Nicholas Phillipson’s new biography of Adam Smith, George Scialabba portrays Smith as having been less a proto-Milton Friedman and more a proto-Paul Krugman (“Das Capitalist,” March).  His portrait, alas, bears no resemblance to the real Adam Smith.

For example, while Mr. Scialabba is correct that “Smith roundly mistrusted businessmen,” such mistrust is a hallmark of market-oriented economics rather than evidence of its rejection.  Precisely because many business people are untrustworthy, competitive markets – free of government-granted privileges (such as the tariffs endorsed by Mr. Scialabba) – are necessary to give consumers and workers maximum possible scope to avoid dealing with business people who are either unethical or incompetent (or both).  Or so market-oriented scholars have argued for generations.

An even more farcical piece of evidence offered by Mr. Scialabba to support his notion that Smith was skeptical of free markets is Scaiabba’s observation that “Smith was firmly on the side of the workers, a robust partisan of full employment and high wages.”  Indeed he was.  (Mr. Scialabba apparently believes that the ranks of market-oriented economists are full of scholars who advocate unemployment and low wages.)  Smith sided with workers against government-protected monopolies and high tariffs, arguing that what he called “the obvious and simple system of natural liberty” would best promote the welfare of ordinary men and women far more surely than that welfare can be promoted by the prescriptions, proscriptions, taxes, and other intrusions into the market of the “man of system.”

Sincerely,
Donald J. Boudreaux

This essay by Scialabba is stuffed with many more errors, misinterpretations, and half-truths than can be mentioned in a single letter.  Curious readers might seek them out and list these errors in the comments section.

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{ 53 comments }

Pfloyd March 21, 2011 at 11:23 am

Scialabba echoes the central misconception of pro-market people by leftists in general: that if you are pro-market you are anti-worker, anti-prosperity, and pro-corporate power.

Nothing is further from the truth.

Jacob Oost March 21, 2011 at 2:31 pm

Exactly, which is why I rarely have the patience to debate such people. You spend more time clearing up misconceptions as a preliminary, that you are too tired to have the real debate!

Ike March 21, 2011 at 11:30 am

Pfloyd is on the money. Leftists (and Rightists, for that matter) tend to have beliefs that are too tightly coupled.

I often have to step back with people who wonder why I hate poor people, because that’s the only reason I would want to cut various programs.

I have to start by explaining that “We all want to help others… we might just disagree about what that help will look like. I happen to believe there’s evidence that leaving people with more of their own resources to spend contributes more to the overall good than trying to artificially spread it around.”

It doesn’t guarantee that I won’t be called a heartless fascist. But if it makes them pause before doing so, then it’s a start.

Jim March 21, 2011 at 12:24 pm

Ike, I find myself having to do the same thing. It is amazing how people on the left assume that I am personally against helping the poor and the downtrodden simply because I don’t support government measures to “fix” the problem. My task usually begins around helping to disconnect this association in people’s minds and to once again think outside the government box.

Rick Caird March 21, 2011 at 12:44 pm

Jim and Ike,

I think you run into these problems with those on the left because those people judge themselves by their intentions, not the results. If I oppose the minimum wage, it is not because I am heartless. It is because the minimum wage consigns some to, not only a life of poverty, but also to a life on the “dole” because the minimum wage prevents those people from developing the skills and attitudes necessary to escape that life. But, the leftist intends to pay everyone more so they can make a “living wage”. All that matters is the intent, not the result.

JohnK March 21, 2011 at 2:08 pm

Time to quote Bastiat.

Socialism, like the ancient ideas from which it springs, confuses the distinction between government and society. As a result of this, every time we object to a thing being done by government, the socialists conclude that we object to its being done at all.

We disapprove of state education. Then the socialists say that we are opposed to any education. We object to a state religion. Then the socialists say that we want no religion at all. We object to a state-enforced equality. Then they say that we are against equality. And so on, and so on. It is as if the socialists were to accuse us of not wanting persons to eat because we do not want the state to raise grain.

kyle8 March 21, 2011 at 5:58 pm

You find a lot less of that among persons who have actually worked in social services for a while.

