Adam Smith's Fallacy
How Smith's theory of productivity supported Vincent Ostrom's Gargantua that ate the ecology
The Wealth of Factories
In the 1970’s I was fighting highways and trying to find the logical wedge that separated the local urban destruction from the apparent myth that the net result of all that destruction was “good for the nation”. To me it did not add up. My logical grappling with the problem went into writing Limits to Mobility (LTM).
In 1980-81 and then after 1984 I lived and worked in the DC orbit where one might expect to find the logical center of the strange arithmetic of adding up destruction to a production. Perhaps there is a path through Schumpeter’s “creative destruction”: Interesting, but that is not where I am going here.
Adam Smith [1723-1790], author of The Wealth of Nations [1776]
The obvious problem with our highway program is that it demolished the urban development at the center of our economic production to create more capacity for automobile traffic where it did not fit. The urban ecology we had, that was transit-oriented development (TOD), was replaced by auto-oriented sprawl (AOS). Productive activities just diffused to cover “green” space. In another version of “adding up destruction to get production”, did we just transfer the productive locations at the cost of using more space? How could that make sense?
In DC I heard some people who believed that the answer was in Adam Smith’s theory of productivity through mobility. Adding space increased productivity.
Most people, and a lot of transport analysts, would not state the theory in that way. Rather, there was a benefit to connecting any locations more efficiently in some big benefit-cost analysis of the ecology * (or “the economy*” if you prefer). And that is where the logical wedge applies: What happens if the locations you thought you were connecting in a static ecology simply spread out more as obviously happens in the AOS? Even economic analysis suggests that when one factor is made cheaper it will be used more. But that affects the physical form of all production.
Is this connection of sprawling locations just a Red Queen race in our ecological consumption? We will pursue this after considering what Smith said and how that was adopted in the American space of our urban-industrial ecology. And then we will tie that to Vincent Ostrom’s theory of efficiency by Gargantua.
*BTW: I often point out that eco-logy is literally our concept of what we live in while eco-nomy is the management of that. Our colloquial meaning of “economy” has shrunk.
Smith’s Scale Economy
I do not want to impugn Smith who said so much that was cogent about the urban-industrial ecology that was developing in the UK. He wrote more than The Wealth of Nations and ythere were few such panoptic thinkers until Marx. Smith’s “invisible hand” recognized the essential form of all complex systems, that from modular interaction emerges a form of interaction. There is no autocrat who made it that way. That is the ecology or any complex part of it. That is the part of Smith LTM takes to criticize the faulty part, that mobility can be a teleology (final cause or goal) of any ecology. There are logical Limits to mobility that in turn limit what the State can dictate.
The crux of the matter of mobility as efficiency is from this passage in Smith [The Wealth of Nations, Adam Smith, Edwin Cannan, ed., The Modern Library, 1937, pg. 147]:
“Good roads, canals, and navigable rivers, by diminishing the expence of carriage, put the remote parts of the country more nearly upon a level with those of the neighbourhood of the town. They are upon that account the greatest of all improvements. They encourage the cultivation of the remote , which must always be the most extensive circle of the country. They are advantageous to the town, by breaking down the monopoly of the country in its neighbourhood. They are advantageous even to that part of the country. Though they introduce some rival commodities into the old market, they open many new markets to its produce. Monopoly, besides, is a great enemy to good management, which can never be universally established but in consequence of that free and universal competition which forces everybody to have recourse to it for the sake of self-defence.”
This is a statement of scale economy elsewhere expanded in Wealth of Nations (WoN). It depends on a particular spatial model of the urban form. It recognizes no limits to the scale economy. But the limit is called congestion and we all know about that even if the colloquial meaning is incorrect. But let us get there by considering the idea of scale economy first:
A little production has little productivity. Productivity is some efficiency, say widgets per hour. Craft production is inefficient (e.g., the cottage pin maker).
A big production (mega flow of widgets) is productive measured as many widgets per hour. Productivity increases with scale, or more precisely the input-output flow though some process node. A bigger flow being more efficient (flow per cost) is scale economy.
There are limits. That may be localized in the process node but over an ecology (an industry, a city, a factory, an economy) the limits shift around. At any limit (bottleneck) the efficiency stops increasing and may even breakdown. The conventional economic term is “increasing marginal cost”.
It may seem a leap from a factory-production image to highways and traffic (or any network and its flows) but that is where “congestion” as the last phase seems more self-evident than endless “scale economy”. Can we relate these models? That is just what the mobility apologists do.
