Adam Smith

Adam Smith is one of those figures that flits in the background of modern life. His work impacts us all, but how many know his name? His profile adorns the textbooks of eager university students, but ask them what he contributed. Even amongst those who know of Smith and his work, who can tell us what inspired and shaped him? What twigged that led him to become the prime mover of modern economics? The stories of comparable men in other fields – Aristotle and biology, Galileo and astronomy, Humbolt and geography; are common knowledge. Their fame and name so dwarf their contemporaries that they all but stand alone in our imaginations. Adam Smith has no such legend. Nevertheless, the story of his quest for a theory of everything deserves to be told.

“The Wealth of Nations is the greatest and most enduring monument to the intellectual culture of the Scottish Enlightenment. It contains a theory about the behaviour of human beings when they are seen through the lens of Scottish politeness, about agents who are deeply committed to the improvement of mind, manners and property, and are able to believe that in following what seems to be the path of nature they are acting in a way that will serve the public good.”

Unfortunately, Adam Smith did not leave a paper trail. He lived with his mother for most of his life, wasn’t much of a correspondent and forced his friends to destroy his personal papers. Really, if it weren’t for David Hume, his few loyal students and his published work, we wouldn’t be left with anything at all. As a result, ideas are all that survive of Smith, and the narrative Phillipson has managed to piece together is entirely an intellectual one. The source material for the tale Phillipson tells is the world that surrounded Smith. Through the courses he took at Glasgow and Oxford, and the notes of his own students, we see a man indebted to Classical Philosophy and Rhetoric. From his friendship with Hume and the set with which he roamed, we find a tireless intellect. And out of his lectures and books we see a theorist drawing from all that surrounded him — from the coffers of Scottish merchants, to the work habits of Oxford dons and the writings of French academics — in the quest to develop a theory of everything.

“Rousseau once famously remarked that while men were born free, everywhere they were in chains. In Smith’s view the chains were those of the imagination, chains could be loosened by a common sense, sceptical awareness of the processes by which the moral personality was formed, but never altogether thrown off.”

Although what we end up with is a jagged silhouette in the middle of a busy canvas — as Phillipson is able to paint around the subject but little more, perhaps the reader is not the worse for wear. The key points of any good biography are more than met. We are introduced to the world in which Smith lived; where Western Philosophy and the Scottish Enlightenment were in full bloom. We encounter both that which inspired Smith, and the full cohort that he in turn inspired. We meet his contemporaries, and accompany him on the better-documented journeys in his later life. All without the emotional baggage of your average biography. I am almost of a mind to thank Smith for removing his personal details from the occasion, it’s much cleaner this way. If you are someone who really wants to learn and benefit from Smith’s intellectual journey, and can stand a rigorous biography, this book is definitely recommended. Maybe if more read this book Smith wouldn’t be flitting in the background.

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p class=”p3″ style=”text-align: center;”>“For in the last resort, the Wealth of Nations, like the Theory of Moral Sentiments and the lectures on which it drew, was a call to his contemporaries to take moral, political and intellectual control of their lives and the lives of those for whom they were responsible. It is in such contexts that the Wealth of Nations needs to be read by historians. The rest can be left to his disciples and critics.”

Why Nations Fail

As we delve further into the twenty-first century, the BRIC and MINT countries are converging with those that have sat atop the heap for so long. They are leaving many nations and billions of people behind. But why is this so? Why did the industrial revolution kick off in England and take only select countries with it? Why were Japan and South Korea able to leave their region in the dust during the twentieth century, and how has Nigeria recently stormed past it’s neighbours? Why is China now set to become king of the mountain, not so long after Mao dragged it to such drastic lows? Why are some countries poor while others prosperous, some successful while others not, and why do these fortunes ebb and flow? In short, what is the magic ingredient? There are many books out there with a claim to answer. Their theories range from the geographic to the cultural. Daron Acemoglu and James Robinson have yet another to add to the pile; for them, the secret sauce is creative destruction. And the differences between success or failure is the presence or absence of institutions that foster it.

“Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people.”

