Monday, September 21, 2009

Examples of Adam Smith's Lost Legacy

From the World Most Popular 20th century Textbook:

Smith’s message said in effect:

‘You think you are helping the economics system by your well-meaning laws and interferences. You are not. Laissez-faire; let be; hands off. The oil of self interest will keep the economic gears working in almost miraculous fashion. No need to plan. No sovereign need rule. The market will answer all things’

Smith never did prove the truth of this. Indeed, until the 1940s, no one yet knew how to prove – or even to state properly – the kernel of it in Adam Smith’s invisible hand doctrine

Paul A. Samuelson and William D. Nordhaus, 1985. Economics: An introductory analysis, 12th edition, p 760

Pure imagination on Samuelson and/or Nordhaus’s part!

Smith never said anything like this “in effect” or otherwise.

Smith’s complaint about government was not about “well meaning laws and interferences” – he recognised the absolute need for laws and justice, without which, he said, society “would crumble into atoms” and “a man would enter an assembly of men as he enters a den of lions” (see Moral Sentiments, II.ii.3.3 & 4: 86).

He never said “Laissez faire; let be; hands off”. He never used the words ‘laissez faire’ anywhere in the near a million words he published. These words were uttered in 1680 by M. Le Gendre, a French merchant in Lyon, to M. Jean Baptiste Colbert, the French Minister of Finance.

He would never have said such a dangerous and seditious thing as “no sovereign need rule” in 18th-century Britain. Transportation would have been the least of his problems.

That such a popular textbook selling millions contained such twaddle is disappointing. No wonder the myths about Adam Smith are so widespread today.

[My comments do not detract from the huge debt economics as a discipline owes to Paul Samuelson.]

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Blogger michael webster said...

" Just imagine the reaction of most people today if you told them that Milton Friedman and Paul Samuelson are the intellectual authors of the $55 trillion notional CDS pyramid scheme!"


11:32 pm  
Blogger Gavin Kennedy said...


Thanks for the pointer:

"Janeway: Samuelson laid down a fundamental philosophical principle, namely that we have to apply to economics what is known as the ergodic principle from the natural sciences, which is the notion that the underlying processes are stationary, the results, the observables they generate arrive stochastically, seemingly randomly, but the distribution is stable over time. Without that principle, we cannot do "positive economics." Now, interestingly, Milton Friedman, the other philosophical father of financial economics, came together with Samuelson on this principle applied to the "real world." Friedman, in his essay on positive economics, says basically that we all know that the assumptions we are making are not true. This is not how people really are, perfectly rational, etc., etc. But Friedman proposed the "as if" principle, namely that we should do our work "as if" they were, as if people were rational."

This is a vast field. Samuelson's genius as a young mathematician was to apply models from hard science maths to simple economic problems and relationships, and he produced score of refereed papers as a result. His bibliography traces these developments.

But physical constants and variables work relentlessly and predictively, whereas humans don't.
Friedman's "as if" science does not eliminate the variability of human relationships; it suspends it and he relied on the outcome, not the process, if the predictions were plausible.

Hence, the late 19th-century Homon economicus joined the maths worlds of general equilibrium, etc.

The results have not been solid. Smith recognised conflict between people with conflciting self-interests (merchants and manufacturers and labour). State intervenors are not much better - they mess-up, big time, too.

6:31 am  

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