Britannia Radio

Adam Smith And Bail Out-Fatigue

From the desk of Friedrich Hansen on Mon, 2011-09-05 15:07

Adam Smith

The present dispute on Adam Smith's legacy is picking up steam while pitching against each other Labor, Liberal and Conservative luminaries on both sides of the pond. And the recent riots in the UK have lent it further virulence. Over the last years the controversy has spread worldwide between intellectuals such as former British Prime Minister Gordon Brown and numerous free market champions, most of them followers of the late Milton Friedman.

One may be forgiven to sense some kind of a repercussion of the financial crash that triggered the downfall of revered financial institutions such as the Lehman Brothers and is now seriously destabilizing European countries such as Greece, Ireland and Portugal. If we frame it as a controversy on the legitimacy of the Western bail-out spending spree at tax payers' expense the dispute has already reached across the channel. For it might be the notorious legitimacy issue with Keynesian deficit spending that spurred Labor into the fray. But strangely enough none other than the main culprit of the dire straits Britain is now in, former PM Brown, is claiming Adam Smith back and trying to link him to the narrative of the limitless blessings of wealth redistribution.

The question emerges whether this myth can survive the current crisis or whether, as Mark Steyn has argued, it inevitably undermines the trust in Western or foremost American leadership along with trust in its economy. The ongoing lending crisis and the erosion of the banking system do not bode well and may indicate that the crisis is reaching much deeper than previously thought.

Now the other side in the Smith controversy, represented by the free market community, is facing fierce accusations of market failure, and in response is quietly shifting away from the orthodoxy of Smith's objective value theory to the Austrian School of economics' subjective value theory. The former, simply put, claims that the value of commodities arises mainly from the labour input and materializes principally prior to market equilibration and adjustment. It was of course the springboard for Marx's theory of unjust wages and the expropriation of the worker by the capitalist. The latter by contrast claims that values are in principal subjective, volatile, subject to taste, preferences and change and exist only in the individual brain, leaving it to the market or if you wish to Adam Smith's invisible hand to precipitate it for a specific time and location.

The Christian foundations of free markets

Few people are aware, even though it has long been established by Joseph Schumpeter, that the subjective price concept is a modification of the teachings of the late medieval Jesuit School of Salamanca that rested on Christian foundations and the emergence of modern Individualism. This development would have not come as a surprise for the late Leo Strauss, who criticized the arrogant condescension of modern thinkers for their medieval and antique predecessors and famously aimed at reversing this self-serving prejudice of modernity. For Christians had always grounded the highest value in the individual, every single man being created equal to any other in the image of God. The invisible Almighty with his monotheistic framework of rules and morals had been the ultimate historical source of peace between tribes and nations albeit not always succeeding in that. Even Enlightenment deists such as Edward Gibbon, David Hume and Adam Smith respected this idea. After all the medieval divine order, springing from the Judeo-Arabic enlightenment, had fueled the flourishing markets of the Mediterranean world and reached its pivotal accomplishments during the European “Dark Ages” in aloof Moorish Spain – roughly between 900 -1400 C.E.

The genius of the Judeo-Arabic enlightenment in Andalusia rested on the integrity of science and religion under the umbrella of classic Greek philosophy as represented in the works of 12^th century Maimonides of Cairo, until today the most eminent Jewish thinker of the middle Ages. Shattered however in the monotheistic crisis of the 13^th century that umbrella was finally dismantled with the onset of the 18^th century Enlightenment. As a result the politico-theological unity fell apart, an accomplishment of the Sephardic Jew whose ancestors hailed from Andalusia: the watchmaker-turned-philosopher Baruch Spinoza. He basically argued that the Hebrew Bible is not philosophy but all about obedience, that's why he is being regarded as the father of liberalism. However he was assisted among others by the psychiatrist Bernard Mandeville. The two Dutchmen fabricated the Enlightenment shift back from transcendence to immanence or from open mindedness to closed mindedness. I will come back to that in a moment. Nevertheless, the hugely important and liberating early Christian achievement, as eminent scholar of Gnosticism Eric Voegelin was convinced, of putting the monotheistic God in a distant transcendence and by that opening up space for self-reflection, was reversed. Spinoza provided the theory and Mandeville the rest.

