Tuesday, June 24, 2008

More on Samuel Bowles' Misreading of Adam Smith

The problem with citing Adam Smith in support of an interpretation of a modern designed experiment in behavioural economics is that the understanding of modern economists, or indeed their familiarity with Adam Smith’s writings, leaves a great deal to be desired. If their understanding of Adam Smith’s theories is not just limited, but what they do know about them, usually from isolated third-hand quotations, is completely incorrect or at least lacking correctness in key places.

I have already referred critically to the article in the 20 June issue of Scientist by Samuel Bowles (for the Sante Fe Institute) and another reports of the article in Reasononline (free minds and free markets) (HERE:)

Does the Invisible Hand Need a Helping Hand?”
(‘A behavioral economist explores the interaction of moral sentiments and self-interest) by Ronald Bailey, 24 June, asserts:

In the June 20 issue of Science, Samuel Bowles, director of the Behavioral Sciences Program at the Santa Fe Institute, looks at how market interactions can fail to optimize the rewards of participants—e.g., the micromanager who gets less than he wants from his employees. For Bowles, the key is that policies designed for self-interested citizens may undermine "the moral sentiments." His citation of the "moral sentiments" obviously references Adam Smith's The Theory of Moral Sentiments (1759), in which Smith argued that people have an innate moral sense. This natural feeling of conscience and sympathy enables human beings to live and work together in mutually beneficial ways.”

“Bowles, with some evident regret, observes, "Before the advent of economics in the 18th century, it was more common to appeal to civic virtues." Bowles does recognize that such appeals "are hardly adequate to avoid market failures." How to resolve these market failures was the subject of Smith's second great book, The Wealth of Nations (1776), where he explained: "By pursuing his own interest (the individual) frequently promotes that of society more effectually than when he really intends to promote it
."

Comment
I pick on these paragraphs because they contain serious errors of attribution to Adam Smith, easily corrected by reading Moral Sentiments and Wealth Of Nations.

For Bowles, the key is that policies designed for self-interested citizens may undermine "the moral sentiments."

His citation of the "moral sentiments" obviously references Adam Smith's The Theory of Moral Sentiments (1759), in which Smith argued that people have an innate moral sense.”

Adam Smith did not assert that “people have an innate moral sense”, which is a fairly common error, though unsustainable if Moral Sentiments is consulted. The idea of an ‘innate moral sense’ properly should be attributed to Frances Hutcheson, Professor of Moral Philosophy at Glasgow University, and Adam Smith’s tutor from 1737-40. Not for the only time did Smith disagree with his old and much respected tutor, whom he described as ‘never to be forgotten’.

Smith excludes the innateness of moral sense by an imaginary example:

Were it possible that a human creature could grow up to manhood in some solitary place, without any communication with his own species, he could no more think of his own character, of the propriety or demerit of his own sentiments and conduct, of the beauty or deformity of his own mind, than of the beauty or deformity of his own face. All these are objects which he cannot easily see, which naturally he does not look at, and with regard to which he is provided with no mirror which can present them to his view. Bring him into society, and he is immediately provided with the mirror which he wanted before. It is placed in the countenance and behaviour of those he lives with, which always mark when they enter into, and when they disapprove of his sentiments; and it is here that he first views the propriety and impropriety of his own passions, the beauty and deformity of his own mind. To a man who from his birth was a stranger to society, the objects of his passions, the external bodies which either pleased or hurt him, would occupy his whole attention. The passions themselves, the desires or aversions, the joys or sorrows, which those objects excited, though of all things the most immediately present to him, could scarce ever be the objects of his thoughts. The idea of them could never interest him so much as to call upon his attentive consideration. The consideration of his joy could in him excite no new joy, nor that of his sorrow any new sorrow, though the consideration of the causes of those passions might often excite both. Bring him into society, and all his own passions will immediately become the causes of new passions. He will observe that mankind approve of some of them, and are disgusted by others. He will be elevated in the one case, and cast down in the other; his desires and aversions, his joys and sorrows, will now often become the causes of new desires and new aversions, new joys and new sorrows: they will now, therefore, interest him deeply, and often call upon his most attentive consideration.” (TMS III.1.3: p 110)

Smith’s metaphor for the effect of society on the individual was as a ‘mirror’ by which people learn how to behave and how to distinguish between propriety and impropriety. They are not born with these attributes; they have no inbuilt set of values; these emerge, slowly and gradually, through contact with others, first with adults and then with other children (in the ‘great school of self command’). It is from these that their ‘impartial spectator’ emerges as the judge of their moral conduct.

Their “natural feeling of conscience and sympathy enables human beings to live and work together in mutually beneficial ways”, but only because they ‘live and work together’, and not because they are born to do so without the essential contact with others. Otherwise, children would ‘know’ how to express their moral senses without the need for the emotional chastisement of the others with whom they interact as they grow up and mature.

At the end of the article there is a clear recognition of Adam Smith’s theories of the location of the sources of moral sentiments: “In other words, as people gain more experience with markets, morals and material incentives pull together.” Yes, it is the gaining of experience from interaction with others in markets that teaches people the role of ‘markets, morals and material incentives’.

The second quotation, moving on from Moral Sentiments to Wealth Of Nations only carries weight in Samuel Bowles’ argument – at least as expressed by Ronald Bailey – because it is torn out of context:

"By pursuing his own interest (the individual) frequently promotes that of society more effectually than when he really intends to promote it." (WN IV.ii.9: p 456)

This is, of course, from the infamous (considering what has been done with it since the mid-20th century by modern economists) quotation from the paragraph that includes his lonely use of the metaphor of ‘an invisible hand’.

It is not true to suggest that this statement was about “how to resolve these market failures” which “was the subject of Smith's” Wealth Of Nations.

Regular readers will know that the paragraph in question, from Book IV and not from Books I, II, III or V, refers to the specific consequence of risk avoidance among merchants leading some, but by no means not all of them, to prefer to invest their scarce capitals locally rather than take the higher risks of piracy, disasters at sea, malfeasance of those strangers they trade with in distant foreign countries and colonies, and the longer delays from returning their capital and profits.

The inescapable consequence, by the laws of arithmetic, that the more capital that is invested locally (foregoing higher profits), the higher will be domestic capital formation, and the higher the ‘annual output of the necessaries, conveniences, and amusements of life’, summarized as the whole is the sum of its parts – increase the parts and the larger will be the whole.

The merchant who is risk averse ‘intends only his own security’ and thereby promotes the interest of the domestic economy, for the larger the local ‘industry’, the larger the local employment (Smith considered the two variables to be intimately linked), and the quicker the ‘spread of opulence’ especially ton the poorer labours and their families. It had nothing to do with ‘market failure’.

That behavioural economics is presented in this manner by Samuel Bowles and others, the greater is the pity because their incorrect interpretation of the very positive research results of their experiments compromises the real lessons that could be gleaned from them if modern economists were more familiar with Adam Smith’s true legacy.

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