Poor Adam

Summer vacation is winding down, I have spent a great deal of time reading papers and books and not enough time doing useful things, so naturally I am continuing to bellyache about modern economics.

Perhaps its that ‘end of summer feeling’, but suddenly I feel bad for Adam Smith. I really do. Remembered as he is for a casual, if powerful, metaphor he always gets mentioned as the progenitor of modern economics. This is a strictly Anglo-Saxon view of course – the Physiocrats, especially Quesnay and Turgot,  were mucking around with various theories before him, and the world was awash with pamphlets, by people like Mun, Petty, and Gresham in England, explaining sundry aspects of trade and so on well before he ever uttered the fateful phrase “a hidden hand”.

Like those before him, Smith was trying to explain what he saw around him. There seemed, to his eye, to be a chaotic burgeoning of local activity, the emergence of factories with production broken down into different steps, businessmen [not, unfortunately, businesswomen] getting together to collude and rig the market, a rapid increase in wealth, and yet a perception of a kind of order on the surface of commerce. To Smith’s eye the local or lower level chaos and this aggregate or higher level order appeared to be a paradox. The two were in contradiction. So, being an inquisitive type, he sought to locate the method, the apparatus, or the mechanism that reconciled them. And by so doing launched economics down its modern path. The scope of his question was more novel rather than his answer. The paradox could only be resolved, he suggested, by postulating the existence of an integrating force, or set of forces, that brought the self-interest of individuals into alignment with the overall, and apparent, betterment of society as a whole.

Thus was born both classical economics and support for modern right wing ideology. Two for one.

The point being that those forces were not controlled by any central authority. Indeed they existed despite and in confrontation with such a central authority. Attempts to defy the forces were doomed and mistaken. Resistance was futile. The authorities, in Smith’s day this meant a King, Queen, Emperor or Empress, could ordain commercial activity, but that ordinance would inevitably diminish the wealth of nations not enhance it.

No. Society, and especially commerce, was best left to self-integrate or self-regulate, and whatever popped out at the end was the best we could all hope for.

Now we must give Smith his due: he foresaw plenty of problems with unfettered business. The proclivity to collude being a salient example. And he argued there were some activities that commerce couldn’t, or wouldn’t, organize well. In this respect he is more modern than his modern followers.

None of this is why I feel sorry for him. He opened our eyes to the complex system that is the economy and the emergent properties that it exhibits at different levels. He didn’t conceive it this way. He couldn’t. The notion of complexity as we now know it didn’t exist. So he used metaphors and notions that were commonplace back in the mid 1700’s. His question was a great one. Our issues are with his language and thus the narrative of his solution. It denied emergent order even though that is precisely the apparent paradox he sought to explain.

No, I feel sorry for him because is is associated – due to his unfortunate metaphor and its subsequent hold over economics – with over two centuries of error. Not just error, but a compounding or increasing error.

He opened the path followed by the great classical economists. Ricardo, Marx, Mill and even Marshall all conceived of great systems driven by even greater fundamental forces that were inevitable. As a footnote: I regard Marx as very Ricardian in this sense. That was bad enough. Worse, he enabled the thinking of Walras whose quixotic and dire search for total order, bedeviled as it is by the mirage of general equilibrium, has perverted the course of economics since the late 1800’s. The Walrasian tradition came to dominate economics at the expense of most all else and lingers on despite the death blow of Arrow-Debreu back in the 1950’s. It was death blow, as I have argued before, because it demonstrated the utter impracticality of the entire enterprise. Nonetheless so haunted, or infected, by the hidden hand had economics become that attempts to rid ourselves of it all failed. Indeed in the modern era it flourished in the hands of Friedman, Lucas, Prescott and their ilk.

So determined were all these folk to establish the supremacy of the great forces that authority could not control, that they drove ever deeper into the bizarre in order to do so. They gave up trying to explain what they saw around them. They abandoned Smith’s question altogether. They took his paradox and dismantled it. At first they sought to explain only the lower level of activity – the behavior of individuals and small business firms. Their problems mounted almost immediately. People seemed to be arbitrary and capricious. They were greedy. They defied neat categories and acted in spite of themselves. So, gradually, all these traits were eliminated from analysis. People were re-invenetd in order to make analysis more tractable. Slowly, but surely, as all the humanity was squeezed out an economics of individual behavior emerged. Nowadays we call it micro-economics. And it is utterly wrong. In its desperation to corral us into an analytical framework it starts from the end and works backwards.

It says, in a nutshell, that since we know(don’t we?) that society is rational and maximizes its resources, the behavior we see, even its more absurd aspects, is a manifestation of this rationality. The preferred activities of us all are revealed by our actual activities. They are one and the same. And since they are the outcome of the rationality we all exhibit they can be shoved into the logically consistent and highly abstract mechanisms economists have constructed to model them. This, you will no doubt have noticed, not a process of enquiry into the world as it is, but is rather an enquiry into the world as economist would like it to be in order to model it. And the more formal the attempt to model the more extreme the eradication of the world outside. Reading most any modern micro-economics textbook is like reading science fiction. It is to enter an imagined world inhabited by made up beings who act and react only according to made up rules. There is no life. Or at least no life Smith would recognize. Nor you. Nor I. But it is accepted and propagated endlessly by economics professors indoctrinated into it.

Smith would be embarrassed to be associated with the fiction.

Now comes the good part.

Having created this fantasy and having come to believe it portrays certain truths about the world, economists – those in the dreamworld anyway – dispense advice designed to bring the world around us into line with their fantasy. So instead of explaining the world they try to construct one. Instead of helping us understand how the economy works they instruct us as to how it would work if only we lived out their fantasy.

This is the exact antithesis of Smith’s project. Yet they do it as part of what they see as his legacy. They simultaneously deface his work and look back to him as iconic. More particularly they ignore him. Smith was intensely attached to the world around him. Most modern economists are intensely attached to their fantasy world.

The final step away from the world about us and thus the final step in closing out humanity from the subject was the sudden urge to ensure that any observation or theorizing about the second part of Smith’s paradox, the order up top, could only be valid if it conformed to the rules made up for the fantasy down below. Aggregate or macro-economics, largely invented by Keynes outside of the fantasy tradition, had to be re-jigged so as to be equally fictional. It had to root itself in the quicksands of micro.

It is all very clever. Remarkably complete and very logical. It sounds highly relevant too. When taught superficially it sounds as if it is addressing the world in the way that Smith intended. That is it sounds as if it is answering current questions about real things. But lurking just off stage is a host of fictional characters, made up forces, kluged rules, and rickety analyses upon which that illusion is built. It all mimics well. It explains only itself. It is all a tour de force of imagination not of scientific enquiry. Its brilliance blinds us to its irrelevance. And, in a curiosity of all fiction, it cannot be “wrong”. Since it is internally consistent, complete, and rigorously conceived it cannot be faulted on its own terms. It is thus “right” within those terms.

As a shiny artifact or a piece of art it works well. As an explanation of reality?

Well, let’s just say “poor Adam” and leave it at that.