Thursday, May 07, 2009

Adam Smith and Rational Man

Justin Wolfers writes on ‘Steinbeck on the Crisis’ in Freakonomics, which is worth reading HERE:

As usual a Freakonomics article has attracted a large number of comments of varying quality, among which I found this from ‘thedude’:

Unregulated capitalism will lead to the utter obliteration of civilization. Adam Smith claimed men were rational; therefore capitalism would be rational. As superstitions, magical thinking in gods, belief in black magic, witches and the occasional late purchase of a juicer attests to, man is not rational.
Luckily for the bankers the American people are too apathetic, ignorant and powerless to do anything about their current looting of the Treasury
.”

Comment
I would not characterize Adam Smith as claiming that ‘men were rational’, in the sense that modern neoclassical economic theory makes such assumptions.

‘The dude’ follows up with what he assumes is the debilitating counter-point to Smith’s alleged claim for men’s rationality:

As superstitions, magical thinking in gods, belief in black magic, witches and the occasional late purchase of a juicer attests to, man is not rational.’

Strange argument to deploy against Adam Smith, who wrote The Theory of Moral Sentiments (1759) and the History of Astronomy ([1744] 1795, posthumous), which among other things detail and show the history (and concurrent) proclivity of humans for ‘pusillanimous superstition’ and many strange beliefs about ‘invisible beings’ (not just hands!) and, in Wealth Of Nations, for people, including ‘merchants and manufacturers’ and legislators and those who influence them to act in their selfish interests, which causes negative social affects (protectionism, monopoly, price-fixing, pollution, environmental disregard, and other negative externalities).

Rational expectations and the neo-classical paradigm are mathematical abstractions – the maths are beautiful, the prescriptions are inadequate, and the consequences of acting on them are woefully disappointing, as well as destructive.

If there are fault lines in the system, which is the gist of most comments, to Justin Wolfers’ article, they have nothing to do with Adam Smith, whose understanding of human nature was more than adequate to fix these problems.

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