Jacob Viner on Schumpeter on Adam Smith

Jacob_Viner

From Jacob Viner’s review of Schumpeter’s History of Economic Analysis (taken from Essays on the Intellectual History of Economics, ed. Douglas A. Irwin [Princeton University Press, 1991], 327ff., 338):

Schumpeter’s “Reader’s Guide” to Adam Smith’s Wealth of Nations, although unfinished, is an admirable outline of such theoretical structure of “system” as there is in that book, and would make an extremely useful introduction to any new edition of it. Schumpeter does not like Adam Smith, however, as theorist, as man, or with respect to his social views. The Wealth of Nations, although in some unexplained way it was “a great analytic achievement” (p. 38), completely lacks originality. It “does not contain a single analytic idea, principle, or method that was entirely new in 1776″ (p. 184). Many of his predecessors excelled him as analysts. Verri’s concept of economic equilibrium was “as far as this goes, rather above than below A. Smith” (p. 178). It is “not without interest to observe how little, if anything, [Campomanes] stood to learn from the Wealth of Nations” (p. 173). Most references to Adam Smith are hostile. He suggests that Smith’s criticism of Mandeville’s (two-volume!) “pamphlet,” The Fable of the Bees, may have been due to jealousy of Mandeville as the anticipator of the argument or “Smith’s own pure Natural Liberty” (p. 184). ” The wooden hands of the Scottish professor” and f”the safe side that was so congenial to him” (p. 212), his “feelings of resentful distrust” and his “narrow views” with respect to big business (pp. 150, 545), these are representative of Schumpeter’s reaction to Smith. Smith was writing “in bad faith” when he claimed that the mercantillists “confused” wealth with money (p. 361). It is not, I think, necessary to accept Adam Smith as a hero of our profession to conclude that Schumpeter’s objectivity was somewhat undermined her by the conflict between Smith’s and his own “ideologies”.

Viner also comments in a footnote that the standard interpretation of Mandeville “overlooks the vital role [he] assigns to ‘the dexterous management of the skillful politician”, which Viner considers in his introduction to Mandeville’s Letter to Dion.

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Why Do We Remember Adam Smith?

A drawing of a man standing up, with one hand holding a cane and the other pointing at a book
Portrait of Smith by John Kay, 1790. Public domain, Wikimedia

My last post tried to answer the challenge that Adam Smith should not be considered the founder of economic science, since he did not make any original analytical contribution. Of course, there is another way to answer Mueller’s challenge is to consider another aspect: if Smith did not make any analytical contributions, why is he considered the father of economic science?

Part of the answer lies in the availability of books. Yes, Smith was familiar with Richard Cantillion’s Essai, as would have the French liberal economistes (Turgot, , Bastiat and Quesnay). Although the essay was written in 1730, it didn’t appear in French press until twenty-two years after his death, was ignored in the nineteenth century, then rediscovered by William Stanley Jevons in the 1920’s. Cantillon showed early drafts of his book to many of his acquaintances, including David Hume and those mentioned above. We could add to this list Antonio Serra’s Breve trattato delle cause, che possono far abbondare li regni d’oro, e argento, dove non sono miniere (1613), of which only a few copies floated around until its recent translation into English with facing pages. (Readers interested in the contributions of the “pre-Smithians” are encouraged to consult Hutchison’s Before Adam Smith: The Emergence of Political Economy, 1662-1776.)

Another part of the answer lies in the type of synthesis Smith was attempting in writing The Wealth of Nations. Looking through James Bonar’s catalog of Adam Smith’s library, it is astounding how literate Adam Smith was in the works of the ancients as well as his contemporaries writing on the topics of state finance, international trade, and money. While there were many economists before Smith, no one had yet written a systematic treatment of these issues (with the possible exception of the late Scholastics, but that’s another story). Intellectual historian Dierde McCloskey has gone as far to call Smith “the last of the virtue ethicists”. Perhaps this is why Schumpeter calls Smith’s Wealth of Nations “a great performance”, written by someone “no doubt equal to the task” of coordinating the ideas of his predecessors.

Schumpeter, Smith, and The Wealth of Nations

One of my favorite writers once said of Alexis de Tocqueville’s Democracy in America, “Tocqueville’s book has so much good sense in it that it seems almost meanspirited to raise a complaint. But since its flaw is important, and happens to be shared by many contemporary writers on America, it needs to be exposed”. My thoughts and sentiments regarding John D. Mueller’s Redeeming Economics are quite similar. This book was recommended to me by someone I respect, Mueller provides some excellent arguments regarding popular arguments that tend to undermine the pro-life movement, and it introduces readers to Jacques Rueff, one of the most important statesmen of the 20th century.

