Tuesday, October 18, 2011

The Adam Smith Myth

STUART KAUFFMAN writes in NPR (public radio)HERE:

“The Lord is my Shepherd”

He opens with the 23rd Psalm and brief assertions about the period, 800 to 200 BCE, ”when, in China, India, Persia, Greece and among the Jews in Exile in Babylonia, civilizations seem to have gathered themselves up and found new expression through Lao Tzu, Buddha, Zarathustra, Plato, Socrates and the writing down of the Old Testament…. some 5,000 years after agriculture led to the beginnings of property rights and the creation of greater accumulated wealth. Civilizations arose in China, the Indus valley, the confluence of the Tigres and Euphrates, the Nile Valley and Abraham gave birth to three great monothestic religions.”

Emphasis on the individual is a cornerstone of our United States Constitution and Adam Smith in the Scottish Enlightenment, setting the foundations of modern economics with his famous "invisible hand," where each acting for his or her own purely selfish interests unwittingly, through the invisible hand of the market, achieves the benefit of all….
Begin with our evolutionary history as social primates in the clan 50,000 years ago. We did something beyond the market: We shared fairly

Watch: I meet you on the trail, you have caught a rabbit. "May I borrow half your rabbit? I'll pay you back in kind very soon," I ask. You agree. I take half your rabbit for my dinner tonight, mark a stick as an IOU and give it to you. Credit is born, as is a rude form of money in the marked stick.

A famous framework called the "Edgeworth box" shows” that Smith was wrong. … But, central to the Edgeworth box is an embarrassment to Smith and modern economics: the famous "contract curve."

“Our social primate evolution steps in. This is seen in the famous "utimatum game." Here it is: I will give you $1,000,000. First, you must offer a fraction to Bill. If he accepts I give you the money and you give the agreed fraction to Bill. But if Bill refuses your offer, I give you nothing and neither you or Bill get anything. Bill knows the rules and that I'll give you $1,000,000.
How much do you give Bill? Across all cultures we give 30 to 50 percent to Bill.”

“Beyond economic theory, market, invisible hand and price as the only sense of value, we base our actions on an evolved sense of fairness that, it turns out, we share with the higher primates.

“perhaps it becomes time for our civilizations to again gather themselves up to find our way to be our own shepherds together, take enchanting time to rest besides green pastures and still waters.

Even with my brutal selection of edited items – motivated entirely in respect of copyright considerations - from Stuart Kauffman’s article (follow the link), you should get a feel for his theme.

It us nicely plausible, but in my view, a quite idealistic picture of the real life experiences of our predecessors’ lives in the forest and afterwards. Anthropologists present a far more gruesome picture of the short lives and generally early and violent deaths of males in the forest and plains from inter-communal and inter-tribal deaths, showing unprecedented death rates per thousand, higher than the violent 20th-century wars and genocides, and the urban murder rates, of which we are familiar. Women fared no better in war-booty rape and abduction raids. The jolly picture of young males and females in ‘sharing’ utopias is a nonsense.

As for the rise of civilizations that somehow lived in communal peace, much depended on where the individual stood in relation to the power structure. Civilisations were based on violence, perpetrated against the numerous and helpless slaves who made possible much of the comforts enjoyed by the upper-reaches of these societies. ‘Abraham and the monotheistic religions’ hardly represented the unmixed blessings of the ‘sharing ethics’ portrayed by Stuart Kauffman. Turning the pages of the Hebrew Bible, one does not have to read far to find violence and treachery. The tears that flowed from the dark side of their civilizations were appropriately symbolised by the great rivers of “China, the Indus valley, the confluence of the Tigres and Euphrates, the Nile Valley” (the “Oriental Despotism”.

What exactly does Stuart Kauffman know about the history that he writes about? Selfishness was not invented and practiced only in capitalism. Thus, when we come to this sentence from his article, we realize he has bought in full the propaganda of an invented myth of modern economics, namely, the so-called contribution of Adam Smith “setting the foundations of modern economics with his famous "invisible hand," where each acting for his or her own purely selfish interests unwittingly, through the invisible hand of the market, achieves the benefit of all”.

The Adam Smith born in Kirkcaldy in 1723 and author Wealth Of Nations 1776 said no such thing. Nor did he talk of the “invisible hand of the market”. The Adam Smith “alive and well in Chicago” in 1976, according to George Stigler, can be said to have said anything, but that Adam Smith did is a myth – he didn’t exist Stuart!

From a myth, Stuart moves on to the Edgeworth Box Diagram (1870s) in a flourish of partial knowledge from Economics 102 and the modern welfare economics (oh, happy days, from when I taught undergraduates such theorems, Pareto et al). Then I looked out of my academic window and observed thousands of individuals actually negotiating for real gains and to avoid losses (I had moved to teach post graduates in Business Schools) and learned better – I also read the Kirkcaldy Adam Smith and knew better.

Edgeworth Box diagrams represent people exchanging tow commodities in pairs, and the ‘contract curve’ traces exchanges where no further exchanges can take place without making one of the pair worse off (Pareto’s theorem). Stuart Kauffman does not tell us why the Edgeworth’s contract curve (1870) is “an embarrassment to Smith” (1723-90). It certainly is not an embarrassment to the Adam Smith from Kirkcaldy – how the invented in Chicago Adam Smith fares is no concern of mine.

Stuart moves on to the Ultimatum Game, supposedly a refutation of Adam Smith. I have discussed that game here several times and shown it consistent with Adam Smith’s Moral Sentiments (1759) and with Wealth Of Nations (1776). Smith makes the important distinction between self-interest as selfishness (which he never excused, nor endorsed – he considered such ideas ‘licentious) by the key consideration of self-interested people as ‘other regarding’, not purely ‘self regarding’, as is mis-interpreted by modern economics and the welfare theorems (perfect rationality and so-called Homo economicus).

The famously misread ‘butcher, brewer, and baker’ example actually states explicitly and clearly the ‘other-regarding’ aspect of the self-interested person in Smith’s example of bargaining, in which he advised you, in pursuit of your self-interest in acquiring the ingredients of your dinner, to address yourself ‘not to their humanity but to their self-love, and never talk to them of [your] own necessities, but of their advantages’ (Wealth Of Nations, I.ii.2: 27-7). That is what being ‘other regarding’ means.

It is that bargaining experience that pushes the individual in the Ultimatum game to a decision roughly aligned to a sense of ‘fairness’. Not some independent, anti-market, ethics allegedly suppressed in actual market transactions (which are never tidy nor compressible into Edgeworth’s contract curve). A slight acquaintance with what goes in real world bargaining exchanges would correct that idealized picture. Human behaviour in the real world is not replicated in the mathematical world. Using the latter to predict the former is futile – prices are not set by ‘rational expectations’, as Smithian scholars are well aware, but not listened to.

However, none of this drains 23rd Psalm of its poetic content, I have heard it at too many funerals to forget its beauty, but it is a psalm of a belief and not a statement of the universal reality of its sentiments. Too many tears have been shed in the ‘still waters’ for majestic beliefs to compare with cold realities.



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