Modern Physiocrats, Witch-Doctors and Their Pretensions

From ‘Quotation of the Day’ (July 14) at DON BOUDREAUX’s invaluable Café Hayek Blog (‘where orders emerge’) HERE:

From Hayek’s 1974 Nobel Prize lecture, “The Pretense of Knowledge“:

“This brings me to the crucial issue. Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement. This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes.

It can hardly be denied that such a demand quite arbitrarily limits the facts which are to be admitted as possible causes of the events which occur in the real world. This view, which is often quite naively accepted as required by scientific procedure, has some rather paradoxical consequences. We know, of course, with regard to the market and similar social structures, a great many facts which we cannot measure and on which indeed we have only some very imprecise and general information. And because the effects of these facts in any particular instance cannot be confirmed by quantitative evidence, they are simply disregarded by those sworn to admit only what they regard as scientific evidence: they thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.

The correlation between aggregate demand and total employment, for instance, may only be approximate, but as it is the only one on which we have quantitative data, it is accepted as the only causal connection that counts. On this standard there may thus well exist better “scientific” evidence for a false theory, which will be accepted because it is more “scientific”, than for a valid explanation, which is rejected because there is no sufficient quantitative evidence for it.”


Comment
This extract is well worth reading and considering, as we have come to expect from Don Boudreaux’s daily Blog (but I wish I could say the same about some of the comments he attracts from some of his readers) (follow the link to the Blog -but give the comments a miss).

Hayek puts his point so well and it is so relevant to the current cul de sac into which economic has driven itself under the influence of the ‘scientific’ mathematicians who drain it of much of its relevance as a guide to both policy and understanding, and are usually – nearly always – wrong in their predictions for the future, allowing for a minority, sometimes of only one, occasionally being right when ignored, because unquantifiable, events intervene.

Adam Smith is regularly criticized by many of today’s ‘scientific’ economists for his Wealth Of Nations being ‘obscure’ and difficult to read (apparently they do not appreciate 18th century literacy standards).

He was also given to drawing on empirical evidence (the quarterly prices of silver for example) that are no longer regarded as relevant, and for quoting from the statements of figures in Classical times, or, example, ancient interest rates in Cyprus and such like. That he was a competent mathematician for his times but chose not to use it to explain social phenomena is disregarded (mainly, I suppose, because facts about him are not widely known).

He sharply criticized the French Physiocrats for constructing a model of an economy that concluded that manufacturing labour was ‘sterile’ and erected an explanatory theory about this imagined fact, burdened with the handicap of it being utterly wrong.
Some modern economists (Jevons, Schumpeter, Rothard, etc.,) see Dr Quesnay’s ‘model’, and ignore the wrong policy prescriptions that Physiocrats claimed follow from it – but they praise its historic ‘scientific’ originality and denigrate Smith , as being ‘unscientific’, even a plagiarist, in some imagined race to be the ‘founder’ of economics.

Smith praised and respected Dr Quesnay; he didn’t agree with his theory of ‘sterile’ labour, a theory today that re-appears in the absurd idea that ‘services’ are less important – even parasitic – than 'proper jobs' in manufacturing; ironically, almost the reverse error of the Physiocrats disregard for manufacturing labour, who would have had society still dependent on agricultural toil.

Today their heirs would have us toiling in the ‘dark’ mills of heavy industry, still supplying the output of the Western ‘workshops to the world’, rather than supplying the world’s high-tech design and development, and all that goes with it in consumerism, entertainment, finance, medicine, life sciences, IT, and creativity.

There are serious threats looming, particularly in funding growth without unsustainable debts, and for as long as economists are bound by their obsessions with ‘scientific’ models that try to confine into 'thin' equations the complexities of high GNP economies, with large welfare policies, always worthy, but often unfunded, then the best brains of the profession are wasted in competing ‘witch-doctorism’, rather than enlightenment.

I think Hayek is worth a second look.

A Commentator Disagrees

‘Cuauti’ posts two comments (23 June, 2011) to yesterday’s post “A Serious Scholar Disagrees”, exactly the same as that which he/she originally posted as a comment on my 17 June 2009 post that praised Chris Berry’s very short biography of Adam Smith on the BBC, followed by cuauti's second comment, also that he/she posted on 29 June 2009, responding to my: ‘A Wee Gem of a Little Book’ on Hector MacPherson’s biography of Adam Smith (1897).

Please note, his/her comments must have been posted much later than my original 2009 posts because the context refers to my preparations in December to leave my then Edinburgh address in 2010.