Nevertheless, there are important flaws in Mueller’s book, so I am going to spend some time here reviewing them. One such flaw in Mueller’s book is his account of Adam Smith and classical economics. Though there are a number of points I could consider, today I will consider Mueller’s denial of originality to Smith. Mueller states at the beginning of chapter three of Redeeming Economics that “Adam Smith was not the ‘founder’ of economics. … Joseph Schumpeter was quite correct to conclude that ‘the Wealth of Nations does not contain a single analytic idea, principle, or method that was entirely new in 1776′”. Since Mueller never provides the context of the quote in either the main text nor the footnotes of the book, I decided to take a gander myself:

We know already that the skeleton of Smith’s analysis hails from the scholastics and
the natural-law philosophers: besides lying ready at hand in the works of Grotius and Pufendorf, it was taught to him by his teacher Hutche-son. It is true that neither the scholastics nor the natural-law philosophers ever evolved a completely articulate scheme of distribution, still less the misleading idea, which was to play so great a role in the theory of the nineteenth century, of a social product or National Dividend distributed among the agents that take part in its production. But they had worked out all the elements of such a scheme, and Smith was no doubt equal to the task of co-ordinating them without further help from anyone. According to Cannan, the Glasgow Lectures—which show no great advance beyond Hutcheson in any direction—contain ‘no trace whatever…of the scheme of distribution which the Wealth of Nations sets forth.’ It is not necessary to infer from this, however, that Smith was under heavy (and largely unacknowledged) obligation to the physiocrats, whom he met (1764–6) and presumably read before he settled down to work at Kirkcaldy. The Draft discovered by Professor Scott proves that this may go too far: the Draft clearly foreshadows the scheme of the Wealth. On the other hand, however, it must not be forgotten that the heritage of the natural-law philosophers and the achievements of A. Smith’s French contemporaries were not all he had to work with. There was the other of the two streams that meet in the Wealth of Nations, represented by the Consultant Administrators and the Pamphleteers. Smith knew Petty and Locke; he presumably made acquaintance with Cantillon, at least through Postlethwayt’s Dictionary, at an early stage of his work; he laid Harris and Decker under contribution; his friend Haume’s writings and Massie’s must have been familiar to him; and in the long list of writers whom he affected to despise because of their ‘mercantilist errors,’ there are some who might have taught him a lot, for example, Child, Davenant, Pollexfen, not to insist on such ‘antimercantilists’ as Barbon and North. But no matter what he actually learned or failed to learn from predecessors, the fact is that the Wealth of Nations does not contain a single analytic idea, principle, or method that was entirely new in 1776. (Schumpeter, History of Economic Analysis, pp. 178 – 179)

There are two things to notice in this passage (three, if you count the editorial footnote at the beginning of this section). First, contrary to Mueller’s thesis that Adam Smith broke with the natural law tradition, Schumpeter acknowledges that the basics of Smithian political economy (“the skeleton”) is based in large part on the work of “the scholastics and the natural-law philosophers”, particularly Pufendorf as “taught to him by his teacher Hutche-son”. Besides these influences and Smith’s French contemporaries, Smith knew of “the Consultant Administrators and the Pamphleteers” (Petty, Locke, Postlethwayt, Hume, Nicolas Barbon, and Dudley North). Though it is not necessary to infer from the above that “Smith was under … obligation to the physiocrats” and their subjectivist theory of value, he had a great deal of material to work with.

Second, it is not so clear that Smith rejected the Scholastic notion of final distribution. Contrary to Mueller’s claim, Schumpeter acknowledges that Smith was competent enough (“no doubt equal to the task”) to develop a theory of distribution (“co-ordinating them”) based on his Scholastic inheritance (the Scholastics “had worked out all the elements of such a scheme”). Such has been discussed elsewhere. (I wonder, though – does Schumpeter  think that the Scholastic theory of distribution is a “misleading idea”?)

So why did people admire and read Smith’s Wealth of Nations?

Those who extolled A.Smith’s work as an epoch-making, original achievement were, of course, thinking primarily of the policies he advocated—free trade, laissez-faire, colonial policy, and so on. But, as should be clear by now and as will become still clearer as we go along, this aspect would not lead to a different conclusion even if it were relevant to our subject. Smith himself, according to Dugald Stewart, indeed laid claim (in a paper drawn up in 1755) to priority concerning the principle of Natural Liberty on the ground that he had taught it as early as 1749. By this principle he meant both a canon of policy—the removal of all restraints except those imposed by ‘justice’—and the analytic proposition that free interaction of individuals produces not chaos but an orderly pattern that is logically determined: he never distinguished the two quite clearly. Taken in either sense, however, the principle had been quite clearly enunciated before, for example, by Grotius and Pufendorf. It is precisely for this reason that no charge of plagiarism can be made either against Smith or on his behalf against others. This does not exclude the possibility of course that, in stating it with greater force and fullness than anyone before him, Smith experienced subjectively all the thrill of discovery or even that, some time before 1749, he actually made the ‘discovery’ himself. (Schumpeter, ibid, 178-179)

Schumpeter then discusses Wealth as “a great performance all the same and fully deserved its success” beford moving onto his “reader’s guide”.  In short, Adam Smith is to his predecessors what Mises and Hayek were to Menger, Böhm Bawerk and Wieser.

