Part 1: Where we started—excerpts from the comments to David Futrelle's post
http://www.wehuntedthemammoth.com/2017/02/02/resisttrump-by-joining-a-local-indivisible-group-maybe/


guest:
Let me talk a little here about the ‘invisible hand’. The Wealth of Nations was published in 1776—at that time corporations were rare, and only authorised individually by Parliament in specific cases for specific purposes to benefit the public (if you’re interested, Smith wrote that corporations should only be authorised for banking, insurance, municipal water supply and transport infrastructure). They were looked at suspiciously by Smith, Parliament, and everyone else because at the time business and economics was all about personal character, and corporations can hide personal character behind collective anonymous ownership. When Adam Smith argued that people acting selfishly are guided by an ‘invisible hand’ to promote the public good, what he meant was that because, in order to gain access to the marketplace, economic actors had to, I guess we would now say, ‘virtue signal’ to demonstrate their trustworthiness as business partners, the stock of actual virtue in society would increase. At the time Adam Smith was writing, to riff on Scildfreja’s point, the economic and the social were not and could not be separated—Adam Smith, whose other book is ‘The Theory of Moral Sentiments’, would have been puzzled at the idea that they could.
@Scildfreja It really does infuriate me that without exception interpreters of Adam Smith are entirely ahistorical. We’re still learning to appreciate the intricacies of what I refer to as the cryptocapitalist economy of Georgian England, but that’s no excuse not to recognise that the ‘capitalism’ Adam Smith writes about in no way resembles the ‘capitalism’ of today. Interpreters are ahistorical in terms of technology as well–his description of the ‘division of labour’ in a pin factory was actually a thought experiment, as nothing like assembly line manufacture existed in England until the early nineteenth century (the Venice Arsenal had developed the technique a few hundred years earlier, but I’d be surprised if Smith knew much about that as it was a military secret–and in fact the first use of the technique in England was also military). Anyway.
And yes, in the first half of the nineteenth century corporations were called ‘public’ businesses, as (as now) they were created by the state, while sole proprietors and family businesses were referred to as ‘private enterprise’. How corporations managed to sneak into the ‘private enterprise’ tent, and thus gain ‘government should leave us alone’ points, is a question I’m still trying to answer (James Taylor, who has done a lot of insightful work in this field, has one answer, I have another, both may be true).
Also I know Adam Smith is a much bigger deal in the US than in England–the English have pretty much never heard of him. When I mention him in talks I typically get a sea of blank looks, so I usually say ‘Adam Smith, you know, THE DUDE ON THE £20 NOTE’ and I swear half the audience reaches for their wallets to look. (I’ve been told he’s on the £20 because he’s from Kirkaldy, which is where Gordon Brown is from.)
And I mean it when I say ‘without exception’–in preparation for giving a talk specifically about Smith’s work at a conference a few years ago I read pretty much everything written about him to date, and not one single author relates his economic work to the actual economy of the time, which is, of course, what Smith drew on to develop his theories.

