prior probability

Nota bene: I discuss Adam Smith’s first “dire warning” here.

As promised (see here and here), I will now turn to the last part of Adam Smith’s 79-page pamphlet (Part #13, pp. 47-79), Additions and Corrections to the First and Second Editions of Dr. Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations (Smith 1784). This part, by far the longest section of Smith’s 1784 pamphlet (it consists of 40 paragraphs spread across 33 pages), was later inserted into “Part Third” of Chapter 1 of Book V of all subsequent editions of Smith’s Wealth of Nations, where Smith surveys “Public Works and Public Institutions”.

In summary, in the first two editions of The Wealth of Nations (1776, 1778), “Part Third” of Book V, Chapter 1 begins with a survey of public goods, such as roads and canals. According to Smith, one of three main duties of government (along with national defense and justice) is the provision of such public goods in order to promote “commerce in general” (my emphasis). The last part of Smith’s 1784 pamphlet, however, added a new subsection to “Part Third” of Book V, Chapter 1, which is titled “Of the Public Works and Institutions which are necessary for facilitating particular Branches of Commerce” (my emphasis). Part #13 begins thus:

“The object of the public works and institutions above mentioned [e.g. roads and canals] is to facilitate commerce in general. But in order to facilitate some particular branches of it, particular institutions are necessary, which again require a particular and extraordinary expense. (Smith 1784, paragraph 1 on p. 47)

So, what are these “particular branches” of commerce that “require a particular and extraordinary expense” by the government? Alas, one is the slave trade:

“Some particular branches of commerce, which are carried on with barbarous and uncivilised nations, require extraordinary protection. An ordinary store or counting-house could give little security to the goods of the merchants who trade to the western coast of Africa. To defend them from the barbarous natives, it is necessary that the place where they are deposited should be, in some measure, fortified.” (Smith 1784, para. 2 on p. 47)

More generally, these “particular branches” of commerce also encompass the activities of any firm that does business overseas. Here (para. 2), Smith surveys three specific examples of overseas trading in the second paragraph of Part #13: Indostan, Turkey, and Russia. Smith writes:

“The disorders in the government of Indostan have been supposed to render a like precaution necessary even among that mild and gentle people; and it was under pretence of securing their persons and property from violence that both the English and French East India Companies were allowed to erect the first forts which they possessed in that country. Among other nations, whose vigorous government will suffer no strangers to possess any fortified place within their territory, it may be necessary to maintain some ambassador, minister, or counsel, who may both decide, according to their own customs, the differences arising among his own countrymen, and, in their disputes with the natives, may, by means of his public character, interfere with more authority, and afford them a more powerful protection, than they could expect from any private man. The interests of commerce have frequently made it necessary to maintain ministers in foreign countries where the purposes, either of war or alliance, would not have required any. The commerce of the Turkey Company first occasioned the establishment of an ordinary ambassador at Constantinople. The first English embassies to Russia arose altogether from commercial interests. The constant interference which those interests necessarily occasioned between the subjects of the different states of Europe, has probably introduced the custom of keeping, in all neighbouring countries, ambassadors or ministers constantly resident even in the time of peace. This custom, unknown to ancient times, seems not to be older than the end of the fifteenth or beginning of the sixteenth century; that is, than the time when commerce first began to extend itself to the greater part of the nations of Europe, and when they first began to attend to its interests.” (para. 2 on pp. 47-48, my emphasis)

In other words, when a private company does business in a foreign country it may have to take pro-active measures, such as the building of fortresses, to protect its agents and property overseas. But Smith also recognizes that most foreign governments are jealous of their sovereignty and won’t allow outside companies to take such pro-active security measures on their soil. As a result, Smith concludes that the British government will have to establish embassies and appoint ambassadors in these foreign countries in order to protect the economic interests of its citizens and firms who are doing business overseas.

But how should these overseas embassies and ambassadors be financed? Smith proposes a kind of “user fee” in the third paragraph of Part #13:

“It seems not unreasonable that the extraordinary expense which the protection of any particular branch of commerce may occasion should be defrayed by a moderate tax upon that particular branch; by a moderate fine, for example, to be paid by the traders when they first enter into it, or, what is more equal, by a particular duty of so much per cent upon the goods which they either import into, or export out of, the particular countries with which it is carried on. The protection of trade in general, from pirates and freebooters, is said to have given occasion to the first institution of the duties of customs. But, if it was thought reasonable to lay a general tax upon trade, in order to defray the expense of protecting trade in general, it should seem equally reasonable to lay a particular tax upon a particular branch of trade, in order to defray the extraordinary expense of protecting that branch.” (para. 3 on pp. 48-49, my emphasis)

Simply put, it is the direct beneficiaries of Britain’s overseas embassies and ambassadors — i.e. the trading companies — who should pay for these public services, either by imposing “a moderate tax” or “a moderate fine” on them, or in the alternative, by imposing “a particular duty” on the imports and exports of those overseas trading companies.