Arriving in London around 1700 with his scandalous Fable of the BeesMandeville invented the metamorphosis of human vices into public goods by virtue of the division of labor and the magic of markets. According to his formula The worst of all multitude did something for the common good - any human vice or habit, regardless how much scorned, might give opportunity to some new craft, trade or business. This template has remained powerful until today. It is in this vein that Mandeville is mostly known epitomized in his verse of 1705 The Grumbling Hive, or Knaves Turned Honest. The Glasgow enlightenment philosopher of moral philosophy Francis Hutcheson, teacher of Adam Smith, could not give a lecture without attacking the Fable of the Bees and Samuel Johnson observed that every young man had the book on his shelf thinking it was wicked. Yet by then importantly it had already become the basis for David Hume’s philosophy. Now it is fair to observe that exactly this lynch pin of the British system of market economics has been utterly rejected by the London mob of recent weeks. For this mob was composed of people who shortchanged the system of mutual contributions and work for society in exchange for goods.

Thus this can be seen as the final undoing of the Mandeville’s concept of evolution and the emergence of a spontaneous order, so crucial for the free market philosophy. They are not easy to detect because he develops his thoughts gradually and indirectly. Friedrich August Hayek in a lecture in 1966 on a 'Master Mind' before the British Academy catches his argument:

“By treating as vicious everything done for selfish purposes, and admitting as virtuous only what was done in order to obey moral commands, he had little difficulty in showing that we owed most benefits of society to what on such a rigorist standard must be called vicious.” (The Collected Works of Friedrich A. Hayek, Volume III, London 1991, p.83).

Not only Adam Smith but opponents like Friedrich Hayek and John Maynard Keynes were fascinated by this concept of the benefits of selfishness. Even Sigmund Freud theorized in the same vein of liberating supposed human vices. And it was Hayek, who first unearthed Smith's heavy dependence on Mandeville and his concept of the division of labor. I am not aware if anyone has demonstrated Smith's dependence on Spinoza, who is certainly not quoted in The Wealth of Nations.

However in an epistemological sense Spinoza in his Tractatus politico-theologicus prepared the ground for Smith's and Marx's turn to the objective value theory that would finally corrupt and undermine the whole enlightenment project. For that objective theory claims that the value of something is crystallized and trapped in the very thing, the worth of which it represents. From this social-democratic idee fixe follows the enlightened prejudice that everyone is after his own advantage only, also known as zero-sum-thinking, which has been incessantly castigated as a feature of capitalism. But as indicated above it was rather the 18th century secular turn to the objective value theory which is at the root of zero-sum-thinking. For this thinking is most characteristic of the enlightened closed mind or in other words secular immanentism, as Voegelin phrased it, for it claims that any gain of someone is being thought to necessarily come at the expense of someone else – by that killing off human initiative and creativeness. From there easily follows the argument for re-distribution of wealth from top to bottom which subsequently became the nemesis of economic growth in any free market economy and is at present about to sink the US economy into oblivion. More to the point, we could argue that it is this thinking that might well have caused the collapse of the financial markets in 2008 and it thus marks the demise of the Enlightenment paradigm of the objective value that was originally meant to warrant trust in the markets. And it is for this reason that Austrian economics with its subjective theory of value of Jesuit provenience is back with a vengeance.

Needless to say that all this is the fruit of the enlightenment eclipse of one Christian truism, reflected in the subjective theory of value, that everyone is slightly different in his or her taste as well as needs. Therefore everybody heads naturally in a different direction with regard to one’s personal advantage. And it is the genius of the market that provides an equal measure for all those different personal demands, the measure being money that signals the market price. The divine medieval subjective theory of value gave due consideration to the volatility of values, whereas the objective theory accounts for the conceit that suggests fixed values sometimes distorted by the market as in the struggle for minimum wages. The Jesuits rightly stated that the value is intrinsically subjective and any estimation of it has no currency beyond ones individual priorities or literally outside our stubborn head.

