Tuesday, May 31, 2016


Samuel Bowles posts (26 May) posts on Evonomics HERE 
And why economists have come to have second thoughts about Homo economicus
.The year before Adam Smith wrote in his Wealth of Nations (1776) about  how the self-interest of the butcher, the brewer, and the baker would put our dinner on the table,  James Boswell’s Dr. Johnson gave  Homo economicus  a different endorsement: “There are few ways in which a man can be more innocently employed than in getting money.”
Adam Smith showed how a constitution for knaves might actually work at least as far as the economy is concerned. The economic actor, he wrote “intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
This is hardly making the case for laissez faire that later generations have attributed to Smith. But it is a milestone in the emerging view that motives other than self-interest could be pernicious. The sentence following one of Smith’s rare references to the invisible hand makes this point:  “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”
Adam Smith knew nothing of the ideas of Homo economicsa wholly near-modern idea - still dubious for all that. Moreover, “the butcher, the brewer and the baker” don’t put our dinner on the table without their customers exercising their own acts in pursuit of their self-interest by agreeing the price for their dinners that incentivises the sellers to go town to the trouble of preparing the ingredients for their customers’ dinners. It is a bilateral transaction.
Smith called it bargaining. See Smith’s Wealth of Nations, Book 1, chapter 2, pages 26-7.
Incidently, Smith never used the words ‘laissez-faire’, which was a wholly one-sided idea presented by French merchants operating in regulated local markets to allow them freedoms, not to share those freedoms with their customers or their employees. In the 19th century UK mill owners argued for laissez-faire for themselves, not their labourers in the disputes over the length of the working day, set arbitrarily by the employers. Likewise with the employers’ campaign to abolish to UK’s Corn Laws so that the price of bread would fall and they could cut wages.
Smith’s rare use of the metaphor or ‘an invisible hand’ was not about a general rule that the “pursuit of his self interest” frequently “promotes that of the society more effectually than when he really intends to promote it.”. It was about a specific case of a merchant, not a general rule, who preferred to invest in the home economy because he consiiderd that investing abroad was too riskly. By investing locally he felt more secure. 

While the outcome of his action was that he added his capital to local economic activity and this was a public benefit. However, the same merchant, like others, could agitate for tariffs on foreign imports - even outright prohibitions - which actions raised domestic prices and merchants’ profits because competition was reduced. Such outcomes are public disbenefits.


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