A Short History of Benefit Societies

Knights and Ladies of Security pin button 2016-11-03.jpg
Knights and Ladies of Security pin buttton. Public Domain.

The following is an excerpt from my paper “American Welfare Reform in Historical Perspective: Marriage, the Family, and Mutual Aid Societies,” which you can download from my Academia.edu profile (see side bar for link). Here I summarize the history of American benefit societies (also known as “fraternal societies” and “mutual aid societies”) in welfare provision and poverty alleviation until the early 20th century. And yes, I do plan on blogging more frequently from now on. – Karl “With A K”

Besides the family and religious institutions, another source of welfare provision was the mutual aid society. Mutual aid societies are as old as the American colonies. In fact, the Freemasons (commonly known as Masons) were the first to establish mutual aid societies in the American colonies. Early Mason members consisted mainly of Americans from the higher classes; this changed with the American Revolution, as the Masons spread to establish lodges wherever chartered members had been stationed. Many mutual aid societies established in the nineteenth century were based on the model set by the Masonic mutual aid societies (Beito 1994, 55).

Unlike modern insurance companies, mutual aid societies “were controlled by their members”, organized at the local level via lodges (Beito 1990, 712). While secret societies “specialized in the social and informal components of mutual aid”, the formal aid offerings of mutual aid societies “had a more substantial social welfare impact” (Beito 1990, 712, 713). A 1910 article noted that the main purpose of mutual aid societies was “insurance against want, the poorhouse, charity and degradation” (Beito 1990, 713). Even in 1931, mutual aid societies provided aid for (at least) ten times as many individuals as mothers’ pensions did (Beito 1990, 714). Death benefits (akin to life insurance) were the keystone of mutual aid assoctiations for a long time; however, societies started offering health and accident insurance in the early twentieth century (Beito 1990, 713, 714).

Around the early twentieth century, mutual aid societies started to decline in membership. According to numbers from the National Fraternal Congress, the number of associated lodge was at 120,000 in 1925. Membership in mutual aid societies then declined through the next eight decades, the pace of which increased during and after the Great Depression (Beito 1994, 59). Twenty percent of member lodges shut down during the 1970’s. Only 52,000 lodges remained in 1986 (Beito 1990, 724). Founded in 1886, the American Fraternal Alliance reports that only sixty-three member societies exist to date (American Fraternal Alliance).

Historians have given several explanations for the decline in mutual aid societies (Beito 1990, 724–729). The most prevalent is actuarial problems as a source of stress on fraternal societies. Similar to problems in today’s Social Security program, letting members pay a basic premium regardless of risk or age came “under severe strain when the membership aged” (725). However, this could not explain how many smaller African–American mutual aid societies were still able to operate efficiently on this system.

David Beito highlights two of these explanations for contemplation. The first, proposed by Roger L. Ransom and Richard Sutch, is that legal prohibitions on certain forms of insurance incentivized “consumer dependency on employer benefit plans and government programs”. Beito notes that this thesis requires development societies (Beito 1990, 726).

A second thesis Beito considers posits a causal relationship between the early expansion of government welfare and the decline of mutual aid societies. According to Beito, the historical evidence “is fairly clear” that “weakened mutual aid coincided with the growth of government’s social–welfare role” (Beito 1990, 726). Two types of government aid that predated the New Deal were workers’ compensation and mothers’ pensions. The number of states offering the later type grew from twenty in 1913, to thirty-nine in 1919, and all but four in 1931 (Beito 1990, 726–727). While correlation is not causation, Beito notes that since mutual aid societies “had [historically] been a creature of necessity,” the government’s increased provision of welfare “must have undermined much of this necessity” that characterized mutual aid societies (Beito 1990, 727).

Bibliography

Beito, David T. “Mutual Aid for Social Welfare: The Case of American Fraternal Societies.” Critical Review 4, no. 4 (1990): 709-736.

___. “Thy Brother’s Keeper: The Mutual Aid Tradition of American Fraternal Orders.” Policy Review 70 (1994): 55-60.

___. “From Mutual Aid to Welfare State: How Fraternal Societies Fought Poverty and Taught Character”. Research report for the Heritage Foundation, 2000.

___. From Mutual Aid to the Welfare State: Fraternal Societies and Social Services, 1890-1967. University of North Carolina Press, 2003.

Olasky, Marvin. The Tragedy of American Compassion. Washington: Regnery Gateway, 1992.

Trattner, Walter I. From Poor Law to Welfare State: A History of Social Welfare in America. New York: Free Press, 1994.

West, Thomas G. Vindicating the Founders: Race, Class, Sex, and Justice in the Origins of America. Rowan and Littlefield, 1997.

___. “The Economic Principles of America’s Founders: Property Rights, Free Markets, and Sound Money.” First Principles Series 32. Heritage Foundation, 2010.

___. “Poverty and Welfare in the American Founding.” First Principles Series 53. Heritage Foundation, 2015. (Updated version of West [1998], 131–146.)

___. The Political Theory of the American Founding: Natural Rights, Public Policy, and the Moral Conditions of Freedom. Cambridge University Press, 2017.