Monday, July 13, 2009

Was Adam Smith Trumped by Charles Darwin?

Thomas McQuade writes (12 July) in Think Markets (‘A blog of the NYU Colloquium on Market Institutions and Economic Processes’) HERE:

Frank and Stein

In a recent opinion piece in The New York Times (“The Invisible Hand, Trumped by Darwin?”), Robert H. Frank proposes that Charles Darwin, not Adam Smith, should be seen as the real intellectual founder of the discipline of economics. He claims that Smith’s most famous idea – that the competitive pursuit of individual self-interest can redound to social good – is but a special case of Darwin’s more general picture of competition in which individual benefit sometimes does, but often does not, benefit the larger group. The sort of competition for which the invisible hand does not work well is, he says, where the competition is for relative gain, i.e., when the rewards depend on relative performance, and people gain by bettering each other rather than by bettering nature.

The problem with Frank’s argument is his careless deployment of the analogy between human beings interacting in a highly structured social environment and animals in general interacting in an environment of considerably less social complexity. He is ignoring the effects of human institutions in constraining self-interested behavior. And compounding the error, he appears unable to distinguish between those institutions which provide constraining feedback and those which undermine and deflect such feedback.

The economic problem at hand is not, as Frank characterizes it, competition based on relative performance versus competition based on absolute performance. It is competition constrained by negative feedback versus competition freed from normal constraints. Successful social institutions, as well as providing positive incentives for personal gain, incorporate negative incentives for straying very far from conventional expectations. The interplay between these opposing forces can make for stable growth of the societal activity in question. It is the reason why science has been such a spectacularly successful social enterprise, and why markets, despite being set about by all sorts of monetary and regulatory interventions which weaken the feedback, have greatly increased human wellbeing.

Frank points to “the recent economic wreckage”, an instance of what can happen when “greedy people trade for their own advantage in unfettered private markets”, as evidence for his contention. Unfettered markets, if they existed, could certainly display greed, herding behavior and other “inefficiencies.

Adam Smith’s contention was that the pursuit of self-interest, constrained by appropriate social institutions, would be much more effective at producing societal wellbeing than actions which purported to aim at that wellbeing directly. And “appropriate” does not involve the overriding of constraining incentives. That is why so much of The Wealth of Nations is taken up with analysis and criticism of the social institutions of Smith’s day. Frank predicts that, 100 years from now, economists will point to Darwin as the owner of the shoulders they are standing on, not Smith. Let me make a competing prediction: that 100 years from now economists will look back and wonder how so many of their predecessors could have been so superficial in their appreciation of Adam Smith and, as a result, could have so completely misunderstood the economic events they lived through
.

Comments
I think Thomas McQuade is closer to the truth than Robert H. Frank. In this month of celebration of Charles Darwin’s Origin of Species (1859), it is natural that writers look for new angles on both Adam Smith and Charles Darwin would compare with the banking crisis uppermost in our minds.

Robert Frank chooses to pit Darwin against Smith (albeit that Frank’s is a version of the Chicago Adam Smith rather than the Adam Smith born in Kirkcaldy in 1723). Even Frank’s contest for the supposed title of ‘the real intellectual founder of the discipline of economics’ is quite spurious (Smith was awarded the title today by others and with the supposed prestige of ‘inventing capitalism’ and or of being the ‘high priest of capitalism’, or similar hierarchical nonsense).

Frank writes: “Smith is celebrated for his “invisible hand” theory, which holds that when greedy people trade for their own advantage in unfettered private markets, they will often be led, as if by an invisible hand, to produce the greatest good for all. The invisible hand remains a powerful narrative, but after the recent economic wreckage, skepticism about it has grown. My prediction is that it will eventually be supplanted by a version of Darwin’s more general narrative — one that grants the invisible hand its due, but also strips it of the sweeping powers that many now ascribe to it.” (New York Times: HERE)

Smith is ‘celebrated’ by Frank for the invented reasons of modern economists (post-war in the late 1940s), not for what Smith actually wrote in Wealth Of Nations or Moral Sentiments. Smith never alluded to ‘selfish reasons’ and ‘greed’ (that was Bernard Mandeville, whom Smith described as ‘licentious’ in Moral Sentiments. Smith was made into a cartoon image by Hollywood script writers (‘Wall Street’ and ‘Beautiful Mind’). He certainly never claimed that “greedy people” will “often be led, as if by an invisible hand, to produce the greatest good for all” and it belittles Frank's credibility for him to claim that he did.

With such glaring errors about Smith, Frank's claims for Darwin are immediately suspect.

The central theme of Darwin’s narrative was that competition favors traits and behavior according to how they affect the success of individuals, not species or other groups. As in Smith’s account, traits that enhance individual fitness sometimes promote group interests. For example, a mutation for keener eyesight in hawks benefits not only any individual hawk that bears it, but also makes hawks more likely to prosper as a species.”

Comment
At least Frank gets Darwin right. Of elks, Frank writes: “For instance, a mutation for larger antlers served the reproductive interests of an individual male elk, because it helped him prevail in battles with other males for access to mates. But as this mutation spread, it started an arms race that made life more hazardous for male elk over all. The antlers of male elk can now span five feet or more. And despite their utility in battle, they often become a fatal handicap when predators pursue males into dense woods.”

