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Adam Smith’s idea is still the basis of the discipline of economics

December 11, 2021

Apology from the editor

This post has been withdrawn on grounds of misattribution.  But the readers’ comments, which relate to the section beginning on page 50 titled “Adam Smith and the Birth of Western Economics” in

Economies and Cultures: Foundations of Economic Anthropology

by Richard R Wilk and Lisa C. Cliggett | Jan 2, 2007

have been retained. 

 

  1. Curious
    December 11, 2021 at 11:19 pm

    Thank you for this insightful historical perspective. And, for a fuller historical picture of this time period, Isaac Newton in his roles at the British Royal Mint (approx. 1696-1727) contributed to the development of quantitative finance (calculus of the time value of money) along with some of his high-ranking government contemporaries. The South Sea Bubble aside, this work in quantitative asset pricing preceded Adam Smith and would likely have had a major influence on Smith’s macroeconomics. Somehow, the connections between this earlier finance quant work and Smith’s work is a significant part of the “origin story” of modern economics. But I am not a historian, just someone curious about the dynamics of how ideas evolve.

  2. EG OSullivan
    December 12, 2021 at 12:18 am

    Interesting comment but open to detailed contestation.

    The key issue in economics since Aristotle was the relationship between price and value.
    The turning point therefore is Alfred Marshall’s Principles of Economics (1890) which attempted to end the argument by sublimating it.

    Marshall did not attempt to affirm the dominance of value over price or the other way round.
    He effectively said the debate is pointless since a situation can be imagined where price and value coincided in a stable equilibrium that was both technically and socially efficient.

    This shifted the argument away from the dispute about value and price to one about why price might diverge from the “ideal” one.

    After Marshall, the debate in conventional economics was almost never about value (subjective or objective)

    It was about market failure (though libertarians would argue this never occurs).

    Economists from that point largely abandoned discussing principles, as Smith did at great length, and concentrated on practical responses to apparent market failure.

    The contemporary theoretical challenge is that Marshall’s theory and its subsequent elaborations provide absolutely no logically-valid approach to analysing the creation and distribution of intangibles/services.

    This is not a challenge of market failure.
    It’s the challenge presented by the reality that in services the market doesn’t actually exist.

  3. yoshinorishiozawa
    December 12, 2021 at 1:35 am

    All right. This is a good summery of problems that Adam Smith faced in his time. But, I have a big reservation on Ken Zimmerman’s repeated idea on the essence of economics.

    Let us read again what he has claimed as a comment to the post by Lars Syll on November 29, 2021.

    The main part of his claim is this:

    After all, science itself is an ideology. Each science is ‘a system of ideas and ideals which form the basis of a study discipline.’ Each science focuses on empirical and conceptual understanding of events and objects people find of interest.

    It is true that science is an ideology. A science is a system of ideas and ideals which form the basis of a study discipline. But, by pointing this out, what kind of effects does he aim at?

    Although he does not say explicitly, he contends that science is not very different from religion and political thoughts. See what follows after two sentences:

    Religious ideologies focus on stating and elaborating the tenets of supernatural foundations for humans and the world. Political ideologies focus on presenting and explaining governing principles for human societies.

    It is Ken Zimmerman’s persistent idea that religions and political thoughts are no essentially different from sciences (including economics), because they are after all ideologies. He knows that sciences are similar to all other ideologies but does not know how sciences are different from other forms of ideologies. In other words, he does not know what sciences are.

    I have once argued with him on this theme. I have now no means to send readers back to our old discussion, but fortunately I have copies of my posts (rare cases). Let me copy and paste what I have written four and half years ago:

    To Ken Zimmerman on July 17, 2017 at 7:19 am:

    Do you know that you are proving by yourself that your range of imagination is heavily biassed. Read the first paragraph of your post July 17, 2017 at 7:19 am. What is lacking in your focus?

    If history of science (not the sociology of science; they are very different disciplines) focuses exclusively on the factors “from scientific training, to professionalism, to informal education, to friendships, to hunches, etc.”, you are excluding the most important entity or driver in a history of science.

    A science is a system of theories (including and concerning concepts, observations, measurement, experiences, data, etc.) that seeks coherence. The internal logic of the system is much more important than all other social factors in which you are interested. The latter are by-players and cannot and should not be a main player. Your history of science is really the tragedy (or rather comedy?) without the prince of Denmark.

    Your comment and questions in the second paragraph are missing the point again. Now I understand why you are repeating this kind of misplaced arguments. You pretend to have studied history of sciences (it may be true), but you have studied it through the looking glass of sociology of science.

