16. The Celebrated Adam Smith

0:00Chapter 16 The Celebrated Adam Smith 1. The Mystery of Adam Smith Adam Smith, 1723 to 1790, is a mystery in a puzzle wrapped in an enigma. The mystery is the enormous and unprecedented gap between Smith's exalted reputation Smith's reputation almost blinds the sun. From shortly after his own day until very recently, he was thought to have created the science of economics virtually de novo. He was universally hailed as the founding father.

0:47Books on the history of economic thought, after a few well-deserved sneers at the mercantilists and a nod to the physiocrats, would invariably start with Smith as the creator of the discipline of economics. Any errors he made were understandably excused as the inevitable flaws of any great pioneer. Innumerable works have been written about him. The bicentennial of his magnum opus, An Inquiry into the Nature and the Causes of the Wealth of Nations, 1776, a veritable flood of books, essays and memorabilia poured forth about the quiet Scottish professor. His profile, sculpted on a medallion by Tassie, is known throughout the world.

1:36A hagiographic movie was even made about Smith during the bicentennial by a free-market foundation and businessmen and free market advocates have long hailed Adam Smith as their patron saint. Adam Smith ties were worn as a badge of honor in the upper echelons of the Reagan administration. On the other hand, Marxists, with somewhat more justice, hailed Smith as the ultimate inspiration of their own founding father, Karl Marx. Indeed, if the average person were asked to name two economists in history whom he has heard of, Smith and Marx would probably be the runaway winners of the poll. As we have already seen, Smith was scarcely the founder of economic science, a science which existed since the medieval scholastics and in its modern form since Richard Cantillon.

2:33But what the German economists used to call in a narrower connection, das Adam Smith problem, is much more severe than that. For the problem is not simply that Smith was not the founder of economics. The problem is that he originated nothing that was true, and whatever he originated was wrong. That even in an age that had fewer citations or footnotes than our own, Adam Smith was Smith was a shameless plagiarist, acknowledging little or nothing and stealing large chunks, for example from Catillon. Far worse was Smith's complete failure to cite or acknowledge his beloved mentor, Francis Hutchison, from whom he derived most of his ideas, as well as the organization of his economic and moral philosophy lectures.

3:24Smith indeed wrote in a private letter to the University of Glasgow of the never-to-be-forgotten Dr. Hutchison. But apparently amnesia conveniently struck Adam Smith when it came time to writing The Wealth of Nations for the general public. Even though an inveterate plagiarist, Smith had a Columbus complex, accusing close friends incorrectly of plagiarizing him. And even though a plagiarist, he plagiarized badly, adding new fallacies to the truths he lifted. In castigating Adam Smith for errors, therefore, we are not being anachronistic, absurdly punishing past thinkers for not being as wise as we who come later.

4:10For Smith not only contributed nothing of value to economic thought, his economics was a grave deterioration from his predecessors. Assessors, from Cattillon, from Turgot, from his teacher Hutchison, from the Spanish Scholastics, even, oddly enough, from his own previous works, such as The Lectures on Jurisprudence, Unpublished, 1762 and 63 and 1766, and The Theory of Moral Sentiments, 1759. The mystery of Adam Smith, then, is the immense gap between a monstrously overinflated reputation and the dismal reality.

4:56But the problem is worse than that, for it is not just that Smith's Wealth of Nations has had a terribly overblown reputation from his day to ours. The problem is that the Wealth of Nations was somehow able to blind all men, economists

5:43in place with a book so derivative, so deeply flawed, so much less worthy than its predecessors. The answer is surely not any lucidity or clarity of style or thought, for the much revered wealth of nations is a huge, sprawling, inchoate, confused tome, rife with vagueness, ambiguity and deep inner contradictions. There is, of course, an advantage in the history of social thought to a work being huge, sprawling, ambivalent and confused. There is a sociological advantage to vagueness and obscurity. The bemused German Smithian, Christian J. Krauss, once referred to the wealth of nations as the Bible of political economy.

6:33In a sense, Professor Krauss spoke wiser than he knew. For in one way the wealth of nations is like the Bible. It is possible to derive varying and contradictory interpretations from various or even the same parts of the book. Furthermore, the very vagueness and obscurity of a work can provide a happy hunting ground for intellectuals, students and followers. To make one's way through an obscure and difficult tract, to weave dimly perceived threads of of a book into a coherent pattern. These are rewarding tasks in themselves for intellectuals. And such a book also provides a welcome, built-in exclusion process, so that only a relatively small number of adepts can bask in their expertise about a work or a system of thought.

7:27In that way, they increase their relative income and prestige and leave other admirers Adam Smith did not found the science of economics, but he did indeed create the paradigm of the British classical school, and it is often useful for the creator of a paradigm to be inchoate and confused, thereby leaving room for disciples who will attempt to clarify Until the 1950s, economists, at least those in the Anglo-American tradition, revered Smith as the founder, and saw the later development of economics as a movement linearly upward into the light, with Smith succeeded by Ricardo and Mill, and then, after a bit of diversion created by the Austrians in the 1870s, Alfred Marshall, establishing neo-classical economics as a neo-Ricardian and hence neo-Smithian discipline.

8:36In a sense, John Maynard Keynes, Marshall's student at Cambridge, thought that he was only filling in the gaps in the Ricardian-Marshallian heritage. To this complacent miasma of Smith worship, Joseph A. Schumpeter's History of Economic Analysis, 1954, came as a veritable blockbuster. Coming from the continental, Walrassian and Austrian traditions, rather than from British classicism, Schumpeter was able, for virtually the first time, to cast a cold and realistic eye upon the celebrated Scott. Writing with With thinly veiled contempt, Schumpeter generally denigrated Smith's contribution and essentially held that Smith had shutted economics off on a wrong road, a road unfortunately different from that of his continental forebears.

9:33Since Schumpeter, historians of economic thought have largely retreated to a fallback position. Smith, it is conceded, created nothing, but he was the great synthesizer and systematizer, the first one to take up all the threads of his predecessors and weave them together into a coherent and systematic framework. But Smith's work was the reverse of coherent and systematic, and Ricardo and Say, his two Two major disciples each set themselves the task of forging such a coherent system out of the Smithian muddle. And furthermore, while it is true that pre-Smithian writings were incisive but sparse, to-ergo, or embedded in moral philosophy, Hutchison, it is also true that there were two general treatises on economics per se before the wealth of nations.