Looking at this from a different angle with the actual financial crisis in mind, the volatility of money might even reflect the loosening of morals. If people don't believe in anything, even money loses its value. In fact the economic renaissance of the Austrian School and the Jesuit's subjective theory of value means nothing less than modern economics catching up with the postmodernZeitgeist of cultural relativism that has been around for some time, rendering any truth and opinion subjective and tied to individuals. We are now ready to delve into the debate on the true legacy of Adam Smith.

In the 'Foundation of Economic Education's online outlet The Freeman (May 2011 edition) Mark Sousen reports how critics of laissez faire - economics have attempted for quite some time to “wrestle Adam Smith out of the hands of the free-market camp and into the camp of the social democrats.” Academics rushing to the aid of Gordon Brown such as Cambridge economic historian Emma Rothschild, Oxford political scientist Iain McLean and philosopher Samuel Fleschaker of the University of Illinois in Chicago, are attempting to convince us that Adam Smith was a “radical egalitarian”, who was well aware of market failure and even loath of 'ruthless laissez-faire capitalism', and thus favored 'distributive justice'.”

Their opponents have rejoined that the metaphor of the invisible handexpresses Smith's ideal, rather than an established fact, that “by pursuing his own self-interest, [every individual] frequently promotes that of the society”. As mentioned before this was taken from the Dutch psychiatrist-turned philosopher Bernhard Mandeville. And it is probably this concept that is meant with Smith's famous metaphor of the invisible hand. As a psychiatrist Mandeville was of course very much into the human brain and he elaborated on a concept, that clearly fascinated Smith and many others, namely that we as humans may be in control of our actions but not at all of their design – suggesting an intangible force. Now the social democratic critics, somehow with view on the scandalous Mandeville, are regarding the metaphor of theinvisible hand as an almost satirical reference masking the true intention of Smith to make use of the helping hand of the state. They rightly insist that Smith used the invisible hand only twice in his two major works. As a result Gavin Kennedy, a profound researcher on Smith's legacy in Edinburgh, originally considered the invisible hand as nothing more than an afterthought, a 'casual metaphor' with limited value. None less though than Nobel Laureate Milton Friedman by contrast took it as a 'key insight' into the workings of the self-regulatory power of the market. And late economist George Stigler even saw in it the 'crown jewel' of The Wealth of Nations. Now, as has been shown above, I suggest that the metaphor might well be understood as a cover for Smith's tacit conversion from the late medieval Jesuit subjective theory of value, to which he adhered in his early lectures, to the secular objective theory of value that prepared the ground for Karl Marxsocialist Utopia.

Already Daniel Klein, economist at George Mason University, assisted by his student Brendan Lucas, observed that Smith deliberately placed the phrase 'led by an invisible hand' literally at the center of his tome, which could reflect a medieval habit of scholastics stressing importance. The phrase was located there in the first and second edition and moved only away from the exact middle when indexes and additional materials were added in later editions of the Wealth of Nations. Klein and Lucas attempted to explain this as a reference to the Aristotelian tradition of the golden mean or middle – the idea “that virtue exists between two opposite vices”. Klein and Lucas even convinced the previous skeptic Gavin Kennedy to admit the “high probability” of their thesis. Historically however this whole debate came up only in the post-Holocaust culture wars of the 20^th century. The term invisible hand was never mentioned through most of the 19^th century, as for instance at the centenary of the Wealth of Nations in 1876. It was still not listed in subject indexes as an entry well into the twentieth century. It was Max Lerner, who first indexed it in 1937 in the Modern Library edition. So only in those culture wars of the 20^th century the invisible hand became firmly attached to laissez faire economics – just as if to give the post-modern coup de grace to any political theology as a way of serious interpretation.