I used to do a lot of work among the poor and came to the conclusion that ALL attempts to help them were worthless unless and until they decided to help themselves. And when they did come to the decision to actually change their lives, then the amount of help needed was not really all that great. Help them write a resume, go on a job interview, some transportation etc. was all that was needed. to change their lives.

Throwing money at a problem will never work.

vikingvista March 21, 2011 at 6:33 pm

“ALL attempts to help them were worthless unless and until they decided to help themselves”

And isn’t it amazing how much sooner they decide to help themselves once the money stops being thrown at them?

Daniel Kuehn March 21, 2011 at 11:36 am

He didn’t seem to be saying the Smith was anti-market – only that he wasn’t the libertarian or conservative that people make him out to be. Scialabba never mentioned Krugman, of course, but actually it makes sense. Krugman figures fairly prominently in the community of modern pro-market non-libertarians! Ultimately I think attaching 21st century labels to 18th century figures is tough. I could see Smith in a variety of modern ideological contexts, and I wouldn’t necessarily commit him to one of them. But I agree with Scialabba – attaching him exclusively to conservatism/libertarianism is a bit rich.

I think of Krugman’s economics as some of the most Smithian economics out there today. Krugman reintroduced issues of increasing returns associated with specialization, and relationships between population density and division of labor that hadn’t really been featured in trade theory in the way that Smith featured them. New Trade Theory is Smithian trade theory re-emergent after a long interlude of more Ricardian themes and forces, is it not?

Ike March 21, 2011 at 11:45 am

You’re right about Krugman’s economics… but no one ever pays attention to those anymore, since he became enamored with being a columnist.

Not even Krugman.

PeterI March 21, 2011 at 11:47 am

If you are talking about the old Paul Krugman, the economist, not Paul Krugman, the columnist, you may be right.

John V March 21, 2011 at 11:48 am

I find it ironic that you are being presumptuous about what Don is saying when you, in fact, are the one being so presumptuous.

Don never said the author claimed Smith to be anti-market nor “like Paul Krugman”. I also think that you are being presumptuous about what libertarians think when you say Smith wasn’t what we make him out to be.

Part of Don is talking about is this very misconception but you seem to missing it completely.

Daniel Kuehn March 21, 2011 at 11:55 am

I read Don write this: “For example, while Mr. Scialabba is correct that “Smith roundly mistrusted businessmen,” such mistrust is a hallmark of market-oriented economics rather than evidence of its rejection.” and got the impression that Don thought the author was suggesting there was evidence that Smith rejected market-oriented economics.

I also read this: “George Scialabba portrays Smith as having been less a proto-Milton Friedman and more a proto-Paul Krugman” and got the impression that Don thought the author was suggesting the author was portraying Smith as being like Paul Krugman.

I didn’t think this interpretation of Don was that off the wall, but if I misread him, then clearly I have no difference of opinion with him and there’s nothing to worry about.

Many libertarians use “Smithian”, “Hayekian”, “libertarian”, “classical liberal”, and “market-oriented” as synonymous. But this is an “if the shoe fits” situation, John V. I don’t think you need to defend libertarians’ honor or anything.

John V March 21, 2011 at 12:19 pm

“and [I] got the impression that Don thought the author was suggesting there was evidence that Smith rejected market-oriented economics.”
No, he’s rejecting the Author’s interpretations of what market-oriented economists. I find it quite straight forward.

On your next impression, well, I think it’s similar in error to the first misconception.

“Many libertarians use “Smithian”, “Hayekian”, “libertarian”, “classical liberal”, and “market-oriented” as synonymous. But this is an “if the shoe fits” situation, John V. I don’t think you need to defend libertarians’ honor or anything.”