10:32One was Cartillon's Great Essay, which, after Smith, fell into grievous neglect, to be rescued a century later by Jevons. The other, and the first book to use political economy in its title, was Sir James Stewart's 1712-1780, outdated two-volume work, Principles of Political Economy, 1767. Stuart, a Jacobite, who had been involved in Bonnie Prince Charlie's Rebellion, was, for much of his life, an exile in Germany, where he became imbued with the methodology and ideals of German Cameralism. Cameralism was a virulent form of absolutist mercantilism that flourished in Germany in the 17th and 18th centuries.

11:21Cameralists, even more than Western European mercantilists, were not economists at all. That is, they did not analyze the processes of the market, but were technical advisors to rulers on how and in what way to build up state power over the economy. Stuart's principles was in that tradition, scarcely economics, but rather a call for for massive government intervention and totalitarian planning, from detailed regulation of trade, to a system of compulsory cartels, to inflationary monetary policy. His only contribution was to refine and expand previously fleeting and inchoate notions of a labor theory of value, and to elaborate a proto-Marxian theory of inherent class conflict in Society.

12:18Furthermore, Stuart had written an ultra-mercantilist tome just at the time when classical liberal and laissez-faire thought was rising and becoming dominant, at least in Britain and France. Even though Stuart's principles was out of step with the emerging classical liberal zeitgeist, it was no foregone conclusion that the work would have little or no influence. The book was well received, highly respected and sold very well, and five years after its publication in 1772, Stewart won out over Adam Smith in acquiring a post as monetary consultant to the East India Company. One reason that the Schumpeter view of Smith shocked the economics profession is that historians have habitually treated the development of science as a linear and upward march into the truth.

13:20Each scientist patiently formulates, tests and discards hypotheses, and thereby each succeeding one stands on the shoulders of the one who came before. What might be called this Whig Theory of the History of Science has now been largely discarded for the far more realistic Kuhnian Theory of Paradigms. For our purposes, the important point of the Kuhn Theory is that a very few people patiently test anything, particularly the fundamental assumptions or basic paradigm of their theory, and shifts in paradigms can take place even when the new theory is worse than the old. In short, knowledge can be and is lost as well as gained, and science often proceeds in a zigzag rather than linear manner. We might add that this would be particularly true in the social or humane and Brain Sciences. As a result, paradigms and basic truths get lost, and economists, as well as people in other disciplines, can get worse, and not better, over time.

14:34The years may well bring retrogression, as well as progress. Schumpeter had heaved a bombshell into the temple of the Whig historians of economic thought, specifically of the partisans of the Smith-Ricardo-Marshall tradition. We have thus posed our own version of the Das Adam Smith problem. How did so badly flawed a work as the wealth of nations rapidly become so dominant as to blot out all other alternatives? But before considering this question, we must examine the various aspects of Smithian thought in More Detail 2. The Life of Smith Adam Smith was born in 1723 in the small town of Kirkcaldy near Edinburgh.

15:28His father, also Adam Smith, 1679-1723, who died shortly before he was born, was a distinguished Judge Advocate for Scotland, and later Controller of Customs at Kirkcaldy, who had married into a well-to-do local landowning family. Young Smith was therefore raised by his mother. The town of Kirkcaldy was militantly Presbyterian, and in the borough school in the town he met many young Scottish Presbyterians, one of whom, John Drysdale, was to become twice moderator of the General Assembly of the Church of Scotland. Smith indeed came from a customs official family.

16:13In addition to his father, his cousin Hercules Scott Smith served as collector of customs at Kirkcaldy and his guardian, again named Adam Smith, was to become customs collector at Kirkcaldy as well as inspector of customs for the Scottish outports. Finally, still another cousin named Adam Smith, later served as customs collector at Aloha. From 1737 to 1740, Adam Smith studied at Glasgow College, where he fell under the spell of Francis Hutchison and imbibed the excitement of the ideas of classical liberalism, natural law and political economy. In 1740, Smith earned an MA with great distinction at the University of Glasgow.

17:03His mother had baptized Adam in the Episcopalian faith, and she was eager for her son to become an Episcopalian minister. Smith was sent to Balliol College, Oxford, on a scholarship designed to nurture future Episcopalian clerics, but he was unhappy at the wretched instruction in the Oxford of of His Day and returned after six years at the age of 23 without having taken holy orders. Despite his baptism and his mother's pressure, Smith remained an ardent Presbyterian and returning to Edinburgh in 1746, he remained unemployed for two years. Finally in 1748, Henry Hume, Lord Cames, a judge and a leader of the liberal Scottish The British Enlightenment, and a cousin of David Hume, decided to promote a series of public lectures in Edinburgh to educate lawyers.

18:01Along with Smith's childhood friend, James Oswald of Dunicare, Keynes got the Philosophical Society of Edinburgh to sponsor Smith in several years of lectures on natural law, literature, liberty and commercial freedom. In 1750, Adam Smith obtained the chair in logic at his alma mater, the University of Glasgow, and he found no difficulty in the requisite signing of the Westminster Confession before the Presbytery of Glasgow. Finally, in 1752, Smith had the satisfaction of ascending to his beloved teacher, Hutchison's, Chair of Moral Philosophy at Glasgow, where he was to remain for 12 years.

18:47Smith's Edinburgh and Glasgow lectures were very popular, and his major stress was on the system of natural liberty, on the system of natural law and laissez-faire, which he was then advocating with far less qualification than later in his more cautious Wealth of Nations. He also managed to convert many of the leading merchants of Glasgow to this exciting new creed. Smith also plunged into the social and educational associations that were beginning to be formed by the moderate Presbyterian clergy, university professors, literati and attorneys in both With Glasgow and Edinburgh It is likely that David Hume attended Smith's Edinburgh lectures in 1752, for the two became fast friends shortly thereafter.

19:41Smith was a founding member of the Glasgow Literary Society the following year. The Society engaged in high-level discussions and debates and met diligently every Thursday evening from November to May. Hume and Smith were both members, and at one of the first sessions, Smith read an account of some of Hume's recently printed political discourses. Oddly enough, the two friends, clearly the brightest members of the society, were extremely diffident and never said a word in any of the discussions. Despite his diffidence, Smith was a busy and inveterate clubman, becoming a leading member member of the Philosophical Society of Edinburgh and of the Select Society, Edinburgh, which flourished in the 1750s, and met weekly, bringing together the moderate power elite from the clergy, university men and the legal profession.

20:41Smith was also an active member of the Political Economy Club of Glasgow, the Oyster Club, of Edinburgh, Simpsons Club of Glasgow, and the Poker Club, Edinburgh, founded by his friend Adam Ferguson, professor of moral philosophy at the University of Edinburgh, specifically to promote the martial spirit. As ifivid this were not enough, Adam Smith was one of the leading contributors and editors of the Abortive Edinburgh Review, 1755 and 1756, dedicated largely to the defense of of their friends Hume and Kames against the hardcore evangelical Calvinist clergy of Scotland. The Edinburgh Review was founded by the brilliant young lawyer Alexander Wedderburn, 1733-1805, who was to become a judge, a member of Parliament in England, and finally Lord Chancellor, 1793-1801.