So far, so good. In the fourth paragraph of Part #13, however, Smith makes the following ominous observation:

“The protection of trade in general has always been considered as essential to the defence of the commonwealth, and, upon that account, a necessary part of the duty of the executive power. The collection and application of the general duties of customs, therefore, have always been left to that power…. But in this respect, as well as in many others, nations have not always acted consistently; and in the greater part of the commercial states of Europe, particular companies of merchants have had the address to persuade the legislature to entrust to them the performance of this part of the duty of the sovereign, together with all the powers which are necessarily connected with it.” (para. 4 on p. 49, my emphasis)

That is, although the protection of overseas trade is one of the main duties of the government, overseas trading company have lobbied their home legislatures to allow them to assume this duty themselves! Next (para. 5 of Part #13), Smith presents the following dire warning about the dangers of self-regulation, an admonition that is still relevant today:

“These companies, though they may, perhaps, have been useful for the first introduction of some branches of commerce, by making, at their own expense, an experiment which the state might not think it prudent to make, have in the long run proved, universally, either burdensome or useless, and have either mismanaged or confined the trade.” (para. 5 on p. 49, my emphasis)

In short, the policy of giving these overseas trading companies the power to protect their own interests has “universally” proved to be “either burdensome or useless”! According to Smith, overseas trading companies with the power to self-regulate have “either mismanaged or confined” their overseas trade. But how is this possible? What happened to Smith’s invisible hand? Is unbridled capitalism really so bad? I shall turn to these crucial questions in my next post. (To be continued …)

Earlier this month (6-8 July), I had surveyed Part #11 of Adam Smith’s 1784 pamphlet, Additions and Corrections to the First and Second Editions of Dr. Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations (Smith 1784, pp. 13-22), where Smith analyzes and critiques British herring subsidies. For reference, links to my herring-subsidy posts are below:

1. The herring subsidy scam (6 July 2026)
2. Adam Smith’s *negative invisible hand* (7 July 2026)
3. Some closing thoughts on Adam Smith’s critique of the herring bounty scam (8 July 2026)

As a short postscript to my three-part survey, I would now like to bring to your attention a follow-up paper by John Leazer, a scholar who specializes in British history. Professor Leazer’s fascinating paper, which I had not discovered until after writing up my three posts above, is titled “A Case for Subsidies? Adam Smith and the Eighteenth Century Scottish Herring Fishery” and is available here (via JSTOR).

In brief, Leazer surveys the history of British herring subsidies, which he traces back to the historic 1707 “Act of Union” treaty that united England and Scotland into a single kingdom (see Leazer 2013, pp. 51-53), and concludes that Smith’s critique of these subsidies was premature. Although the amount of herring caught declined from 1775 to 1782 despite the subsidies (ibid. at Figure 8, p. 62), upon closer examination Leazer attributes this decline to exogenous factors, including “dramatic price increases in materials” and an “onslaught of privateers” (ibid. at p. 64).

Moreover, inspecting the fishery data from 1787 to 1799, Leazer concludes that the herring subsidies actually worked in the long run, for the subsidies created “a thriving industry where none existed before” (p. 47). Also, according to Leazer the true costs of the subsidies were not as high as Smith had imagined, for after 1786 “an increasing amount of [herring] were caught for the same amount of subsidy invested in the industry” (pp. 58-59). Or in the words of Leazer: “How could Smith be so wrong?” (p. 64)

Alas, Professor Leazer fails to consider another intriguing possibility: what if it was Adam Smith’s critique of herring subsidies that (perhaps unwittingly) set into motion the train of events that was ultimately responsible for this increase in herring production? After all, Parliament decided to tweak the subsidy scheme when it enacted the Fishery Act of 1786, two years after Smith had first published his stinging critique of herring subsidies in 1784.

Or perhaps it was the steady decline in herring production (especially between the years 1775 to 1782; see above), along with the spotlight Smith shined on this topic in his 1784 pamphlet, that motivated Parliament to enact the 1786 Fishery Act? Either way, what specific change did Parliament end up making to the herring subsidy in 1786? As it happens, Parliament totally ignored — or rejected! — Smith’s advice; instead, it doubled-down on the herring bounty, or to quote Leazer:

“After the Act of 1786 adjusted the bounty system, bounty payments increased dramatically, and herring catches increased as well. Figure 4 shows the yearly tonnage bounty payments between 1783 and 1799. These bounties rose from just over £10,000 in 1783 to almost £20,000 in 1787 and remained consistently around £20,000 between 1788 and 1799.” (Leazer 2013, p. 56, footnote omitted)

Simply put, the subsequent increase in herring production from 1787 to 1799 that Leazer touts so much in his paper was thus most likely due to the dramatic increase in subsidies made in 1786. But what is even more damning for Leazer — and more exculpatory for Adam Smith — is the following fact: Parliament eventually eliminated the herring bounty altogether in the 1830s. Yet, by Leazer’s own admission, “In 1850, total herring catches grew to a half million barrels and, by the end of the 19th century, production reached close to two million barrels …” (pp. 65-66; my emphasis). In other words, to paraphrase one of the characters in The Treasure of the Sierra Madre, we don’t need no stinkin’ subsidies! Smith’s critique of herring subsidies was vindicated by history.

Nota bene: I will proceed to the last part of Smith’s 1784 pamphlet (Part #13) in my next post.

