How Many Economists Can Say They Read Adam Smith?

I have always wondered about this. Adam Smith is by far one of the most popular economists in history. But who has actually read Smith?

We are told that Smith was the first, or at least the one that popularized, the view that self interest, sometimes interpreted as selfishness leads to benefiting the common good. This is shown usually by referring to this passage:

…every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

This, of course, has some truth… Entrepreneurs seeking for profit, and does this by producing goods and employment does indeed benefit society, but should we really take what Smith states about self interest as absolute? Gavin Kennedy, a person who takes great interest in understanding Smith, thinks not, and he is right to take such a claim. Smith, for example, thought that some merchants shouted for protectionist polices only to benefit themselves, this is to say, they wanted to reduce competition and also increase their prices . Kennedy goes on in another post to defend what self interest actually means to Smith. Unlike the standard interpretation that self interest = greed or selfishness, Kennedy points out that Smith’s notion of self interest has a very moral substance to it. Self interest is obviously important, and quite obvious to see in everyday life, but if we wish to cooperate in society, we must also keep in mind the interests of others. Or as Kennedy states, ” [T]he nature of each bargain is summed by the expression “Give me this that I want and you shall have that which you want”. (In modern negotiating, I express this as “IF you do this for me, THEN I shall do that for you”).” This is quite a radical view. We are given the invisible hand metaphor and self interest examples of Smith as proof that Smith was this liberal fighting for hands free government markets! Kennedy blames the standard invisible hand metaphor as something that Paul Samuelson popularized.

The blame shouldn’t all be going to Samuelson though. Carl Menger, the founder of the Austrian School, also fought in favor for Smith against the standard government free interpretation of Smith that was popular in Germany at the time. The German Historical School, with the exception of Karl Knies, did not particularly like Smith, for they held that Smith was an economist fighting for laissez faire economics, an economist fighting for the interest of the rich over the worker, etc. So the German Historical School, like Samuelson, also misinterprets Smith. Menger wrote an article with a purpose to clear up misconceptions that the historical school had about Smith*. Here is Menger:

In all cases of conflict of interest between the rich and the poor, A. Smith stands without exception on the side of the latter. I use the phrase ‘ without exception’ very carefully. There are no places in The Wealth of Nations where A. Smith represents the interest of the rich and powerful against the poor and weak. While A. Smith quite positively recognizes the free initiative of individualism in economic matters, he supports in all the cases state intervention where the matter relates to the abolition of laws, and the application thereof, that suppress the poor and weak for the sake of the rich and powerful.

It is not true, indeed it is a forgery of history, to say that A. Smith was a dogmatic advocate of the ‘ laisser faire, laisser aller’ principle and that he believed that the completely free play of individual interests would lead to the economic cure of society. In various parts of his work, he admits that the efforts and interests of individuals and entire social classes stand in direct opposition to public interests. Not only did he accept state intervention in most cases, but he believed it to be an order of humanity considering the public welfare.

One can find the similarities between Kennedy’s and Menger’s interpretation of Smith. the biggest one being that Smith’s concept of self interest is incompatible with interpretations of greed or selfishness.

This, once again, raises questions on how radical of a liberal Menger was. People that study Menger’s life realize that he sees Smith has a big influence, probably his biggest influence. His concept of spontaneous order (which is also misinterpreted by a lot of Austrians) is arguably the same as Smith’s concept of the invisible hand.

Personally, I have always been skeptical of the standard interpretation of what the invisible hand implies, especially after reading Vaughn’s book Austrian economics in America

Nevertheless, classical liberalism, at least back then, saw an active state indeed. Modern libertarians need to realize this. They seem to only be concerned about what things classical liberals criticized the State for, and yet forget to look at the other side of the coin. In other words, classical liberals went far beyond just looking at a state to provide basic public needs (roads, security, law) and advocated interventions, which modern libertarians would look at as being anti market.