21:44Wetterburn was so latitudinarian as to favor the licensing of brothels. Other luminaries on the Edinburgh Review were top moderate leaders. The politician John Jardine, 1715-1760, whose daughter married Lord Cain's son, the powerful Reverend William Robertson and the Reverend Hugh Blair, 1718-1800, Professor of Rhetoric at the University of Edinburgh. The intensity of Adam Smith's Presbyterianism, even though not fundamentalist, may be seen in his relationship to Hugh Blair. Blair, the minister at the High Kirk, Greyfriars, was in constant hot water with the Orthodox Calvinist clergy, who repeatedly denounced him to the Glasgow and Edinburgh Presbyteries.

22:38In The Wealth of Nations, Adam Smith delivered the following encomium to the Presbyterian clergy. There is scarce, perhaps, to be found anywhere in Europe a more learned, decent, independent and respectable set of men than the greater part of the Presbyterian clergy of Holland, Geneva, Switzerland and Scotland, to which his old friend Blair, though himself a leading After Smith published his Moral Philosophy and his Theory of Moral Sentiments, 1759, his increasing fame won him a highly lucrative position in 1764 as tutor to the young Duke of Buccleuch.

23:32For three years of tutoring, which he spent with the young duke in France, Smith was awarded a lifetime annual salary of 300 pounds, twice his annual salary at Glasgow. In three pleasant years in France, he made the acquaintance of Turgot and the physiocrats. His tutorial task accomplished, Smith returned to his home town of Kirkati, where, secure Over in his lifetime stipend, he worked for ten years to complete the Wealth of Nations, which he had started at the beginning of his stay in France. The fame of the Wealth of Nations led his proud erstwhile pupil, the Duke of Buccleu, to help secure for Smith in 1778 the highly paid post of Commissioner of Scottish Customs at Edinburgh.

24:24With a pay of 600 pounds per annum from his government post, which he kept until the day of his death in 1790, added to his handsome lifetime pension, Adam Smith was making close to a thousand pounds a year, a princely revenue, as one of his biographers has described it. Even Smith himself wrote in this period that he was fully as affluent as I could wish. He regretted only that he had to attend to his customs post, which took time away from his literary pursuits. And yet his regrets were scarcely profound. In contrast to most historians who have treated Smith's customs post embarrassingly as virtually a no-show sinecure in reward for intellectual achievements, recent research has shown that Smith worked full-time at his post, often chairing the daily meetings of the Board of Customs Commissioners.

25:24Moreover, Smith sought the appointment and apparently found the position enjoyable and relaxing. It is true that Smith spent little time or energy on scholarship and writing after his appointment, but there were leaves of absence available which Smith showed no interest in pursuing. Furthermore, the groundwork for Smith's quest for the appointment was not so much his intellectual attainments as a reward for his advice as consultant on taxes and the budget to the British government since the mid-1760s. 3. The Division of Labour It is appropriate to begin a discussion of Smith's Wealth of Nations with the Division of Labor, since Smith himself begins there, and since for Smith this division had crucial and decisive importance.

26:22His teacher, Hutchison, had also analyzed the importance of the Division of Labor in the developing economy, as had Hume, Turgot, Mandeville, James Harris and other economists. But for Smith, the division of labor took on swollen and gigantic importance, putting into the shade such crucial matters as capital accumulation and the growth of technological knowledge. As Schumpeter has pointed out, never for any economist before or since did the division of labor assume such a position of commanding importance. But there are more troubles in the Smithian division of labor than his exaggerating its importance.

27:07The older and truer perception of the motive power for specialization and exchange was simply that each party to an exchange, which is necessarily two party and two commodity, benefits, or at least expects to benefit, from the exchange. Otherwise the trade would not take place. But Smith unfortunately shifts the main focus from mutual benefit to an alleged irrational and innate propensity to truck, barter and exchange, as if human beings were lemmings, determined by forces external to their own chosen purposes. As Edwin Canan pointed out, Smith took this tack because he rejected the idea of innate differences in natural talents and abilities, which would naturally seek out different specialized occupations.

28:05Smith instead took the egalitarian environmentalist position, still dominant today in neoclassical economics, that all laborers are equal, and therefore the differences between them can only be the result, rather than a cause of the system of the division of labor. In addition, Smith failed to apply his analysis of the division of labor to international trade, where it would have provided powerful ammunition for his own free trade policies. It was to be left to James Mill to make such an application in his excellent theory of comparative advantage. Furthermore, domestically, Smith placed far too much importance on the division of labor within a factory or industry, Industry, while neglecting the more significant division of labor among industries.

29:01But if Smith had an undue appreciation of the importance of the division of labor, he paradoxically sowed great problems for the future by introducing the chronic modern sociological complaint about specialization that was picked up quickly by Karl Marx and has been advanced to a High Art by Socialist Gripers about alienation. There is no gainsaying the fact that Smith totally contradicted himself between book one and book five of The Wealth of Nations. In the former, the division of labor alone accounts for the affluence of civilized society, and indeed the division of labor is repeatedly equated with civilization throughout the book.

29:49And yet, while in Book One the division of labor is hailed as expanding the alertness and intelligence of the population, in Book Five it is condemned as leading to their intellectual as well as moral degeneration, to the loss of their intellectual, social and martial virtues. There is no way that this contradiction can be plausibly reconciled. Adam Smith, though himself a plagiarist of considerable dimensions, also had a Columbus complex, often accusing other people unfairly of plagiarizing him. In 1755 he actually laid claim to having invented the concept of laissez-faire, or the system of natural liberty, asserting that he had taught these principles since his Edinburgh lectures in 1749.

30:45may be, but the claim ignores previous such expressions by his own teachers, as well as by Grotius and Pufendorf, to say nothing of Bois-Gilbert and the other French laissez-faire thinkers of the late seventeenth century. In 1769, the contentious Smith levied a plagiarism charge against Principal William Robertson upon the occasion of the publication of the latter's History of the Reign of Charles V. It is not known what the topic of the literary theft was supposed to be and it is difficult to guess considering the remoteness from Smith's work of the theme of the Robertson book. The most famous plagiarism charge hurled by Smith was against his friend Adam Ferguson on the question of the division of labor.

