Five Errors About Adam Smith and Classical Political Economy

Lee Elliott, Director, Wonderful Life Project, writes (24 August) in The Independent, Grand Island HERE

“What’s wrong with economics? It ignores altruism”

“There has been a fascinating struggle going on within the field of economics since the 1970s.

Historically, economics has been known as the “dismal” science because of its ruthless belief that people are motivated solely by their financial interests. This came from Adam Smith’s notion that if all of us act selfishly, then an “invisible hand” will guide the creation of the best society possible.

There is a flaw. Smith recognized there was a feature of human character that just didn’t fit this idea. That feature is altruism.

He said we do things for others even though we derive nothing from it except for the pleasure of caring for others. It just doesn’t seem to fit classic economic theory. It also was almost impossible to measure. As a result, economists dropped the idea that we’re altruistic.

In fact, there is a second flaw. Classic economics assumes we are consistently rational. We’re not. In fact, it has been demonstrated that, at times, we are quite irrational but we are consistent in our irrationality.”

Comment

Lee Elliot makes five major mistakes about Adam Smith’s ideas and what he calls “classic economics”.

I shall not elaborate on each mistake beyond identifying them and briefly commenting.

One: Lee Elliott ignores Adam Smith on “altruism”. 

Smith wrote , “The Theory of Moral Sentiments” (1759), discussing “benevolence”, the 18^th century word for altruism, and it featured in his even longer book, “An Inquiry in the Natured and Causes of the Wealth of Nations” (1776).

He did not ignore what today we call altruism, and discussed it positively, but observed that it was not a strong enough moral force to provide everybody with their minimal biological needs in modern society.  If everybody expected their modern dinners from benevolence, who was left to labour to produce its ingredients for everybody, as well as every thing else they needed?

Two: Lee Elliott ignores the true history of the phrase the “dismal science”.

This phrase was created by Thomas Carlyle in 1849 in his short pamphlet, originally entitled the “Nigger Question” (later changed to the “Negro Question”), which was a disgraceful racist diatribe against John Stuart Mill, an economist, for supporting a petition favouring the emancipation of Jamaican slaves. That the phrase was later back-projected to refer to something different about early economists (Malthus particularly) is no excuse for giving the disgusting phrase credibility.

If Lee Elliott knows its history and still uses the phrase, he is, I hope, beyond the pale for readers of the Independent; if he did not know its history, he must inform his ignorance forthwith.

Three, it was never “Adam Smith’s notion that if all of us act selfishly, then an “invisible hand” will guide the creation of the best society possible”.  Nowhere in his writing does this outrageous notion appear.  His writings on “self interest” were clearly descriptive (he was a philosopher, not an evangelist) and are carefully shown to be about self-interested people mediating their differences by mutual persuasion and the exchange of concessions in a voluntary bargaining process.

The “selfish” notion came from modern economists, particularly Paul Samuelson in 1948 in his popular textbook.   I have discussed this source many times on Lost Legacy and invite Lee Elliot to scroll previous posts.

Four, Lee Elliot is confused about the history of “classic economic theory” and the dropping” of “altruism” because it was “almost impossible to measure”.  Classical theory regarded “benevolence”/”altruism” as an integral part of moral philosophy in political economy; which became (post-1870) neoclassical theory (post-1920) by turning to model economic behaviour mathematically and statistically.  Lee Elliot melds these two distinct schools of economics together and thinks they are the same.  They are distinctly different.  The neoclassical school obtained “scientific” credibility at the expense of understanding the real world.

Five: This “achievement” which also “assumes we are consistently rational” is, like Samuelson’s “selfishness”, a chimera. Humans apply reasoning to suit their perceptions of their circumstances and prospects, but they are not consistently “rational” in a mutually consistent manner. The myth of “Homo economicus” (from the 1870s) is a non-existent entity, as are theories of “rational expectations” and all the other aspects of “perfect information” supposedly guiding actors in an economy.   All these ideas belong not to “classical economics” but solely to its “neoclassical” inheritors, the ideas of which remain antithetical to Adam Smith’s.