This strange, though welcome, behaviour no doubt has a perfectly valid explanation, but while I regard his/her comments as not too serious a criticism, they deserve an answer. The reason why I had not replied at the time to Cuauti’s posts is that I seldom scroll back a year or more looking for unanswered comments awaiting my reply (and I always respond to comments, critical or otherwise that I notice).

Here are the two 2009 posts by Cuauti:

‘The description is wonderfully - stultifying. Smith with a homogeneous life style. In fact, Smith knew nothing about classical economics before being coached by the Économistes in Paris. Being bored in Toulouse for 18 month he started to write the promised book on Government which became the "Wealth". Later in Paris, Smith learned about macro-economics, about productive and unproductive labour. The Économistes tried to avoid the bankruptcy of feudal France and the French Revolution. The opening passage of the Wealth mirrors these ideas. Smith did not understand everything as even after 2,5 years in France his French was very poor. He thought to dedicate the Wealth to Quesnay had the latter not died earlier. But his Wealth is a muddle of his former ideas, before he became educated as a classical economist and classical economics.’
By cuauti on “The Very Best Short Summary of Adam Smith's Life a... and on 23/06/11 A Serious Scholar Disagree (and on or about June 2009).

And:

‘First: Smith spoke about "an invisible hand" not about "the" invisible hand. Smith spoke about "the invisible hand" in "Astronomy", the hand people refer to if they don't understand the facts. Economists citing "the invisible hand" don't understand the facts. Second: Smith's hand "frequently promotes that of the society" so don't trust it works in your case. Third: An invisible hand "promotes an end which was no part of his intention." So you intend to make a fortune of your invention and the invisible hand helps competition to copy it. An invisible hand procures that competition curtails profits to the benefit of consumers. That's the definition of dynamic competition. (26 June 2011 and- originally posted on Lost Legacy, on or about June 2009).

To which I would comment:

That Smith owed ideas to the Physiocrats is unexceptional. Enlightenment scholars owed much to each other because the conversed without restraint and each influenced everybody else. That’s why it is called the Age of Enlightenment.

How much one philosopher owed to another was a subject of much discussion among later scholars – it still is by modern researchers looking for PhD subjects and forensic scholars digging deep into their special subject areas (a recent example I have read is Paul Russell’s excellent work on ‘The Riddle of Hume’s Treatise: skepticism, naturalism, and irreligion’, 2008, Oxford University Press).

It has been a common thread among modern Mise-ian scholars to downgrade Adam Smith’s contribution from the pedestal he was put on by 19th century economists and his epigones in the 20th century. “cuauti’s” over-extra assertions to debunk Smith are of that ilk.

Comments like ‘being coached by the Économistes in Paris’, ‘Being bored in Toulouse for 18 month’, ‘Smith did not understand everything as even after 2,5 years in France his French was very poor’, and ‘before he became educated as a classical economist and classical economics’, are to be judged as opinions not supported by the whole picture.

Certainly the Physiocrats explained their ideas to Smith and loaned him their many papers, all in French. The facts are he had a good working knowledge of French (his fluent translation of Rousseau’s Essay in 1755, and published in the Edinburgh Review, is an excellent example). Comments were made on his spoken French, but first he was not taught spoken French, he also spoke Scot’s English with a lowland’s accent that was commented on by English speakers let alone attendees at the Parisian salons; its affect on his spoken French was to make it execrable. He certainly spoke fluent Latin (a requirement in Scotland even to attend as a student, let alone teach in a university – which was also a common tongue with educated French men and his tutors at Glasgow and Balliol). Similarly, he was fluent in Classical Greek and had a working knowledge of Italian.

Cuauti writes: ‘But his Wealth is a muddle of his former ideas, before he became educated as a classical economist and classical economics.’ Again, an opinion but the evidence rebuts it. Smith did not start writing WN in Toulouse and the documentary evidence for this overwhelming.

A ms known today as the ‘Early Draft’ is in the Glasgow University Library that was written in 1763 for the Duke of Buccleugh’s guardian and follows the general lines of what became WNi, i.e., before Smith left for France in 1764.

Moreover, the students notes of his Lectures On Jurisprudence ([1762-3] 1978) contain long sections that appeared in WN almost verbatim in its early chapters. Smith taught ‘police’ (political economy) in his Jurisprudence classes from 1752 (part of his Moral Philosophy Class) and he claimed, according to Dugald Stewart, to have taught his ideas on political economy in Edinburgh 1748-51 in the 1755 paper then in Stewart’s possession in 1793.