31:37Professor Hamowy has shown that Smith did not break with his old friend, as had previously been thought, because of Ferguson's use of the concept of the division of labor in his essay on the history of civil society in 1767. In view of all the writers who had employed the concept earlier, this behavior would have been ludicrous, even for Adam Smith. The conjecture is that the break came in the early 1780s because of Ferguson's discussion at their club of what would later be published as part of his Principles of Moral and Political Science in 1792. For in the principles, Ferguson summed up the pin factory example that constituted the single most famous passage in The Wealth of Nations.

32:30Roth had pointed to a small pin factory where ten workers, each specializing in a different aspect of the work, could produce over 48,000 pins a day, whereas if each of these ten had made the entire pin on his own, they might not have made even one pin a day, and certainly not more than twenty. In that way, the division of labor enormously multiplied the productivity of each worker. In his Principles, Ferguson wrote, a fit assortment of persons, of whom each performs but a part in the manufacture of a pin, may produce much more in a given time than perhaps double the number, of which each was to produce the whole, or to perform every part in the construction of that diminutive article.

33:24When Smith upbraided Ferguson for not acknowledging Smith's precedence in the pin factory example, Ferguson replied that he had borrowed nothing from Smith, but indeed that both had taken the example from a French source where Smith had been before him. There is strong evidence that the French source for both writers was the article on pins in in the Encyclopedia, 1755, since that article mentions 18 distinct operations in making a pin, the same number repeated by Smith in the Wealth of Nations, although in English pin factories 25 was the more common number of operations. Thus Adam Smith broke up a long-standing friendship by unjustly accusing Adam Ferguson of plagiarizing The Rev. Carlisle's comment that Smith had some little jealousy in his temper seems a vast understatement, and we are informed by his obituary notice in the 1790 monthly review that Smith lived in such constant apprehension of being robbed of his ideas that if he saw Smith's use of an example of a small French pin factory, rather than a larger British one, highlights a curious fact about his celebrated wealth of nations.

35:13The renowned economist seems to have had no inkling of the Industrial Revolution going on all about him. Although he was a friend of Dr. John Roebuck, the owner of the Caron Iron Works, whose opening in 1760 marked the beginning of the Industrial Revolution in Scotland, Smith showed no indication that he knew of its existence. Although he was at least an acquaintance of the great inventor, James Watt, Smith displayed no knowledge whatever of some of Watt's leading inventions. He made no mention in his famous book of the canal boom, which had begun in the early 1760s, of the very existence of the burgeoning cotton textile industry, or of pottery, or of the new methods of making beer.

36:02There is no reference to the enormous drop in travel costs that the new turnpikes were bringing about. In contrast, then, to those historians who praised Smith for his empirical grasp of contemporary economic and industrial affairs, Adam Smith was oblivious to the important economic events around him. Much of his analysis was wrong, and many of the facts he did include in The Wealth of Nations were obsolete and gathered from books 30 years old. 4. Productive vs. Unproductive Labor One of the physiocrats more dubious contributions to economic thought was their view that only agriculture was productive, that only agriculture contributed a surplus to the economy. Smith, heavily influenced by the physiocrats, retained the unfortunate concept of productive labor but expanded it from agriculture to material goods in general.

37:12For Smith, then, labor on material objects was productive, but labor on, say, consumer services on immaterial production was unproductive. Smith's bias in favor of material objects amounted to a bias in favor of investment in Capital Goods, since a stock of capital goods, by definition, has to be embodied in material objects. Consumer goods, on the other hand, either consist of immaterial services, or they get used up, consumed, in the process of consumption. Smith's imprimatur on material production, therefore, was an indirect way of advocating Amassing Investment in an Accumulation of Capital Goods as Against the Very Goal of Producing Capital Goods, Increased Consumption When discussing exports and imports, Smith realized full well that there was no point to amassing intermediate objects except that they eventually be consumed, that the only goal of production is consumption.

38:23But as Professor Roger Garrison has pointed out, and as we shall see further on the question of usury laws, Adam Smith's Presbyterian conscience led him to value the expenditure of labor per se for its own sake and led him to balk at free market time preferences between consumption and saving. Clearly, Smith wanted far more investment towards future production and less present consumption than the market was willing to choose. One of the contradictions of this position, of course, is that accumulating more capital goods at the expense of present consumption will eventually result in a higher standard of living, unless Smith prepared to counsel a perpetual and accelerated shift toward more More and More Never to be Consumed Means of Production In Book Two of The Wealth of Nations, Smith opines that labor on material objects is productive, while other labor is not, because it does not fix or realize itself in any particular subject, which endures after that labor is passed, and for which an equal quantity of

39:40labor could afterward be purchased. Included in immaterial and hence unproductive labor are servants, churchmen, lawyers, physicians, men of letters of all kinds, players, buffoons, musicians, opera singers, opera dancers, etc. To Smith, the important point was that the work of all unproductive laborers perishes Smith writes that productive labor adds to the value of the subject on which it is bestowed, whereas unproductive labor does not.

40:35Another way of putting the fact that labor on services is not embodied in any particular subject. Productive labor, moreover, allegedly creates a surplus for profit in manufacturing. Adam Smith's lingering physiocratic bias was also shown in his preposterous assertion that agriculture is a far more productive industry than manufacturing, because in agriculture Nature works alongside man and provides extra rent for landlords as well as profit for capitalists. In addition to other fallacies, Smith here failed to realize that nature in the form of ground land collaborates in all activities of man, not just agriculture, and that all Several activities, including manufacturing, will therefore yield ground rent to landowners.

41:33In his thorough and searching critique of Adam Smith, Edwin Cannon speculated that Smith, if pressed, would probably have admitted that the declamation, harangues and tunes have a value. Smith oddly identified the buildup of material capital goods with annual production. On the latter, as Kennan points out, the durability of the things produced by labor is in reality of no significance. The declamations, harangues and tunes are just as much a part of the annual produce as champagne or boots. Yet Smith, in Book II, excludes all production of immaterial services from the annual product, which is allegedly produced entirely by the productive laborers, who in turn maintain not only themselves, but all the unproductive classes of labor as well.

42:32In a witty and charming passage, Cannon then comments, People have always been rather apt to imagine that the class which they happen to think Ludwig the most important maintains all the other classes with which it exchanges commodities. The landowner, for instance, considers or used to consider his tenants as his dependents. All consumers easily fall into the idea that they are doing a charitable act in maintaining a multitude of shopkeepers. Employers of all kinds everywhere believe that the employed ought to be grateful for for their Wages, while the employed firmly hold that the employer is maintained entirely at their expense.