Huh? Talk about adding a layer of interpretation of to deflect my point. “Many libertarians use…”….well, if you want to lump all conversation together and treat it as one aggregate mass (very Keynesian, I might add), then go ahead. But I think it’s very easy for you to broad brushwith no detail since it helps you disagree more easily.

At any given time, the context could make any of those adjectives accurate. There’s nothing wrong with that. And again, I think you are the one with presumptions that you are avoiding addressing.

Daniel Kuehn March 21, 2011 at 12:24 pm

“No, he’s rejecting the Author’s interpretations of what market-oriented economists”

This doesn’t even make sense. Look – the more you write, the more you’re confusing me.

I’m really not interested in what you think – I come here to see what Don and Russ think of certain things.

John V March 21, 2011 at 12:35 pm

DK,

It makes sense if you figure that I forgot a word. The missing at the end would be “say”.

It’s not confusing and it makes perfect sense, You seem to be adjusting your reasoning ability and willingness to think clearly based on who is saying what.

By talking about the supposed “little known views” of Smith that go beyond the most commonly understood version, the author is making it seem as if those views somehow contradict or are at odds with the more commonly understood version. They are not. YOU seem to be saying that such views are at odds with libertarians think…both in terms of their views and in terms and their views of Smith. They are not.

Whatever would be unclear there is beyond me.

Daniel Kuehn March 21, 2011 at 12:39 pm

John V -
I specifically said it’s hard to attach modern labels to Smith, so I don’t see how you could read me as saying that Smith holds views that are at odds with what libertarians think. In a lot of ways, Smith is like modern libertarians.

Don seems to read Scialabba’s suggestion that Smith wouldn’t be fully on board with libertarians as saying that Smith is not market-oriented. That reading of Scialabba just seems absurd to me.

sandre March 21, 2011 at 1:34 pm

John V says…“No, he’s rejecting the Author’s interpretations of what market-oriented economists. I find it quite straight forward. “

That’s exactly how I understood it.

Daniel Kuehn March 21, 2011 at 1:53 pm

Sandre and john v…

… it doesn’t bother you at all that the author didn’t seem to ever offer a perspective on what market-oriented economists think? I highly doubt Scialabba would deny that Smith was a market-oriented economist.

John V March 21, 2011 at 4:24 pm

DK,

Yes I’m sure that the author knows smith is market-oriented. But I also think you are being overly precise when reading short-hand writing in order to miss the point.

Ryan Vann March 21, 2011 at 3:19 pm

It’s sort of pointless to debate whether economists share ideas with a founder of economic thought. Most economists are probably going to have Smithian perspectives.

Things get a bit muddied when politics are involved, but it is probably accurate to say libertarians (especially of the minarchist/classical liberal ilk) are the most obvious descendents of Smith. I don’t know why anyone would find this a particularly controversial drawing of lineage.

Daniel Kuehn March 21, 2011 at 3:25 pm

“I don’t know why anyone would find this a particularly controversial drawing of lineage”

Really??

Ryan Vann March 21, 2011 at 9:38 pm

Yes, really. It’s pretty obvious libertarianism is a direct offspring of natural rights and rationalist thinking of Smith’s age.

kyle8 March 21, 2011 at 6:01 pm

Modern day Krugman is the antithesis of Adam Smith.

Smith was not pro business and neither is any thoughtful Austrian Economist or any libertarian.

He was pro-commerce. there is a difference. Businessmen will always seek to use government to get a leg up on the competition, That is why libertarians don’t want government to have that power in the first place.

brotio March 21, 2011 at 11:16 pm

*liked*

John V March 21, 2011 at 11:37 am

That middle paragraph explains the biggest misconception about what free markets are really all about and what the purpose is.

It’s glaringly apparent when reading left of center writers and posters that they have this conceptualization BACKWARDS. They think that free markets are what business prefers. And they do this by cherry-picking certain aspects of free markets that play into their Marxian based world view of exploitation and greed.

