[By the way David, I enjoyed your TV appearance with Ed Meese]

David Friedman, replying to Jimbo Wales, wrote:

If one applies the term "political economy" narrowly to refer
specifically to the British classical school and not to economics in
general, then it is fair to say that Rand got her dates correct.  It
seems much more plausible, though, to argue that it was Hume (and
to a lesser extent Smith's predecessors in the Scottish
Enlightenment) and not Kant who created the intellectual atmosphere
that permitted a Bentham and a J.S. Mill to sneak egregiously
collectivistic ideas into classical political economy.

Economics was quite prominent in France and even in Scotland long
before Kant or Smith.  While the usual mythology is that Smith
and Ricardo founded modern economics, that honor really belongs to
Richard Cantillon.  His treatise written sometime around 1730,  
_Essai sur la nature du commerce en general_, is the first work to
demarcate the field of economics and give a systematic treatment of
the theory.

Cantillon wasn't alone either.  The Physiocratic school and the great
theorist Anne Robert Jacques Turgot were active in France well before
Smith, and Smith's predecessors in the Scottish Enlightenment
(Gershom Carmichael and then Francis Hutchenson) bequeathed their own
body of economic theories (albeit less sophisticated, less
comprehensive, and less laissez-faire in their conclusions than the
French) to Smith.

What Smith really did was import a few French theories (but
unfortunately not some of the more advanced conceptions of value)
into the Scottish context, and thus introduce the English-speaking
world to some laissez-faire ideas in a watered-down form.  Of
particular importance was Smith's advocacy of free trade in
international commerce, which has become a sort of holy grail of
British political economy (even in its more collectivist variants)
ever since.

However, unlike some of the French, Smith's pro-capitalist stands
were not integrated in a coherent fashion to offer a rigorous
defense of laissez-faire, so he wound up advocating a long list of
interventionist measures instead - specifically banking regulation,
a government monopoly of money, public works, a government postal
monopoly, agricultural export restrictions, mandates for certain
aspects of real estate (fire walls, mortgage registration), and
prohibition of wages-in-kind.  Smith also was in favor of many kinds
of taxes.

I have stressed that the corruption is associated with
*British* political economy because economics in the
Catholic countries on the continent remained strongly individualist
and non-Smithian (J.B. Say being an important transmitter of this
tradition).  Of particular importance later in the 19th Century were
the developments in Austria, which became the homeland of
the individualist variant of marginal utility theory and the bastion
of the anti-Marxist/anti-positivist methodology in economics.  

Indeed, the magnificent performances of the Austrian economists Eugen von
Bohm-Bawerk in refuting Marxist economics and Carl Menger in challenging
German historicism casts strong doubt on the contention that no one
rose against collectivism in the 19th Century.  The problem was that
the Austrian challenge didn't really have much impact in England and
America, where linguistic barriers and a lack of translations kept
English-speaking economists in a state of intellectual isolation
from the real debate.

Most economists today are still largely unaware of the ideas of the
early Austrians and of the pre-Smithian body of economic theory.  The
Smith-as-founder myth became entrenched because the post-Revolution
French economists, starting with J.B. Say, found it politically
expedient to distance themselves from their 18th Century predecessors
(who were pro-royalist reformers, with Turgot even being Minister of
Finance briefly) and portray themselves as Smithians instead.
--
Vincent Cook <xyzepicu...@xyzcreative.net> Remove the xyz's
Epicurus & Epicurean Philosophy Page - http://www.creative.net/~epicurus/
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In article <199805070727.AAA26...@cybere.creative.net>, "Vincent Cook"

You are arguing that Turgot's physiocratic theory was "integrated in a
coherent fashion?"

Putting aside the question of influences, what do you find in Cantillon or
Turgot that is correct, and that Smith got wrong?

What government monopoly of money? Smith supported the Scottish system of
private banks issuing their own currency. Do you mean his support for a
government monopoly over small notes?

Where does Smith say that the post should be a monopoly? Indeed, where
does he discuss a post office in our (rather than the 18th century) sense
of the term?

Where does he support agricultural export restrictions?

Actually, Smith favored a slightly higher tax on wages in kind--a mistake,
but not the mistake you attribute to him, unless you are thinking of a
passage I don't know.

