Tuesday, February 27, 2007

Explanation, Yes; Prediction, No

There is nothing wrong with being ‘self-taught’ if the output is as good or better than being tutor-taught. Then everything depends on the tutor, which may be marginally better or worse than being self-taught; but everything then depends on by which instruments of learning you are self-taught?

Ranjit S. Mathoda on his Blog: Mathoda.com (‘the art and observations of…)’, says he ‘taught himself quite a bit of economics’ (26 February), and he plunges in with:

“Adam Smith is widely credited as the father of economics, but he would not have considered himself to be an economist. He was considered in his time to be a moral philosopher. He was interested in human behavior generally, and used certain techniques to help him understand and predict behavior. Modern economists like Gary Becker and Stephen Leavitt have applied the tools of economics to areas as varied as family dynamics, or the naming of babies.”

Ranjit’s pretty good on Adam Smith as a moral philosopher and his not considering himself an economist – there was no discipline called economics in his day – but is in an error with: “He was interested in human behaviour generally, and used certain techniques to help him understand and predict behaviour.”

I do not think Smith attempted to ‘predict’ behaviour. He was in the explanation, not the prediction, business, a far more modest goal, though difficult enough. Smith looked backwards into events and history and also looked outside his window; he used his model of political economy to analyse what factors enhanced the employment of productive labour as a proportion of total employment (the rest being unproductive labour) and derived from this how far short the past and current employment of labour was from what it would have been under Perfect Liberty.

This is the extent of his aspirations in Wealth of Nations, a case study of the history of the false mercantile doctrines prevalent for many decades before 1776. We should always remember that Smith did not propose that the necessary and valuable interventions by governments should be ended (he was not a libertarian). He opposed prodigal interventions of government (wars, colonies, reckless spending and attempts to do what markets would do better), and also opposed to those mercantile and monopoly policies of misguided merchants and manufacturers, which he heavily criticised.

From his analysis of the past he suggested that because productive labour added to annual net revenue, it produced higher annual growth of the ‘necessaries, conveniences, and amusements’ of life and spread opulence, especially to the labouring poor. History showed that prodigality harmed this long term process; frugality speeded it up and kept it doing its productive work.

That modern economist took on the mantle of being in the prediction business, and rich people believed that their econometric tools could predict the future (a silly hubris upon which they wasted their money, for which some economists were truly grateful while myths about their voodoo tools lasted), is a testament to the credulity of those desperately seeking an edge in a world of uncertainty.

Explain, understand, and be thankful. That was a perfectly good enough goal for Adam Smith – it’s also better than most modern economists can aspire to, with all of their tools – and it’s good enough for me, too.

[Read Ranjit Mathoda’s post at: http://www.mathoda.com/archives/117]


Blogger Ranjit Mathoda said...

Great post! I think anyone who explains the past or present in sufficient detail, Adam Smith included, ends up in the prediction business. This is because a thorough explanation of how things work is a discussion of causes and effects. In discussing causes, it is very common to discuss what factors are permanent (benefit of specialization, supply and demand) and what causes have been and could be subject to change (a certain law or policy) and how this relates to the effects that follow. Discussing erroneous past policies inevitably discusses past causes that could recur in the future, and is therefore a prediction as to how the world would be changed by readopting past policies (such as excessive mercantilism). Admittedly, in today's present vernacular prediction is often something akin to a regression analysis of some trend or fad, but Adam Smith was involved in a particular form of prediction all the same, in my opinion.

4:37 pm  
Blogger Gavin Kennedy said...

Ranjjit Mathoda

Thanks for your post, which I have just noticed.
I trust you know the log was moved by Blogger to:

I think our difference on Smith's non-prediction habit are somewhat small. That he did not predict is evidenced in his Works. He warned of the negative consequences of following mercantile policies, leaving the future to, well, the future, and always expressed scepticism about expecting too much even from reforms he approved of (for example, free trade).

Even the current policies from economics are not yet reliable to make safe predictions. Smith studied the past, including deep history, to understand the present. I think we should follow that advice.


3:33 pm  

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