Adam Smith and GDP/GNP Analysis

Evan Soltas, a student at Princeton University, posts on his Blog HERE 

“A New Generation of Econ Data?”

“In the beginning, there was no economics data. Greats like Adam Smith wrote treatises on political economy in the equivalent of near-total darkness. Later economists such as Vilfredo Pareto and Alfred Marshall introduced mathematical foundations, changing the direction of what had been a very qualitative philosophical endeavor. After the Great Depression, Paul Samuelson and John Hicks consolidated Keynes' work into the modern field of macroeconomics -- and they received critical (and I might argue significantly under-appreciated) support from econometricians and statisticians like Simon Kuznets.”

Comment

I found this article by Evan Soltas interesting, though my comments are directed at this first paragraph.

I am not so sure that Adam Smith and contemporaries wrote “in the equivalent of near-total darkness”, though I get what he means. 

There were no systematic treatises on political economy on hand; there was quite a large pamphlet-size literature on economic subjects written in the 17^th-18^th centuries, of which Yale (I think) has assembled over 4,000 pieces available (now) for consultation, most of which were not known to Smith (and probably not known en masse to others.  In 1767, Sir John Stuart, a recently returned Jacobite exile, published his 2-volume, Principles of Political Economy, which we know Smith had read, but he did not mention it in Wealth Of Nations.*  Two further sources can be traced from Smith.  First was Cantillon’s privately circulated thesis (1735), mentioned by Smith; the other was Turgot’s more substantial anonymous publication, considered by some scholars to be previous to WN.**

The mathematisation of political economy was of mixed blessing.  It cleared up the fuzziness of language at an eventual cost of removing political economy from contact with reality.  Statistics was also a new subject in the late 18^th century (see my history of statistics: “An Invitation to Statistics”, Wiley, 1984 – Amazon now sells it for 1c [!]).

The History of economics may be bit like the history of astronomy; both subjects started with observations melded with a few old concepts; then the concepts took over, and the real world made to fit the new concepts. 

In the case of astronomy this hindered knowledge as the religious concepts of the earth and the heavens circulating the sun ruled supreme as the word of God, until ever improving ongoing observations challenged the concepts, which, once they proved overwhelming,  rescued astronomy from rigid religious concepts.

Economics is going through a stage of the dominance of new concepts, such as theories of homo Economicus with rational humans making rational choices beautifully accounted for by pure maths, which had overwhelmed the political economy of Smith's times.  Maths has taken over; quantitative work – including statistics of behaviour and tests of rational concepts in behavioural games - have kept the debate about the real world alive.

In this process, Smith’s ideas are still worth studying, provided we stick to what he was writing and not to how modern ideas have allegedly made them redundant historically.  Take, for example, Smith’s limited and primitive  ideas on productive/unproductive labour.  In modern GNP work his distinction is disregarded as not precise enough.  Yet it keeps rising in modern dialogues.  Pure government expenditure does not have the same productive effect of market expenditure; the former has to be replaced pound for pound from taxation and borrowing.  Market activity reproduces itself pound for pound, plus additional pounds in the form of profits.  Smith was drawing this distinction which exists though it was not clear enough theoretically for quantification. 

Smith also was inconsistent and the margins were vague.  Government expenditure was not unproductive when it purchases goods and services from private enterprises.   Take defence expenditures (the first duty of government).  Defence suppliers receive revenues from the government, and reproduce the costs of their defence services – they also make a profit and pay their suppliers and the wages of their employees to stay in business.  The defence departments pay their soldiers and seamen, which is unproductive in Smith's sense as these forces do not generate a revenue to cover their costs and the costs of their materials used in defence, but they consume through markets, adding to local revenues.  Much has been written and studied on local defence-sourced multipliers.

Likewise with his example of consumers spending money on wines and their dinners in restaurants, hotels and theatre goers, seeking legal advice, and such like.  Consumers of these services do not reproduce their expenditures – they consume them.  However the restaurants, hotels, theatres, puppeteers, lawyers – even Brothel keepers and the courtesans – are productive in Smith's sense.  They receive incomes that reproduce their costs plus profits.

It is a muddle, true, as expressed in WN, but the point remains; those activities that recover their costs plus a profit add to economic activity and those than do not, do not.  These last are the necessary costs of an economy functioning; those that do recover their costs plus a profit are the necessary revenues that enable an economy to continue and to grow. It is not a GNP analysis as shown in the statistics.  Smith's distinction is still worth understanding, as are GNP/GDP statistics, and their derivation. 

*Smith in correspondence to Adam Ferguson.  Stuart made a case for mercantile tariffs and such like, and while Smith knew him socially, they did not agree (politely).  He told Ferguson that he had “confuted” all Stuart’s arguments in WN without mentioning “his” (Stuart’s) name.

(It was considered impolite in 18^th-19^th century literature to criticise living persons by name – first and last letters with dashes in between were sometimes used instead  Smith just left Stuart's name out, perhaps to save embarrassing friend).

* Turgot was a senior state official in the French King’s service and was near paranoid about anyone mentioning his name in view of the consequences.  All printing in France was subject to bureaucratic censorship.  Turgot often used aliases and also urged writers not to mention his authorship ever.  From textual evidence, we know Smith used similar expressions from Turgot’s main published work in later editions, after the first edition of WN in 1776, and long after passages reproduced in WN from his Lectures in Jurisprudence, 1762-63.  Turgot had many ideas in advance of anybody else though he sometimes appeared to be quasi-Physiocratic.