Sunday, December 28, 2008

A Smithian Scholar Moves to Take Charge

A post on Macleans.ca Blog caught my eye (HERE):

A lesson in Iggynomics"

"What does the new Liberal leader know about the economy?"

"Michael Ignatieff drags around the longest paper trail of any Canadian politician. As an author, professor, high-brow journalist and broadcaster, he wrote a stack of books, countless lectures, and many articles, not to mention documentary scripts, usually about human rights, foreign affairs, and security. But not much about the economy. And as federal Liberal leader—the job he landed sooner than expected at the end of the recent parliamentary crisis—economic policy is his first priority.

Ignatieff’s two-pronged prescription—stimulus based equally on compassion and competitiveness—might sound suspiciously like a politician trying to be all things to all people. But his interest in blending ideas about creating and spreading wealth go back to his early days as an academic.

In 1983, when he was a research fellow at Cambridge University, Ignatieff collaborated with economic historian Istvan Hont on a paper about the 18th-century Scottish philosopher, and icon of economic conservatism Adam Smith. They read Smith’s Wealth of Nations as more than the foundational work on how competition creates prosperity. “Our argument,” Ignatieff and Hont wrote in the introduction to an essay collection entitled Wealth and Virtue: The Shaping of Political Economy in the Scottish Enlightenment, “is that the Wealth of Nations was centrally concerned with the issue of justice, with finding a market mechanism capable of reconciling inequality of property with adequate provision for the excluded.”

Ignatieff studied Smith at about the same time Harper was taking economics at the University of Calgary. Whether in England or Alberta, the academic atmosphere of the early 1980s was charged with the conservative doctrines of Ronald Reagan and Margaret Thatcher. For Harper, that climate was formative, pushing him permanently to the right. Ignatieff remained a Liberal, but the era’s lessons weren’t lost on him. “If you’ve studied and written about Adam Smith, you’re a believer in markets,” he said. “But Smith always believed that markets had to be regulated. So I’m a market guy, and I think we’ve all discovered that light-handed, smart regulation by government is needed to keep markets safe, honest, fair and transparent—that’s the lesson of the past six months.”


Comment
Michael Ignatieff has a distinguished academic record among Smithian scholars. He co-authored chapter 6, “Needs and justice in the Wealth of Nations; an introductory essay” (pp 339-443), in Istvan Hont’s magisterial, Jealousy of Trade: internatiomnal competition and nation-state in historical perspective, 2005, Belknap Press, Harvard, which alone establishes the quality of his credentials.

That he now has a career in Canadian politics as the federal leader of the Liberal Party provides a unique setting for him to switch from an observer into a doer and from being an influencer to a legislator.

I shall watch his progress as an opposition leader towards government with close interest.

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3 Comments:

Blogger michael webster said...

Ignatief wrote: "Our argument,” Ignatieff and Hont wrote in the introduction to an essay collection entitled Wealth and Virtue: The Shaping of Political Economy in the Scottish Enlightenment, “is that the Wealth of Nations was centrally concerned with the issue of justice, with finding a market mechanism capable of reconciling inequality of property with adequate provision for the excluded.”

If this is the Liberal leader's political economic philosophy, then the challenge of Vernon Smith's work on experimental economics, as I outlined in a previous post, should be of some theoretical and possibly practical interest.

2:19 p.m.  
Blogger Gavin Kennedy said...

Michael
The experimental evidence cited by Vernon Smith's work shows that people do not accept the rational model of choosing any division offered as long as there is some gain (including a division of 1/99).

Participants apparently prefer gaining nothing to what can be described as an 'unfair' division. They seem not to expect an equal division (50/50), but do seek something at least 30/70.

Given that Adam Smith did not regard market participants as 'rational' (as defined in neo-classical economics), I have never accepted the 'rational calculus' arguments of modern economics.

In voting for preferred policies, most voters prefer something closer to their own views than insisting on extreme versions of the policies they prefer, if this means they 'other side' would gain a clean sweep. Only unique political crises attract large votes for extreme polices.

Moreover, in the very famous 'butcher, brewer, and baker, paragraph' in Wealth Of Nations Smith (Chapter 2) states that the self-interested bargainer formulates his behaviour by 'satisficing' through addressing the interests of the other bargainer, and not by addressing his own self interests (i.e., his 'necessities'; he needs his family's dinner).

This seems to me to suggest that Adam Smith was not what we would call a 'utility maximiser' on the very practical grounds that if both bargainers only address their own intersts, they will be unsuccessful in the exchange proposal of 'Give me this that I want and you shall have that which you want' (approx. quote, as I am at my daughter's party and have slipped into her office to use her computer in the absence of my copy of Wealth Of Nations!).

My gripe on Lost Legacy has been that Vernon's experiments are often reported as contradicting Adam Smith; they don't; they contradict the modern epigones' versions of Smith but not the writings of the Adam Smith born in Kirkcaldy in 1723.

8:22 p.m.  
Blogger michael webster said...

Gavin;

I didn't make myself clear. My fault.

Here is my understanding of Vernon Smith's original market clearing experiments.

Let there be two groups of individuals, called Low and High.

Low and High are in the market to exchange.

Each individual in the Low group has a reservation price, Li.

Each individual in the High group has a reservation price, Hi.

Additionally, we can order the Li's from lowest to highest, and the Hi's from highest to lowest.

Intuitively, the idea is that an individual A in the Low group wants to trade with an individual B in the High group, if Hb > La, meaning the good is worth La to A and Hb to B.

Supply and demand economics makes quite precise predictions about when this market will clear, and at what price.

Smith showed that this prediction was satisfied when the open call auction method was used to reveal the reservation prices.

After the auction, the predictions made by the supply/demand economics were borne out. Trades were done at the predicted price, an at the end of the day, there were no more possible deals.

The no trade guys were big losers, and even at the predicted price, some winners were bigger than others.

I take it that those interested in making the market results fairer have to deal with these experimental results. Or perhaps generate less envy.

Here is my preliminary thought on how to do that.

Taken as an exercise in multi-party mediation or negotiation, we, might arrive at an different trading arrangement than the open call auction.

For example, if the mediator knew the rank orders of Low and High group, he could simply pair up all the traders who satisfied the Ha >Lb condition.

Very high reservation prices in the High group could be matched with very high reservation prices in the Low group - putting together traders that would not find each in the open call auction.

9:55 a.m.  

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