Through the glass, darkly: trying to figure out Adam Smith, the person

          Dennis Rasmussen’s book The infidel and the professor is a pleasure to read. It is an excellent introduction to the thinking and the friendship of David Hume (le bon David as he was dubbed by the philosophes during his wildly successful sojourn in France) and Adam Smith. I had a book recommended to me by a friend, and I read it with two objectives in mind: first, to get a bit more of a feeling for Adam Smith as a person, and second, to learn more about his relations with the physiocrats while he lived in France, On both accounts, I learned nothing. Still, the book was a pleasure to read: it is well structured, not overly technical, and very well written.

            Of the five economists I discuss in my forthcoming book (Quesnay, Smith, Ricardo, Marx, Pareto) I find Smith the most enigmatic. This book confirms him as being reserved, a somewhat distant and lonesome character despite dinners and company that he seemed to have, intermittently, enjoyed. Rasmussen’s thesis about the very close friendship between Hume and Smith is somewhat dubious, or is at least exaggerated. Rasmussen, for example, claims that it was the closest and/or the most important intellectual friendships in history. But just going over the five authors I mentioned, there are intellectual friendships that seem stronger: Quesnay and Mirabeau as well as Marx and Engels coauthored articles and books; Ricardo and Malthus, and Pareto and Pantaleoni corresponded much more frequently than Hume and Smith.

            So how close was the Hume-Smith friendship?  They did not spend almost any time living in the same place: when Smith was in Glasgow, Hume was in Edinburgh; when Smith finally moved to Edinburgh, Hume was dead for a year. According to Rasmussen, they exchanged 170 letters, of which only 56 are still extant (15 from Smith to Hume and 41 from Hume to Smith). Hume and Smith met in 1749 and Hume died in 1776. That means, on average, 6.3 letters per year—not an extravagant number for a  seemingly very close friendship. In this relationship, Hume is the insistent partner, often beseeching Adam Smith to visit him, reinviting him again, finding schemes that might please him and induce him to come. Smith’s letters are mostly technical in nature: they ask for Hume’s recommendations (especially during Smith’s stay in France) and bring to Hume’s attention this or that of Smith’s students or friends. Lack of Smith engagement with Hume’s incessant invitations can also be read—a hypothesis Rasmussen does not mention—as a slight annoyance with an obstreperous friend: rather than having to find endless excuses for not getting together Smith just prefers to keep quiet.  

Hume’s open, vivacious  and friendly temperament, attested by all, was very different from Smith’s. In this partnership the usual roles between a younger and older partner were reversed: while usually a younger partner tends to seek out the older and better established partner’s friendship and to ask for his advice, here we have a twelve-year older and more famous Hume asking for Smith’s company, and Smith often proffering advice to Hume. In fact, Smith’s advice is always on point: good, rational, cautious and mindful of the intellectual and political climate. The role reversal was due to the temperamental difference between the two men:  the less guarded and much more lively older man, and the very deliberate and thoughtful younger one.

Other than confirming Smith’s reserved and prudent nature as well as his wisdom, both in dealing with people and in his writings, the book does not throw new light on Smith’s life: his relations with his mother and the family, his amorous life (apparently non-existent) or his wealth. This is not the primary objective of the book since it tries to document Hume’s and Smith’s intellectual mutual influence (Smith seems to have in many instances benefitted from Hume’s—the reverse is practically non-existent), not their lives. However, Rasmussen’s emphasis on their friendship inevitably drives the book towards the personal side of both thinkers. The book thus falls somewhere between intellectual history and a biography à deux.

On my second topic of interest, the influence of physiocrats on Smith, there is nothing in the book. Smith’s stay in France (from January 1764 to the Fall of 1766) is given in the chronological order but with very few details. I do not think that this is due to Rasmussen’s choice: other books on Smith’s travels in France are equally vague. There is simply not enough information on what Smith did in France, and by whom he might have been influenced.

Rasmussen makes the usual nod to Smith having met with d’Alambert, Voltaire, Quesnay etc. in Toulouse and Paris, but this is all that we know. Even the word “met” is, I think, hardly appropriate in this case. Smith’s spoken French was quite poor; his understanding was probably not much better, especially not in a salon where several people would speak at the same time and where topics would easily mix personal intrigue and gossip with philosophy. So, it may seem more appropriate to say that Smith was a few times (we do not know how many: three, five, ten, twenty?) in presence of the French luminaries. No document referring to their discussions or conversations exists.

One wonders how Smith was spending his days in Toulouse with his young change, the Duke of Buccleuch. Were they made of the same solitary routine as his ten years in Kirkcaldy during which he wrote most of The Wealth of Nations?  What did Adam Smith do evening after evening in Toulouse? Surely, he was not conversing with the eight-year old Duke, nor did he have any French acquaintance to visit or entertain (as he himself complains in his letter to Hume—asking, as usual, for Hume’s intercession on his behalf). Spending eighteen months like that, at the age of 41, must not have been especially pleasant.

