I was listening to a rebroadcast of an old recording of American Top Forty with the legendary Casey Kasem on my second-favorite SiriusXM channel — 70s on 7 — the other day when this oldie by the musical duo Pratt & McClain popped up. Their hit song, which peaked at No. 5 on the AT40 in 1976, is still one of my favorites from my childhood days!
By all accounts (see, e.g., Frame 2015, p. 44; see also here and here), the Rev. Thomas Bayes (1701-1761) developed his now-famous theorem in the 1740s but never published his remarkable work during his lifetime; instead, it was his close friend and fellow dissenting minister, the moral philosopher and mathematician Richard Price (1723-1791), who edited and communicated Bayes’s unpublished work via a letter to physicist John Canton (1718-1772), who then read Bayes’s paper, along with an appendix prepared by Price, aloud to the famed Royal Society of London on 23 December 1763. (The mathematician-astronomer Pierre-Simon Laplace (1749-1827) made additional contributions to Bayesian probability in the late 1700s; see here.)
For his part, Adam Smith’s familiarity with inverse probability is unclear at best. Although Smith was elected a Fellow of the Royal Society on 21 May 1767, he could not have been present at that 1763 meeting of the Royal Society in which Bayes and Price’s work on probability was discussed (Smith was still in Glasgow), and he was either en route to France or in France when Bayes’s original paper and Price’s appendix were finally published and circulated (Bayes 1763; Price 1765). Also, although Smith and Price shared many mutual friends (e.g. David Hume) and moved in the same London social circles, Smith himself had a low opinion of Price. In a letter dated 22 December 1785, Smith writes: “Price’s speculations cannot fail to sink into the neglect that they have always deserved. I have always considered him as a factious citizen, a most superficial Philosopher and by no means an able calculator.” (Corr. No. 251) Ouch!
Nevertheless, although there is no other evidence that Smith engaged with or incorporated Bayesian probability theory in any of his works, he definitely had some implicit appreciation of the concept of probability, for the words “probability” and “probably” appear a lot of times in his Wealth of Nations — by my count, over 110 times in all! By way of comparison, the word “liberty” appears 88 times. (By way of further comparison, “probability” and “probably” appear about two dozen times in Smith’s Theory of Moral Sentiments, while the word “liberty” appears only 15 times.) Bonus link: Check out this paper by my colleague Michael Emmett Brady (2016), a lecturer at the Dominguez Hills campus of California State University.
Talk about the division of labor: large language models can write your term papers and grade them too!
Is American exceptionalism for real? With the recent news that the public debt of the United States has now surpassed $40 trillion (see here, for example), I want to take a moment to share my previous blog posts (from earlier this year) on Adam Smith’s thoughts on public debts:
Happy hump day! I began my in-depth survey of Adam Smith’s 79-page 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), way back on 25 June 2026 (see here). Since then, we have carefully combed through Smith’s work line-by-line and paragraph-by-paragraph. Today, eight weeks later (19 August), I will conclude my survey with some final thoughts on this timeless pamphlet as a whole.
To begin, two things about Smith’s 1784 pamphlet strike me as especially noteworthy. One is the fact that Smith was still engaged in scholarly pursuits even after he was appointed to the position of Commissioner of Customs in 1778 and Commissioner of Salt Duties in 1780. The other is how Smith incorporates into various parts of his pamphlet the knowledge he must have acquired as a dual commissioner. But what I find most illuminating of all is Smith’s digression on joint stock companies in the last part of his pamphlet, where the Scottish scholar surveys the leading corporations of his day and diagnoses a potential disease that most large-scale private and public companies share in common: the principal-agent problem. (See here, for example.)
In closing, it’s also worth noting that Adam Smith was writing up his additions and corrections to The Wealth of Nations in 1784 while the French artist Jacques-Louis David was painting his masterpiece, “Oath of the Horatii” (pictured below), in Paris. Like the father of the Horatii brothers, arming his sons for battle against the enemies of Rome, Smith’s pamphlet arms us for battle against mercantilism and the enemies of free markets, for among other things, Smith explores the relationship between wealth and power (here), makes the case for free trade (here), and levels a devastating critique of monopolies (here) and farm subsidies (here). In short, Smith’s additions and corrections are no mere afterthought; they are central to his slam-dunk defense of markets and his overall libertarian project!