JohnK March 21, 2011 at 2:18 pm

“They think that free markets are what business prefers.”

That only proves that they don’t think. They feel. They see free markets as government “allowing” the wealthy to keep their wealth, as opposed to forcibly relieving them of their wealth in the name of charity or equality, and they don’t like how it makes them feel.

If they were to actually think about it they would see how a business fears free markets because that means they actually have to compete and please the consumer, when it is so much easier (and effective) to cozy up to political cronies.

But then there’s the part that I don’t get. They say that the solution to political corruption and crony capitalism is a more powerful government. That makes no sense at all, even on an emotional level.

vikingvista March 21, 2011 at 3:39 pm

The solution to cronyism and concentration of power, is more cronyism and concentration of power. Is that the leftist’s version of fighting fire with fire?

Leo T. March 21, 2011 at 12:54 pm

Donald,

And how about the nonsense of “infant industry protectionism”? The notion that profit is “a deduction from the product of labor”? The physiocratic distinction between “productive” and “unproductive” that is so dear to totalitarian regimes?

Pete March 21, 2011 at 1:39 pm

I liked this quote:
Smith straightforwardly supported the principle underlying progressive taxation:

The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

But one can read the Smith quote as supporting a flat tax, where your taxes are directly proportional to income, which is not what is generally meant by progressive taxation.

Pete March 21, 2011 at 1:42 pm

Or this: Nor was Smith a proponent of the minimal state. Government has the duty of “erecting and maintaining those public institutions and those public works which may be in the highest degree advantageous to a great society,” but which “are of such a nature that the profit could never repay the expense to any individual or small number of individuals.” .

I read this as saying government should do only that which really can’t be done effectively by individuals, which sounds like minimal government to me. Not zero government but minimal.

Don Boudreaux March 21, 2011 at 1:50 pm

Indeed so.

Pfloyd March 21, 2011 at 5:03 pm

I’ve always interpreted (and argued for) it in a similar fashion in that government had a limited role in addressing market failures (asymmetric information, public goods, etc) alongside the other minarchist roles of protecting property rights, enforcing contracts, and the like. Unfortunately, the scope of government has spread well beyond that and now we have far more engineered instances of those issues, rather than creating the environment where those issues are diminished or eliminated.

SaulOhio March 21, 2011 at 1:51 pm

On a similar topic, I have been hearing this quote from Democrats on internet discussions. They say Adam Smith said “capitalists left to their own devices would rather collude than compete.” This is used as justification for strong antitrust or “soak the rich” policies. I have been unable to find the quote. I searched a PDF copy of “The Wealth of Nations” and did internet searches to find a reference. I strongly suspect that if this quote is even real, it is taken out of context. Was it taken out of a passage where Smith argues that it is the free market that prevents such collusion? Or that collusion only happens when the government helps?

Does anyone have any idea if he ever said this?

Ryan Vann March 21, 2011 at 2:02 pm

Could be it was in Theory of Moral Sentiments, although the sentence doesn’t immediately seem familar to me. Both TMS and WoN are rather dense and long reads, and quoting one sentence or another seems a silly basis for an argument.

Ryan Vann March 21, 2011 at 2:10 pm

I just thought that the quote you are coming up with might be a bastardization of his famous quote that “People of the same trade seldom meet together, even for merriment and diversion, but conversations ends in a a conspiracy against the public or in some contrivance to raise prices.”

He seems to be referring to guilds here, and proceeds the passage with an explanation fo why the legal system shouldn’t intervene in these matters.

kyle8 March 21, 2011 at 6:04 pm

I think he is quite literally referring to ALL businessmen. As I stated above he was not pro business, he was pro commerce.

Businessmen will always seek to colude or to use government to help them squash competitors.