The combination of intellectual and personal history is at its best in the chapters that describe the nasty querelle between Rousseau and Hume (actually, the querelle was almost entirely in Rousseau’s mind and was of his creation), Smith’s refusal, in the last months of Hume’s life, to publish his strongly anti-religious Dialogues, and finally the Socrates-like Hume’s final days when “everyone” was curious to see whether the impious philosopher would succumb to the dread of annihilation and, as many have done, espouse religion in the last hours of his life. As is well known, Hume did not do so.

But, in the end, it is worth mentioning Smith’s reaction to Hume’s request to publish posthumously his Dialogues. Rasmussen provides several hypotheses for Smith’s decision, and I think that the most sensible one has to do with Smith’s self-interest. Given Hume’s terminally declining health, the posthumous publication of the Dialogues would have come just months after the publication of The Wealth of Nations. At that point--especially at that point!—Smith was not keen of getting embroiled in a row over religion which could not only taint him with the epithet of atheist but would eclipse his just released book, in whose writing he had spent, on and off, two decades of his life.

Smith’s decision was fully comprehensible and in keeping with his personal interest. By unfortunate coincidence, it happened to mean the rejection of a favor being asked by a dying man who was his friend and from whom he has learned a lot. Smith had to choose between the philosophy of the Theory of Moral Sentiments that applies to our relations with family, friends and others close to us, and the philosophy of The Wealth of Nations that applies to our relations with the rest of the world. He chose the second even if, by his own criteria, he should have chosen the first.

  

 

 

 

Socialist enterprise power structure and the soft-budget constraint

 Yesterday’s bizarre and rather ignorant discussion of the Komsomol in the US Congress and the recent passing of Janos Kornai, the famous “inventor” of the soft-budget constraint, reminded me that I planned for several years to describe in very simple terms how the socialist companies of labor-managed kind, as in Yugoslavia, really functioned. Having worked in one and having read a fair amount on it, I know the topic, I think, quite well. Especially so when I think that most people in capitalist countries never had a clear idea how labor-managed (LM) enterprises differed in their internal structure from capitalist firms, and nobody younger than 55 or even 60 in the former communist countries has any direct experience with how such companies worked. The structure described here is fully relevant for Yugoslavia in the period 1965-90, and probably for Hungary and Poland after 1968-70, and even for the Soviet Union and China in the part dealing with the role of Communist party (CP) in management.

Shareholders and workers. Take the standard capitalist firm. It is run by shareholders whose individual power is equal to the amount of shares they own. Shareholders elect a board which does closer oversight of management, and the board elects chief executives who do the daily work. Now, just replace shareholders with workers employed in the enterprises, each with equal voting power, who elect the workers’ council, which in turn elects the enterprise director and you have the management structure of an LM enterprise.

This is not at all very difficult to understand. Some features are obvious even from such a simple sketch. First,  workers will have the power to decide about how the company will be managed (in Yugoslavia, since it was a market economy, they were involved even in decisions on what to produce, how to make profit and the like). Second, ability to enjoy only the usus fructus rights from capital (worker could not sell his share in the enterprise; it simply did not exist) led workers to focus on short-term gains; and third, workers’ power to decide on hirings led to their tendency to restrain enterprise membership. These problems were amply discussed in the economic literature at the time (I explain them here too). But my objective now is not to discuss them but to explain the internal structure of the enterprise.

So far that structure seems relatively simple. But now the complicated part kicks in. We have to explain the role of trade unions and enterprise-level communist party organization (ELCP).

Trade Unions. Their role was basically nil. The reason  is obvious. If the company is run by workers’ assembly and the workers’ council, the very same people being members of the trade unions (trade union membership was compulsory and thus 100%), have already made their decisions. There is nothing for them to do through trade unions. Trade unions were thus a redundant organ  and very little attention was paid to them.

Communist party organization. ELCP was important. Its members were employees who were CP members. This could, I guess, range from 10-20% of  the labor force to 80%. They too met in assemblies (strictly speaking, after the work hours while the organs of workers’ management, including the assembly and the workers’ councils, met during the work hours), and elected either a small committee and/or the head of enterprise-level party organization. We shall have to talk more of him/her.

Election of the director. Now, let’s go back to the management structure. The company has a director. The director is elected by the workers’ council. However, the Party organization within the enterprise has also an informal veto power. So the director, in order to be elected, has also to have support of the ELCP which essentially means of the head of the enterprise party organization.

Here the duality of power immediately becomes apparent. It is reinforced by the fact that the director is almost always a Party member himself and within the party organization he is below the enterprise Party leader. But as director he is his boss within the company. Not an easy situation.

