Friday, January 31, 2014

Learning From Adam Smith

Ian Buckley, (Emeritus Faculty, The Australian National University) posts an interesting article: HERE  [Last accessed 1 February. 11 am]
Learning from Adam Smith - Help at Hand Today: an essay on How the World’s Economies Might be Justly Optimised”.
This is an interesting essay even for beginners studying Adam Smith and would benefit to some ‘old hands’ too.  The first 25 pages of 44 are devoted to a well- written, fairly comprehensive account of aspects of Wealth Of Nations, complete with copious and well-chosen quotations from Smith’s historical account of the evolution of commercial society from pre-history to the 18th -19th century, including Britain’s and other European countries’ Empires. 
This covers a lot of ground and for many readers may be new, at least in its coverage in one short essay.
Ian Buckley writes well and clearly, qualities not always found in this area.
The second theme is an account of the beginning of the end of colonialism marked by the recommendations by Smith at the end of Wealth Of Nations (see the very last paragraph). But no European governments followed his advice, including London after its arrogance lost it its first empire and immediately embarked on seizing its second Empire (West Indies, South Africa, India, South-East Asia, Australia, the Pacific and Canada).  The over-reaching phenomenon of Empire building and its associated historical rivalries led to much waste of blood and treasure on war preparations that diverted much capital (fuelled by taxation and borrowing), and especially so by the First and Second World wars in the 20th century.
Ian Buckley is masterly in his use of politico-historical sources that led up to the First World War in this section, which I am sure will be informative for many readers of Lost Legacy.
Now, Britain is in its twilight years and continues to assume a world military role that it can hardly afford the billions required.  UK politicians have learned nothing and tend to regard its past glories as solid evidence that it plays a world role today and will do so tomorrow. Instead of becoming a beacon for world moral leadership with its humanitarian impulses and standard-setting, and democratic institutions, it chooses to assume its continuing role by sullying the positive sides of its historical reputation and its example.
Adam Smith had a lot to say about Britain’s potential place in the world that is worth reading, ‘warts and all’.   Ian Buckley’s essay in a good place for readers to start their reflection of what we can learn from Adam Smith.

Thursday, January 30, 2014

Theories That Ignore The Real World of the Politics of States Are Not Helpful Operationally

