Wednesday, January 30, 2013

Respect the Integrity of History - Don't Rewrite it


Daniel Kuehn in “Facts and Other Stubborn ThingsHERE 
"...the notion that a social system moved by independent actions in pursuit of different values is consistent with a final coherent state of balance, and one in which the outcomes may be quite different from those intended by the agents, is surely the most important intellectual contribution that economic thought has made to the general understanding of social processes. [Adam] Smith also perceived the most important implication of general equilibrium theory, the ability of a competitive system to achieve an allocation of resources that is efficient in some sense. Nothing resembling a rigorous argument for, or even a careful statement of the efficiency propositions can be found in Smith, however"  Arrow and Hahn, 1971.
Arrow of course proceeds to provide some efficiency propositions that most economists would find relevant to think about, and he rigorously demonstrates the point that individuals pursuing their own interests can generate beneficial results for society in a system of market exchange. Adam Smith took an enormous step forward and provided arguments that had been fairly convincing. Walras, Arrow, Hahn, Debreu, etc. picked up where Smith left off. I'm sure they found Smith's arguments plenty convincing, but they were nevertheless able to provide new arguments - and they did.
Is Arrow's efficiency criteria Smith's? No, of course not. They didn't even talk about "efficiency criteria" back then and Pareto hadn't even been born yet (much less Kaldor or Hicks). To point out that this is not precisely how Adam Smith addressed the question misses the point. We don't want to keep providing the same answer, we want to make this Smithian channel of thought deeper, broader, and stronger.
Are the parameters of Arrow's inquiry exactly the same as Smith's? No, of course not. The analytical toolbox gave primacy to some assumptions and made others less relevant. In the end Arrow did not speak to all that Smith spoke to, and vice versa. But again, we don't want to keep providing the same answer in science. We want to take a good answer and make it deeper, broader, and stronger. And that's what Arrow did.
Mark Blaug has called this a "travesty", but Mark Blaug seems to think Arrow's citation of Smith indicates that Arrow thought he was reproducing Smith's argument as opposed to doing constructive work in the same channel of thought. Mark Blaug is a historian of thought, but in calling Arrow's citation of Smith a "travesty" he demonstrates that tendency that we all succumb to sometimes when we hold a hammer: the tendency to see nails everywhere.
… The suggestion that he is not moving forward Smithian economics because his framing of the issue is not identical to Smith's seems to miss the whole point of "moving forward Smithian economics" to me. The most important element here is that private choices in market exchange are socially beneficial. Arrow has that. The idea that he brings in certain efficiency criteria and assumptions to talk rigorously about this phenomenon doesn't change the fact that he's doing Smithian economics. Smithian economics is about the heart of the theory, not the minutiae of approaching the question that change over time. On the flip side, the idea that Arrow is not moving forward Smithian economics because he only provided his answer to a relatively restricted case is laughable. You try to do better if you are tempted to throw this at him. I know I can't!
Comment
Daniel Kuehn’s presentation of the issues raised by Arrow and Hahn’s contributions to General Equilibrium theory for Adam Smith’s contribution is misleading.
 To point out that this is not precisely how Adam Smith addressed the question misses the point. We don't want to keep providing the same answer, we want to make this Smithian channel of thought deeper, broader, and stronger” Adding: Arrow and Hahn “picked up where Smith left off” and repeats the mantra about making Smith “deeper, broader, and stronger”. 
 In general I have no problem with 20th/21st century economists advancing analytical science, for which they deservedly receive the accolades of Nobel Prizes.
  My objection is when they link their work in general equilibrium and Pareto’s Welfare theorem directly to Adam Smith’s use of the metaphor of  “an invisible hand”. This leads to misleading associations of Adam Smith authority with modern views of how economic processes work.
 On the association of the invisible hand, see Arrow (1987): “The profoundest observation of Smith”; Arrow and Hahn (1971): “surely the most important contribution of economic thought”; Tobin, (1992): “one of the great ideas of history and one of the most influential”, and Samuelson (1976): who introduced his readers (and their tutors) to the notion that general equilibrium redefined the “the humble Invisible Hand doctrine”. 
These attributions to Smith on the back of modern work are misleading. They are now endemic in public commentary by economists. They make a “doctrine” out of a grammatical metaphor, giving its metaphoric role a completely doctrinal role well beyond its role in Smith’s work. For Smith it was a metaphor, not a doctrine. Mark Blaug was right to describe it as a "travesty".
That “private choices in market exchange” can be “socially beneficial” is true.  Smith said as much.  He also noted in Wealth Of Nations over 70 instances (not including the withering critiques contained in Book IV of WN) in which “private choices” specifically not beneficial to the “public good” (such as monopolies, mercantile policies, tariffs and such like).  Nobody wants answers to remain the same in science, but in respect of Smith’s work in the 18th century, his answers for him stubbornly remain the same.  Modern authors should respect the historical integrity of Smith’s work.