But it gets more complicated. Enterprise director in any medium- or larger-scale company would also need, in order to be elected, to have tacit support or even explicit clearance of the territorial Party organization where the enterprise is located. Decisions on management promotions of very large enterprises were  not left at the discretion of workers’ council. Its sovereignty was limited. Thus our director needs to court three constituencies: workers in his company, CP organization and its enterprise leader, and the territorial-level Party organization. Moreover, the ELPC leader is structurally linked with the Party decision-makers at the territorial level. Consequently, he can exercise pressure on the director through two channels: internally, by being the leader of a large part of workers (who are members of the CP), and externally, by having close links with the territorial party organization that needs to vet the election of the director.

Director is thus hemmed in from all directions. Unless he himself has powerful allies at the territorial level and a compliant enterprise party boss, his power of decision-making is quite restrained but responsibility, if enterprise does badly, is all his. Enterprise-level party boss bears no responsibility for profit or loss of the enterprise.

This duality of power within the enterprise, and the divorce between power of decision-making and responsibility is a cause for both the emergence of the soft-budget constraint and for constant friction between the more technocratically-minded managers (directors) and the more bureaucratically-minded people who made their careers within the Party. (The latter topic was much studied in the sociological literature of the 1960s and 1970s dealing with socialist economies).

Soft budget constraint. Mixed hierarchical lines between the managers and CP enterprise leaders do not only give large indirect power to the latter, but might stimulate in them desire to become managers themselves (and be paid more: enterprise-level party boss was a non-remunerated position.) Now, people who would make their careers through the Party were generally less knowledgeable and interested in economic matters and would often have close to zero knowledge of how to manage companies. This was different from “normal” directors who would rise by gradually going from managing a section within a company, to a larger branch, and eventually the whole company. But if the enterprise-level CP leader succeeded to be elected (garnering the support of the workers’ council and the territorial CP organization), he would not necessarily pay much attention to the functioning of the company, relying rather on his political connections. With good political connections (at the territorial level) he could be sure that almost any amount of enterprise losses would be covered by the banking system (which was government-controlled). He may even be very popular among workers. He can relax labor discipline, workers can work much less, and then cover all the losses through credits that would never be repaid or through outright subsidies. Thus for workers it was often preferable to have an incompetent, but well-connected, party hack as a director than a more technocratically-minded person: workers’ salaries might be higher while they would work less.

Inefficiency. As this makes clear, the soft-budget constraint was an endogenous part of the system. Its origin is, I think, in the unwillingness of the CP to relinquish the power of enterprise decision-making (which in theory it conferred on workers’ councils). It thus created a dual power structure that had many inefficiencies of its own (long discussions, permanent canvassing of support, creation of factions etc.) and on top of that it created the soft-budget constraint. The softness was the greater the more powerful the enterprise director, and the most powerful were those managing large companies (“too big to fail”) who also had good connection with the territorial party organizations. Thus, the center of power decisively shifted towards the Party and bureaucracy, and away from managers or technocrats. And this in turn reduced the enterprise efficiency.

Nota bene. Some of these undesirable features might appear in Chinese enterprises (private and public) where enterprise-level CP organizations are re-introduced. In my opinion, for an efficient management, political organizations, like CP, must not be made part of power structure within the enterprise. They can remain on the territorial level. But then of course their real economic power would be much diminished. This is the conundrum.

On the role of economics and global inequality

I wrote this in a Twitter discussion about the importance of knowing and reading classical texts in economics (say, from Quesnay to Pareto although these end-points are fairly arbitrary).

●If your definition of economics is this: "I would like to start with the one that I would have used when I was young and studied Marxist economics. Economics matters because it enables you to look at the grand political and economic changes in history and to explain them using economic factors. In other words, it is, if I can say so, a branch of historical materialism. Decisions driven by economic factors shape societies and make them change." Then you must read classics.

●If your definition is this: "A neoclassical view of economics would be more pragmatic. It would be to argue that economics matters - and to use Alfred Marshall’s definition there - because it deals with our ordinary life and its objective is to improve that ordinary life, to make our incomes higher, to allow us to have more free time, and to make poverty disappear so that we can enjoy other activities that we like while having a satisfactory standard of living." Then, you should read them but perhaps not as carefully as under the first definition.

●If your definition is: "Economics is the allocation of scarce resources among the alternative ends." Then you can read only selected classic texts.

●If your definition is that economics is just what businesses and finances do now, then perhaps you should not bother with classic texts.