* I use this paper for passages

A Passage By Carl Menger on The State

“Why Mises (and not Hayek)?” by Hoppe is probably one of the worst articles at Mises.org. The whole point of the article is to show that Mises is above Hayek because of his views on the State. Mises is seen as the ‘true’ classical liberal, while Hayek is seen as a social democrat.

First off, I really don’t get why advocating public works beyond basic defense, court systems, etc. makes one a social democrat. Keep in mind that Hoppe uses some of Hayek’s Constitution of Liberty to ‘prove’ that Hayek was a social democrat, even though Mises thought the same book was a work that resulted from Hayek’s studies in the philosophy of freedom, and said nothing negative about it. Second, Mises thought the State as a necessary institution, and one that goes beyond providing basic defense.

But I really don’t want to continue on criticizing Hoppe’s horrible article. The title of this post implies a passage by Menger on the State, one that I haven’t provided yet. So here is Menger from one of his lectures* :

Important roads, railways and canals that improve the general well-being by improving traffic and communication are special examples of this kind of enterprise and lasting evidence of the concern of the state for the well-being of its parts and thereby its own power; at the same time, they are/constitute major prerequisites for the prosperity of a modern state. The building of schools, too, is a suitable field for government to prove its concern with the success of its citizens’ economic efforts. (p 121)

Are we to assume, by using the same Hoppeian logic, that Menger, the founder of the Austrian school, is a social democrat too?

The truth of the matter is is that while classical liberalism may critique certain aspects of the State, this does not necessarily mean that all classical liberals are critical of all it’s interventions, in fact, as Menger states, some it’s interventions “constitute major prerequisites for the prosperity of a modern state.” a modern state in which Menger never wanted to see its abolition in. Keep in mind that later on in the lecture, he provides his justification for intervention to prevent deforestation (p 131-133) and also laws to improve worker conditions (in fear that if workers weren’t happy in the job they are in, that this would result into a communist type rebellion) (p 127).

So in light of the debate between Kuehn and Murphy over what a ‘free market’ label entails, was Menger a free market economist, given what he states about the State and it’s role in society?

*Carl Menger’s Lectures to Crown Prince Rudolf of Austria

My Views on Government

I have received a couple emails from different people criticizing me, for lack of a better term, because I fail to give a nice clean version of what I think Government should do as far as policy is concerned. Do I believe in small government, big, free trade or protectionism, do I believe in social programs etc. Let me first start by saying that I have not really blogged about this kind of stuff because explaining government policy is not my main concern as a studying economics student. At the moment, I am much more interested in ‘how’ to think about economics than ‘what’ to think, this is to say, I am interested in methodological issues at the moment and I want to expand those ideas to critique more of the neoclassical economics that we see today. Another reason why I have refrained from explicitly expressing my views on the topic is that I only generally know what I think government should do. I really do not have an ideal amount of government I want, and ideally, what programs I see my ideal government having. But because I have been asked to say something about my thoughts on government, I will express my general views on government.

First off, I believe a government is necessary. I am not an anarchist or an anti-statist and I do think it is really hard to justify that position.  Sure, they can point to certain points in history of societies where they thought it was anarchist with some capitalistic aspects (and we can see some of the failures, even in their own literature (look at the conclusion of ‘Not So Wild Wild West‘)) , but what of modern times where we have complex financial systems? It seems like these anarcho types ignore this capitalistic aspect of the economy when theorizing their anarcho society. I leave what I have to say about anarcho types at this, for it is not the purpose of this post to critique anarcho types.

So what policies do I believe a government should pursue? I do agree that in a recession, a government needs to spend and decrease taxes. How much or how little of each, I do not know. At the same time though, I do think in all times, whether recession or  not, to cut inefficient government programs. I believe in this because I do not believe in creating programs because the program in itself creates jobs, I believe in programs because of the possibility that it will benefit society.