And Turgot and Cantillon (and Menger and ...) were in favor of having no
taxes? News to me.

Or, alternatively, because they found Smith (and Ricardo) to have a more
nearly correct and consistent theory.
--
David Friedman
D...@Best.com
http://www.best.com/~ddfr/
"No man is secure in his life, liberty or property
while the legislature is in session"

Turgot did not make the sorts of mistakes that Quesnay and other
Physiocrats did, and Smith in fact was more prone to embracing
Physiocratic errors.  Turgot's relationship to the Physiocrats was
more of a personal and political one than an intellectual one.

The most fundamental problem with Smith is that in the _Wealth of
Nations_ he sunders price formation from consumer utility.  Whereas
the French economists had understood (albeit without the benefit of
marginalism) that scarcity was a factor in price formation and had
worked out a rough understanding of how subjective utility affects
price formation and opportunity costs, Smith's articulation of the
diamond/water paradox presaged his slide into an incoherent
real-costs theory of exchange-value.

Some other key ideas one can find in Cantillon and Turgot but not
Smith (or stated much better than in Smith) are:

(1) a clear statement of an Austrian-like methodology (Cantillon),

(2) market prices derived from subjective utlities (Cantillon with
some qualifications and Turgot more consistently and in great
detail),

(3) uncertainty and a division of knowledge as the basis for
entrepreneurship (Cantillon and Turgot),

(4) a sophisticated theory of spatial economics (Cantillon),

(5) a sophisticated commodity theory of money (Cantillon),

(6) specie-flow mechanism for monetary equilibrium (Cantillon and
Turgot),

(7) the law of optimum returns (Turgot), and

(8) the time-preference theory of capital (Turgot).

All in all, a pretty impressive list.  The good points
about Smith (his understanding of the benefits of a division of
labor and the freedom of international trade) can be found also in
Cantillon and Turgot.

I'm talking about the minting of coins, not the issuance of
paper currency.  The world used gold and silver
coins as the standard money back in those days.

I don't have references to the original sources handy, since I'm
relying on a secondary source for my bill of particulars (Murray
Rothbard's _Economic Thought before Adam Smith_).  I neglected to
mention that public education and usury laws should be on this list
also.  Even his commitment to free trade was not consistent, since he
argued that Navigation Acts were o.k. if justified by considerations
of national defense.

I do have a quote from the _Wealth of Nations_ regarding his
support of public education:

"An instructed and intelligent people besides are always more decent
and orderly than an ignorant and stupid one.  They feel themselves,
each individuallly, more respectable, and more likely to obtain the
respect of their lawful superiors, and they are therefore more
disposed to respect those superiors.  They are . . . less apt to be
misled into any wanton or unnecessary opposition to the measures of
government."

That's hardly the sort of rhetoric one would expect from a champion
of individualism.  I guess we can be thankful that public education
has failed so badly that wanton opposition to the measures of
government is still alive and well.

The point I'm getting at here is that Smith is a sort of Laffer-like figure
who is more interested in generating revenues in the most efficient manner
for the state than in minimizing the state's take.  The French
economists, on the other hand, thought of tax reforms in terms of
getting rid of most of the extant taxes (in fact, all but one tax in
the case of the Physiocrats and Turgot).

Turgot's hard-core libertarian attitudes can be discerned from this
passage from _Plan for a Paper on Taxation in General_:

"It seems that Public Finance, like a greedy monster, has been lying
in wait for the entire wealth of the people."

Contrast that to Smith's insipid canons of justice in taxation,
especially his advocacy of the unlovable income tax we have to suffer
with today:

"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.  The
expense of government to the individuals of a great nation, is like
the expense of a great estate, who are all obliged in proportion to
respective interests to the estate."

I think that a "greedy monster" is a more accurate description of
the state than a "great estate," don't you?

It may also be germane to the tax question that Adam Smith's
so-called laissez-faire principles didn't stop him from spending
the last twelve years of his life as a commissioner of Scottish
customs.  How could it be that the foremost champion of free trade
turned into an enforcer of the mercantilist order?

In December of 1785, Smith wrote this in a letter to another customs
official, George Chalmers:

"it may, perhaps, give the Gentleman pleasure to be informed that the
net revenue arising from the Customs in Scotland is at least four
times greater than it was seven or eight years ago.  It has been
increasing rapidly these four or five years past; and the revenue of
this year has overleaped by at least one half the revenue of the
greatest former year.  I flatter myself it is likely to increase
still further."