I would like to explain what I meant by these definitions. The first definition is clearly Marxist in the way it is written, but substantively it is the same definition that can be found in works as far apart historically and even ideologically as Adam Smith and Kenneth Pomeranz. In this view of economics, its role is to illuminate economic factors that have led to systemic changes, to people moving from one way to organize production to another. It is Smith’s stadial theory of economic history, from “the rude state of society” of pastoralists to the commercial society of his time. It is of course Marx’s view too. But it is also the point of view of whoever has studied (say) Roman Empire, its economy, and the dissolution of the manifold links that kept the Western Empire together: Michael Rostovtzeff or Moses Finley. It is a view of economics common to Paul Bairoch and Fernand Braudel. So, it is not a predetermined ideological position, but  the methodological approach that is important here.

The second definition (due to Alfred Marshall) is, I wrote, much more pragmatic. It looks at the ways of improving people’s lives. It is related to the first definition when, under the first definition, we believe that societies tend to choose more efficient ways of production over the less efficient. Through the Darwinian struggle of different modes of production, the most efficient wins, and that most efficient mode increases people’s incomes the most. (Assuming here that we look at people’s incomes broadly, and not only at the mean income which may be misleading.) The second definition allows you not to worry about the grander historical forces but to focus, here and today, on how to make things better.

The third definition is Lionel Robbins’. That definition narrows economics very significantly. Economics becomes similar to operation research. It is not interested in the succession of different systems, not even in improvements in welfare as such, but in optimization. It could be used under any system. It is not surprising that Tjalling Koopmans and Leonid Kantorovich, working in two different systems but both interested in optimization,  came up with very similar findings. The “scarcity => ends” definition can be used to best allocate inputs and people in a factory whether it is privately- or state-owned, to maximize work effort of inmates of a labor camp or of cotton-picking slaves.

The fourth definition is beyond pragmatic. It is concerned with own, or people one works for, immediate maximization of income; it ignores everything that is not useful for that purpose, and blurs the difference between a social science and the profit-making of a single business. It is Gordon Gekko in action.

If you think that these distinctions are too abstract, here is an example to show how they are very much concrete and are in reality applied right now. You can study China by asking the question of whether it is capitalist or not, whether its opening and marketization that began in 1978 is just one very long NEP or an irreversible change; whether Chinese economic history leads us to believe the country will evolve in one or another direction. You are then applying Definition 1.

Or you may not bother with decisions that led China to liberalize in 1978, but focus on policies that reduced poverty, increased its income, or widened disparities between the affluent and the poor. You are applying Definition 2.

Or you can discuss whether the state-owned Chinese banking system is allocating loans in the best way or not: here you are working under Definition 3.

Or you can write an article discussing if Evergrande will pay its creditors next week or not. You are in the world of Definition 4.

I was always interested in Definition 1. It gave economics its magisterial gravitas. It showed why economics matters. When I began the work on global inequality more than two decades ago, I never saw it as a mere work in empirics. Empirics is important as the first step, but one should try (if possible) not to stop there.  I was not quite successful in going beyond (and I criticize myself for that in my forthcoming book). Still for me global inequality was always more about global politics, economics, and indeed power, than about numbers. 

The rising global inequality in the 19^th century was simply a reflection, in numbers, of the greatest ever divergence in power between two parts of the globe: the West and the Rest (see the graph). You could not discuss these numbers without realizing that the rising between-country inequality “explained” or “reflected” (both are probably true) the 1840s Opium Wars and the Indian Rebellion of 1857. Behind increasing within-national inequalities was the class struggle: the Revolution of 1848 and the Emancipation of serfs in 1861.

Then the high plateau of global inequality in the middle of the 20^th century showed us the newly-parceled three worlds: the first world of rich capitalist countries; the second world of socialism; and the third world of Asia, Africa and Latin America.  You cannot understand the work of Frantz Fanon and Samir Amin without knowing that in the background there existed three non-overlapping worlds. You cannot see where Bandung came from if you do not see this graph (or have similar knowledge anyway).

And finally, and most recently, the decrease in global inequality is simply the translation for the rise of populous Asian countries. This mirrors the Industrial Revolution: the center of economic gravity is tilting towards one region, the losing areas are deindustrializing, and as Asia catches up, global inequality is reduced. Political and economic implications of this change are obvious to all: the US vs China conflict is written there in scarlet letters. You do not need to look for its causes in politicians’ speeches.   

What will come in the future we do not know. Will the equalizing trend continue?  Africa, with high population growth and lack of income  convergence, may push global inequality up again, and become additionally marginalized. Or it might replicate Asia. China may become (and is already becoming) too rich to exert a downward pressure on global inequality and the two new hegemons (China and the US) may in two generations from now be in a group of their own.

The economic and political structure of the world today is very different from those in 1921 or 1971. All of that is not only reflected in global inequality numbers; these numbers help us understand political and social movements.  This is how I see global inequality work as proceeding according to Definition 1.