Thursday, July 14, 2011

A Review Worth Reading Perhaps

Enrik Jensen (professor of economics, University of Copenhagen, writes a most interesting review of several professional papers in the American Economic Review (13 July) in ‘hjeconomics’ Blog (HERE):

‘Economics as a Moral Science: Papers & Proceedings 2011’

“I for one, however, have never put much emphasis on forecasting abilities as a measure of success—a solid understanding of the past is much more important, as that can pave the way for good current policy advice in face of unanticipated shocks. Being right about the future in a pure statistical sense is not necessarily a virtue, as you may be clueless about why you were right. Hence, I have more respect for smart people that make unsystematic mistakes than dumb people who get things right every once in a while. …

… the paper by Benjamin Friedman stands out as [by] far the most interesting piece. He provides a fascinating account of how religious movements in the 17th and 18th century Europe may have influenced the thinkers of the time, in casu Adam Smith. His “Wealth of Nations” from 1779 defines many central themes in modern economics, in particular, that individuals acting out of pure self-interest (and thus potentially without any of the moral sentiments central to Smith’s 1759 book), under the right circumstances can result in a mutually beneficial situation. This “just” requires a little help from the “Invisible Hand”. Friedman sees this thesis as one that was facilitated by religious movements of the times whereby the predominant orthodox Calvinism is gradually phased out. The orthodox Calvinism considered individuals as being utterly depraved and in vicious pursuit of self-interest. Moreover it preached predestination setting aside any role for human choice, and finally, serving God was the only reason for life. Instead, the opposing Protestants would believe in the goodness of man, the ability of human action to play a role for outcomes (and for who will be saved, after all, this is about religion and salvation). Finally, Protestants believed that human happiness was important; not just that of God.

Friedman notices that during these times, various fields were much more intertwined than today. Therefore, these religious debates and movements may very well have had an influence on Smith (even though he was not religious). Moreover, since many of the people shaping the development of the economic sciences were out of religious movements, Friedman argues that the religious movements of the times have had influence not only on economics previously, but also to present day. As he notes, most modern economist avoid models where initial conditions affect final outcomes. This could be consistent with the passing of predestination as a strong religious belief. In the end it demonstrates that economics is a moral science even though many do not appreciate or notice it.
Friedman has several interesting thoughts and I close by quoting from his ending paragraph, which, of course, nicely sums up his points.

Critics sometimes complain that belief in free markets, not just by economists but among ordinary citizens too, is a form of religion. It turns out that there is something to the idea—not in the way the critics mean, but in a deeper, more historically grounded sense (p. 170).

So, pick up the issue and check your own moral sentiments.


Comment
My short extracts are selected from the themes with which I mostly agree.

I have long suspected the hubris of claiming ‘forecasting abilities’ for economists. True, a minority of the profession have made more than nice livings from selling their ‘forecasting abilities’, or what passes for the same, inspired guesses, and not a few have failed the ‘two-handed economists’ test, as described by the more wizened and, I dare say, more cynical among us.

As often I have commented on Lost Legacy that ‘a solid understanding of the past is much more important, as that can pave the way for good current policy advice’.

Adam Smith’s historical approach best exemplifies this approach. His Wealth Of Nations, developed from his ‘Lectures On Jurisprudence’ [1762-3] 1983, which he gave at Glasgow from 1752-1763, demonstrate clearly his backward, not forward, looking political economy. According to a document, now lost, in the possession of Dugald Stewart in 1793, Smith also gave some parts of these ideas in his lectures in Edinburgh, 1748-51. Smith hardly ever made firm predictions about the future. That was something only within the competence of future generations.

Smith’s singular prediction about the future was in reference to the heirs to the British colonies in North America, then on the verge of a rebellion that would propel in a few years to the founding of the United States:

From shopkeepers, tradesmen, and attornies, they are become statesmen and legislators, and are employed in contriving a new form of government fro an extensive empire, which they flatter themselves will become, and which, indeed seems very likely to become, one of the greatest and most formidable that ever was in the world’ (WN IV.vii.c.75: 623).