Peter Boettke declares enthusiastically that he “loves thinking about economic theory” HERE 
“I am also struck by the beauty of an economic explanation of the self-regulating free market economy; how the really great economic thinkers are able to derive the invisible-hand theorem from the self-interest postulate via the institutional analysis of private property rights, relative price adjustments, and profit and loss accounting.  Hume, Smith, Ricardo, Say among the classics; Menger, Bohm-Bawerk, Wicksteed, Wicksell among the early neoclassicals; Mises, Hayek, Alchian, Buchanan, Coase, Demsetz, Kirzner, V. Smith, and Tullock among the moderns --- all reflect this beautiful logic of economic theory in the hands of a skilled practitioner.
The beautiful theory these thinkers helped to construct and work with, however, was part blackboard abstraction, and part hard nosed observation of the economic world.  They used the blackboard economic theory they worked out to understand the world they saw out the window.  The purpose of theory is to do history.  But you must use a theory --- there is no such thing as theory-less observation.  You either utilise articulated and defended theory or you use implicit and undefended theory, but theory is going to guide interpretation of the world of economic experience.
A lot of complaining is currently going on about blackboard economics -- some of it is justified, much of it is VERY confused and ideologically motivated.  In these discussions, however, it seems important to stress two things: (1) the world of economic life is so intellectually fascinating that taking on the role of the economic naturalist (to use Robert Frank's term) is an amazing adventure once you allow yourself to be open to the mystery of the mundane, and (2) you cannot accomplish (1) without being in possession of a solid understanding of basic economic theory.  Economic theory must be understood as a tool for social understanding, never as a tool for social control.  But in order to learn theory, you must study the blackboard, follow the logic of an argument, engage your critical reasoning skills, and adopt the attitude of a life-long learner.
I discuss this issue in my latest Economic Way of Thinking column for FEE.  Being able to look out the window is our goal, but our vision will be that much better when improved with the eye-glasses of economic theory as developed by the classical political economists, the early neoclassical economists, the Austrian school economists, property rights economists, market process theorists, and modern political economists -- i.e., what I describe as "mainline" economics in my “Living Economics: yesterday, today, tomorrow”.  2012. The Independent Institute – Universidad Francisco Marroquin).”
I warmly recommend Peter Boetkk’s introductory text book. It is refreshingly written (typical of Boettk’s writing style, which, if followed in his teaching, I can imagine  his classes are very popular.
However, sad to say, articulate writing and teaching are quite independent of the validity of the views expressed therein and while I would agree with much of what he writes I am not so certain that beyond undergraduate years the enthusiastic presentation of content is sufficient to be the sum of concerns about the advice for policies to govern in an economy.
Peter’s selection of the high contributors to economic theory ("Hume, Smith, Ricardo, Say among the classics; Menger, Bohm-Bawerk, Wicksteed, Wicksell among the early neoclassicals; Mises, Hayek, Alchian, Buchanan, Coase, Demsetz, Kirzner, V. Smith, and Tullock among the moderns") is not an exhaustive selection from the host of the world’s economists who made seminal contributions. 
I am not suggesting that Peter’s list was meant to be exhaustive, but that list or a different list identifies the problem.  Those of a different persuasion, or ideology, would produce a “beautiful logic of economic theory” and would lay claim to be “skilled practitioners”.   Or worse, “skilled practitioners” or not with “beautiful logic” or with back of an envelope ravings and particular bees in their bonnets, can and have formed other theories  (or as Keynes once remarked, “heard voices in the night”). 
In short, economies are not pristine beautiful, nor self-managed. They exist in human societies and have always been integrated within the social relations of varying degrees of sophistication, that is, within politics.  Pristine beauty is not a characteristic of any known economy now, recent, near past, distant past or very distant past.  Hence, blackboard models from the simplest demand curve to general equilibrium, to complex, adapted, economic theories function within unstated but ever present political constraints, not present in the equations for the purposes of pure analysis, but absent the political influences of humans in society means they are neglected at great cost to their operational relevance.
Much economic theory ignores the existence of the States that economies must work within, yet states in some form from primitive to recent and today’s ‘Big’ Governments have existed since some humans left the metaphorical forests and peopled the Earth.
Hence, the competitive free markets at the root of the ‘beautiful’ theories have never really existed and are unlikely to ever exist whether this fits the “beautiful economic theories – or their Statist (Marxist ‘dictatorships of the proletariat’ and Fascist ‘national destinies’) – or not. 
Moreover, arguments between ideologies of Left and Right, at root are political and therefore irresolvable once students leave the blackboards in their classrooms. Meanwhile, teachers, including brilliant teachers like Peter Boettke, clear their blackboards and settle down to think of new materials for their next class. 
The same goes for those in the higher-levels of mathematical abstraction who regularly publish in the higher academic journals, some, meanwhile, dream of winning their Nobel Prize and joining the advisory council for a friendly President or Prime Minster to assure them of the viability of the “invisible-hand theorem from the self-interest postulate” to wreck or run the state dominated, real less- than- perfect economy allegedly operating “outside their windows”. 
It is sad in a way and predictable, but I remain optimistic for the long run. 