43:19So the physiocrats alleged that the husbandman maintained himself and all other classes, and Adam Smith alleged that the husbandman, the manufacturer and the merchant maintained themselves and all other classes. The physiocrats did not see that the husbandman was maintained by the manufacturing industries of thrashing, milling and baking, just as much as the millers or the tailors are maintained by the agricultural industries of plowing and reaping. Adam Smith did not see that the manufacturer and merchant are maintained by the menial services of cooking and washing, just as much as the cooks and laundresses are maintained by the manufacturer of bonnets and the import of tea.

44:09It is not just durable objects, however, that Adam Smith was interested in. It was durable capital goods. Durable consumer goods like houses were, again, for Smith, unproductive, although he grudgingly conceded that a house is no doubt extremely useful to the person who lives in it. But it is not productive, wrote Smith, because if it is to be let to a tenant for rent, as If the house itself can produce nothing, the tenant must always pay the rent out of some other revenue, which he derives either from labor or stock, capital or land. Again, Kennan provides the proper repost.

44:55It did not occur to Adam Smith to reflect that if a plow is let for rent, as a plow itself can produce nothing, the tenant must always pay the rent out of some other revenue. Adam Smith's bias against consumption and in favor of saving and investment is summed up in Professor Rima's analysis. It is clear from his third chapter in Book II on the accumulation of capital or of productive and unproductive labor, that he is concerned with the effect of using savings to satisfy the desire for luxuries by those who are prodigal, instead of channeling them into uses that will enhance the supply of fixed or circulating capital.

45:43He is in effect arguing that savings should be used in such a way that they will create a flow of income and new equipment, and that failure to use savings in this manner is an impediment to economic growth. Perhaps. But it also means that Smith was not content to abide by free market choices between growth on the one hand and consumption on the other. Professor Edwin West, a modern admirer of Smith, who generally portrays the Scotsman as an advocate of laissez-faire, admits Smith's bias. Yet Smith, like a prudent steward of a Scottish aristocrat's estate, could hardly disguise a strong personal preference for much private frugality and therefore for productive labor in the interests of the nation's future accumulation.

46:40He then proceeds to concede implicitly Professor Garrison's insight that Smith exhorted us to negative or at least zero time preference. Citing Smith's theory of moral sentiments, West notes that the virtue of frugality commands the esteem of Smith's alter ego, man's innate moral sense, the impartial spectator. Quoting from Smith, The spectator does not feel the solicitations of our present appetites. To him, the pleasure which we are to enjoy a week hence, or a year hence, is just as interesting as that which we are to enjoy this moment. We might note that the lofty refusal to discount future satisfactions in favor of the present, That is, the rejection of positive time preference is all too easy of any impartial spectator.

47:39But is the impartial spectator truly human, or is he simply a floating wraith who does not participate in the human condition and therefore whose insight can be brusquely dismissed? Adam Smith's Calvinistic scorn of consumption can be seen in his attack on dancing as primitive The Theory of Money and Credit

48:29together the powers of generation. Smith furthermore favored low and criticized high profits, because high profits induce capitalists to engage in excessive consumption, and since large capitalists set an influential example for others in society, it is all the more important for them to keep to the path of thrift and industry. Thus, besides all the bad effects to the country in general, which have already been mentioned as necessarily resulting from a high rate of profit, there is one more, fatal perhaps, than all these put together, but which, if we may judge from experience, is inseparably connected with it.

49:16The high rate of profit seems everywhere to destroy that parsimony which in other circumstances is natural to the character of the merchant. When profits are high, that sober virtue seems to be superfluous, and expensive luxury to suit better the affluence of his situation. Because of the influence of the example of the higher orders, Smith adds, if his employer is attentive and parsimonious, the workman is very likely to be so too. But if the master is dissolute and disorderly, the servant who shapes his work according to the pattern which his master prescribes to him will shape his life according to the example which he sets him.

50:04Accumulation is thus prevented in the hands of all those who are naturally the most disposed to accumulate. The capital of the country, instead of increasing, gradually dwindles away. But if Adam Smith was excessively in favor of capital investment as against consumption, he at least was sound in realizing that capital investment was important in economic development, and that saving was the necessary and sufficient condition of such investment. The only way to increase capital, then, is by private savings or thrift. Thus, Smith wrote, whoever saves money, as the phrase is, adds proportionately to the general mass of capital.

50:53The world can augment its capital only in one way, by parsimony. Savings and not labor is the cause of accumulation of capital, and such savings promptly puts into motion an additional quantity of industry, labor. The saver then spends as readily as the spendthrift, except that he does so to increase capital and eventually benefit the consumption of all. Hence every frugal man is a public benefactor. All this was a pale shadow of the scintillating and creative work of Turgot with his emphasis on time, the structure of production, and time preference, and it was probably cribbed from Torgot to Boot.

51:44But at least it was sound, and it stamped its imprint indelibly on classical economics. As Schumpeter put it, in discussing what he calls the Torgot-Smith theory of saving and investment, Torgot then must be held responsible for the first serious analysis of these matters, As A. Smith must, at the least, with having it inculcated into the minds of economists. Finally, apart from the Marxists, even the abject Smithians of today reject, or at least dismiss, the master's productive versus unproductive labor distinction. Characteristically, however, Smith was not even clear and consistent in his fallacies.

52:33His presentation in Book One of The Wealth of Nations contradicts Book Two. In Book One he properly states that every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life, a phrase almost directly lifted from Catillon. But in that case, of course, there is no difference in productivity between material objects and and Immaterial Services, all of which contribute to such necessaries, conveniences and amusements. And indeed Smith's discussion of wages proceeds in Book 1 as if there were no distinction between productive and unproductive work.

53:215. The Theory of Value From Smith's doctrine on value was an unmitigated disaster, and it deepens the mystery in explaining Smith. For in this case not only was Smith's theory of value a degeneration from his teacher Hutchison, and indeed from centuries of developed economic thought, but it was also a similar degeneration from Smith's own previous unpublished lectures. In Hutchison, and for centuries, from the late scholastics onward, the value and price of a product were determined first by its subjective utility in the minds of the consumers, and second by the relative scarcity or abundance of the good being evaluated.

54:12The more abundant any given good, the lower its value. The scarcer the good, the higher its value. All that this tradition needed to complete its explanation was the marginal principle of the 1870s, a focus on a given unit of the good, the unit actually chosen or not chosen on the market. But the rest of the explanation was in place. In his lectures, furthermore, Smith had solved the value paradox neatly, in much the same way as had Hutchison and other economists for centuries. Why is water so useful and yet so cheap, while a frippery like diamonds is so expensive?