None of this is inconsistent with his being ‘bored’ in Toulouse (prompting him to compile it into a book) before he spent months in Paris with access to Dr Quesnay’s circle, 1765-6, and exchanged ideas on a range of subjects. Nor is it inconsistent, or sinister, that he respected Dr Quesnay’s work, though disagreeing with its narrow conception of productive and ‘sterile’ labour (which he demolished in WN).

Of his second post, I am well aware that Adam Smith referred to ‘an invisible hand’ (I have often drawn readers’ attention to this fact because modern economists since the 1940s have made a noun out of the metaphor as used by Smith (most do not seem to know what a metaphor is). In yesterday’ post I wrote:

“Smith also recognized that other factors guided individuals; indeed, that was the actual point that he made about the ‘invisible hand’: some but not all merchants were led (‘by an invisible hand’) in the form of their insecurity about the evident risks of foreign trade to invest in ‘domestick industry’ and suggested, but did not identify, many other examples of similar non-price driven behaviour (WN Book IV.ii. 1-9). [Smith was no single-track ideologue.]”

This clearly differentiates between the ‘invisible hand’ [separating today’s noun use from Smith’s metaphoric use, which, as I stated: “were led (‘by an invisible hand’)”.

Smith reference to ‘the invisible hand’ in Astronomy did not refer ‘to the hand people refer to if they don't understand the facts.’ He, ‘cuaunti’, does not understand the facts: in Astronomy Smith refers to ‘the invisible hand of Jupiter’ because that is precisely what they (Roman Pagans) believed as part of their ‘pusillanimous superstition’; specifically that their god Jupiter dealt with enemies of Rome by pointing his heavenly finger at them and firing lightning bolts to destroy them. For them it was not a metaphor; it was all too real.

Some Roman coins carried the image of Jupiter’s pointed finger and a lightning bolt. It wasn’t that they did ‘not understand the facts’ – they explained irregular events by their superstitious beliefs. Perhaps ‘cuaunti’ should read Smith’s Astronomy essay more carefully.

He writes: Smith's hand "frequently promotes that of the society" so don't trust it works in your case.” No, it’s the object of the metaphor that promotes the interests of society, not an actual invisible hand (metaphors do not exist!), and the object of the metaphor here is the merchant’s regard for ‘his own security’ that leads him to prefer the ‘domestick industry’ to ‘foreign industry’, which in turn raises domestic ‘revenue and employment’ above what it otherwise would be if he had sent it abroad instead. This is plain to see from what Smith wrote.

Next, ‘cuauti’ asserts: ‘the [!] invisible hand helps competition to copy it’. Now this cannot be derived from what Smith wrote, or indeed, is meant by a metaphor: which ‘describes in a striking and more interesting manner’ its object (Adam Smith, Lectures in Rhetoric and Belles Lettres, [1763], 1983, p. 29).

If cuauti believes that there is an actual invisible hand (a perfectly legitimate belief, like the beliefs of Romans in imaginary gods, just as we have a right not to share his, and their, beliefs), his conclusion makes sense (to him, though not to me, or I would suggest would have made sense to Smith). But it is incumbent on ‘cuauti’ to explain how his ‘invisible hand’ achieves these results in ‘dynamic competition’, or whatever, where is it, can it be seen, who created it, and where does it reside in society?

‘cuauti’ is welcome to reply, with the caveat: I can identify web trolls quickly enough.

"The Hesitant Hand" by Steven Medema: Review, Part One:

Steve Madema opens his book, The Hesitant Hand, with a Prologue that spells out where he is going with his main theme on the part played by self-interest in society as a whole and how philosophers like Adam Smith and those before him approached the question. With an economy of style he gets down to business quickly.

Smith was not the first, nor the only, philosopher to focus on self-interest. Decades before 1776 (Wealth Of Nations), others had made explicit reference to self-interest. My first slight concern occurs here because Steve associates these interests of others and Smith with laissez-faire, a uniquely French term, which was not mentioned by Adam Smith in any of his works or correspondence, though he was familiar with it from his contacts with the French Physiocrats and their publications.

There is today an assumption that Smith’s preference for competition and reduced interventions of the kind practised by European governments in their mercantile legislative policies was in essence a policy of laissez-faire, which, strictly, it was not. Not all Physiocrats advocated laissez-faire – in fact some of their policies were interventionist, as were some of Smith’s.