Wednesday, January 29, 2014

Misled Consequences of a Views Reporter

Eric Zuese, an ‘investigative  reporter’, posts (21 January) on OpED News HERE  on
“The  Invisible-hand of Crooks”
This is the reality of what Adam Smith called the "invisible hand". This reality is no "invisible hand," but instead merely the hidden hand, of top organized criminals. These elite criminals, our aristocracy, buy their selected politicians, in our "democracy," in this "capitalism." Andy Denis's brilliant and devastating 2005 "The Invisible Hand of God in Adam Smith" in Research in the History of Economic Thought and Methodology, traced the origin of the "very significant apologetic aspect to Smith": "The message is clear: what is good is good and what is bad is good as well; everything is for the best, so whatever happens rejoice, and accept." Smith himself, in 1790, explicitly heaped praise on the "all-wise Being, who directs the movements of nature," and he said that, "God himself is the immediate administrator and director" of everyone. Smith wrote, there, that, "All the inhabitants of the universe, the meanest as well as the greatest, are under the immediate care and protection of that great, benevolent, and all-wise Being, who directs the movements of nature; and who is determined, by his own unalterable perfections to maintain in it, at all times, the greatest possible quantity of happiness." He went on to urge "magnanimous  resignation to the will of the great Director of the universe," and he said that, "The care of the universal happiness of all rational and sensible beings, is the business of God and not of man." So, unquestionably, it's God's "hand." A writer like that is the perfect propagandist for the aristocracy; so, his career was financed by them, and they still spread his fabrication. They call it "the free market." Of course, back then, buying and selling slaves was a booming part of it. That's how "free" it really was.
Is this updated feudalism really just fascism, not "capitalism," at least not any democratic form of capitalism? Is it just a Big Lie?
Whose hand is it, really, that's secretly rummaging through our pockets, while we would get life imprisonment for stealing just a millionth of what they have already filched?
And celebrations are held in their honor? Why? Who is paying for this party?”
Adam Smith's "Invisible Hand" of Crooks is tendentious.  
Part III of Moral Sentiments was added to TMS in Smith’s final revision, published in January 1790, some months before his death after the ms went to his publisher in December 1789 which was long delayed after his fifth edition, 1781 (see Smith’s apologetic correspondence with his publisher).  It also contained much of his revisionary editing of his earlier expressions with open and subtle and retractions of his declining religious faith, instigated from during his days at Oxford 1740-46.
In TMS Part III, pp. 109-78, Smith describes the two sources of the ‘Sense of Duty’ in mankind, ‘Nature’ and the ‘Will of a Devine Deity’.  Smith was careful all of his life to avoid antagonizing the considerable powers of the religious zealots, then active in the Church of Scotland and known for their disruptive powers over those who, in their theologically narrow views’ could, and did, cause personal problems for signs of deviation from their strict interpretations of biblical doctrine. [For more detailed treatments, see my paper, “The Hidden Adam Smith in his Alleged Theology”, Journal of the History of Economic Theory, September 2011, and my chapter in “Adam Smith on Religion”. 2013. Oxford Handbook of Adam Smith, eds. Berry, Paganelli, Smith, Oxford University Press].
In consequence, when Andy Dennis, a formidable young intellectual, who teaches in London and has written widely and deeply on Adam Smith (we have met and discussed his work at UK History of Economic Theory seminars, which encounters were always conducted with the proper scholastic proprieties, and both of us remain unconvinced by each other’s arguments), is quoted by Eric Zuese, an ‘investigative reporter’, he accepts Andy’s statements without question.
I am bound to say that Zuese apparently has probably not read TMS and explored what Smith was really saying, and has simply accepted what Andy wrote in his brilliant published PhD, in the appropriate context of Smith’s circumstances in a clerically dominated 18th-century, Scottish society.
In the chapter quoted by Andy Dennis, Smith discusses the ‘rule of duty’ in human behaviour and identifies the “coarse clay of which the bulk of mankind is formed, cannot be wrought up to such perfection”, and thereby requires “general rules” to guide conduct. 
Smith discusses men in how societies “during the ignorance and darkness with pagan superstition” of religious ideas of their fear of “mysterious invisible beings”, called “upon Jupiter to be witness of the wrongs that was done to him”.   Smith originally analysed this mystical phenomenon in his 1744 essay on the “History of Astronomy” (published posthumously in 1795).  He added in 1790:
And thus religion, even in its rudest form, gave a sanction to the rules of morality, long before the age of artificial reasoning and philosophy. That the terrors of religion should thus enforce the natural sense of duty, was of too much importance to the happiness of mankind, for nature to leave it dependent upon the slowness and uncertainty of philosophical researches”. (TMS III.5.4:164].
With the replacement of pagan superstition in parts of Europe, the revealed religion of the New Testament took over reinforcing what ‘”Nature” had prescribed inadequately in its execution and replaced it with the religion of a single (also invisible) Deity. 
Smith described the role of that religious single Deity but, as is typical throughout the last 6th edition of TMS, presents this knowledge very carefully, not absolutely.
Since these, therefore, were plainly intended to be the governing principles of human nature, the rules which they prescribe are to be regarded as the commands and laws of the Deity, promulgated by those vice-regents which he has thus set up within us. 
Note that Smith alludes to ‘the rules of nature” that have now become “to be regarded as the commands and laws of the Deity” and decidedly are not “the commands and laws of the Deity”.  This is an example of many other similar qualifying terms that avoids Smith’s embarrassment of conflicting with and, thereby, raising the hue and cry of the ever vigilant vigilante-like zealots (during Smith’s time at Glasgow, as both student and professor, the zealots in the Glasgow Presbytery charged three Professors of Moral Philosophy with heresy and hauled them before them to answer the charges). 
Near his death-bed in January 1790, Smith was free of that threat but if he believed in Christian religion he would have been aware that he was supposedly about to meet his maker.  However, his conduct was not risky for a defiant non-believer!
Readers who seek more comments on the quotations from Smith’s TMS selected by Eric Zuese (or Andy Dennis) should consult my above-mentioned papers in JHET and the Oxford Handbook.
As to the implied nonsense about “financed by the aristocracy” and “fascism”, by a so-called ‘investigative reporter’, I respectfully suggest that he does a lot more “investigative” work into the Works and times of Adam Smith before moralising negatively about a long dead person who cannot answer back.