For example, one of my greatest influences is my grandfather, who worked for social security for decades. During the Clinton administration, there was some type of bill that basically forced government programs to hire certain unemployed people, like low income people or former Armed Forces people. Well many of those new people he hired made his social security office more inefficient because most of these people did not do anything, and my grandpa, as a head, couldn’t fire these people, as it was very difficult to fire people that got jobs because of this bill. The only thing he could do was to tell these people to stay out of the way and stay in their cubicle. So while we did increase employment here, these newly employed made the office less efficient and the end result was a waste of government money because they were paying these people for doing nothing! This is wrong, in my opinion and we cannot just increase the size of social programs because we need to increase employment.

Another example of absurd social program polices is section 8 housing, especially in Dallas, which is where I am from. I was raised in what I consider lower middle class. I lived ok but I lived in a one bedroom/one study apartment with my mother in Dallas. I really cannot say we lived paycheck to paycheck, since we had some money to spare for some entertainment on occasions, but we lived close to it. What always angered me though were the section 8 houses a few blocks down.  Most, if not all, these places had relatively new renovations and the spaces were huge (in Dallas there are several two story houses/town homes that are part of section 8). This to me, is absurd. Here is my mother and me, both working and me going to school too, and not part of social programs where the government paid certain stuff for us (aside for my Pell Grant), and we lived in a one bedroom apartment, while there are people across the street that may not have jobs (highly possible actually), are not tax payers, and just brings property value  down and crime up and at the same time, get nice housing paid for by government.

I am not saying I consider these programs to be illegitimate, but that there needs to be some restructuring in these programs. Take the section 8 housing for example,… do these people really need two story houses and newly renovated equipment, or just a basic place to live? Benefits shouldn’t increase because of lack of responsibility, this is to say for example, one should receive a bigger home or more money because they up’d their family size by one. Housing provided by the government is not so poor people can live in luxury, it is so they can have basic shelter.

How big would I like to see government? I don’t know. I generally see myself as a classical liberal, thus implying that I believe in a limited government but how limited, I do not know. Obviously, I do not want a government so limited that it cannot engage in policies to help in recession or the marketplace. That said though, I put the same amount  of uncertainty to the government as I do in markets. Post keynesians, at least most of them, agree that governments reduce uncertainty, but I do not see that as true, at least in a theoretical perspective. If we look at the markets, we both can agree that there is ontological uncertainty and is non-ergodic. But to me anyway, this applies to governments as well, thus they both have similar problems because of reality. And thus, I do not see how governments limit uncertainty, especially in a world of change. The post Keynesians essentially fall into the same trap as (some) Austrians when they claim that increase of knowledge = less uncertainty. (more on this by a ‘post’ austrian, here and here )

One thing I completely agree with libertarians is how government should treat social issues. Stuff like marriage, what kind of dog breed you can own, what you can or cannot see on the internet, abortions, requirements for adoptions, etc. are stuff that government shouldn’t get involved in. And if there are things that people do not like about the government, they should have the right to protest about it and practice civil disobedience (though there can be limits on civil disobedience. )

So hopefully by this, at least some of you will get where I am coming from. Again, I tried not to put too much detail into this because I do not really have a set in stone ideal picture of government, nor is it currently something that I am putting a lot of time into because as I said, I want to discuss methodological issues than policies, this of course is not to say that I wont do research on policies, it is just that I wont do it at this time.

-Isaac Marmolejo

Government Working Around It’s Own System

Not too long ago, the Department of Justice (DoJ) sued a 90+ year old lady for failing to report the sale of a product (in this case suicide kits) in her taxes. Keep in mind the DoJ has made it clear that they are not suing her because of the sale of the suicide kits. But I think it is clear that the main reason that the DoJ sued this lady is because she is selling something that the government feels wrong to sell. The police department in San Diego know of at least four people in the last year that have committed suicide using these kits and one of them happens to be a 19 year old kid. This at least provides the incentive for government officials to get this product off the streets, even though it is not illegal to sell suicide kits.