54:57The difference, said Smith in his lectures, was their relative scarcity. It is only on account of the plenty of water that it is so cheap as to be got for the lifting, and on account of the scarcity of diamonds that they are so dear. Furthermore, with different supply conditions, the value and price of a product would differ drastically. Thus Smith points out in his lectures that a rich merchant, lost in the Arabian desert, would value water very highly, and so its price would be very high. Similarly, if the quantity of diamonds could, by industry, be multiplied, the price of diamonds on the market would fall rapidly.

55:43But in the wealth of nations, for some bizarre reason, all this drops out and falls away. Suddenly, only ten or a dozen years after the lectures, Smith finds himself unable to solve the value paradox. In a famous passage in Book 1, Chapter 4 of Wealth, Smith sharply and hermetically separates and sunders utility from value and price, and never the twain shall meet. The word value has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys.

56:28The one may be called value in use, the other value in exchange. The things which have the greatest value in use have frequently little or no value in exchange, and on contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water, but it will purchase scarce anything. Scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use, but a very great quantity of other goods may frequently be had in exchange for it. And that is that.

57:15No mention of the solution of the value paradox by stressing relative scarcities. Indeed, scarcity, that concept so fundamental and crucial to economic theory, plays virtually have no role in the wealth of nations. And with scarcity gone as the solution to the value paradox, subjective utility virtually drops out of economics, as well as does consumption and consumer demand. Utility can no longer explain value and price, and the two-centered concepts will reappear in later generations as left-wingers and socialists happily prayed about the crucial difference between production for profit and production for use, the air of the Smithian emphasis on the alleged gulf between value in use and value in exchange.

58:13And since economic science was reborn after Adam Smith, since all previous economists were cast into limbo by prevailing fashions of thought, the entire tradition of subjective utility, scarcity as determinants of value and price, a tradition dominant since Aristotle and the medieval and Spanish scholastics, a tradition that had continued down through writers in 18th century France and Italy. That great tradition gets poured down the Orwellian memory hole by Adam Smith's fateful decision to discard even his own previous concepts. Although Samuel Bailey almost restored it, the great tradition was not to be fully resurrected until its independent rediscovery by the Austrians and other marginalists in the 1870s.

59:09Adam Smith has a lot to answer for at the bar of history. Paul Douglas put it eloquently in a commemorative volume for the Adam Smith sesquicentennial. Smith helped to divert the writers of English classical school into a cul-de-sac from which they did not emerge, in so far as their value theory was concerned, for nearly a century. And we can understand the anguish of Professor Emil Kauder when, after lamenting the sinking into oblivion of the great French and Italian economists of the 18th century, he wrote, Yet it was the tragedy of these writers that they wrote in vain. They were soon forgotten. No scholar appeared to make out of these thoughts the new science of political economy.

1:00:01Instead, the father of our economic science wrote that water has a great utility and a small value. With these few words, Adam Smith had made waste and rubbish out of the thinking of 2,000 years. The chance to start in 1776 instead of 1870, with a more correct knowledge of value principles, had been missed. How could Smith have made such a colossal blunder? In effect, he turned away from his almost sole emphasis on explaining market price in the lectures to another concept which for him took on overriding importance, the natural price, or what might be called the long-run normal price.

1:00:52This concept, similar to Cantillon's intrinsic value, or Hutchison's fundamental value, had appeared in the lectures, but occupied a minor role, as it did in the work of these other economists. But suddenly, the natural price and its alleged determinants now became more important, more truly real than the market price of the real world that had always been the prime focus of economists. Value and price theory shifts because of Adam Smith's unfortunate and drastic change of focus in the wealth of nations from prices in the real world to a mystical non-existent price in the never-never land of long-run equilibrium.

1:01:42But this alleged natural price is neither more real than nor equally real as the current market price. Price. It is, in fact, not real at all. Only the market price is the real price. At best, the long-run price is useful in providing a vital clue to the direction of price and production changes in the real world. But the long-run price is never reached, and never can be reached, for it keeps shifting as Underlying Supply and Demand Forces Continually Change. The long-run normal price is important but only for explaining the directional tendencies and the underlying architectonic structure of this economy, and also for analysis of how uncertainty affects real-world income and economic activity.

1:02:42The virtually exclusive classical and neoclassical absorption in the unreal long run to the neglect and detriment of analyzing real world prices and economic activity, shunted economic thought onto a long, fallacious and even tragic detour from which it has not yet fully recovered. Another terrible loss inflicted on economic thought by Adam Smith was his dropping out Out of the concept of the entrepreneur, so important to the contributions of Cantillon and Turgot, the entrepreneur disappeared from British classical thought, never to be resurrected until some of the continental thinkers and especially the Austrians.

1:03:31But the point is that there is no room for the entrepreneur if the focus is to be on from the Unchanging Certain World of Long-Run Equilibrium. Before the wealth of nations, economists had always concentrated on the market price and had seen readily that it was determined by the forces of supply and demand, and hence of utility and scarcity. Indeed, while David Hume knew nothing of utility and spoke of labor as the source of value, He was far sounder on value theory than his close friend Adam Smith. On receiving a copy of the newly published Wealth of Nations, Hume, on his deathbed, was able to write to his friend on one important criticism.

1:04:21I cannot think that the rent of farms make any part of the price of produce, but that the price is determined altogether by the quantity and the demand. In short, compared to Smith, Hume was in the continental tradition and almost proto-Austrian. But if Smith stressed the long run, what is supposed to determine the non-real concept of a natural or long-run normal price? Following up unfortunate hints of his 18th century predecessors, Smith concluded that The natural price is equal to, and determined by, costs of production, a concept that had only occupied a fitful and subordinate place in economic thought since the medieval scholastics.

1:05:15Not that the long-run normal price, or as we now call it the equilibrium price, is nonsense. The equilibrium price is the long-run tendency of the market price. As Adam Smith indeed saw, if the market price is higher than the long-run equilibrium, then extra gains will be made and resources will flow into this particular industry, until the market price falls to reach equilibrium. Conversely, if the market price is lower than equilibrium, the resulting losses will drive The Equilibrium Concept is highly useful in pointing to the direction in which the market will move, but equilibrium will only be reached, in reality, if the data of the market are magically frozen, that is, if the values, resources and technological knowledge on the market continue to remain precisely the same.

1:06:23Cost of production is defined by Adam Smith as total expenses paid to factors of production, that is, wages, profits and rent. More specifically, in what was to become the famous classical triad, Smith reasoned that there were three types of factors of production, labor, land and capital. Labor receives wages, land earns rent and capital earns profits, actually long run rather than short run rates of return, or what might be called the natural rate of interest.