Friedrich Hayek by grounding Smith on the Fable of the Bees injected, albeit tacitly, to the idea of the invisible hand a fair amount of determinism, if biological. After all the medieval subjective theory is more spiritual and by that liberal compared to the labor determined objective theory which is a lot more materialistic. Anyway it was the need of a more hands-on market management which might have urged Smith to switch from a less controllable subjective to the new objective concept, that allows for some control by externalizing value in things produced by human effort. In support of Hayek's analysis I found out for example, that Smith first used the terminvisible hand as a metaphor for divine providence (soft determinism) in his dissertation on astronomy. The corollary of this for the later Smith and others was the assumption of the invisible hands capability to drive and control through markets the whole of human society more gently than the state, making authoritarian rule obsolete for good. This used to be benevolent formula of free marketers as advocates of the self-regulatory power of free economic market interactions. They are opposed by the savvy regulators, themselves advocates of the social democratic, viz centrally directed state.

As already mentioned, Smith's heroic 'economic system of natural liberty' of the individual rested philosophically on Benedict Spinoza who had put on a level playing field or equalized two henceforth categorically different entities: God's creation as distinguished from mere human secular production. By arguing that man-made things are in principle the same as God-made ones he laid the foundation for the cardinal sources of global economic expansion of markets as distinguished from medieval markets. For it was Spinoza who came up with his groundbreaking secularization formula Omnia animata - equalizing things of human and divine origin, or God's nature and man's commodities. Earlier philosophers had called this the gap between content and form, with form being always part of a hierarchy whereas content resting more on equal terms. So the divine hierarchy of souls is lost with secularization being the big equalizer leaving everything endowed with a soul. Spinoza adopts this language by saying all things have a soul in different degrees, Omnia animata. This transfer of the soul from living to dead things, as it were, this equalization appears to be a logical outcome of the abandoning of God's transcendence and making him immanent. It also appears to be an anticipation of the later turn from subjective to objective value theory, for only if even dead things have souls, God is effectively incarnated in the whole world.

Leo Strauss as a young man had condemned Spinoza for his concept of unlimited secularization, but credited him later in his life for his genuine foundation of liberal democracy. Thus it might be argued that Smith's invisible hand is an adaptation of Spinoza's formula of 'souls in all things' in the sense that God's touching and blessing everything that appears on the market place is sort of accreditation for anonymous individual market participants that were supposed to drive the whole economy. For Spinoza represented man's body and mind as just finite modes of God's attributes ofthought and extension and just as in God these two attributes were to be united, he figures, human mind and body ought to be too. And in Smith's system of natural freedom, the invisible hand seems to be the agent of choice submerged into the intangible workings of the market.

Which brings us straight back to the controversy on the legacy of Smith. Basically both sides missed the point. And this has to do with the Scottish enlightenments recognition that human intelligence is too weak to design our own economic cosmos, leading Smith to acknowledge the need for sort of divine blessing of the market with the invisible hand. However the devout enlightened Catholic Lord Acton, for one, convinced himself that without Smith laying the groundwork of the objectivist turn of value, Marx could never have succeeded in destabilizing modern capitalism for centuries to come. On the other hand many deists like Smith were well aware of the risks of botched secularization – a secularization that did not implement a replacement for divine order encouraging human restraint. Today most economists clandestinely admit that besides the risk-prone bankers, spendthrift consumers in the Anglosphere brought about the present lending crisis. In the Euro zone the entitlement culture is more to be blamed, both calamities indicating a surfeit of the old familiar Mandevillian vices and the failure of his concept rather than that of the market as such.

In response, the wisdom of the markets seems to resort to prudence of subjective purchasing power and mute estimation of values with the return of Austrian economics. Since the human brain remains today the last little known province of the human body, not very much in this respect has changed really since the days of the Salamanca Jesuits. Hence the London riots and the transatlantic dispute on rating agencies remind us of the importance of the principle fact that the value of a thing is up to the community, part of which are the investors. And it remains obscured in the head of any particular of them and utterly subjective, even though there may be herd instincts. And that is what the rioters and the investors are sharing in a strange coincidence.