It could be argued that such quibbles were outwith the thematic realm of Steve’s book – he wants to get on with his narrative, absent such scholarly niceties – and ordinarily I would agree with him, but just as the term had specific meanings for Vincent de Gournay, who popularised the term in his debate with Colbert, the Finance Minister of Louse XIV (“laissez-faire, laissez- passer”), about freedom from the stifling regulations pertaining to the conduct of commerce in France, it has come to have specific meanings for modern economists of the extreme libertarian school – the absence of government - neither of which can be said to be particularly Smithian in content or application.

However, Steve's Prologue is a masterly entre to what follows, especially in Chapter 1, “Adam Smith and His Ancestors” (5-25). This opens with Adam Smith and “an invisible hand” which would tend to “harmonise individual and social interests” and “attempts by the state to interfere with this would run counter to the national interest”. “Competition”, says Steve, “was hampered on all sides” (5).

Much of the legal structure was inimical to economic growth and this structure was the creation of governments following, or initiating, assertions about appropriate economic policy, mixed with religious or contemporary moral philosophies, from the
Greeks onwards.

Steve marches through this history at a brisk, readable pace, which economists who read the chapter would do well to take on board (or be reminded of). Plato, Aristotle, Aquinas, and the Scholastics, are buried in continuing economic thinking, despite the best efforts of modern economists to purge anything that cannot be modelled mathematically.

Rulers prefer subjects who submit to their rule by identifying their self-interest with the Sovereign, and still today they seek enforcement of their writ where their subjects do not do what is wanted of them (in Britain and the US we have petty bureaucrats, in Iran we have black-clothed thugs on motor-cycles, in Pakistan, police with canes, and China their versions of the Gulag). Learn about the past and you understand the present.

Steve covers Scholastic thinking neatly, with comments on much Christian thinking (the will of God) and how it related to, then, contemporary problems of taxation, the sovereign’s appetite for expenditure, regal lifestyles, monuments to their greatness, and the morality of borrowing (usury debates). Into this mix the self-interest of commoners and crown conflicted (the king debased his currency and his subjects ‘clipped’ it), as they did in debates over private and public property (sound familiar in echoes of the tragedy of the commons?).

As the power of the state increased from the 16th century, Steve notes that the influence of theologians declined and that of merchants rose (11), the latter with a self-interested motive to try to influence government policy, based on the well-known (and perpetuating knack for presenting their otherwise blatant self-interest in terms that appealed to the ‘national interest’, which was of greater concern to the sovereign than the petty wishes of seedy merchants). It was, and still is, the way of the lobbyist.

A small quibble emerges for me in Steve’s assertion that the term ‘mercantilism’ was coined in the 1760s (11); I have always understood that it originated from the German word in late 19th century and transferred to English from the late 19th century.

Of no doubt though, the critique of mercantile policy emerged in the late 18th century, particularly in Smith’s Wealth Of Nations in Book IV. While often presented as a critique of bullion accumulation, it goes much deeper than that, summed as the policies associated with what Hume called ‘Jealousy of Trade’.

Steve’s account of the debate is another example of his masterly exposition style which makes the subject interesting (11-13).

The subject is a clear example of the self-interested actions of individual merchants, in alliance with legislators and those who influenced them, that were, in Smith’s and in others’ view, contrary to the national interest.

Self-interest, clearly, does not necessarily result in some way in the public interest (and it remains a mystery to me why proponents of such a view continue to attribute it to Adam Smith – presumably they have never read Book IV!).

If you are not sure what the issues were (and, regrettably still are today) in the mercantile policy debate, Steve’s exposition will remove all doubts and uncertainties. He quotes from the inimitable Jacob Viner to great effect (13) on the appeal of mercantile advocates to Providence for chauvinistic support for their doctrines.

Moving on to the Physiocrats and the economic policy regime of Jean Baptiste Colbert (1619-83), Steve uses 17th-century France as a case study in all that was wrong with mercantile interventionist policy. He discusses their strong points (identified by Adam Smith, who admired them personally) and their ‘errors’ - the superiority of agriculture (produit net) versus the ‘sterility’ of manufactures. They related their ideas to their version of ‘natural law’. (15) As Steve points out the Physiocratic programme required a strong state led by ‘experts’.

This brings Steve to Adam Smith and his works.
However, apologies (I am supposed to be on holiday, and family demands on my attention interrupt my section on Adam Smith - I shall finish it tomorrow and post it then.