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Thursday, July 4, 2013

The spread of the Smithian movement

The Wealth of Nations and Jeremy Bentham

Contrary to received opinion, the Wealth of Nations was not an instant success. Of the leading British journals of the day, the Annual Register gave it a brief, tepid review, while the Gentleman's Magazine ignored it altogether. The most influential journal, the Monthly Review, was ambivalent about the book. Indeed, there were no citations to the Wealth of Nations in articles on economics for ten years after its publication, and no one mentioned the book in Parliament until 1783. It was only in the 1780s that the book began to roll.

By 1789, the Wealth of Nations had already gone into five editions. Between 1783 and 1800, MPs in Britain appealed to the authority of Adam Smith 37 times. The noted English philosopher Jeremy Bentham (1748–1832), son of a wealthy lawyer, proclaimed himself a fervent disciple of Smith. His first economic work, however, was bold enough to take his master to task for inconsistency in his own free market views by upholding usury laws. In The Defence of Usury (1787), Bentham pointed out that usury laws create a scarcity of credit. He also stressed that usury is what would now be called a victimless crime and therefore not really a crime at all. He had noted elsewhere, in a work on morals and legislation, that ‘Usury which, if it must be an offence, is an offence committed with consent, that is, with the consent of the party supposed to be injured, cannot merit a place in the catalogue of offences, unless the consent were either unfairly obtained or unfreely; in the first case, it coincides with defraudment; in the other, with extortion’. In short, in the latter cases, no special laws against usury would be needed beyond the common legal prohibitions of force and fraud.

There are hints in Bentham's Defence of Usury, for the first time in Britain, that the fundamental cause of interest is time-preference. Thus Bentham refers to lending as ‘exchanging present money for future’, and also defines a saver as someone who has ‘the resolution to sacrifice the present to [the] future’. He also understands that added to pure interest is a risk premium proportionate to the risks a creditor expects to incur in a particular loan.

Some Smith biographers have accepted the legend that Bentham's Defence of Usury converted Smith to the free market in lending position, but there is no real evidence to that effect. Moreover, it goes against what we know of Smith's general intractability. A Scottish friend wrote to Bentham that Smith is supposed to have told a third party that he admired the Defence, and that he could not complain about the treatment Bentham had accorded to Smith. The friend concluded that Smith had ‘seemed to admit that you were right’. On reading this, the eager Bentham wrote to Smith asking him whether he had actually converted him to opposition to usury laws. Smith, however, received the letter virtually on his deathbed, and he could only send Bentham a copy of the Wealth of Nations. All this is far too flimsy an evidence of any recantation by Smith.

Austrian Perspective on the History of Economic Thought (2 volume set)

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