Creative Destruction is an idea popularised by the economist Joseph Schumpeter to refer to a process of incessant industrial revolution, of innovations pushing out the antiquated. It is records making way for cassettes, CD’s bowing before Mp3 players. Why Nations Fail is built on the premise that this innovation, this creative destruction, is a necessary ingredient in the success of a country. And further, for a nation to harness creative destruction requires a certain amount of freedom, transparency and protection for it’s citizens. According to Acemoglu and Robinson, these are features of society that are granted or restricted by it’s institutions. So-called “inclusive institutions” are markets, laws and norms that protect and incentivise innovation and productivity. They foster creative destruction and are the building blocks of a successful society. On the other hand, “extractive institutions” are ones that protect and enrich the elite, that dis-incentivise productivity and innovation. They hinder creative destruction and are a recipe for a failed nation. 

“The fear of creative destruction is the main reason why there was no sustained increase in living standards between the Neolithic and Industrial revolutions. Technological innovation makes human societies prosperous, but also involves the replacement of the old with the new, and the destruction of the economic privileges and political power of certain people.”

Viewing the world through this prism gives Acemoglu and Robinson an explanation for where we are, and where we are going. The countries that today enjoy a high standard of living are those that have established multi-party democracies, transparency and protection through the rule of law and independent judiciaries, and incentives through free markets and patents (etc). On the other hand, countries that have seen dictatorships and despots, entrenched elites, disruptive monopolies and subsidies, and few political rights; have failed, are in the process of failing, or will soon do so. Acemoglu and Robinson explain that the Industrial Revolution kicked off in Britain because the citizens had already achieved hard won restrictions on the elite. Power was distributed and new protections in areas such as patents rewarded innovation and productivity. Pioneers like James Watt – famous for his steam engine — were not shut out by a rent-seeking aristocracy. Further, the efforts of these pioneers to secure their gains ensured a virtuous cycle, a promulgation of new institutions to further codify gains. According to Acemoglu and Robison, Britain hosted the Industrial Revolution because it’s inclusive institutions had already made way for the mother of creative destruction, and creative destruction begat even more creative destruction.

“The striking thing about the evidence on patenting in the United States is that people who were granted patents came from all sorts of backgrounds and all walks of life, not just the rich and the elite.” 

The authors use compelling examples and “experiments” to back up their claims — most notably, the difference between Nogales, Arizona and Nogales, Sonora; a city that straddles the border between the United States and Mexico. This one city provides a seemingly perfect “natural experiment” of the institution thesis; as geography, culture, and ethnicity are the same on both sides of the fence. Arguably, it is only recent history, which has resulted in differing institutions, that have caused the diverging living standards for the two Nogales. But there is more. Other examples trotted up by the authors include East and West Germany, Spanish South America – where the indigenous population were exploited to cash in on an abundance of natural resources, and English North America – where a scant aboriginal population and minimal natural resources forced the English to transplant and incentivise a European population. West Germany is still footing the bill for the shambles that was East Germany. The inhabitants of Spanish South America were turned into chattel, while the new inhabitants of North America progressed and built institutions to protect their growing status. More examples come in the analysis of East and Western Europe – where Western Europe had largely managed to reign in their monarchs and elites, much of Eastern Europe carried the burdens of Serfdom and Feudalism well into the twentieth century. While industry promulgated in the West, Eastern Lords bound their subjects and continued personally profitable agrarian economies. Most compelling for me was an exploration of Australia – where a scarcity of labour similar to North America forced the English to incentivise immigrants. The Convicts and settlers went on to build institutions to secure what they had gains in a similar fashion to their brothers elsewhere, institutions that are the foundations of modern Australia. Through numerous examples, Acemoglu and Robinson show that the countries that have succeeded have done so by following an economic ideal of productivity and innovation over monopoly and rent seeking, and they have done so not out of economic rationality, but political necessity.