1:07:19In equilibrium, which Smith seems to have believed was more real and hence far more important than the actual market price, the wage rate equals the average or the natural rate, and the other returns similarly equal the natural rent and the long-run average rate of profit. There is one striking fallacy in his analysis of cost that Adam Smith shared, though in in an aggravated fashion with earlier writers. Whereas market price is changeable and ephemeral, cost is somehow determined objectively and exogenously, that is, from outside the world of market economic activity.

1:08:07But cost is not intrinsic or given. On the contrary, it itself is determined, as the Austrians were later to point out, by the value foregone in using resources in production. This value, in turn, is determined by the subjective valuations that consumers place on those products. In brief, rather than cost in some fundamental sense determining value, cost at any and all Times is itself determined by the subjective value or expected value that consumers place on the various products. So that, even if we might say that prices will equal cost of production in long-run equilibrium, there is no reason to assume that such costs determine long-run price.

1:09:03On the contrary, expected consumer valuation determines what the value of costs will be on the market. Cost is strictly dependent on utility, in the short and long runs, and never the other way around. Another grave problem with all cost of production theory is that it necessarily abandons any Any attempt to explain the pricing of goods and services that have no cost because they are not produced, goods that are simply there or were produced in the past but are unique and not reproducible, such as artworks, jewelry, archaeological discoveries, etc.

1:09:50Similarly, immaterial consumer services such as the prices of entertainment, concerts, Physicians, domestic servants, etc. can scarcely be accounted for by costs embodied in a product. In all these cases, only subjective demand can explain the pricing or the fluctuations in those prices. But this analysis scarcely exhausts Smith's sins in discussing the central concept in economics, the theory of value. For side by side with the standard cost of production analysis as equaling wages plus rents plus profits, another new and far more bizarre theory was set forth.

1:10:39In this alternative view, the relevant cost of production that determines equilibrium price is simply the quantity of labor embodied in its production. It was, indeed, Adam Smith, who was almost solely responsible for the injection into economics of the labor theory of value, and hence it was Smith who may plausibly be held responsible for the emergence and the momentous consequences of Marxism. Side by side and unintegrated with Smith's cost of production theory of the natural price Lay His New Quantity of Labor Pain Theory Thus, the real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.

1:11:35What everything is really worth to the man who has acquired it and who wants to dispose To use of it or exchange it for something else is the toil and trouble which it can save to himself and which it can impose upon other people. What is bought with money or with goods is purchased by labor, as much as what we acquire by the toil of our own body. They contain the value of a certain quantity of labor which we exchange for what is supposed at the time to contain the value of an equal quantity. Thus goods exchange on the market for equal quantities which they contain of labor hours, at least in their real long-run prices.

1:12:28Immediately Smith recognized that he faced a profound difficulty. If labor quantity is the source and measure of all value, how can the mere quantity of labor hours be equated to the quantity of labor pain or labor toil? Surely they are not automatically equal. As Smith himself admitted, in addition to labor time, the different degrees of hardship endured or ingenuity exercised must likewise be taken into account. Yet such equating is not easy, for indeed there may be more labor in an hour's hard work than in two hours easy business, or in an hour's application to a trade which it cost ten years labor to learn than in a month's industry at an ordinary and obvious employment.

1:13:25How does this crucial equating take place? According to Smith, by the higgling and bargaining of the market, bringing them into a rough sort of equality. Yet here, Smith fell into an iron trap of circular reasoning. For, like Ricardo and Marx after him, he attempted to explain prices and values by the quantity of labor, and then appealed to the settling of values on the market to determine what The quantity of labor is, by weighting it by differences in the degree of labor hardship and toil. Smith tried to escape such circularity by his egalitarian assumption, still held in orthodox neoclassical economics, that all laborers are equal, and that hence wages, at least in the natural long run, will all be equal, or rather will be equal for equal quantities of labor toil among all the workers.

1:14:29According to Smith, competition on the market will tend to equate wages per unit of sacrifice or labor toil. As Douglas put it, Smith believed he had established the fact that equal units of labor in the sense of disutility were at any one time compensated for by equal amounts of money wages. Thus Smith opined in an 18th century egalitarian way that the difference between the most dissimilar characters, between a philosopher and a common street porter, seems to arise not so much from from Nature as from Habit, Custom and Education. There are no unique individuals and irreducible differences between people.

1:15:20In this reductionist view, now active again in the 20th century, the mind of a human being is merely a tabula rasa on which external environment fills in the content. Hence, according to Smith, skilled labor earns more than unskilled merely to compensate for years of apprenticeship and training, when earnings were much lower, so that their labor hours and toil, and hence wages, would be equalized over a lifetime. Wages in occupations which are active in only part of the year should be higher to compensate for the fewer days of work, so that annualized incomes would be equal. Other things being equal, furthermore, workers in unpleasant or dangerous occupations would receive higher wages to compensate them for the higher labor sacrifice, while prestigious occupations would receive lower wages since their sacrifice or unpleasantness is lower.

1:16:25While all these distinctions make some sense and have to be taken into account in any theory of wages, they founder on the a priori assumption that every person's mind is a uniform tabula rasa. Once enter the realistic assumption of innate differences in talent, and the egalitarian leveling of wage rates to equal units of sacrifice, assuming, of course, that the latter could be measured, falls to the ground. As it is, Smith ran into considerable difficulty in explaining why prestigious occupations, far from earning low wages in the real world, actually earn higher wages than the average.

1:17:14When discussing the high income physician or attorney, for example, he lamely fell back on the implication that they were positions of great trust, and, therefore, presumably faced onerous and painful responsibilities to their clients and were compensated thereby. His other attempt to rationalize the high incomes of attorneys was to make the dubious assumption that the average income in such occupations was lower than in others, Since a flood of people are attracted by the glittering prizes of very high incomes, accruing to the few top people in the profession. Adam Smith, in addition, muddied the waters still further by putting forward, side by side with the labor cost theory of value, the very different labor command theory.

1:18:10The labor command theory states that the value of a good is determined not by the quantity of labor units contained in it, the labor theory of value, but by the amount of labor that can be purchased by the good. Thus, the value of any commodity to the person who possesses it is equal to the quantity of labor which it enables him to purchase or command. If in the real world the price of every commodity precisely equaled the amount of labor units contained in its production, then the two quantities, the labor cost and the labor command of a good, would indeed be identical.

1:18:57But if rents and profits, that is, interest, are included in cost, then the price or relative Purchasing power of each good would not be equal to the labor cost. Labor cost and labor command for each good would differ. In his typically purblind way, Adam Smith did not perceive the contradiction between these two labor theories in a world where rent and profits exist. As indeed, he did not seem to see the difference between the labor and the cost of production and Theories of Value. Ricardo was to see the problem and struggle with it in vain, while Marx tried to resolve it by his theory of surplus value going to the non-workers in the form of rent and profits, a theory that foundered on Marx's attempt to reconcile two contradictory propositions, The Labor Cost or Quantity of Labor Theory of Value and the Acknowledged Tendency Toward an Equalization of Profit Rates on the Market.