Ryan Vann March 21, 2011 at 9:42 pm

He was talking about guilds. Businessmen weren’t really even a commonly existing concept in his time. Add in that Smith was a proponent of Watt (a proto-business man), and I don’t think anyone can honestly say Smith was talking about business men in general. The usage of “People of the same trade” is referring to guilds men. People read Smith without considering the era of time, and can draw some wacky conclusions as a result.

SaulOhio March 21, 2011 at 4:00 pm

I’ve looked everywhere. I found a whole bunch of PDF files of Adam Smith’s works at http://onlinebooks.library.upenn.edu

I came up bupkus. I found “The Theory of Moral Sentiments” there, and the quote isn’t in that, either.

So far, it looks like its in the same category as Darwin’s deathbed confessions.

jjoxman March 21, 2011 at 6:01 pm

Thanks for the awesome link!

RonPaulAlways March 23, 2011 at 7:10 am

Saul, the Democrats are referring to this:

http://www.econlib.org/library/Enc/Cartels.html

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.”

What they miss, deliberately of course, is that two paragraphs after the paragraph that quote appears in, he writes:

http://www.econlib.org/library/Smith/smWN4.html#B.I,%20Ch.10,%20Of%20Wages%20and%20Profit%20in%20the%20Different%20Employments%20of%20Labour%20and%20Stock

“An incorporation not only renders them necessary, but makes the act of the majority binding upon the whole. In a free trade an effectual combination cannot be established but by the unanimous consent of every single trader,*52 and it cannot last longer than every single trader continues of the same mind. The majority of a corporation can enact a bye-law with proper penalties, which will limit the competition more effectually and more durably than any voluntary combination whatever.”

Note that he states that regulations can limit competition “more durably than any voluntary combination whatever”.

The conspiracies he is referring to are clearly conspiracies to enact legislation, or else he wouldn’t have expressed his belief that “In a free trade an effectual combination cannot be established but by the unanimous consent of every single trader,*52 and it cannot last longer than every single trader continues of the same mind” two paragraphs after the first quote.

vikingvista March 21, 2011 at 3:34 pm

I think Smith is being confused with Colbert.

Toy Camplin March 22, 2011 at 11:35 am

I already commented over there. Taking things out of context can help you make anyone into almost anything you want them to be.

N. Joseph Potts March 22, 2011 at 12:04 pm

It is ironic, and perhaps telling in some way, that people who have attained great wealth through “capitalistic” competitive processes end up, once they have attained it, among the very first to grasp the levers and shackles offered by government to the rich, to suppress and defeat their would-be successors in the hurly-burly of free-market competition.

It’s a corollary of the old saying, “A conservative is a liberal who got money.”

vikingvista March 22, 2011 at 1:23 pm

Is it the very same businessman who created the success who then turns to cronyism, or is it the businessman who inherits management of the already successful enterprise? I look at successful companies run by self-made men, and those men seem to be on average more libertarian than the typical CEO-for-hire.

John V March 22, 2011 at 2:21 pm

I don’t distinguish between the two.situations regardless of the how the business man came to be in his position, any rational business man will gladly seek an easier way toward the ends he wants while becoming more paranoid of forces that could upset his plans as he wants them to work. The free market doesn’t allow this self-interest to be channeled into lobbying and seeking influence. It forces business to go about this things “the ol’ fashioned way”.

Businesses enjoy the free market when they are new or up and coming. They have nothing to lose and everything to gain…so the dangers don’t bother them as much. Established business don’t like the free market. They have a lot to lose and greater gains become more and more difficult due to complacency in an established model and rhythm as well as the sheer size of the company.

I recall a Cato article that frowned on Google’s behavior as they become a top national company. What was once a vibrant firm driven by innovation had become a typical fortune 500 company that started paying for lobbyists and establishing a presence in the DC legislation wars. This is something the author referred to as “The Parasite Economy” where political positioning and struggles become part of doing business once a company reached critical mass.

vikingvista March 22, 2011 at 3:30 pm

Google is a good example for your position. But commonly a person has his way of doing things. When that way becomes entrenched through time and struggle, and proves to be very successful, I think he tends to be hesitant to change it–to become in effect a different man with different ways. Habits die hard.