But then one might say to me so far, “Well you are just being suspicious of the government. Clearly, she has done something wrong (not reporting the sales in her taxes) and she has to pay for it. The government just wants the taxes, nothing more, nothing less.” And I would agree with this criticism, maybe the government only wants the tax money and could care less about the product she is selling, if it wasn’t for the court’s ruling on this case. The court’s ruling states that she has to work for the IRS to pay back her debt, and she has to agree that she would not sell these suicide kits again. The first part of the ruling is pretty common in cases like these, ‘ You fail to pay your taxes, so you have to work to pay back the debt you owe us,’ but the second part is clearly not, ‘You failed to report the sale of suicide kits in your taxes, so you must agree to never sell these suicide kits ever again!’ Clearly the government wanted these suicide kits off the streets, and since there is no law restricting people to sell such objects, they have to work around the system. Wow, the system working around its own system, how ironic.

This is even more absurd if we were to substitute other objects instead of suicide kits For example:

  • ‘You failed to report the sale of used televisions in your store, therefore you must pay back your debt, and agree to never sell used televisions again’
  • You failed to report the sale of homemade candles at this swap meet, therefore you must pay back your debt, and agree to never sell your candles again!’

This is an obvious case of the government breaking its own laws. Don’t get me wrong, I want a government, I believe that in order to have a stable decent society, the society must have a government (which I know my ideas of the government differs from those of other libertarians, maybe it is more correct to call me a classical liberal), but I want a government that knows its laws and is consistent in how it looks after its society.

- Isaac Marmolejo

To Hell With Habeas Corpus In Certain Situations

“The Constitution’s guarantee of due process is ironclad, and it is essential, but … it does not require judicial approval before the president may use force abroad against a senior operational leader of a foreign terrorist organization with which the United States is at war, even if that individual happens to be a U.S. citizen,” – Eric Holder

Stossel -v- Typical Republican

I feel bad for Stossel because for some reason he gets a harsh wrap in some libertarian circles, but I never really understood why. Many believe he is some Fox News puppet, pretending to be libertarian in order to bring libertarian viewers to Fox. But I do not this is the case for a couple reasons: 1: He is  very critical of the Republican establishment, just watch his show, 2: There is no evidence to support this claim, and 3: He is an open agnostic. But what I want to talk about in this post is the point of being critical of the Republican establishment, and this is quite clear if we look at the Drug War debate he had with Ann Coulter.

Clearly Stossel exposes Republican irrationality in this debate. Coulter’s basic premise of ‘we need to control what people do because we live in a welfare state’ is insane because this extends to what we can do in our daily lives, and not just what drugs we may consume in our own homes. But also her facts are all wrong. Coulter claims that death rates decreased during the times when alcohol was illegal because it reduced alcohol related deaths, and that murder decreased but as Stossel showed, murder rose during times of Prohibition. And what is the typical Republican response when facts contradict their beliefs : I don’t believe that!

But let me get back to Coulter’s premise – we need to control people because we live in a welfare state. She further justifies this position by saying because she is a tax payer of the welfare state that she has a right to control the lives of what people are doing because she assumes that people that takes drugs will lead to a higher dependence of public services. I do not know if this is necessarily true, as a lot of successful people have taken drugs before (and since she is the one making the claim, I would love to see evidence of this claim), but legalizing or at least decriminalizing drugs would reduce the amount of money we spend in prisons, that I can say for sure. They would reduce the policy programs that target solely drug users. The United States currently puts a lot of money into funding prisons and police drug programs and this would surely decrease if drugs were legal.

Also, in an economics perspective, according to Milton Friedman, an economist that is supposedly praised to the right wingers, criminalizing drugs generally brings drug users that use mild drugs to more heavy drugs. For example, in the case for weed,  where it is a bulky substance, thus relatively easier to detect, thus increasing the cost for it, has led people drugs like cocaine where it is less bulky. Also on top of that, making the drug costs more, leads people to create more harmful versions of hard drugs. For example, Friedman points out that one of the reasons for the creation for crack was because cocaine was too expensive.

