Keynes and Smith, Opponents or Allies? Part II: Smith, and Keynes-Smith Parallels

ABSTRACT

In investigating Keynes–Smith relationships, this paper discusses Smith and the parallels between the mature contributions of these two philosopher-economists. It begins by carefully examining Smith’s economic theory and policy, summarising his core argument in a clarifying syllogism, and exploring his invisible hand remarks. It then turns to the largely unexplored parallels between their major economic works. In theoretical terms, their core arguments have similar structures and analytical characteristics. In policy terms, both proposed new institution-based systems serving individual and social interests, considerable socio-economic restructuring and non-minimalist roles for the state. The paper concludes with a syllogism summarising Keynes’s parallel position, and comparative comments on some recent analyses of Smith’s thought.

KEYWORDS:

• Smith
• ‘invisible hand’
• Keynes
• state’s role
• institutional change

JEL CODES:

• B12
• B22
• B31
• E10
• E12

Acknowledgements

I thank two anonymous referees for their informative and helpful reports.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 As it is impossible for one paper to discuss all relevant points, my focus is on structural parallels in conceptual frameworks and general conclusions. Much is omitted, including discussion of Hume and Burke (both significant figures for Smith and Keynes), and of money neutrality/non-neutrality.

2 See Campbell, Skinner, and Todd (1976, p. 258; also pp. 255, 265–267, 337, 372, 451, 697).

3 For the Smith quotations here, see Campbell, Skinner, and Todd (1976, pp. 265–267, 145, 462) respectively.

4 From Smith’s draft of WN; see Scott (1937, p. 351).

5 For a good, extended discussion of Smith’s policies, see Kennedy (2008, ch. 13).

6 This version of Smith’s syllogism is an expansion of an earlier syllogism formulated in 2018 as a result of reading Karl Mittermaier’s then unpublished 1987 dissertation; see Mittermaier (2020) and O’Donnell (2020a). Subsequently, I discovered both Wesley Mitchell’s (possibly 1926) presentation of Smith’s argument in syllogistic form in a more conventional, inaccurate and shorter version (Mitchell 1967, pp. 61–65), and Rosenberg’s (1960) criticism of Mitchell’s neglect of institutions. Although both were cognisant of Smith’s institutional context, neither saw that institutions and other elements need to be explicitly included in the syllogism to generate a better account of Smith’s core argument.

7 Consistent with these propositions, the initial premise in the above syllogism states that an increase in the national product is in society’s interest, with no implication that only the maximum possible increase is in its interest.

8 See also Campbell, Skinner, and Todd (1976, pp. 377–379), and below.

9 Skinner (1996) rightly takes the concept of ‘system’, especially in Smith’s economics, as a central theme. However, its chapter 8 frames WN primarily as a free market resource allocation system with the state having the minimalist role of correcting market failures. This is a surprisingly unsystematic (and inconsistent) account, not only of Smith’s own argument, but also of Keynes-Smith relations where Roll (1976) is cited to suggest that in this minimalist respect Smith and Keynes had much in common.

10 Interestingly, the same anatomical idea recurs in LJ, ‘[the rich man] has not a larger stomach than any ordinary ploughman’ (Meek, Raphael, and Stein 1978, p. 194), and in WN, ‘The rich man consumes no more food than his poor neighbour’ (Campbell, Skinner, and Todd 1976, p. 180, added emphasis).

11 See also Campbell, Skinner, and Todd (1976, p. 374).

12 See Rae (1895, pp. 12–13, 60). See also Rothschild (2001, pp. 68, 129–135, 295 fn. 49, 298–301).

13 The WN paragraph Baumol uses opens with ‘What is annually saved’ and closes with ‘the consumers are different’ (Campbell, Skinner, and Todd 1976, pp. 337–338).

14 Although well aware of politics, Smith largely left the associated change-processes undiscussed.

15 Campbell, Skinner, and Todd (1976, p. 606). Smith’s references to ‘perfect liberty’ by itself (Campbell, Skinner, and Todd 1976, pp. 79, 116) occur early in WN well before ‘systems of political economy’ are discussed.

16 Smith was also well-known for his forgetfulness.

17 Pasinetti (2007, p. 23) incorrectly suggests Keynes was as critical of Smith as he was of Ricardo, both being seen as ‘guilty of excessive reliance on … market institutions’ and for ‘not realising that … Say’s Law is not automatically satisfied’.

18 Uncertainty is a sub-theme in Rothschild (2001), but insufficiently explored. She argues for the conceptual unimportance of the invisible hand in Smith, whereas my account stresses its conceptual irrelevance (in TMS and WN).

19 On these matters, see O’Donnell (2019) and (2020b).

20 Several other parallels exist, but are omitted for length reasons.

21 International institutions are also omitted.

22 Note, importantly, that both arguments involve real markets, not imaginary or unattainable ones.

23 See also Samuels (2009), Samuels and Medema (2005), and Medema and Samuels (2009). But while closely aligned, certain key differences separate our accounts. The last-mentioned work, for example, portrays Smith as advancing a ‘markets-plus-framework’ model. This label implies that markets exist prior to, and independently of, government which then enters subsequently. This seems unfortunately influenced by those laissez-faire versions of Smith that see the state’s role only in terms of interventions to correct undesirable ‘free’ market outcomes. In the account of Smith’s analysis of commercial society presented here the market and the state co-exist at the start, the private sector and the government both have crucial roles in determining the nature and extent of markets, and the state undertakes varied economic activities to attain improved outcomes. Both Smith and Keynes have instead what could be labelled a ‘state-markets interdependence’ model.

24 A granite mountain cannot be declared non-igneous because a few sandstone rocks lie on its foothills.