It’s time to wrap up my survey of Adam Smith’s digression on joint stock companies, which first appeared in his 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). Simply put, to sum up my multi-part survey thus far, Adam Smith is not a big fan of joint stock companies. According to Smith, even when a joint stock company is granted monopoly rights, it is still almost always destined fail due to the inherent conflict of interest or fundamental disconnect between the owners of the company (shareholders) and the agents who are actually running it (managers/directors).
More specifically, as we saw in some of my previous posts on Smith’s digression on joint stock companies (see here), this corporate principal-agent problem manifests itself in the divergent time horizons and misaligned incentives of the shareholders on the one hand, who bear the ultimate financial risk of failure, and the agents of the company on the other, who will be tempted to pursue high-risk ventures or engage in wasteful expenses in order to aggrandize their own personal lucre and power, or in the immortal words of Adam Smith (1784, p. 60), “The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.” In short, the directors and managers of a corporation are playing with other people’s money, not their their own!
But are there any circumstances in which a joint stock company can overcome this handicap? For Smith, ever the intellectually-honest and astute pragmatist, the answer is a qualified yes! More specifically, in paragraphs 32 to 39 of the last part of his 1784 pamphlet (pp. 76-79), the Scottish scholar identifies four — but only four — lines of business in which joint stock companies can succeed in making money even without a monopoly: banking, insurance, canals, and waterworks.
What about corporations in other types of industries, like copper mining, lead smelting, and glass grinding — the three examples that Adam Smith himself refers to in the last paragraph (para. 40) of his pamphlet? In a word (ok, two words), no dice. Smith writes: “Except the four trades above mentioned [i.e., banking, insurance, canals, and waterworks], I have not been able to recollect any other in which all the three circumstances requisite for rendering reasonable the establishment of a joint stock company concur.” (Smith 1784, p. 79) So, what are these three necessary conditions for a joint stock company to succeed?
Nota bene: I will offer some closing thoughts on Adam Smith’s 1784 pamphlet as a whole in my next post.
To my mind, one of the most maddening aspects of the whole Jason Arday affair has been the business-as-usual progressive and pro-DEI biases of the mainstream media and of the blogosphere. Have you noticed, for example, how most of the news articles and blog posts (both in the U.S. and the U.K.) reporting or commenting on the Jason Arday affair mention Nathan Cofnas’s damning substack post exposing Arday’s alleged misconduct (i.e. the post that set this entire affair into motion), but how — at the same time — few, if any, of these articles and blog posts actually bother to provide a link to Cofnas’s original exposé, which is titled “DEI Fraud and Cover-Up at Cambridge“. Hmmm. (As of this writing, the one exception I can find to this sneaky media blockade is Retraction Watch; see here.) In addition to the above links, I have also archived Cofnas’s devastating hit piece here for good measure in case our big tech overlords were to try to erase it from the Internet.
Be that as it may, the case of this now-deceased academic con artist provides us another painful reminder of what we already should have known about so-called “critical theory”, education studies, and post-modernism more generally. (Surprise, surprise!) And his death may have not been in vain for another reason, for his alleged misconduct highlights another major gap in academia: the lack of legal liability for research fraud. After all, why should Cambridge University be immune from liability (especially to her students) for hiring Arday in the first place, and why should the academic journals that published Arday’s fraudulent work likewise be immune from liability? On these questions, see my 2017 paper “Legal Liability for Research Fraud.” (My main argument is that, without the threat of legal liability, the parties in the best position to detect research fraud, like academic hiring committees and journal editors, will have no economic incentive to change their intellectually pernicious and shallow DEI ways.)
Bonus links: Why philosophers hate that ‘equity’ meme. (I include this link because I see this popular meme as an intellectual litmus test of sorts.) Also, like my colleague and friend Josh Blackman, I cannot help but ask, How many more Jason Ardays are there, especially in academia?