Congested Networks
To be precise, in graph theory (about networks) a congested network is one in which the form (the joint or ecological conditions) of all the nodal interactions (flows) changes with the flows. No one is operating in a static “circumstance”. Then a “congested network” is just a general case, in fact that of any economy or ecology or physical system. We only align the network characteristic with the colloquial image of “limit”, “breakdown” or “increasing marginal cost” (if you are an economist) when we notice particular bottlenecks. Freeways are a congested network alright, but we only say “congested” when the production of traffic is high and meets capacity limits. And then highway engineers say how “efficient” it would be to take some more urban space for right of way (ROW), and never how efficient it would be to produce less traffic.
You have been led down a logical path in which Smith’s little model becomes a congested network of a complete economy, or urban-industrial ecology. A scale economy is only a transient on the way to a scale dis-economy. The bottleneck may jump around and the “scale economist” only points to the particular nodes that are not bottlenecks but have slack capacity. Look how productive that factory is, not at what the air pollution produces (or other dosage-risk) or what happened to that clear-cut rainforest to feed the plant. We arrive at the myopic image that “growth is good” and GDP is its measure. As for highway engineers, they just keep chasing “congestion”, never wanting to admit that their level of service (LOS) efficiency is just transient while ecological destruction is permanent.
With the rose-colored myopic view the rest of Smith’s quote may follow: Look at where the slack is, not where the bottlenecks will move to. The part about “monopoly” however is clearly misguided. Soon it would become obvious that “monopoly” in its industrial-pejorative sense would be the dominant image as production exploited mobility to override the efficiency of competition.
Smith is as right as there are scale economies somewhere in the ecological (or just industrial) network. And he is wrong anywhere there are bottlenecks or limits. This adds up to null in the complete ecology. No one is qualified to control all the bnottlenecks or to claim it would all be “better” if there was just more flow everywhere. Our practice of measuring the flow as GDP just shows the fallacy regarding the complete ecological state.
The fallacy, less in Smith than his growth apologists, is known as ceteris paribus in economics. That is just the myopic mistake that if the rest of the network stays the same I can be more efficient by increasing my flow. And that cannot go far until I reach my limits. It is also myopic over the time of my own development. The extreme example would be: Hey, this freeway is great since I can get places faster. And there are so many places to get, some of which are also on the move. Faster pussycat, faster! Then I am spending all my time doing nothing anywhere.
It is curious to me that the argument for mobility efficiency is that getting anywhere is a dead loss of unproductive time and so to be minimized. There are many who have noticed this mess of inconsistency and point out that access, the form of the spatial ecology, is the proper object. The network is congested, and changes, but it is the places left over that matter as much as their connection.
Smith’s model is that there was a place of production connecting outflow places of consumption (the market) and inflow places of supply. That adds up to a complete network, and not just a buy-sell one but the complete ecology. And in that network Smith’s quote taken naked is just a fallacy of ceteris paribus or incompleteness.
Even within conventional economics, the existence of an economic equilibrium requires congested production at increasing marginal cost. The fantasy of indefinite scale economy—by mobility or any other means of exploiting the ecology—would be of an ecology and economy in total transience. In geographical terms there would be no place.
Smith to Hamilton
We will leap from 1776 to the new U.S. government and then, despite the Constitution, a State Gargantua that does projects—especially whacking congestion bottlenecks—by whacking its mature urban development.
Just suppose Smith is the “free market” advocate that the ideologues unconcerned with the ecology, or risk or equity, take him to be. Actually reading all of Smith’s works, especially The Theory of Moral Sentiments [1759] would show his concerns to be much broader than the efficiency of a factory. The factory has to be in an urban center of labor and the labor has its own human needs. That is the ecology and its economy in a fuller (but still anthropocentric) sense.
Even when it came to “internal improvements”, Smith saw that they could be made by financially accountable turnpike or canal enterprises before the State was needed. And why would the State be needed at all except where projects had diminishing economic return? This ironically raises the issue of “larger” ecological benefits, that the State should attend to. But doing that from the narrow (money) perspective is just contradictory (as I explained in my benefit-cost post). The analysis just claims that exploiting the ecology to bring it into the money-economy is “beneficial” and that is a myopic and value-less conclusion..
Smith was a product of his time and place. America in contrast took the British urban-industrial revolution, despite our Revolution, and spread it behind a transient spatial frontier. The indubitable role of the State in spreading west required an expansive military path-and-fort project, analogous to what England was doing to subdue Scotland. Behind the frontier, did we or did we NOT have an urban-industrial ecology that would self-organize as if by “free enterprise”? Did the Constitution say that the Federal State should do the development? Noooo…
LTM Part II has more on the subtleties of our “internal improvements” debate. That in any case was ignored by the State projects, notably for highways, after 1893.That was in the maturity of the TOD and absent any such projects for “free enterprise” rail. Let rail die as it met its financial bottlenecks pressed by highways.
