MORE EVIDENCE OF THE TIDE TURNING?

Oscar Valdes Viera posts (1 July) a most interesting Working Paper ( NO. 893)  HERE Working Paper No. 893

The Neoclassicals’ Conundrum

If Adam Smith is the Father of Economics, It Is a Bastard Child

Neoclassical economists of the current era frequently pay lip service to Adam Smith’s theories to certify the validity of natural-laws-based, laissez-faire policies. However, neoclassical theories are fundamentally disconnected from Adam Smith’s notion of value, his understanding of the economic individual and their interactions in society, his methodology, and the field of study he afforded to political economy. Instead, early neoclassical economists parted ways with the theories of Adam Smith in an effort to construct economic laws that would validate the existing capitalist order as universal, natural, and harmonious

* The author would like to thank John F. Henry for his most helpful comments on earlier drafts. All errors, however, are the author’s own.

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ABSTRACT

Neoclassical economists of the current era frequently pay lip service to Adam Smith’s theories to certify the validity of natural-laws-based, laissez-faire policies. However, neoclassical theories are fundamentally disconnected from Adam Smith’s notion of value, his understanding of the economic individual and their interactions in society, his methodology, and the field of study he afforded to political economy. Instead, early neoclassical economists parted ways with the theories of Adam Smith in an effort to construct economic laws that would validate the existing capitalist order as universal, natural, and harmonious.

Keywords: Economic Thought; Classical School; Neoclassical Economics; Adam Smith; Economists

JEL Classifications: A11; A13; B12; B13; B16; B20; B31

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“But coherence doesn’t mean ‘equilibrium’,” Alice objected.

“When I use mathematics,” Humpty Dumpty said, in a rather scornful tone, “it means what I choose it to mean—neither more nor less.”

“The question is,” said Alice, “whether you can make mathematics mean so many different things.”

“The question is,” said Humpty Dumpty, “which is to be the master—that’s all.”

—A corruption of an exchange in Lewis Carrol’s Through the Looking Glass (Minsky 1985, epigraph)

I. INTRODUCTION

Modern orthodox economists frequently theorize and propose their models wrapped in algebraic expressions and econometrics symbols that make their theories incomprehensible to anyone without significant training in mathematics. These complicated mathematical models rely on sets of assumptions about human behavior, institutional frameworks, and the way society works as whole, i.e., theoretical underpinnings developed through history. Yet, more frequently than not, their assumptions go to such great lengths that the models turn out to be utterly detached from reality.

The mathematical approach was brought to the forefront of economics during the 1870s, in an effort to emulate the success of the natural sciences in explaining the world around us, and so transform political economy into the “exact” science of economics. The new discipline, born with a scientific aura, would provide a legitimate doctrine for rationalizing the existing system and state of affairs as universal, natural, and harmonious.

It is frequently claimed that orthodox economic theory is traceable to the theories of Adam Smith and his “invisible hand” metaphor (Henry 2008). However, Adam Smith argued that the scientific method should be an attempt of the imagination to solve observable problems; the scientist could use mathematical tools or models to propose laws, but they should subordinate to observed phenomena (Fleischacker 2004, ch. 2). Smith’s notion falls more along the lines of the ideas proposed by heterodox economists like Hyman Minsky, who argued that any scientific

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theory disconnected from observations should be rejected, because in “sciences theory is a servant of observations” (Minsky 1985, 1).

Nevertheless, the “invisible hand” metaphor seems to be the most pervasive misrepresentation of Adam Smith and is taken literally by high-ranked economists in their understanding of economics. Smith’s hypothesis of how the economy works, as if governed by an “invisible hand,” has been disguised behind scientific-mathematical formulations that tend to reduce our complex world and irrational society to a small, rational scheme, where the profit motive and competition align the self-interests of individuals to produce a collective good. Then, because such process is natural and inevitable, all that is needed to guarantee the proper functioning of the economy is to remove any barriers (i.e., the government and its regulations) and allow the system to work freely.

In short, this paper argues that the advent of rigorous mathematical models was the turning point in the transformation of political economy into the science of economics. On the basis of economic laws that would confirm those characteristics, the new science—epitomized by the neoclassical Marginal Revolution—parted ways with the theories of Adam Smith in an effort to validate the existing capitalist order as universal and natural. However, neoclassical economists of the current era still pay lip service to Smith and his theories to certify their laissez-faire policies, representing an incongruence that is at the foundations of orthodox economic theory.

COMMENT

This by far is the most focussed contribution to the missing debate over where and why did economic theory and science go astray from the 19th century though to the 21st century.

I recommend readers to take the trouble to follow the links and read the whole paper and make their own minds up about the degree of the validity of the Author's arguments.

I confess to being impressed with its central theme and the degree to which Oscar Valdes Viera's survey of the end-state of what today passes for the near universal acceptance of the so-called modern science of economics, coincides broadly with mine.