But is this not the same with Smithian competition? An individual exploits a handy source of raw materials, disregards the environmental damage, and enjoys prosperity for a while. He runs out of the resource, or the owners of the resource site impose heavy taxes, or take the resource over and run it themselves. Local maxima need not be higher than competitive maxima.

Frank: “Ideas have consequences. The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all. If, as Darwin suggested, many important aspects of life are graded on the curve, his insights may help us avoid stumbling down that grim path once again.

The competitive forces that mold business behavior are like the forces of natural selection that molded elk. In each case, we see instances of socially benign conduct. But in neither can we safely presume that individual and social interests coincide
.”

Comment
Frank notes that the “uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts”, but which ‘disciples’ is he talking about? (Note the religious overtones of ‘disciples’).

The Kirkcaldy Adam Smith was quite clear on the need for regulations (or ‘police’ as they were called then) where ‘merchants and manufacturers’ misbehaved (see Smith’s discussion on regulating banks to curb the behaviours of ‘bold projectors’, WN II.ii.56-7: 304).

His reputation as a believer in ‘laissez-faire’ ideology is undeserved (he never used the words ‘laissez-faire’). Smith was no extreme ‘libertarian’, but he believed firnly in Liberty, tempered by the negative virtue of Justice, without which society would ‘crumble to atoms’; TMS II.3.4: 86).

How much of Adam Smith has Robert Frank actually read recently? He is, after all, an economist at Cornell, and a visiting faculty member at the Stern School of Business at New York University.

Frank adds: “The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all.

I would agree, but the ‘invisible hand’ celebrated by modern economists, many of them proud to wear the title of ‘disciple’ of the Chicago Adam Smith, is actually a crown of thorns: he never had a ‘theory’, a ‘concept’, a ‘doctrine, or a ‘paradigm’ of ‘an invisible hand’ (fir him it was a mere metaphor), and while such people, and the people they influence (for good money), parade their version of it to limit some regulations, they also have used their influence to continue the mercantile regulations, which Smith railed against in the 18th century, and which blight modern economies through various forms of protectionism and tariff policies, and they lower world living standards both at home and abroad, particularly in poorer countries.

Thomas McQuade ends his review of Frank’s article with a a comment on Frank's prediction that:

100 years from now, economists will point to Darwin as the owner of the shoulders they are standing on, not Smith. Let me [Thomas McQuade] make a competing prediction: that 100 years from now economists will look back and wonder how so many of their predecessors could have been so superficial in their appreciation of Adam Smith and, as a result, could have so completely misunderstood the economic events they lived through.”

I completely agree with Thomas McQuade and give a thumbs down for Robert Frank.

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6 Comments:

Blogger michael webster said...

Gavin,

I am going to disagree with you on Robert Frank's article, but not because you are not right.

You are right that Frank hasn't read Smith, but in this case it doesn't matter.

Robert Frank is casting Smith in the usual role, which many people, despite your blog, have come to accept.

Your reference to read Smith about banks and curbing bold projections is probably the best counter point to Frank.

But, as someone who tries to read Smith, I find it hard to parse the language and get the concepts.

Now, if I find it hard, I can pretty much guarantee that 99.99% of people will find very difficult.

So help us out - engage with us and help us understand what Smith said about bankers and "curbing their bold projections."

Thanks.

2:05 am  
Blogger Gavin Kennedy said...

Michael

An excellent point and something I am more than willing to co-operate to do something that helps.

Without feedback of this kind I just trundle along as always.

So, I shall look at my post later - I have to get a report away today on an article I am refereeing but when that is done I hsall ahve a go. If you think it works I shall adopt it elsewhere.

Gavin

9:26 am  
Blogger Michael Kruse said...

I saw this article today and thought it might be worth a "Lost Legacy" post:

The Myth Versus the Reality of Adam Smith’s Political Economy

12:27 pm  
Blogger Gavin Kennedy said...

Hi Michael Kruse

Yes, I saw this piece today and thought it a rather juvenile website and copied it with a view to comment, if I have time tomorrow.

Thanks for the pointer.

Gavin

8:08 pm  
Blogger Insurance said...

I think the difference between Darwin and Smith was the mechanism of development in Darwin's groups was largely accidental and unconscious or at least instinctive, while actions in Adam Smith's groups (society) were conscious and purposeful. Further, Smith was not Ann Rand. Smith was a moral philosopher who argued that the role of man was to serve others though work, while Rand and Darwin had another view of social interaction.

9:00 pm  
Blogger Gavin Kennedy said...

'Insurance'
Thank you for your helpful comment.

Natural Selection works through individuals of a species and not groups. Individuals procreate and pass their adaptations to their descendants. Adapters and non-adaptors are then in competition - separate into different species - and events show whether the adaptations were 'beneficial' to descendants.

Adam Smith's behavioural changes also work through individuals in Natural Liberty but can be coerced through groups (government, powerful sub-entities (religion, myths, superstition, fanaticism, politics).

The question is the limits of 'purposeful' intent. Smith believed that individual changes promoted by individuals in Natural Liberty were likely to be more beneficial than the purposeful intent of governments, though, be clear, he was no ideologist - he chastised French Physiocrats and Dr Quesnay for seeking purposeful Natural Liberty as a pre-condition of progress towards opulence (Wealth Of Nations IV.ix.28: 674)

5:29 am  

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