@Alan It’s not that businesses felt a sense of public responsibility–it’s that people were obligated to treat other people fairly in business to ensure that they were treated fairly in return. Craig Muldrew writes in The Economy of Obligation in 1998 that up to then historians had no real understanding of the scale of the early modern economy–they postulated a low rate of economic activity based on the fact that very little money circulated. What Muldrew explained for his period, and what more of us now understand is the case for later periods, is that the entire economic edifice was built on personal credit. Say you and I do business with each other. We meet once a year to settle up–I’ve provided you with £100 worth of goods, and you’ve provided me with £101 worth of goods–so I pay you £1. The £1 is visible, the rest of the economic activity is not. That’s obviously a simple example; the credit chains for an extraordinarily complex economy could be very long, in space as well as in time. I’ve read lots of letters saying things like ‘x owes me £y, and x’s friend z owes him £a, so why doesn’t z pay me some portion of £a next time I see him and I’ll credit x for that part of £y’.
This kind of economic system can only work if the people involved know and trust each other. I and others have done work on how personal trust, which facilitated these kinds of informal credit arrangements, was established and maintained. Many business relationships were kin-related (people’s children married the children of people in related businesses to establish trust links) and religious (one of the explanations for the success of Quaker businesses), but most were built up through personal reference and association. One’s character was a marketable trait–if people could vouch for you you had access to credit. I’ve seen lots and lots of letters saying ‘I don’t do business with strangers–who do we know in common, who can assure me that you’re trustworthy, before I engage in a business relationship with you?’
As business was all about relationships, and as these depended on one’s character, if you couldn’t demonstrate to people you wanted to have an economic relationship with that you were worthy of their trust, by acting in a virtuous way, you wouldn’t have access to their credit, and would thus be effectively ostracised from the marketplace. ‘Long term relationships discouraged cheating; as rumour of unfair dealings discouraged others from interacting with their subject it was thus in everyone’s self-interest to act honestly.’
Interestingly, this ties into the history of money–a fantastic book about this is David Graeber’s Debt: the first 5000 years. Money was originally used only for taxes and religious offerings; Deborah Valenze, in The social history of money, talks about how as late as the eighteenth century it was still considered a little ‘dirty’ to exchange money directly for goods and services, and the reliance on personal credit and exchange gave the Georgian economy ‘an aura of gifting’. Aside from extending long-term informal credit, people maintained business relationships through exchanges of actual gifts–of goods, services and information.
Oh and speaking of credit–people in business wanted people to have credit with them; credit was part of the relationship. We read a lot in the literature of the time about people having ‘bills with their tailors’ and whatnot–but this wasn’t necessarily a bad or irresponsible thing. The example I use is this: say you and I are friends. Over the years I’ve lent you a few books, and you’ve lent me a few books. What if I suddenly come to your house with your books and say ‘here, these are all the books of yours that I have, I’m giving them back.’ The implication is that the friendship is over–I no longer have any reason to see you again. Another example is buying drinks at pubs–if I buy you a drink, and you don’t buy me a drink this time, we’ll need to get together again so you can buy me a drink. Outstanding credit is a way to maintain a relationship.
The economic system of peer to peer exchange based on credit facilitated by long-term personal relationships, which I call cryptocapitalism, has been generally ignored by historians–in my opinion it’s because of Marx, whose four-level economic categorisation leaves this stage out. (In writing this I’m realising that Marx himself was observing and writing during the transition from cryptocapitalism to modern capitalism–I’m not enough of an expert on Marx to know how much of what he calls ‘capitalism’ is the former rather than the latter; it would be a good research question.) Scholars have identified aspects of this economy, but have never drawn it out as a distinct system–E. P. Thompson does a good job of describing parts of this economy in Customs in Common, but as he is a Marxist he can’t really place it, referring to it as a ‘transition period’ between feudalism and capitalism. (How it can be seen as a transition when it resembles neither of these is beyond me.) Some historians seem genuinely baffled by it–here’s Gillian Cookson:
‘To accept that some kind of collaboration operated, and apparently worked well, requires an imaginative leap out of the competitive and confrontational framework upon which much late-twentieth-century management thinking rests. The evolution and success of the system is explicable in the artisan context of early textile engineering. Artisans generally took a long view of business, seeing continuation as a priority so that following generations had the means to make a living. This apparently anachronistic pre-industrial milieu provided a highly suitable setting for the new industry.’

Rhuu:
@guest: I honestly don’t understand how economists don’t get the

‘x owes me £y, and x’s friend z owes him £a, so why doesn’t z pay me some portion of £a next time I see him and I’ll credit x for that part of £y’.

bit. Haven’t they ever had a large group of friends? I’m not particularly fond of the idea, but it always seems to happen! You make a group order from thinkgeek or something, then someone else organises tickets to a concert, then someone ELSE organises a big dinner where everyone is going to pitch in 5$ for ingredients. And you’re like “OH, I’ll just pay 10$ because I owe 5$ for that thinkgeek order, and cover that organiser. And we’ll be square!”
I just never realised that that sort of thing would happen on a larger scale, and be the basis of an economy.
Though since it also happens organically in games like Catan or Bohnanza, that makes total sense haha.
Thank you for the lesson! Economics is something that seems so big, I really don’t know much about it. I enjoyed the people aspect of it as well.
guest:
Yes, exactly–that’s just how a group of friends, who know and trust each other, are connected through long-term relationships, and don’t see any benefit out of ripping each other off, would behave. One of my favourite research finds was a letter from someone who manufactured parts for spinning machines to the owner of a canal boat company–he wrote something like ‘hey, I ordered 40 pigs of iron but you only dropped off 38 on Tuesday–could you have a root around the bottom of the boat and bring me the other 2 when you find them’–that’s how two people who have a personal as well as business relationship interact. Informal mediation to settle disputes was preferable to formal contracts or legal action–letters like ‘you and I disagree how much I owe; let’s get two people we respect to hear us out and decide.’ This is capitalism, but a very different kind from what we see today.
Alan Robertshaw:
You’re really putting a lot of the stuff I do in context. What’s especially interesting though is how much of what you mention still goes on. It’s just not as apparent. But we have things like ‘without prejudice’ discussions, alternative dispute resolution, and you may remember from some threads about the sharia courts how the arbitration acts allow for parties just to choose someone all sides trust to decide disputes and avoid the regular courts. It’s not just small businesses either. The biggest users of ADR are the oil companies. And those ‘Alice owes Bob, Bob owes Charlie, so Alice can do something for Charlie’ solutions crop up a lot. It’s ironic perhaps but barter, promises of future favours etc are really common in big business. It avoids legal costs and there can be tax advantages.
Trust is still a major thing in commercial settings. One problem that I often encounter is that there’ll be some hugely complex multi million pound deal and absolutely no written record of it. It’s all done on a handshake. That’s fine until something goes wrong.
Related to that is that I’ve done more defamation cases for companies than humans. Obviously corporations can’t suffer hurt feelings but they can claim for loss of reputation. You might not be surprised to hear that ‘imputations as to competence, honesty in business dealings or creditworthiness’ are treated with particular seriousness in law.