Tuesday, October 02, 2007

Reuter's Chief, Tom Glocer on Alan Greenspan and Adam Smith

From Tom Glocer’s Blog (Chief Executive Officer of Reuters [BETA])here: “Alan Greenspan and Adam Smith”:

In a private chat after the event [opened by Prime Minister Gordon Brown], I had the chance to explore further with Dr. Greenspan the observation he made during his formal remarks that after a long and distinguished career as a central banker, he had concluded that human beings were naturally inclined to create and fall victim to speculative financial bubbles (e.g, the tulip bubble, the South Sea bubble, and, more recently, the equity and housing bubbles). While this somewhat psychological explanation might seem at odds with the classical economic position often ascribed to Adam Smith, Dr. Greesnpan noted that one needed to read the far better known and widely read The Wealth of Nations alongside Smith's other great work, The Theory of Moral Sentiments.”

In reaching for a more holistic interpretation of Adam Smith's legacy, Dr. Greenspan is, of course, very much in keeping with the recent work in behavioral economics which has come to challenge the view that all market participants are fully rational actors who will only act in their own self-interest. If this summer's market shenanigans are any indication, this more humanistic side of the "dismal science" will be working overtime on new empirical data.”

I hope this is not an indication that having realised the limitations of rational homo economicus (a wholly modern construction designed to make the mathematical modelling simpler) people like Alan Greenspan, and perhaps Tom Glocer, are not going to encourage another diversion into the hopeless quest to ‘mathematicise’ human beings as if they are wooden pieces on a chess board (the illusion of ‘men of system’, as Adam Smith put it) with no principles of motion of their own.

Adam Smith never believed in a homo economicus, nor anything like it. Moral Sentiments is about humans as multi-motivated and complex individuals within societies, the main principle of which is that individual interests are mediated by the ‘mercenary exchange of good offices’ and the mediation of conflicting interests through ‘conversation’, ‘exchange’, and ‘learned’ acceptable behaviours in the proximity of others (the impartial spectator).

Gregory Clark remarks several times in ‘A Farewell to Alms’ (apologies for the absence of references but I sent my copy back to Edinburgh with a family member who returned early) that Adam Smith asserted that 'humans are all the same’, an assertion well off the pace in fact. He (with Hume) agreed that human nature, in all its complexity (its ‘rich tapestry’) endures but this is quite opposite to the idea that we are all the same, a manifest error obvious from looking at members of the same family, let alone everybody else.

The rational homo economicus, neoclassical school may well be guilty of such manifest nonsense, but not Adam Smith. Even the ‘bubbles’ phenomenon affects a small minority to participants; the rest of use read about them.

People are not universally identically rational; their self-interest does not always lead them to do the same things, and it certainly does not lead them (disembodied hands notwithstanding) to benefit society and, sometimes does not benefit even themselves.

That Alan Greenspan is restless with his lifetime’s adherence to the Chicago version of Adam Smith, is encouraging. That he and others are edging towards reading Smith’s ‘Theory of Moral Sentiments’ is excellent news. It might help them if they re-read Adam Smith – the joined-up version, otherwise known as his Wealth Of Nations, instead of the series of selected quotations that commonly makes up their knowledge of what he was about.

I am doubly pleased that Tom Glocer, the CEO of Reuters, is aware of the need for this reading list because Reuter’s journalists, who question opinion formers who utter incorrect attributions to Adam Smith, could help turn the tide in restoring his lost legacy.


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