Tuesday, January 28, 2014

Genuine Question on a Baffling Statement

Livio Gaeta (Università di Napoli “Federico II”) posts on John Betjamins Publishing Compay HERE
The invisible hand of grammaticalization”
“West-Germanic substitutive infinitive and the prefix ge-
“Grammaticalization may have therapeutic and pathological effects on morphology. The paper will focus on these latter with special regard to the occurrence of a morpheme in an unexpected form as is the case for the West- Germanic substitutive infinitive. The reason for this mysterious case of formmeaning mismatch must be sought in the grammaticalization of the Germanic telic prefix *ga-. As a consequence of its grammaticalization in the past participle, a semantic incompatibility prevented the so-called AcI-verbs from being touched by the grammaticalization wave spreading the perfect periphrasis throughout the whole verbal system. Thus, the arguably default form came in, namely the infinitive, whereby the perfect periphrasis could be completely paradigmaticized even though at the cost of a form/meaning mismatch. In this light, the long-wave effect of grammaticalization can be made responsible for the anomaly preserved until today in all West-Germanic dialects, in which ge- was grammaticalized as an inflectional marker.
When you do not know what someone is talking about, it is probably best to say nothing.
So I shall abstain on this occasion. But as a metaphor describes its object in a “more striking and interesting manner” (Adam Smith, 1762-3, p. 29. “Lectures on Rhetoric and Belles Lettres”, Oxford University Press and Liberty Press, my question to Livio Gaeta would be: of what object does the IH metaphor on this occasion refer? 

Misplaced Certainty From Moderate Voice

William Kern posts on The Moderate Voice (“An Internet hub for centrists, independents and moderates with domestic and international news, analysis, original reporting and popular features from the left, center and right”):
Wikipedia’s ‘Invisible Hand’: More Right-Wing than Left (Le Temps, Switzerland), HERE 
Participating individuals pursue their own personal goals, sometimes in competition, but they contribute to the general interest. Free competition leads to the gradual elimination of error. Marc Foglia, in his book on Wikipedia, draws a parallel with one of Adam Smith’s 18th century theories. Just as in economics, the “invisible hand” will always guide Wikipedia toward increasingly reliable information.
The anonymous authors have bought into the modern myth of the ‘invisible-hand” which does not exist and which Adam Smith never credited his use of the metaphor to have the “miraculous” power that it “will always guide Wikipedia [or anybody or anything else] toward increasingly reliable information.”
It certainly does not do that in any known economic system.  So why would it do that for a web site, even if staffed by well-intended people (remember: 'the road to hell is paved with good intentions, etc.,') and human motives lead to actions that can, and often do, have unintended consequences, as Adam Smith noted, but as regularly those consequences are not benign, especially in economics.
Therefore, I do not have confidence that Wikipedia will buck that trend and “always” begat “reliable information”.  It doesn’t happen anywhere else, and certainly not in economics.
The “wisdom of crowds”, likewise is a dangerous tiger to ride upon. The enthusiasm of crowds can produce appalling outcomes, as Nazism and Communist revolutions showed, as well as cheering crowds at some adorable political figure who leads their party, and the country, into a dead-end.