Works cited

John Leazer, A Case for Subsidies? Adam Smith and the Eighteenth Century Scottish Herring Fishery, The Historian, vol. 75 no. 1 (Spring, 2013), pp. 47-68.

Adam Smith, Additions and Corrections to the First and Second Editions of Dr. Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations (1784).

Shout out to my favorite L.A. bookstore, Lost Books (the entrance of which is pictured below), where I found a veritable treasure trove of erudite tomes — listed below in alphabetical order (by author):

1. Ananyo Bhattacharya, The Man from the Future: The Visionary Life of John Von Neuman (Norton, 2022). Full disclosure: I have been wanting to read a book-length biography of the great Hungarian-American polymath John von Neuman for many years now. Thanks to Dr Bhattacharya, I now have my chance!
2. T. C. Boyle, The Relive Box and Other Stories (Ecco 2017). Along with Junot Diaz, T. C. Boyle is my favorite North American novelist and short story writer.
3. Ian Klaus, Forging Capitalism: Rogues, Swindlers, Frauds, and the Rise of Modern Finance (Yale, 2016). This book not only surveys many long-forgotten financial frauds; it also poses a provocative question: what would Adam Smith have to say about stock markets, “futures” contracts, and other 19th-century developments in financial capitalism?
4. Michael Lewis, The Money Culture (Norton, 2011). It’s by Michael Lewis. What more do I need to say!
5. Hilary Powell & Dan Edelstyn, Bank Job (Chelsea Green, 2020). Two idealistic artists print their own money and pull off a “reverse heist” to protest the 2008 bank bailouts and consumer debt culture more generally.
6. Guy Standing, Basic Income: A Guide for the Open-Minded (Yale, 2017). Is “universal basic income” (UBI) feasible? Among other things, this book describes many different types of UBI proposals and explains why some of them might be doable.

Nota bene: I will be resuming my previous multi-part series on Adam Smith’s 1784 pamphlet, Additions and Corrections to the First and Second Editions of Dr. Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations (see here, for example), as well as writing up mini-reviews of the above works in the days ahead.

Below are links to some free mathematics textbooks/lecture notes: (hat tips: @pickover, @LunesDes, and @ParamSiddh)

• Donna Kirk, Contemporary Mathematics (2026)
• W. W. Sawyer, A Path to Modern Mathematics (1966)
• C. H. Taubes, Probability, Statistics, and Linear Algebra (2010)

Bonus link: See also my 2015 paper “Finding Santiago“, where I trace the biographical origins of the legendary protagonist of Ernest Hemingway’s timeless novella The Old Man and the Sea.

Are prediction markets (PMs) immoral or dangerous? What about retrodiction markets? What would Adam Smith or F. A. Hayek say? In alphabetical order (by author), below are some anti-PM links:

1. Saahil Desai, Polymarket is going to get someone killed, The Atlantic (7 March 2026)
2. Aisha Down, ‘Abhorrent’: the inside story of the Polymarket gamblers betting millions on war, The Guardian (11 April 2026)
3. Eleanor Harmsworth and Matthew Field, You can now gamble on war, death and destruction. Some people never lose, The Telegraph (7 March 2026)
4. Augustin Lebron, Predicting our own demise, Reducible Errors (17 August 2025)
5. Nitish Pahwa, The legalized gambling industry is collapsing in on itself, Slate (25 August 2025)
6. Bonus link: @TomJrSr, Replies to anti-prediction market claims

For further reference, here is an overview of how prediction markets work.

More generally, is “good faith” more like a rule (e.g. a speed limit or “no smoking” sign), or is it more like a standard (e.g. “fair use” or “be careful”)? Or does the meaning of good faith depend on purely subjective or idiosyncratic factors (e.g. “I know it when I see it”)? My favorite paper thus far at this year’s ALSB (Academy of Legal Studies in Business) conference in Minneapolis has been “Statutory Good Faith and its Continuum of Definitions, Rules, and Standards” by my colleague and friend David Orozco (Florida State), who presents several competing definitions of “good faith” along a sliding-scale or continuum.

Evolvable AI or “eAI” refers to artificial intelligence systems that can autonomously create copies of themselves, pass on heritable traits, and undergo some form of natural selection, e.g. random mutation, recombination, and survival of the fittest. Some AI researchers claim that eAI poses a serious threat to humanity. See Victor Müller, et al., Evolvable AI: Threats of a new major transition in evolution, PNAS (20 April 2026)? Others dispute that claim. See, for example, Maarten Boudry, Domesticated, not feral: Why evolvable AI is not yet a Darwinian threat, PNAS (2 July 2026)? So, who’s right? And if it’s too soon to say who’s right, then what?

Is it possible to tame the A.I. beast in higher ed? I am a college professor who sees the handwriting on the wall: it’s only a matter of time before university administrators begin using “A.I. tools” to replace costly faculty. Although resistance is probably futile at this stage, some law school faculties in the U.S. are now starting to fight back by restricting the use of new technologies like “generative A.I.” in the classroom. (See here, for example.) Is this a lost cause or the start of a counter-revolution in higher ed?