He became more specific two pages later:

Such has hitherto been the rapid progress of that country [North America] in wealth, populations and improvement, that in the course of little more than a century, perhaps, the produce of America might exceed that of British taxation’ (WN IV.vii.c.79: 625).

This was a modest prediction in the event, but Smith’s recommendation of parliamentary Union, with American elected MPs in the British Parliament in proportion to their proportion contributed to British taxation (a version of ‘no representation without taxation’) failed to get a hearing in either Britain of the Colonies, and George III’s demands for everything led to him getting nothing.

‘ “Wealth of Nations” from 1779 defines many central themes in modern economics, in particular, that individuals acting out of pure self-interest (and thus potentially without any of the moral sentiments central to Smith’s 1759 book), under the right circumstances can result in a mutually beneficial situation.’

Benjamin Friedman misreads Adam Smith in this regard. Smith’s WN is perfectly compatible with his other great work: TMS.

Self-interest for Smith was not a synonym for ‘selfishness’ and is not separable from moral sentiments. Both books work together. They were revised in 6 editions each and Adam Smith was not so careless as to continue to edit two mutually inconsistent master works oblivious of a blatant contradiction as was evident apparent only to German scholars, who were oblivious of his yet to be discovered student notes of his Lectures On Jurisprudence, discovered in Oxford in 1895 (and edited and published by Edwin Canaan in 1896 (Oxford University Press). Smith, of course taught both subject in tandem at Glasgow University. If such an error existed, some of he brightest students would have interrogated him.

As I have shown elsewhere*, Smith is emphatic that one can only realize one’s self-interest by addressing the self-interest of others with whom one necessarily transacts to acquire what we want (WN I.ii.2: 26-7).

‘This “just” requires a little help from the “Invisible Hand”. Here I forego an opportunity to take Benjamin Friedman to task on repeating this blatant modern error on Smith use of the invisible hand metaphor (see numerous earlier postings on Lost Legacy).

What is most interesting, however, is Benjamin’s ‘fascinating account of how religious movements in the 17th and 18th century Europe may have influenced the thinkers of the time, in casu Adam Smith.’ I would be most interested in reading this paper, which observes that:

The orthodox Calvinism considered individuals as being utterly depraved and in vicious pursuit of self-interest. … Moreover, since many of the people shaping the development of the economic sciences were out of religious movements, Friedman argues that the religious movements of the times have had influence not only on economics previously, but also to present day.

Benjamin concedes that Smith ‘was not religious’ (a view I share: see my forthcoming article, The Hidden Adam Smith in his Alleged Theology in the forthcoming Journal of the History of Economic Thought, September, 2011).

I only observe for now that as most university educated persons tended to conform, at least outwardly despite their private views, to Calvinism in the four Scottish universities and to the Church of England in the two English universities, it was inevitable that many authors were nominally ‘out of religious movements’ without necessarily agreeing with their more imaginative precepts, as represented by the zealots in the Churches.

I think that Benjamin’s paper deserves greater scrutiny and I intend to follow it up when able to access a university library.

* Kennedy, G. [2008] 2010. ‘Adam Smith: a moral philosopher and his political economy’, 2nd edition, Palgrave Macmillan, London.

Postscript"

Warren Samuels [a distinguished historian of economic thought] in his reflections on Veblen in the Journal of Economic Issues (1995) writes:

"Veblen was the great demystyfier. He emphasized that human arrangements are in a process of Darwinian evolutionary flux, without ultimate ontological causation, meaning, or normative status."

"The reason why Veblen provided no blueprint for the future, aside from some relatively innocent but informed speculations, is that he believed that the future would have to be worked out, that one could not set it forth once and for all time. Veblen was a true existentialist, pragmatist, instrumentalist, and evolutionist; the world of future would have to be made by those who applied their tests of workability and so on, not by some armchair intellectual."

From Sumitra Shah, a fellow Historian of Economic Thought.

Comment
I agree with Samuels on Veblen. Predictors are the modern equivalent of witch doctors. Like war plans - they last to the initial contact with the enemy.

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