“World inequality today exists because during the nineteenth and twentieth centuries some nations were able to take advantage of the industrial revolution and the technologies and methods of organization that it brought while others were unable to do so”

Why Nations Fail is a book that kicked up a storm of debate in the academic and development communities. The reviews written by the authors of other theories are enlightening, as are the responses of Acemoglu and Robinson. However, there are also major flaws in this work. One look at the book jacket, at those who have lent their names to promote it, raises questions. They are a remarkably homogenous bunch. People like Niall Ferguson – who even utilises some similar examples in his book, Civilisation. And, I’ll be honest, I tore through this book, loving it the entire way. It’s message appealed to me. But of course people like Niall Ferguson and myself love it. It offers a theory that takes a very Eurocentric view of the world, and then works backwards. Democracy and much of the social and political norms cherished in the West are taken as given and as ideal, and then ascribed major roles in past success. Niall Ferguson, myself, and everyone else on that jacket have a natural predilection to this theory. Our innate biases are towards the institutions that have allowed us to prosper and thrive in our wonderful, Western societies. But can liberalism really be the only path to success? The cloud overhanging all of this is the lack of real explanation of what’s going on in places like China – a nation ravaged by extractive institutions if there ever was one, yet with an economy growing pell mell and a massive savings rate. If anything, success is simply too complicated for such a grand unified theory. However, and whether you agree with their theory or not, Acemoglu and Robinson have produced a fantastic book. A great read. This is one of those library books that I really wish I had bought. From the moment I started reading it, I have wanted to share it with all and sundry. I have my doubts, but I highly recommend it. At the very least it will provoke debate and introspection.

“Nations fail today because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate.”

Informing The News

Who doesn’t lament the state of the news media? Their preoccupation with celebrities, disasters, scandals, crime, the political horserace, and other such pabulum and infotainment. But Thomas E. Patterson also deplores the state of democracy, and views the two as inextricably linked. Just as ninety years ago Walter Lippmann warned the “crisis in Western Democracy is a crisis in journalism,” Patterson has sought to highlight the deficiencies in modern journalism, how it is affecting our ability to self-govern, and has offered an antidote; knowledge-based journalism.

“It is a short step from misinformation to mischief, as we have seen repeatedly in recent policy.”

Around the world, studies measuring trust and satisfaction consistently put journalists at the bottom of professions. Even below politicians. All the while, the traditional mass media lose audience to the purveyors of satire, punditry and hackery. The financial issues facing the journalism industry are well documented, but as Patterson points out throughout the book, there is a deeper crisis facing the profession. Journalism has become dumbed down. Even name-brand journalism schools have structured their courses to more resemble trade schools than instructors of a vital component in a functioning democracy. Journalists increasingly have little experience or knowledge in the subjects that they cover. While technical expertise may be exemplary, content expertise is often lacking.

“It is nearly impossible to have sensible public deliberation when large numbers of people are out of touch with reality.”

In an age of tight deadlines and slimmed down newsrooms, this is a disaster for creating an informed public. Serious policy is overlooked while much simpler — for the journalist as well as the consumer — political hackery is played up. Minor but easy to understand developments — such as interest and inflation blips — are held under the microscope, while the larger picture — the state of the business cycle for example — is all but lost. Powerful figures — such as those who pushed for the invasion of Iraq – are left unchecked by those ill equipped to do so. All the while, journalists must rely ever more on outsiders to do fundamental aspects of their jobs — providing context and scrutiny in a world bursting with information. Studies show that the public are consistently misinformed on a variety of important subjects, and, as Patterson points out, many of these subjects bear a startling correlation to the innate biases of a profession that is chasing its audience and has lost sight of its intellectual rigour. Is there any doubt of the cumulative effect?

“Informed citizens do not spring forth from birth. The process of informing the public is an ongoing task”

For Patterson, the answer to both conundrums is the injection of “knowledge” back into journalism. Specifically, the “knowledge of how to use knowledge”. Obviously, the variety of subjects that any one journalist will encounter during a career is too much to become intimate with all of it. But similar can be said of a teacher. So, like teachers, Patterson suggests that journalists be trained in the fundamentals of what they need — history, analytical thinking, ethics, data analysis , etc. But also like teachers, they should be trained in communicating across these subjects. Providing context and other information in order that the audience can “make sense of the events”. According to Patterson, this “content knowledge” would take journalism a step closer to fulfilling its duty to democracy, all the while distancing it from the innumerable hacks who operate on the internet for free. Knowledge, Patterson claims, is the solution to more than one of the problems that plagues journalism.