Adam Smith versus John Nash on Self-interest

A regular number of different readers write to me about posts I made in 2005-2009.  Some of these posts were from students taking up  defending Noam Chomsky’s views on the importance of Adam Smith allegedly recanting his views on the division of labour in Wealth Of Nations, which, in my view, is not true.  These comments were usually sent around the same months of each year, from which I surmised that a class teacher somewhere put the reference on his reading list. (No, I am not paranoid!).
Here is another very ‘late’ comment on a post on a different subject, this time referring back to my original post on the John Nash theorem in 2007.   This time I criticised the lines given to John Nash, by the Hollywood scriptwriter for the semi-biographical film, ‘A Beautiful Mind’, containing a scene on a boy’s night out, into which bar came an attractive young woman.  All the boys make a beeline for her to ‘chat her up’, as is said by kids.  Of course the mass ‘chat up’ fails, to which the John Nash character comments sourly about how their competition predictably disrupted each others efforts, and concluding that Adam Smith was wrong about the positive influence of competition.
The post generated some comments from readers.  Similarly, over the years I have replied to other reviews of “Beautiful Mind” when they come up, especially because they repeat the canard about Smith being wrong and John Nash on the boys night out being right.
I reproduce the original post below and my original comment:
My Post from Lost Legacy, February 2, 2007:
“John Nash Was Not Right about Adam Smith Being Wrong”
“I found a most interesting piece of commentary that is one of those that goes almost far enough, but not quite in its thinking, and I would like to examine its good points and suggest how it might be made completely accurate. The extract states what the author considers a difference between Adam Smith and John Nash, or rather an Hollywood scriptwriter’s version of the differences. Fine. I am not snobbish and given only to contesting the ideas of tenured professors out of Chicago; I’II take on Hollywood scriptwriters too, yes Sir.
The author is someone from The Amrita School of Business blog (2 February), but I know no more about him or her. The author writes:
As the great Adam smith stated, - the market benefits when everyone does what is good for him; we are unknowingly following his path, and take for granted that the whole market is benefited.
However, instead of following Adam smith, only if we follow the versions of Prof. Nash, we all would be in a better situation.
Prof. Nash suggested that the market benefits, when one does what is good for him and also for the group. Following this idea, if we try doing well for ourselves and at the same time, think for gain of the whole group; we all would be in better situation.
By following Adam Smith’s principle (self interest), we are actually blocking each others way and giving rise to ambiguity and dissatisfaction. Instead if we think of others (Prof. Nash’s Theory) and follow what is stated below every one will be benefited.”
2007 Comment [GK]:
John Nash wrote a seminal paper for Economica in 1950, ‘On the Bargaining Problem’, which set out certain far reaching and basic assumptions that, in effect, eliminated from consideration the process known as bargaining, and substituted instead a consideration of the outcome after two parties bargained. In short it is a study of the solution of bargaining, it is not a study of how two (or more) bargainers arrive at a solution.
The optimal solution (Pareto efficient) shows that the division of an amount of the various items available for trade with varying numerical utilities for the bargainers is the one where the product of the net gains in utility of each bargained set is maximised. Any attempt to redistribute the sets would make one or both of them worse off.
Hence our author concludes that “if we try doing well for ourselves and at the same time, think for gain of the whole group; we all would be in better situation.” However, accepting as true the conclusion, it does not solve the bargaining problem. The problem is not one of achieving an optimal outcome, so much as one of how to achieve that optimal outcome. Nash [in his paper, not the film] eliminated the most interesting part of the problem by his assumptions (the boys in his [1950] example had perfect information about each other’s utilities for the items available for trade, their bargaining skills were eliminated, and they both knew what each would trade their items for in the bargaining.
Mathematic modelling is only determinate (has a solution) if these conditions operate. They don’t, so apart from being an instructive exercise into the nature of an optimal solution, it is also non-operational.
Smith wrote on the bargaining problem in Wealth of Nations (Book I), but he discussed the process not the solution. So Smith and Nash were addressing different parts of the problem, and like apples and pears, it is difficult to see how a valid comparison can be made between their different solutions. Following ‘the versions of Prof. Nash … instead of following Adam Smith’, will not get us very far because the Nash version is non-operational, it does not address how we conduct the process.