Smith was drawn into this muddle by Alexander Hamilton and his American System. That is contained in Hamilton’s “The Report on the Subject of Manufactures”, December 1791 [fully transcribed in Papers of Alexander Hamilton, Volume X, Syrett, ed., Columbia Univ. Press, 1966].
Hamilton’s American System was about developing industry, and implicitly an urban-industrial ecology, here in the US of A. This was not at all “free trade”. It mattered what kinds of manufacture were here and not somewhere else. American industry was to be encouraged, perhaps by bounties, and protected from trade by tariffs. After the Civil War, about our sectional differences on labor, tariffs and trade, Smith’s theory about scale economies argues for international free trade and we see we are in another reaction period against that. If only Drill Baby’s tariffs had some of Hamilton’s logic and an idea of urban-industrial form behind them.
None of The American System was much about urban development. That was hardly thought of at all until the New Deal realized the cities were where the economy mostly was. And only at that time [1934] were urban highway projects even thought of. But then with a vengeance leading to the urban freeway system and all the fallacies inherent on extrapolating Smith’s mobility idea. And after all it was rail carrying the load but the State was ignoring that since 1920.
To go back to Hamilton is to return to the same naiveté of Smith’s regarding a partial picture of an urban-industrial ecology that would develop radically over the century. Neither was thinking “rail” or cities so complex they needed their own economy (in the proper sense). At no time would the State projects be competent to grapple with that.
Hamilton’s Report is mostly a reaction to the concept we think of as Jeffersonian, that America is an agrarian-yeoman society. The later [1808] Gallatin projects under Jefferson may be interpreted mostly as reinforcing the frontier expansion of development but also tripping over constitutional constraints.
Hamilton was arguing against the agrarian bias as if it were also industrial indifference. But the urban-industrial ecology was already a fact. Except for a transient of subsistence just behind the frontier, it was a cash-crop economy (cf., the whiskey rebellion) needing industrial tools and urban markets. We had the central-place urban geography at all levels of mobility until the State projects were indifferent to urban form (What? Land use? Not my project.)
Then Hamilton was fighting a strawman, as even he shows by enumerating just how much industry had developed. He was just arguing that the State should pay some attention to what industry was here rather than “there”. At stake was how our urban-industrial form would develop. And indeed the next half century would show the importance of that issue. Would we be like the South, just another Caribbean-slave, natural resource exporter or a full high-tech, capitalist industrial-urban power, like the Brits our once and future enemy. It was also about defense.
I am tracing the similarity between Hamilton’s arguments after our Revolution and Lenin’s/Stalin’s after the Russian Revolution. I find that Smith is much more the common source than Marx. Marx was however the better critic of all economic theory and its corruptions on behalf of the partial economy (i.e., capitalism) rather than the full economy of at least the human ecology. Smith would not object except that Marx gets too wound up on the chimera of “value”. The value is the ecology, what you can live in. It was not produced just by human labor.
How much of Hamilton’s American System becomes the System of anything is a matter of what I call formal cause. Sure many people knew what Hamilton was talking about and may have acted in their own times for their own ideas about the urban-industrial ecology. The tariff thing was quite active in the 19th century and, as noted, comes again. If Hamilton had said “microchips” we would be carrying his Report around like Mao’s little Red Book. But Drill baby is less keen on the bounties part that go to nasty places like New York. His United States would rather be Red States. That is just changing the “where” Hamilton had in mind without much attention to the “what”.
An Industrial Policy is not Just a Mobility Policy
It happens I agree that the “where” is important. In the TOD we had the industry in the cities, and even as late as in the cities of Connecticut when I came along in 1948 from parents who met in a ball bearing factory. That factory incidentally was bought out by a German firm and disappeared. The mistake is to think that the scale-economy argument for mobility is complete in the ecology. Take mobility to its extreme and you get frictionless trade and industry slides to where there is cheapest labor. Where’d my job go?
Come through the 1970’s and the long formal effect of the collapse of the TOD was causing the polarizing despair we are in now. The cities and countryside are in despair for the derelict factories. Allocation of blame ensues and the “them” are both in China and here as we polarize and believe in the Leader’s tariffs however he overturns the Constitution. LTM just says that started with how the TOD was treated by supremacy of a modally-biased mobility.
However muddled Hamilton was, and further pressed through the stupid-sieve afterwards, the one prescription that came through to the later State was the same as Smith’s about mobility and scale economy for productivity.
Smith wrote WoN in 1776. A new nation looks for reference material: Let’s Google “Wealth, how to get”. Ah, here is this chap Smith (Scottish so not the hated Brit anyway). And we get Hamilton making practically a direct quote of WoN in his Report [Papers of Alexander Hamilton, Volume X, Syrett, ed., Columbia Univ. Press, 1966, pp. 310-311]:
XI. The facilitating of the transportation of commodities.
Improvements favoring this object intimately concern all the domestic interests of a community; but they may, without impropriety, be mentioned as having, an important relation to manufactures. There is, perhaps, scarcely any thing which has been better calculated to assist the manufacturers of Great Britain, than the melioration of the public roads of that kingdom, and the great progress which has been of late made in opening canals. Of the former, the United States stand much in need; for the latter, they present uncommon facilities.