“Knowledge is the starting point as well as the end product of systematic inquiry, guiding the practitioner in what to look for as well as what to make of what is found.”

As a citizen, an avid news consumer, and someone who spends considerable time in a newsroom every week, Pattersons’ book rings horribly true on many levels. The lack of socially beneficial news and a common set of facts, as well as the incursion of infotainment into the “bible of democracy” has undoubtedly harmed the public square. I would be glad to see more informed voices take the stage. But I am sceptical that there is a place for such a development. Recent election coverage in Australia and America was abysmal, topped only by the bush-league reporting of the actual governance after the spectacle. But it is this, along with the blow-by-blow accounts of everything royal and celebrity, beat-ups and other fluff; that really pulls in the ratings. Look at what actually gets shared on social media. Its cat pictures and Upworthy, not the Washington Post or the Financial Times. Patternsons’ book gives a great account of much of what ails the news media. I’m not so sure how much demand there is for his cure.

“Journalists are in the daily business of making the unseen visible, of connecting us to the world beyond our direct experience.”

Cornelius Vanderbilt

Even now, more than a hundred and thirty years after his death, it’s pretty hard to escape the shadow of Cornelius Vanderbilt. Along with the likes of Rockefeller, Carnegie and Morgan, he was instrumental in the creation of our modern world. They kicked off the era of the mega-corporation and titans of industry, of the worship of laissez-faire and self-made men. They so dominated their age that even now, reading almost any newspaper, you can still see the fear these robber barons stirred. But if anything, Stiles’ account of Vanderbilt only makes him rise in my estimation. He wasn’t just the richest man of his age. He wasn’t just the railroad king with the killer sideburns. He was the 19th century’s Richard Branson. He was batman.

 

The story starts on Staten Island, where an entrepreneurial family instilled Vanderbilt with many of the skills and qualities that would lead to his total domination of the American economy. He wasn’t educated — he left school at the age of 11, and many of Stiles’ quotes betray a command of spelling and grammar that would embarrass a modern 11 year old. By sixteen he was already a skilled sailor and wheeler-dealer, by twenty he was ferrying goods and people along the cost, and only a couple of years later he was riding the crest of the Steam Revolution with Edward Gibbons.

 

What follows is several hundred pages tracking Vanderbilt’s rise through the echelons of the business and social world. First smashing the syndicates that monopolised shipping around New York, then pioneering new lines up and down the coast, and even riding the rapids through Nicaragua to the West Coast of America – to capitalise on the Gold Rush. Along the way Vanderbilt encountered entrenched interests, traitors, legalised monopolies, and even the American Civil War. He waged battle after battle (and not just financial), slashing fares and costs, and engaging in the short-selling and cornering that marked the new battlefield — the stock exchange. Eventually we wind up with Vanderbilt in the role most of us know him as: railroad king. A role that would see him build New York’s Grand Central Station and personally oversee/fund the construction of infrastructure that would shame the South and much of Europe. In all, we follow Vanderbilt from captain of a small skiff to his station as the first tycoon — a man whose wealth would have counted for $1 out of every $9 in circulation.

 

This is the book that any proponent of unfettered capitalism should be forced to read. But it also masterfully illustrates the shortsightedness of decentralisation, cronyism and over/needless regulation. It is hard to read of the syndicates, monopolies, vulture capitalism, lobbying, battles and dominance, and not wonder how this benefited the average consumer and citizen. But the regulatory and societal norms that Vanderbilt had to push through, also make you wonder what more he could have accomplished, and what others were left behind. Stiles has managed to write a book that both serves its purpose as a historical account, and provides commentary on our present. About the only complaint I can muster is that after a while the names and dates were just too much to follow — but this is no complaint at all. It is a brilliantly written — dare I say swashbuckling — story. The subtitle “Epic life of Cornelius Vanderbilt” doesn’t capture the half of it. Four out of five.

 

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