Thursday, March 30, 2006

Which Version of Adam Smith?

“How can the efficient-markets hypothesis and behavioral economics ever be reconciled? According to Andrew Lo, perhaps by looking to Charles Darwin instead of Adam Smith.”

Source: Survival of the Richest by Andrew W. Lo Harvard Business Review March 2006

Everything in his hypothesis depends on with what version of Adam Smith Andrew Lo is comparing Charles Darwin. As he doesn’t state what he thinks Adam Smith’s Works said about evolutionary changes, it is not possible to judge the credibility of Lo’s proposition.

Smith had a social-evolutionary approach to his entire corpus of Work. He demonstrates this in his earliest essay, usually known by its short title: ‘History of Astronomy’ (c. 1743-48), compiled in the main while still an MA student at Oxford (Essays in Philosophical Subjects, Liberty Fund, 1982).

The same social-evolutionary approach is demonstrated in his ‘Considerations Concerning the First Formation of Languages’ (1761), also published in the 3rd edition of The Theory of Moral Sentiments (1767), and available in his Lectures on Rhetoric and Belles Lettres (Liberty Fund, 1983).

The Theory of Moral Sentiments (1759) is a major example of his social-evolutionary approach to the development of moral sentiments within a behavioural framework. As are his Lectures on Jurisprudence [1762-3] (Liberty Fund, 1978). His most well known Work, The Wealth of Nations, much of it delivered in his Glasgow lectures, 1752-64, is thoroughly social-evolutionary in structure.

Hence, I do not know from where Andrew Lo draws his suggestion that we turn from Adam Smith’s legacy, as he wrote it, to Charles Darwin. I consider them both compatible in approach, Smith less explicit maybe, but definitely not at variance. Towards the end of his article, Andrew Lo mentions ‘rationality’ and if this is an expression he associates with Adam Smith’s legacy. I suggest he is careful in case he imposes the modern paradigm of homo economicus on an 18th-century philosopher who did not subscribe to such an entity in what he actually wrote.

Smith always wrote about how people behave, not how they may be assumed to behave, and certainly not as they ‘ought’ to behave to fit the arguments of rational calculus.

Read Andrew Lo’s article at:


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