…The following remarks [of Smith's] are sufficiently judicious and pertinent to deserve a literal quotation: "Good roads, canals, and navigable rivers, by diminishing the expense of carriage, put the remote parts of a country more nearly upon a level with those in the neighborhood of the town. They are, upon that account, the greatest of all improvements. They encourage the cultivation of the remote, which must always be the most extensive circle of the country. They are advantageous to the town, by breaking down the monopoly of the country in its neighborhood. They are advantageous, even to that part of the country. Though they introduce some rival commodities into the old market, they open many new markets to its produce. Monopoly, besides, is a great enemy to good management, which can never be universally established, but in consequence of that free and universal competition, which forces every body to have recourse to it for the sake of self-defence.
Hamilton proposed a Federal Board on industrial development. That comes to nothing. Except for wartime mobilization with the New Deal momentum, we do “industrial planning” as little as we do “urban planning”. It is too much “social planning” and so the slippery slope to socialism and Five Year Plans. But projects are different (?)
Gargantua does Projects
The previous post was about Vincent Ostrom’s use of Smith’s scale economy for regional projects. Ostrom, Tiebout and Warren [1961] argued that Gargantua was the way to be efficient in eminent-domain projects (EDP) emphasizing that Gargantua is top-down preemption by the State. Gargantua gets things done. Gargantua has the expertise. Gargantua overrides all the squabbling among little jurisdictions. It is not the way to economy of the ecology. Elinor Ostrom had the opposite idea of Polycentrism.
Gargantua is perfect for the highway program that has, for a century, overridden jurisdictional enfranchisement and accountability. And always with an anti-urban bias. Not to repeat the previous post, we get a logical line from Smith, through Hamilton to our modern sectional polarization. The idea of an industrial policy became an unaccountable non-policy for the urban ecology. EDP had its own role in the corporate-State power game. So Smith is taken selectively: Free enterprise means no regulation of what we live in; Mobility means GDP and corporate growth. Smith can be used to defend Gargantua against the inconsistency that we do not do socialism or planning but sure can evict people to run a right-of-way through a city.
The fallacy of all this is in the incompleteness of the scale economy idea in the congested network of the ecology, or even just highway networks. It is not a complete theory for the ecology anymore than transport is all of urban access. Access includes location, and yes it does matter where things are. Running a highway through a productive city does displace production even if we only become aware when it has slipped all the way beyond “our economy”. But if you did not catch that when we lost the TOD it is too late when we have to look all the way overseas.
The misapprehension of Smith, leading to Gargantua, is a matter of time and place. In 1776 England the Tragedy of the Commons (TOTC) for agrarian society had already occurred. Ignore that and you have, for instance, wool from the fields-without-community flowing into the dark satanic mills of the industrial cities with disenfranchised slum-labor. That is what Marx noted in his own way. Smith just focused on capitalist efficiency. The transition from distributed craft to the urban factory just suggested that straight line of growth through scale if you ignored the congestion already there. Strip the economy down to a factory node with supply in and product out and all focus is on the scale economy of the process in between. That is just what any corporation would celebrate. That requires technology and reduction of labor to being part of the machine. Of course it requires the consumer market. Smith’s quote just addresses the efficiency of links in and out that are necessary to the scale of the process in between.
What happened is even clearer in America than England. In post-colonial America (and that can include more than the US) it was a matter of time and space that, after all, are what mobility is about. The State saw this as a matter of total space. Manifest Destiny was its project, even if that bifurcated into two sectional prongs. Access was the unorganized space to be seized by reaching across the continent. The transcontinental railroads were the apotheosis of this reach. And they were no “free enterprise” financially accountable but EDP of stupendous corruption. That was the model for later EDP. I recommend Robert Fogel’s The Union Pacific Railroad: A case in premature enterprise [1960].
In the interim between the transcons and 1893 (the start of the State highway program) the TOD matured in the space given it. The TOD organized the urban-industrial access form. Smith came around again in the illogical conclusion of scale economy: Monopoly that the State had to regulate, not foster. Smith and Hamilton missed that.
What did develop as the TOD was not by EDP. It was rather what free enterprise did, up to the limits where regulation was required. The defects of the TOD were in the congested phase of scale economy, and that is the part that rises to State regulation. The Smith-Hamilton extrapolation to Gargantua misses that entirely. It misses it as much as the Soviet Five-Year plans do.