1:20:08For as we shall see further in the Treatment of Marx, chapters 9 through 13 in volume 2, the surplus value of profits out of labor should be greater in labor intensive than in Capital Intensive Industries, and yet profits tend to equalize everywhere. Paul Douglas, properly and with rare insight, noted that Marx was, in this matter, simply a Smithian-Ricardian trying to work out the theory of his masters. Marx has been berated by two generations of orthodox economists for his value theory. The most charitable of the critics have called him a fool, and the most severe have called him a knave for what they deem to be transparent contradictions of his theory.

1:21:01Curiously enough, these very critics generally commend Ricardo and Adam Smith very highly. Yet the sober facts are that Marx saw more clearly than any English economist the differences was between the labor cost and the labor command theories, and tried more earnestly than anyone else to solve the contradictions which the adoption of a labor cost theory inevitably entailed. He failed, of course, but with him Ricardo and Smith failed as well. The failure was a failure not of one man, but of a philosophy of value, and the roots Parts of the ultimate contradiction made manifest in the third volume of Das Kapital lie embedded in the first volume of The Wealth of Nations.

1:21:54Adam Smith also gave hostage to the later emergence of socialism by his repeatedly stated view that rent and profit are deductions from the produce of labor. In the primitive world, he opined, the whole produce of labor belongs to the laborer. But as soon as stock, capital, is accumulated, some will employ industrious people in order to make a profit by the sale of the materials. Smith indicates that the capitalist, the undertaker, reaps profits in return for the risk and for interest on the investment for maintaining the workers until the product is sold, so that the capitalist earns profit for important functions.

1:22:43He adds, however, that, in this state of things, the whole produce of labor does not always belong to the laborer. He must, in most cases, share it with the owner of the stock who employs him. By using such phrases and by not making clear why laborers might be happy to pay capitalists for their services, Smith left the door open for later socialists who would call for restructuring institutions so as to enable workers to capture their whole product. This hostage to socialism was aggravated by the fact that Smith, unlike the later Austrian in School did not demonstrate logically and step by step how industrious and thrifty people accumulate capital out of savings.

1:23:36He was content simply to begin with the alleged reality of a minority of wealthy capitalists in society, a reality which later socialists were, of course, not ready to endorse. Roth was even less kindly to the role of landlords, where he recognized no economic function whatever that they might perform. In pungent passages he writes that, as soon as the land of any country has all become private property, the landlords like to reap where they never sowed, and demand a rent even for its natural produce. And again, as soon as the land becomes private property, the landlord demands a share of almost all the produce which the laborer can either raise or collect from it.

1:24:30There is no hint of recognition here that the landlord performs the vital function of allocating the land to its most productive use. Instead, these passages were to become understandable red meat for socialists and for Henry Georgists in Calls for the Nationalizing of Land. As we shall see further below, Smith's labor theory of value did inspire a number of English socialists before Marx, generally named Ricardian but actually Smithian socialists, who decided that if labor produced the whole product and rent and profit are deductions from labor's Produce, then the entire value of the product should rightfully go to its creators, the laborers.

1:25:20Douglas justly concluded that it is then from the Whiggish Pages of the Wealth of Nations that the doctrines of the English Socialists, as well as the theoretical exposition of Karl Marx, spring. The history of social thought furnishes many instances where theories elaborated by one Modern writers have been taken over by others to justify social doctrines antagonistic to those to which the promulgator of the theory gave adherence. But had the gift of pre-vision been granted to those men, few would have been more startled than Adam Smith in seeing himself as the theoretical founder of the doctrines of 19th century socialism.

1:26:09Human writers have tried to salvage the unsalvageable labor theory of value of Adam Smith by asserting that in a sense he did not really mean what he was saying, but was instead seeking to find an invariable standard by which he could measure value and wealth over time. But to the extent that this search was true, Smith simply added another fallacy on top of all the others. For since value is subjective to each individual, there is no invariant measure or yardstick of value, and any attempts to discover them can, at best, distort the enterprise of economic theory and send it off chasing an impossible chimera.

1:26:56At worst, the entire structure of economic theory is permeated with fallacy and error. Professors Robertson and Taylor, indeed, go so far as to call the admitted failure of Adam Smith a grand and noble failure, and one which they assert to be far more inspiring in its essential bankruptcy than if Adam Smith had continued in the subjective value tradition of his forebears. In a bizarre passage, Robertson and Taylor acknowledge the correctness of Professor Cowder's anguished critique of Smith as leading economic theory into a century-long blind alley. But they still laud Smith for his very failure.

1:27:46If a true explanation is given here of the reasons for Adam Smith turning from scarcity and Utility to a Labor Theory of Value. Did he not, in fact, do more for the progress of economics by a grand failure in an impossible but fundamental task? Then he would have done, had he been content to add a seventh rung, or even to strengthen some of the existing steps in the rickety ladder of subjective value theory? Such as, according to Dr. Couter, it appeared in 1776. Is it hopelessly banal to counter that truth is always superior to fundamental error in advancing a scientific discipline?

1:28:34There is a more fundamental and convincing reason for Adam Smith's throwing over centuries of sound economic analysis, his abandonment of utility and scarcity, and his turn to the the erroneous and pernicious labor theory of value. This is the same reason that Smith dwelled on the fallacious doctrine of productive versus unproductive labor. It is the explanation stressed by Amell Couter and partially by Paul Douglas, Adam Smith's dour Calvinism. It is Calvinism that scorns man's consumption and pleasure and stresses the importance of of Labor virtually for its own sake. It is the dour Calvinist who made the extravagant statement that diamonds had scarce any value in use.

1:29:26And perhaps it is also the dour Calvinist who scorned, in the words of Robertson and Taylor, real world market values which depended on monetary whims and fashions on the market, turned his attention instead to the long-run price, where such fripperies played no part, and the grim eternal verities of labor toil seemingly played the decisive economic role. Surely this is a far more realistic view of Adam Smith than the quixotic romantic in quest of the impossible dream of an invariable measure of value. And while Smith's most famous follower, David Ricardo, was not a Calvinist, his leading immediate disciple, Dugald Stewart, was a Scottish Presbyterian, and the leading Ricardians, John R. McCullough and James Mill, were both Scottish and educated in Dugald Stewart's University of Edinburgh.

1:30:30The Calvinist connection continued to dominate British, and hence classical, economics.