Smith said bargainers address each other in something like the following manner: ‘Give that which I want and you shall have this which you want’ and ‘it is this manner that we obtain from one another the far greater part of those good offices which we stand in need of.’ (WN I.ii.2: p 26) Now he doesn’t say how they should formulate their solution at this point, but he hints very strongly how this should be done (in fact he is quite prescriptive on the point).
In that most famous quotation from Wealth of Nations, of the transaction (process) among the ‘butcher, brewer, and baker’, he observes: ‘it is not from their benevolence … but from their regard to their own interest.’ So, if the bargainers want something from the other party they have to take full account of the other party's, not just their own, self-interest. Yes, they have to think of the other person’s self-interests first and bargaining allows for a mediation of their different interests into the common interest of a voluntary settlement. We call that negotiation; ‘the process by which we obtain what we want from someone who wants something from us.’
Yet, the author of the piece from Amrita Business School asserts: that following Adam Smith’s advice “we are actually blocking each others way and giving rise to ambiguity and dissatisfaction.” Having shown that is not what Smith said (anywhere in his writings), I think that author needs to rewrite his sentence.
But we have not yet done, because Smith said more. He advised prescriptively (so Smith did not consider it optional) that ‘we address ourselves, not to their humanity, but to their self-love’, which is clear enough in advising the bargainer not to address herself to her own self-love. To make this clear, he also advised her ‘never to talk of them of our own necessities, but of their advantages’. Again, it is clear: don’t think of your needs, think of their advantages from completing a bargain with you, and to do this effectively you must look for what advantages trading with you has for him, not yourself.
In what manner can this ever be described as ‘blocking’ or causing ‘dissatisfaction’, if the bargainers are doing exactly the same by addressing the other party’s interests and the other party’s ‘advantages’? Is this not exactly what Nash was supposedly suggesting? If it is different, enlighten me. Are we reading from the same page?
However, I think there is another problem, apart from the weakness of the Nash solution addressing the outcome of the optimal bargain but not able to offer any help with how to get to it, and the weakness of the author’s understanding of Adam Smith’s contribution, which dealt with the process, and that is the possibility that our author is mixing up the Prisoner’s Dilemma solution with the Nash Theorem. They were both published around the same time in 1950, and are often mixed up (especially in examinations from poorly prepared candidates).
Prisoner’s Dilemma shows that the choice is between doing best for oneself or doing best for both parties. People play ‘co-operate’ or ‘defect’, and those that defect do so for one of two reasons. In effect, the defector acts to protect himself from possible defection by the other (‘I defect, not because I want to, but because I must’), or the defector does so because he intends to exploit the other player (‘I defect not because I must, but because I want to’). Unfortunately, depending on the pay-offs in the game, defection is the majority choice by a long way in my experience of conducting thousands of games in my negotiation courses (about 92 per cent play the defection ‘red’ against the co-operators ‘blue’).
Interestingly, its creators wrote to Nash not long after the papers circulated, but Nash did not reply to their request for his comments. But that’s a long way from the Hollywood scriptwriter, who stuck  Russell Crowe’s/John Nash’s inserted the side-attack on Adam Smith’s alleged views.
We don’t’ need to look far for where the script writer got these absolutely wrong views he attributed to Smith; they come from the Chicago version of Adam Smith and not the man from Kirkcaldy. Chicago never has understood Smith on bargaining (let alone the corpus of Smith’s works), and they have a lot to answer for in their miss education of generations of economists in what Adam Smith actually wrote about.
It’s not as if it is difficult to get a hold of a copy of Wealth of Nations…
Read the author’s piece at:
“You shouldn't take it so seriously. The text you quote is almost exactly the same, word by word, as a few lines from the film A Beautiful Mind, where Nash's ideas are misrepresented heavily, especially in that part. In any case, Nash equilibria have nothing to do with what's best for the group. It's about your best choice given everyone else's best choice, when facing the same problem as you are.