In conclusion, it is going to be nearly impossible to convince the typical Republican on the issue on drugs, simply because they have this predetermined idea of their ‘perfect’ conservative society….sick and Coulter is the one calling us kooky, can you say ironic?

-Isaac Marmolejo

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Hayek’s Constitution of Liberty: Intro

I like the intro, and hopefully I can say the same for the entire book once I am finished.

The way I interpret the intro is almost of a critique to the current day liberty advocate.He claims that much of the writings on liberty have to do with appeals to emotion and Hayek understands why they appeal to emotion. The writings on liberty (in a libertarian or classical liberalist point of view) is often very powerful. In a sense, they get us ‘pumped up.’ Or as Hayek states, “[I]n writing about liberty the temptation to appeal to emotion is often irresistible (p. 6).” Nevertheless, Hayek wants to talk about liberty from a different point of view, specifically in a more intellectual point of view.  The emotions on liberty might be desirable, and very well need be to nourish, but “…the strong instincts on which the struggle for liberty has always nourished itself are indispensable support, they are neither a safe guide nor a certain protection against error. The same noble sentiments have been mobilized in the service of greatly perverted aims. Still more important, the arguments that have undermined liberty belong mainly to the intellectual sphere, and we must therefore counter them… (p 6)”

I agree with this and what I think where Hayek was going with this was that the classical liberals/libertarians need to become more practical in what they want to see happen. Don’t get me wrong, it is all fun and games when I get together with libertarians and come up with hypothetical situations, like assuming a stateless society or assuming a completely non regulated free market, etc. and debating on what to do given specific issues, or what is the most libertarian thing to do (under the given hypothetical situation), but I only look at these talks as fun mind games. These hypothetical situations assume away much of reality. What Hayek offers here is a start of a way to think about liberty in a more practical, intellectual view. Of course, this is not to say that the emotional aspect is pointless, its not, but we have to take into consideration other aspects in what makes liberty a philosophy that society should strive for.

A side note: I have mentioned this but just to be clear, ‘liberty’ is meant in a general classical liberal point of view and is defined throughout the book as implied on page 7.

-Isaac Marmolejo

The Welfare State Is Socialism?

This is Ludwig von Mises in ‘Liberty and Its Antithesis’

In fact, the Welfare State is merely a method for transforming the market economy step by step into socialism. The original plan of socialist action, as developed by Karl Marx in 1848 in the Communist Manifesto, aimed at a gradual realization of socialism by a series of governmental measures. The ten most powerful of such measures were enumerated in the Manifesto. They are well known to everybody because they are the very measures that form the essence of the activities of the Welfare State, of Bismarck’s and the Kaiser Wilheim’s German Sozialpolitik as well as of the American New Deal and British Fabian Socialism. The Communist Manifesto calls the measures it suggests “economically insufficient and untenable,” but it stresses the fact that “in the course of the movement” they outstrip themselves, necessitate further inroads upon the old social order, and are unavoidable as a means of entirely revolutionizing the mode of production.”

Later, Marx adopted a different method for the policies of his party. He abandoned the tactics of a gradual approach to the total state of socialism and advocated instead a violent revolutionary overthrow of the “bourgeois” system that at one stroke should “liquidate” the “exploiters” and establish “the dictatorship of the proletariat.” This is what Lenin did in 1917 in Russia and this is what the Communist International plans to achieve everywhere. What separates the Communists from the advocates of the Welfare State is not the ultimate goal of their endeavors, but the methods by means of which they want to attain a goal that is common to both of them. The difference of opinions that divides them is the same as that which distinguished the Marx of 1848 from the Marx of 1867, the year of the first publication of the first volume of Das Kapital.

Mises is dead wrong about the welfare state.