Smith's early works may have had a lot going for them, but from the
_Wealth of Nations_ on it was all downhill, and judging from the
sentiments expressed here he had sunk very low indeed.

That wouldn't account for the persistence of the non-Smithian elements in
continental economics.
--
Vincent Cook <xyzepicu...@xyzcreative.net> Remove the xyz's
Epicurus & Epicurean Philosophy Page - http://www.creative.net/~epicurus/
PGP Key - http://pgp5.ai.mit.edu/pks-commands.html
Key fingerprint =  6C AC 39 33 4C F1 72 13  38 89 45 B2 34 D0 69 27
.

The May 2 issue of The Economist has an article on antitrust (p.62-4) with a
cartoon contrasting the "Chicago School" with the "Real World School" and
quotes several economists who are skeptical of "Chicago Orthodoxy" on
antitrust.  In particular, according to the article, the idea of "predatory
pricing" has a new lease on life due to "connected markets" (Microsoft is
mentioned), and some markets (air travel) are no longer thought to be
"contestable" due to large sunk costs.

Would you describe this as an instance of your "2% rule" (as in "you can find
2% of economists who don't favor free trade"), or could something more
serious be going on?

Even more interesting is the article's mention of two recent antitrust cases
in which detailed sales information (from point-of-sale scanners) was used to
prevent mergers even though the industries seemed highly competitive.  For
example, in the case of Staples and Office Depot, Staples was found to have
lower prices in cities where Office Depot had a store than in other cities.

If "rifle-shot" analyses are now possible, the argument that antitrust laws
have been economically harmful overall might be getting the flavor of the
"sunk-cost" fallacy.

Gordon Sollars
gsoll...@virginia.edu

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In article <199805080606.XAA29...@cybere.creative.net>,
  "Vincent Cook" <Use-Author-Address-Header@[127.1]> wrote:

The "world" is a big place; what we care about here is Scotland, where the
banks in fact had a well developed system of bank-notes.  Smith held that it
was proper to restrict the notes to "large" amounts, (I think) because those
making large transactions would be better able to judge the reliability of
the bank behind the notes.  The "poor" would use coin.  Perhaps for this bit
of paternalism Smith stands condemned.

Is there any evidence that the French economists you cite objected to the
government minting of coins?

And I, too, have a quote from Smith:

"Domestic education is the institution of nature;
public education, the contrivance of man.  It is
surely unnecessary to say, which is likely to be the wisest."

Your Smith quote says nothing about *public* education.  I'm curious; did
your quote come from the Rothbard book you mentioned?

Was Turgot speaking of government in general, or of his experience with
French government in particular?  That is, if Turgot had been in Scotland and
Smith in France, what differences might we have seen in their writings?

Gordon Sollars
gsoll...@virginia.edu

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I don't know. There has been a game theory literature for some time
challenging the standard debunking of predatory pricing. I don't find the
bits I have seen very convincing, but it is not a field I work in.
--
David Friedman
D...@Best.com
http://www.best.com/~ddfr/
"No man is secure in his life, liberty or property
while the legislature is in session"

In article <199805070727.AAA26...@cybere.creative.net>, "Vincent Cook"

All of which I gather, if I understand Vincent correctly, is based not on
his own reading of Smith, Cantillon, etc., but on his reading of a book by
Rothbard, whose conclusions he is here summarizing.

I found and downloaded Cantillon's essai and a work by Turgot; I have now
skimmed the former but not yet gotten to the latter. So far as Cantillon
is concerned, while he certainly anticipates Smith in various ways, to
describe him as more libertarian, more pro-laissez-faire, etc. is, to put
it mildly, inaccurate. Insofar as there is a maximand in his essay it is
not, as in Smith's case, the welfare of the population but the power of
the state.

Since Vincent illustrated Smith's supposed evils with selective quotes and
references, I will do the same for Cantillon, along with the relevant bits
from Vincent (this post and another). Since I am selecting for passages
that contradict Vincent's picture, my quotes will make Cantillon look
somewhat worse than he actually is--and hopefully provide Vincent an
incentive to go read him for himself, assuming I am right in believing
that he has not so far done so.