Even so, by core convergence/Edgeworth conjecture, under certain attractive assumptions, the Nash equilibrium converges to the competitive and Pareto efficient equilibrium.

The people at The Amrita School of Business should better stop stealing lines from superficial movies and start reading on the real deal.
I am with Gabriel Mihalache...
"People shouldn't take it so seriously"... 
but unfortunately this page is still showing up at the first place of search engine results when you google "Adam Smith John Nash" keywords...
You can check yourself...
 Unknown said...
Podríamos decir que Nash hace un estudio Normativo de la Economía, de lo que debería ser, y Smith ha hecho un análisis positivista de la economía, de lo que realmente sucede en la psiquis humana.

We could say that Nash makes a normative study of economics, than it should be, and Smith has done a positivist analysis of the economy, of what actually happens in the human psyche”.
Todays Comment by a reader:
John Nash comment
I disagree with many of the other comments. With the extremely strong gut-feeling that most people did not know who John Nash was until the movie appeared (or even Adam Smith!), I think it is very valuable for someone to point out important discrepancies between fiction and reality. As a case-point, I actually did previously believe John and Adam were talking about the exact same problem -- go figure! I learned something new today and I'm content. Thank you author.” On John Nash Was Not Right about Adam Smith Being Wrong.

Monday, January 27, 2014

Adam Smith and Unintentional Desirable Outcomes

Anon” quotes from J. J. Rousseau and posts (26 January) on “Capitalist Imperialist Pig” (since 2004, no less) with a rather confusing, though well argued anti-Libertarian, intellectual slant, that sees the previous lives of humans from “100,000 year ago” as a universal “paradise”, until, that is, our distant predecessors began to leave the forest for shepherding and farming about 8,000 years ago, and then on to commercial societies.  That process is now complete, except for a few thousand acres in very remote pockets. HERE 
I think I've read that the phrase "invisible hand" occurs only once in Adam Smith's Wealth of Nations, but nothing else from economics is so sacred or sacralized. His insight was that the workings of a competitive market would produce a number of socially desirable outcomes. This insight was central to classical economics, and, dressed up in mathematical glad rags, central to neoclassical economics, and its offspring, like the Real Business Cycle theory. Now Adam Smith was a very clever fellow, and he knew that business men really hated free competition, and would work the levers of power to eliminate it, but he probably underestimated their skill at eliminating it.
No, I shall abstain from tackling the myth of the “invisible hand” metaphor (new readers may scroll down Lost Legacy and read my weekly jousts with the “sacred” myth). 
I shall amend the shy Anon author’s statement: “His [Adam Smith’s] insight was that the workings of a competitive market would produce a number of socially desirable outcomes.” That is too narrow an assertion, especially with the definite verb: “would" which should be “could” as there is nothing in Adam Smith’s “Wealth Of Nations” that is so definite about “socially desirable outcomes”.
Any reading of Smith’s WN would inform the attentive reader whom, sorry to say, is among a small minority of the small minority of modern economists who have read “Wealth Of Nations” at all, beyond a compendium of selected quotations.  Most, that is nearly all, modern economists never get very far with Wealth Of Nations, though quite a few have it on their book shelves.
If they did read it they would find mention after mention of Smith’s rather dismal view of the behaviour of “merchants and manufacturers” and the privileged minority who were eligible to become legislators acting against the interests of labours and toilers, as well as the general interests of the public (as did their feudal predecessors before them – “vile rulers of mankind”.
Sometimes, merchants and manufacturers did cause actions in their own self-interests that led society to “unintended consequences”, some of which accidently served the “public good”.  But this was not a general, let alone, a universal consequence of the self-interests of “merchants and manufacturers” (the word capitalism was not known in Smith’s time as it was first used in English in 1854).
In this respect, neoclassical economics was no improvement.  In fact its so-called ‘scientific’ methodology was a great diversion.
I shall leave "Anon" to his quarrel with Libertarians.  The "Hard" Libertarians do have some odd ideas, but, then,  that is why I am a "soft" Libertarian

Saturday, January 25, 2014

Adam Smith's Self Interest is Not Served by Selfishness

A correspondent asks about the natural role for co-operation in an economy, and below is my (short) response:
Adam Smith addresses the substance of your paper.  You are correct that Smith did not advocate nor excuse selfish behaviour.  He writes to that affect throughout both ‘Moral Sentiments’ and ‘Wealth Of Nations’.   Moreover, and most relevant, he was quite clear on the substance of your basic theme: humans everywhere depend on the voluntary co-operation of thousands of others (WN I.ii.).  That is the essential feature of any economy in any society.
Anthropologists show how human small bands (fewer than 30 adults) depend on each other for their sustenance, sharing in times of need and in many cases institutionalising this natural ‘insurance’ behaviour (observed not conjectured) in band-wide pooling of the products of their labours each day, which brings reciprocal sharing behaviours that empirically substantiates Smith’s point (in his case conjectured, not necessarily observed). For examples see Christopher Boehm. 2012. ‘Moral Origins: the evolution of virtue, altruism, and shame’. Basic Books. (Based on scores of fieldwork cases and specialist observations over many years).
However, Smith’s conjectured point led to his firmly and clearly asserted advice in his famous passage in Book 1, chapter 2, of the “butcher, brewer, and baker” example, widely misread (if read at all), with its specific emphasis on the male buyer (more likely his female relative!) searching for the main ingredients of his dinner requiring him to “address the interests (‘self-love’)” of the sellers, and specifically not address or refer to his own self-interests!  
The needs of the buyer are not an explicit part of the persuasive side of such transactions – that would mean the buyer relying on the seller’s benevolence, already excluded because benevolence was an “insufficient” resource (basically because nobody has enough of the means of everything to be totally benevolent towards everybody else for everything).
In short, Smith advised buyers to address their self-interests solely by addressing the self-interests of others, that is self-interests are only realised on a daily basis by each individual party to the transactions mediating their self-interests through persuasion, conversation, and bargaining, not by egotistically demanding others surrender to ours. This is fundamental to the Smithian doctrine of self-interest. It was also common in successful negotiations between self-interested and often antagonistic parties (as my 25 years fieldwork confirmed as a consultant negotiator in my former day job at Edinburgh Business School).  
George Stigler’s 1976 opening admonition that economics is founded on the “granite of self-interest” needs to be modified by the inclusion of the words “the granite of mediated self-interest”!  Smith might then have saved the Chicago ‘boys’ from embarrassment in Chile if they had read Smith properly and not been enthused by Stigler’s enthusiasms for a half-understood idea that wasn’t Smith’s anyway.