Nota bene: I will conclude my comprehensive survey of Adam Smith’s 1784 digression on joint stock companies on Tuesday (18 August), but in the meantime below is a compendium of my recent blog posts on Adam Smith’s critique of joint stock companies:
General (three posts)
Royal African, Hudson’s Bay, and South Sea companies (one post each)
East India Company (five posts)
Bonus link (via Wikipedia): List of chartered companies
If you are looking for any further evidence that Adam Smith is, deep down, a pragmatist, then check out paragraph 30 of the last part of 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. The first three sentences of this paragraph describe three examples of temporary monopolies that are perfectly justified: copyrights, patents, and … wait for it … overseas trading companies like the East India Company! Or in the immortal words of Adam Smith:
“When a company of merchants undertake, at their own risk and expense, to establish a new trade with some remote and barbarous nation, it may not be unreasonable to incorporate them into a joint stock company, and to grant them, in case of their success, a monopoly of the trade for a certain number of years. It is the easiest and most natural way in which the state can recompense them for hazarding a dangerous and expensive experiment, of which the public is afterwards to reap the benefit. A temporary monopoly of this kind may be vindicated upon the same principles upon which a like monopoly of a new machine is granted to its inventor, and that of a new book to its author.” (Smith 1784, pp. 74-75)
Smith further adds that any military bases (“forts and garrisons”) built by overseas trading companies to protect their foreign investments should be expropriated by the home government (Britain):
“But upon the expiration of the term, the monopoly ought certainly to determine; the forts and garrisons, if it was found necessary to establish any, to be taken into the hands of government, their value to be paid to the company, and the trade to be laid open to all the subjects of the state.” (Smith 1784, p. 75)
Despite Smith’s concession in favor of certain types of temporary monopolies, Smith is adamantly opposed to perpetual monopolies. Smith provides two reasons why perpetual monopolies are bad and are never justified:
“By a perpetual monopoly, all the other subjects of the state are taxed very absurdly in two different ways: first, by the high price of goods, which, in the case of a free trade, they could buy much cheaper; and, secondly, by their total exclusion from a branch of business which it might be both convenient and profitable for many of them to carry on. It is for the most worthless of all purposes, too, that they are taxed in this manner.” (Smith 1784, p. 75)
But wait, there’s more! There’s an additional reason why perpetual monopolies are so bad. According to Smith, giving a company a perpetual monopoly will end up subsidizing, in Smith’s words, “the negligence, profusion, and malversation” of the employees of the company protected by such a perpetual monopoly:
“It is merely to enable the company to support the negligence, profusion, and malversation of their own servants, whose disorderly conduct seldom allows the dividend of the company to exceed the ordinary rate of profit in trades which are altogether free, and very frequently makes it fall even a good deal short of that rate.” (Smith 1784, p. 75)
Smith concludes his survey of East India Company with a general point about all joint stock companies that are engaged in the business of overseas trade. According to Smith, such joint stock companies cannot survive without a monopoly: “Without a monopoly, however, a joint stock company, it would appear from experience, cannot long carry on any branch of foreign trade.” (Id.) Why not? Because the directors and managers of large joint stock companies can’t respond to market conditions as quickly or astutely as smaller competitors can:
“To buy in one market, in order to sell, with profit, in another, when there are many competitors in both, to watch over, not only the occasional variations in the demand, but the much greater and more frequent variations in the competition, or in the supply which that demand is likely to get from other people, and to suit with dexterity and judgment both the quantity and quality of each assortment of goods to all these circumstances, is a species of warfare of which the operations are continually changing, and which can scarce ever be conducted successfully without such an unremitting exertion of vigilance and attention as cannot long be expected from the directors of a joint stock company.” (Smith 1784, pp. 75-76)
Smith then applies this general lesson to the specific example of East India Company:
“The East India Company, upon the redemption of their funds, and the expiration of their exclusive privilege, have right, by Act of Parliament, to continue a corporation with a joint stock, and to trade in their corporate capacity to the East Indies in common with the rest of their fellow-subjects. But in this situation, the superior vigilance and attention of private adventurers would, in all probability, soon make them weary of the trade.” (Smith 1784, p. 76)
Notice what Smith is doing here. He is describing is a kind of political-economic paradox, a classic catch-22 or “damned-if-do, damned-if-you don’t” situation. On the one hand, monopolies are doomed to fail because monopolies tend to produce “negligence, profusion, and malversation” on the part of employees. But at the same time, a joint stock company engaged in overseas trade cannot survive unless it is awarded a monopoly over that trade. Hence the catch 22!
Does this paradox have a solution? What is the ultimate lesson of the East India Company? The Smithian solution is to grant “temporary” monopolies, just like the we do for copyrights and patents. But how long should these each of these “temporary” monopolies last? That is, how temporary is temporary? Alas, Smith does not say.
Nota bene: I will conclude my survey of Adam Smith’s digression on joint stock companies on Tuesday (18 August).
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