Tuesday, September 18, 2007

Whichever Adam Smith Alan Greenspan Now Rejects It Wasn't the Adam Smith Born in Kirkcaldy in 1723

From Newsweek online, 17 September: “The economics of human behaviour: Alan Greenspan discovers that human beings are … irrational!” by Daniel Gross.

The acolyte of Ayn Rand believed market capitalism was ordained to triumph in the 20th century because it spoke to human strivings in a way that collectivism couldn't. But when Newsweek editor Jon Meacham and I interviewed Greenspan last week and asked what he learned from writing his new memoir, “The Age of Turbulence”, he said that the experience made him appreciate that human nature is far more complex than what he learned about it from Adam Smith and The Fountainhead.”

Greenspan seems to argue that since the case for capitalism is so overwhelmingly rational, the opposition to it must surely stem from very deep-seated, immutable characteristics. “And that carries me to the general conclusion that if you're going to model an economy, you have to do far better in understanding how the unit of the economy functions—i.e., the human being.”

As he compiled the book, Greenspan lifted his eyes from spreadsheets and data sets long enough to notice certain universals in human behavior—beyond profit-seeking. “When you get to be my age you see teenagers who replicate each other generation after generation, and it's all crazy and idealistic in the same ways,” he said. Greenspan also recalled his discovery that people in all sorts of isolated societies smile, and that when Lewis and Clark encountered the Indians of the Northwestern United States, they found certain commonalities: “These were societies that truly grew up without contact with the rest of the world.”

Looking to human nature also helped Greenspan solve a perplexing economic mystery. Over the last 150 years, it seems that the maximum productivity growth the economy could achieve over a long period of time was 3 percent annually—despite a series of productivity-enhancing innovations, from the steam engine to the Internet. His conclusion? “What ultimately looks to be the case is that's the pace at which human beings operate,” he said. People simply can't process new ideas more quickly. “The answer is that the human race, no matter how one defines it, is not smart enough to do better.”

I have had occasion to comment on Alan Greenspan’s knowledge of Adam Smith before on Lost Legacy (see archives, 2005), which if what is reported is accurate, he does not seem to be acquainted with his Works to any degree.

His image of Adam Smith is firmly stuck in the Chicago model of Adam Smith, which has little acquaintance with the man from Kirkcaldy.

Of Ayn Rand, I only know what I read of her’s earlier in my youth, before I went to university to study economics, though I have all of her books on my bookshelf here in France (except one which Jim borrowed in 1958 and did not return). Her objectivist rationality model of selfishness has little in common with Adam Smith; more a coherent version of Bernard Mandeville.

May be Alan Greenspan confuses the two philosophers. Neoclassical economists have erected a complete mathematical structure on rationality which even a superficial glance across a café’s occupants ought to raise questions as to its generality to all humans.

Adam Smith on the other hand made a study of human behaviour in The Theory of Moral Sentiments, showing a far more complex set of behaviours among humans than the myth of rational maximisers.

That Greenspan concludes now that “you have to do far better in understanding how the unit of the economy functions—i.e., the human being”, is welcome (better a sinner that repenteth …), though for all his influence today it may be a trifle late to be effective. His interviewers reveal that he found that ‘when Lewis and Clark encountered the Indians of the Northwestern United States, they found certain commonalities.’

If Greenspan had read Smith’s Lectures On Jurisprudence and Wealth Of Nations more closely (if he read either at all; the latter perhaps only for well-known quotes) he would have found that Smith wrote about the reports of travellers in North American (French and British) about the lives and habits of the inhabitants (the earlier invading migrants from Asia) and of his general conclusions that human nature (in all its richness, not rationality) within a known range, as exemplified in literature and history (Herodotus, Cicero, Shakespeare, and Machiavelli, and many more) was shared among and between the distance and present ages.

So, whatever Greenspan claims to have ‘learned about [human nature] from Adam Smith’ certainly did not come from the Adam Smith, born in Kirkcaldy in 1723, though it may have come from the mythical Adam Smith, whom George Stigler claimed ‘was alive and well in Chicago’ in 1976.

As for Fountainhead my memories of it included a range of characters, but not Ayn Rand’s heroes, who were anything but in the mould of rational maximisers, but who were more representative of the human nature he claims to have discovered lately. It wasn’t Adam Smith who misled him; he misled himself in becoming a convert to Ayn Rand, while wandering the street of Manhattan and not on a road to Damascas.

Smith understood the need to take into account the pace at which people move under their own motions, not as wooden chess pieces as the playthings of ‘men of system’ who ‘are wise in their own conceit’ (TMS VI.ii.2.16-18: pp 233-4), but as complex characters in their own rights. That is why he advised, many times in Wealth Of Nations, that philosophers should take account of the ‘slow and gradual’ pace of change, and not rush into things because they seem right at the time.

Modern economists, consulting their equations like ancient Romans consulting their astrologers and readers of the runes, issue proclamations, and worse, predictions, and forecasts, often not stopping to consider why they are so often wrong.
Greenspan admits to realising the accuracy of forecasting in his profession has not been very successful.

There is a connection between those failures and his belief in rational mankind, integral as it is to neoclassical economics, yet if he had cared to look more closely at Adam Smith’s Works he would have found not just a similar wrestling with the facts of human nature, but also a determined habit of not predicting the future.

You learn more by looking backwards in history, recent and distant, than by pretending to have an ability to look forwards to what has not yet happened.


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