Wednesday, January 22, 2014

Good Sense on Economics, Adaptation, Complexity and Evolution

William Peakin, business correspondent, author of the ‘Evolution of Wealth” in “Holyrood”, Scotland’s fortnightly political and current affairs magazine covering issues debated at the Scottish parliament in Edinburgh, manages to cover this broader debate in an informed manner that shames the narrow, blinkered focus of many of our leading economists in US and Europe in a short article “Evolution of Wealth”, “We need to rethink the meaning of work, consumption and prosperityHERE
This is quite the most perceptive short article I have read on the current debate among economists on how a market economy operates, ‘warts and all’ as Oliver Cromwell might have put it.
It addresses a basic problem for modern and classical economists on the nature of markets and how they were analysed by neo-classical and post neo-classical modern economists.
Peakin reports how Eric Beinhocker, executive director of a joint research programme between the Institute for New Economic Thinking and Oxford University, recalls “sitting in a thatched hut, leaning against a wall made of dung, talking to a group of Maasai tribesmen. They were feeling sorry for the former venture capitalist and McKinsey & Company consultant because he had told them he had no cattle. But they were also bewildered; how could this poor man afford to travel and own a camera?”  
From analysing the importance of such natural misconceptions and their clarifications, Beinhocker suggests that “Modern evolutionary theorists believe that, like gravity, evolution is a universal phenomenon, meaning that no matter whether the algorithm is running in the substrate of biological DNA, a computer program, the economy, or in the substrate of an alien biology on a distant planet, evolution will follow certain general laws in its behaviour.
“If the economy is truly an evolutionary system, and there are general laws of evolutionary systems, then it follows that there are general laws of economics – a controversial notion for many.
“Saying that there are laws of economics does not imply that we will ever be able to make perfect predictions about the economy, but it does imply that we might someday have a far deeper understanding of economic phenomena than we do today.
These ideas were preceded by a remarkable transformation from the regular lives of humans in the open savannah: the discovery of value, not measured in pounds, pence or dollars, but in what the products of human labour, including endeavour, enabled humans to do.   All human history, including the long, very long, pre-history story of the creative blessing of the use of valued items, ideas, and their accessibility to every widening numbers of others besides their creators.
What William Peakin, business correspondent, author of the ‘Evolution of Wealth” in “Holyrood”, Scotland’s fortnightly political and current affairs magazine covering issues debated at the Scottish parliament in Edinburgh, manages to cover this broader debate, in an informed manner that shames the narrow focus of many of our leading economists in US and Europe.  
Certainly, his presentation of the post-classical theorists on complex, adaptive systems, recently discussed on Lost Legacy, and, more thoroughly, in David Simpson’s “The Rediscovery of ClassIcal Economics: adaptation. Complexity and growth” (Edward Elgar) 2013, is a welcome gale of good sense. 
I cannot recommend too highly that you follow the link and read it (and pass it round). William Peakin deserves acclamation for his perceptive presentation of Eric Beinhocker’s ideas, particularly from my own vantage point, because he does not mention anything about the mythical “invisible hand” nonsense that is the usual resort of the mystics dominating our profession!