3 Comments:

Blogger Daniel said...

re: "My objection is when they link their work in general equilibrium and Pareto’s Welfare theorem directly to Adam Smith’s use of the metaphor of “an invisible hand”."

OK, but I didn't say it was linked directly. In fact I made quite a point of saying that We can't say that Smith was doing what Pareto was doing.

What we can say is that they were thinking about the same issues.

You also ought to highlight for your readers that I was careful to talk about "Smithian economics" rather than the "invisible hand theorem" or something like that. I'm well aware Smith's use of "the invisible hand" was not what everyone thinks it was. That doesn't change the fact that Smithian economics is about the possibility of public benefit from private self-interest: precisely what Arrow and Hahn were working on.

You and I disagree on one thing: how much it matters that people have taken to calling that "the invisible hand". So long as people aren't making claims like "when Smith used this phrase he meant X", I can't see how it matters that much - it's just an ironic, completely inconsequential misappropriation of a phrase.

We genuinely disagree on that.

But I think you are over-interpreting the rest of what I said about Arrow and Hahn.

5:41 p.m.  
Blogger Gavin Kennedy said...

Daniel,
Nice to hear from you and clarify aspects of what you meant where you consIder I was being unfair. That was not my intention and I apologise if you believe I was.
Elsewhere in other posts on Lost Legacy I have shown that Smith did not make a general statement that public benefit arose from self-interested actions by merchants and others. That opulence was a general benefit as an alternative to abject poverty was suggested to his readers. But self-interests could also work against public benefits. For example, in self-interested actions by merchants in favour of narrowing competition, protection and tariffs, monopolies, 'conspiring to raise prices'. Also when landowners used primogeniture laws and entails to control inheritances, when sovereigns raised taxes or borrowing to fight dynastic wars.
The IH metaphor in WN was a very narrow case of some but not all merchants from their insecurity who invested domestically which added to "domestic revenue and employment" and benefitted the public. It was not a general statement of public benefits arising from all private self-interests, let alone anything remotely akin to the GE proposition of Pareto. That is an idea credited Smith 2 centuries after him. People today credit Smith so as to give the completely artificial imagination of GE authority.
Those are my points.
Gavin

10:31 p.m.  
Blogger Gavin Kennedy said...

Daniel
An addendum:
"Smith also perceived the most important implication of general equilibrium theory, the ability of a competitive system to achieve an allocation of resources that is efficient in some sense."
Smith's actual use of the IH metaphor was about an arithmetical consequence of investment in domestic industry rather than in foreign trade. An economy consists of investment in both domestic and foreign trade, hence the arithmetic total of domestic investment at any moment is not necessarily maximised because leakages to foreign trade vary. Indeed, in the same chapter Smith talks of the varying consequences of the mix, all related to their different circulation of capital cycles.
Smith's point was limited. Those merchants who did decline to invest capital abroad added arithmetically to changing total, a local maxima, not equilibrium. Those countries that prevented foreign trade would have a lower maxima - because trade was one of the causes of opulence and domestic trade was insufficient to maintain a growing economy.
Example: China from the 15th century.
I suspect Arrow, Hahn, were confusing a local, if unstable, maxima with retrospective projections of seeds of GE, not what Smith was actually writing.
Gavin

8:46 a.m.  

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