"Suppose the butchers on one side and the buyers on the other. The price
of meat will be settled after some altercations, and a pound of beef will
be in value to a piece of silver pretty nearly as the whole beef offered
for sale in the market is to all the silver brought there to buy beef"

Or in other words, the total amount purchasers spend on beef is roughly
independent of its price. If you think you can square that with even a
rough understanding of how subjective utility affects price formation, I
would be interested.

Cantillon  expects scarcity to affect price in the short run but price to
be determined by production cost (land and labor) in the long run--which
is to say, his theory is essentially the same as Smith's.

I cannot speak to Turgot, but so far as Cantillon is concerned the latter
part is false; he is not a free trader but a mercantilist. A few examples:

"If the proprietors of land and the nobility in Poland would consume only
the manufactures of their own state, bad as they might be at the outset,
they would soon become better, and would keep a great number of their own
people to work there, instead of giving this advantage to foreigners: and
if all states had the like care not to be the dupes of other states in
matters of commerce, each state would be considerable only in proportion
to its produce and the industry of its people."

"This is an example of a branch of trade which strengthens the foreigner,
lessen the number of inhabitants of the state, and without causing any
circulating money to leave it weakens the same state. I have chosen it to
show more strikingly how one state may be the dupe of another in trade,
and the method of judging the advantages and disadvantages of foreign
trade."

"It is by examining the results of each branch of commerce singly that
foreign trade can be usefully regulated. It cannot be distinctly
apprehended by abstract reasons. It will always be found by examining
particular cases that the exportation of all manufactured articles is
advantageous to the state, because in this case the foreigner always pays
and supports workmen useful to the state: that the best returns or
payments imported are specie, and in default of specie the produce of
foreign land into which there enters the least labour. "

"...  But I have no intention of entering into detail as to the branches
of trade which should be encouraged for the good of the state. Enough to
say that it should always be endeavoured to import as much silver as
possible."

"(I assume always that the comparative wealth of states consists
principally in the respective quantities of money which they possess)"

Vincent attributes to Cantillon "(6) specie-flow mechanism for monetary
equilibrium." This is in part true, but note that Cantillon writes:

"I consider in general that an increase of actual money causes in a state
a corresponding increase of consumption which gradually brings about
increased prices."

And makes it clear that the increase in consumption is real, and is a
benefit due to an inflow of gold. So he has the right result from the
wrong cause--unlike Ricardo, who gets the whole thing right.

Vincent writes (about Smith):

"It is true that it would be a great advantage to a state to teach its
subjects to produce the manufactures which are customarily drawn from
abroad, and all the other articles bought there"

and

"If the Prince or administrators of the state wish to regulate the current
rate of interest by law, the regulation must be fixed on the basis of the
current market rate in the highest class, or thereabout. ...  But the
bankruptcy laws being favourable enough to debtors to allow them to start
again it seems that usury laws should always be adjusted to market rates,
as in Holland."

Which is precisely Smith's (mistaken) position.

Victor writes (about Smith):

"I think public banks of very great utility in small States and those
where silver is rather scarce, but of little service for the solid
advantage of a great State."

"It is then undoubted that a Bank with the complicity of a Minister is
able to raise and support the price of public stock and to lower the rate
of interest in the State at the pleasure of this Minister when the steps
are taken discreetly, and thus pay off the State debt."

Smith is in favor of private banking and private money issuance, with some
qualifications; Cantillon is unambiguously in favor of a government bank
in small states, and believes that in large states a bank, with
cooperation of the government, can lower the interest rate in order to let
the state pay off its debt.

So far as the state monopoly on money is concerned, all I can find in
Cantillon is:

"But as silver can be combined with iron, lead, tin, copper, etc. which
are not such scarce metals and are minded at less expense, the exchange of
silver was subject to much fraud, and this caused several kingdoms to
establish mints in order to certify by a public coinage the true quantity
of silver that each coin contains... ."

From which it certainly sounds as though he approves of government coinage.

You are assuming that they want to reduce the number of taxes in order to
reduce the total collected. I can see no sign of that in Cantillon, and my
memory of the Physiocratic doctrine was that they simply argued that a
single tax was a more direct and ...

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