1) Welfare States are not a method to transform a market economy to a socialistic one (which he implies that a socialistic economy is one without markets). This is not a goal for advocates of the Welfare State. They are currently one of the biggest market supporters, I am specifically talking about the Nordic countries.  The Welfare States that are currently successful have strong property rights, enforce contracts, and low regulation on business. They accept the capitalistic mode of production, something that socialists reject. In fact, Welfare Statists take major criticism from Marxists and other socialists because they accept the capitalistic mode of production. So to equate socialists with Welfare Statists is a fallacy.

2) It is also a fallacy to call Bismarck a socialist. A quick google search on Bismarck demonstrates that he actually debated and was cautious about socialism. He even banned socialistic books and made it illegal for socialists to meet.

3) What separates communists and Welfare Statists IS the ultimate goal of their endeavors. Their goals are not the same at all. The biggest difference is that one supports a capitalistic mode of production and one supports a socialistic one. One wants to keep the market system in place while the other wants to revolutionize the mode of production.

In conclusion, I am by no means advocating the Welfare State. I just think that we should critique it fairly and not straw man it. And calling the Welfare State socialistic (in the Marxist sense) is a straw man.

Bachmann Fails at Logic

As an avid reader on Aristotle, I think I know a bit of logic. Or at least I know that my understanding of logic is far better than Michelle Bachmann’s understanding of the subject. Let me show you what I mean:

Here is a video showing a student asking Bachmann on what she would do for the gay community in America. Bachmann responds by saying that no one group of people have rights over other people. Every America has the same civil rights. This I agree with, no one group should have special rights that other people outside of the group don’t have.

But then, the student asks,” Then why can’t gays marry?” and Bachmann responds, “Well they can get married,” she goes further to say that gay men can marry women and gay women can marry men, so therefore the law is still equal across the board.  The student then responds, “So heteros have a privilege.” Bachmann of course replies no because the law only permits for opposite sex marriage, therefore we have to respect the law as stated.

So in Bachmann’s view, she first assumes the law is stated as civil as it should be, in this case, opposite sex marriage is legal. Then she assumes that since the law is civil as possible that everyone has equal right to this law. But here is her flaw, while she gives equal rights to everyone under the given law, the law in itself is advocating hetero marriage over homo marriage, that is, the law is advocating a special right to one group. Now knowing this, Bachmann must reject the premise that ‘no one group of people have rights over other people outside of the group’ in order to stay consistent with her conclusion.

Also, I want to note that she makes the argument that the law permits only opposite-sex marriage and we must respect the laws of America. But then this begs the question: Does she imply that we can never question our laws since this is a way of disrespecting a law? So if we keep consistent with the argument that we must always respect the laws and not question them, does that mean that if she was a politician in the 1960′s, that she would have been an advocate for segregation, since that was the law at the time, or in the 1910′s to 1920′s would she be opposed to the women’s sufferage movement, since the law only allowed men to vote? Hey, if it wasn’t for women back then demanding for the right to vote, Bachmann would not be a presidential candidate.  Maybe she forgot that Thomas Jefferson, a person she claims to admire, once said that if the law was unjust, it was our duty as citizens of this country to protest against it.  A true admirer of Jefferson would have never said to follow the law because that is the law and we must respect it.

I think I have shown Bachmann’s inconsistent claims, but probably the best way to approach Bachmann’s position is by simply turning the situation around, that is, lets say the law only permitted same-sex marriage. Would Bachmann’s position still be the same? Under this law all men, regardless of sexual preferences, have the equal opportunity to marry men and all women have the equal opportunity to marry women. See the law is equal… and since the law doesn’t grant opposite-sex marriage, it is illegal for men to marry women, and we must respect this because it is the law of the land. So Mrs. Bachmann, I ask, would your position be this?

Mrs. Bachmann fails at logic. I would have more respect for her if she just came out and said, “I am opposed to gay marriage because I dislike gays because it is an immoral action. I know best and I am just trying to make my views into law.” At least if she said that, she would be logically consistent, and not making such an absurd claim that ‘ this is law and we must respect the law.’

-Isaac Marmolejo