I think the bigger problem is that the conventional wisdom of the big business CEO pool, if not the actual education and training in prestigious MBA programs, is that cronyism is an acceptable ethical practice that should legitimately be sought after for the benefit of shareholders. I think cronyism is an openly accepted and entrenched ethic of big business culture.

JohnK March 22, 2011 at 3:41 pm

That’s why it is so important to go to an exclusive school, meet as many people as possible, and keep in touch with as many of them as possible.

The more potential cronies you have the more likely you will succeed.

John V March 22, 2011 at 5:45 pm

“I think the bigger problem is that the conventional wisdom of the big business CEO pool, if not the actual education and training in prestigious MBA programs, is that cronyism is an acceptable ethical practice that should legitimately be sought after for the benefit of shareholders. I think cronyism is an openly accepted and entrenched ethic of big business culture.”

Yes. I agree. But that’s only because we allow it. Many interest groups have expended tons of energy…sometimes in vain and sometimes successfully…to get around the constitution where the wording is problematic for their goals. Usually, what I am talking about happens in the social issue area: Freedom of speech, Right to bear arms, Privacy matters, Abortion, Drugs and so on. The Constitution’s Bill of Rights has probably thwarted more narrow-minded passion and agendas than we could possibly imagine. And this has all taken place under the condition of having the Bill of Rights preemptively deny the action in question.

What does this tell us:? It tells us that people who want they things that they cannot procure or affect on their own seek government power to do it for them. The story of how illicit drugs became illegal is fascinating and shameful from a legal standpoint.

But the point to all this talk of social issues and the Bill of Rights is that economic matters were not so successful in this regard. Justifications, legally speaking, have been far easier to work through the system. If lobbying were more difficult (–> meaning not as worthwhile in terms of energy vs. potential reward), companies wouldn’t look to legislating their way to easier waters.

vikingvista March 22, 2011 at 6:26 pm

“Yes. I agree. But that’s only because we allow it.”

I agree with your post, assuming appropriate restrictions on the word “we” in the above sentence. I have never myself run for office, but I’m pretty confident that if I did, I would be lucky to get 2 votes–both within my family. And I know for a fact that I have never had a choice on a ballot against crony capitalism or most of the other state evils. State democracy is not an excuse for blaming “we the people” for the current state of affairs.

Except for this–if pro-liberty sentiments were so deep and widespread in this country, it would be difficult for state democracy to find people who would take legislative action against liberty, and fewer to enforce it. This was the sentiment in the 19th century. But state democracy then, as now, will always attract the biggest statists out there.

So “we” let it happen only if we are not actively involved in education and in forums such as this one. Because really, there is nothing more effective that we can do besides changing hearts and minds one willing individual at a time. If we are successful enough at that, it really doesn’t much matter what kind of government there is, because it must draw from the population to staff it.

Sam Grove March 22, 2011 at 6:21 pm

Of course, sometimes, when a business becomes wildly successful, it becomes a target for competitors and politicians.

Microsoft didn’t occupy D.C. until the government went after them.

Join the club or get screwed.

vikingvista March 22, 2011 at 6:29 pm

Thanks Sam. That was one of the example that I was thinking of. Cronyism wasn’t a thought for Gates until it became a matter of self-defense against the aggression of government.

And there are other examples, many from Silicon Valley. But also historically. People successful in cronyism, like those successful in free market capitalism, don’t tend to change. The type of success selects for the type of person.

Steve Perreira March 23, 2011 at 5:06 am

Dear VV:

My first visit to this forum. I was hoping someone else in this wide, wide world had noticed that business creators (entrepreneurs) and business managers (your CEO plant) are hardly related, likely no more so than adopted siblings. You are right on; it’s the less confident dullard heir that more often turns to cronyism!

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