    In the history of science there are specialists who are called externalists. They often give a new fresh air to the history of science. So I do not deny that they have some roles in the history of science(s). In the history of economic thought there are also externalists. Philip Mirowski is an example. On the opposite extreme of externalists, we have internalists. My paper on An Origin of the Neoclassical Economics is written from the internalist point of view. In this case, I questioned why John Stuart Mill was guided by an internal logic of the problem he wanted to solve (probably despite of his wish) to open a way to the neoclassical economics.

    If sociology of science can be included among the history of science(s), it belongs to the strand of externalists. It cannot be the core of history of science(s), because it lacks understanding of the main motive of scientific development.

    To Ken Zimmerman July 18, 2017 at 1:08 pm:

    Fifty years after 1970’s is a short time for sciences in general and for social sciences in particular. In these 50 years, did your history and sociology of science help to advance a science? It has helped to advance sociology of science, but not others.

    Sociology of science or anthropology of science revealed how once established regime continues to reign for a long time. But with that knowledge alone, sciences do not advance, at least at the time of crisis (I am not speaking of economic crisis but crisis of economics). After all, we know such kind of thing already in 1970’s. Leijonhufvud wrote a note Life among the Econ.

    (It appeared in Western Economic Journal in 1973 and reprinted as Chapter 12 of his book Information and Coordination, 1981. It was an amusing piece of paper and became very popular. Someone including me was encouraged by the paper but it gave us no hints to the contents of economics.)

    Do you know how the economics today is in crisis?

    Do you know a plan or prospectus to save economics from the crisis?

    The second question is my original question to you. Larrymotuz July 11, 2017 at 7:30 pm judged that “Ken has no prospectus. He has a point of view.”

    Please tell me how your sociology of science is helpful to go beyond the present crisis of economics!

    In your post July 9, 2017 at 5:14 am, you contended that it is your prospectus that “new economics needs to begin from scratch.” In your post July 9, 2017 at 7:25 am, you contended that “economics [should] be made into a social science.” Such a rough opinion does not give any suggestion to this imminent but long-dated question. You may make a sociology of economics out of your sociology of science but it does not help to bring economics out from the crisis.

    As for An Origin of the Neoclassical Revolution, have you given a look on it? I have described how he was guided by the “internal logic.” But it has nothing to do with what you imagine: “Mill never participated in human communities, never engaged with his fellow humans, or with the world around him.” There is no such contention. Do not apply your thesis without knowing (or even reading) what the “internal logic” is in this case.

  4. Garrett Connelly
    December 12, 2021 at 2:00 am

    “In this calculus, there is no essential or inherent natural conflict between the individual’s and society’s best interests, as long as free individuals are educated and enlightened to act in rational ways.”

    Sounds like a normal model assumption.

  5. Asad Zaman
    December 12, 2021 at 6:38 am

    Thanks Ken, An excellent and insightful supplement to Tawney’s Religion and the Rise of Capitalism. Is this your personal analysis or does this summarize a more elaborate presentation of these views elsewhere — if so, a reference would be appreciated.

  6. reallifeeconomics
    December 12, 2021 at 7:19 am

    I do not think that there can ever be “a calculus of fact” to explain “self-interested human nature and and the conduct of public life” or economics. We live in a world where there are no ceteris paribus social facts, that is behaviour of all agents are interrelated, and thru their interactions they form their environment reflexively. Briefly, life is complex and so is economics. Complex systems are mathematically not closed and therefore undecidable. There are other computataional, and/or empirical methods to do economics in a very satisfactory manner, but one must first understand that economics as a complex phenomenon, just like climate, just like our lives.

  7. Egmont Kakarot-Handtke
    December 12, 2021 at 1:53 pm

    How Adam Smith messed up economics
    Comment on Ken Zimmerman on ‘Adam Smith’s idea is still the basis of the discipline of economics’

    The history of economic thought is the history of scientific failure. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism, MMT ― are mutually contradictory, axiomatically false, and materially/formally inconsistent. Because of this, the whole analytical superstructure of economics is scientifically worthless. Because of this, economic policy guidance NEVER has had sound scientific foundations.

    Now, the problem is this: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

    Because economists do not have the true theory, economics boils down to brain-dead agenda-pushing. Economists are not scientists but clowns, useful idiots, and agenda pushers in the political Circus Maximus. Economics is proto-scientific garbage and because of their scientific incompetence, economists are a hazard to their fellow citizens.#1

    The mental misery can be traced back to Adam Smith: “Smith … disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” (Schumpeter)

    Or, as Ken Zimmerman spins it: “The real start of modern Western economics as a discipline is usually traced to Adam Smith (1723–1790). Beginning as a moral philosopher concerned with human motives, Smith later wrote The Wealth of Nations in 1776 as a series of lectures on public policy. The task he set for himself was that of a natural scientist, to discover the workings of a vast machine ― the economy. From this philosophical foundation, Smith builds a powerful argument that the individual’s self-interest generates the society’s best interests. Beginning with a rational individual motivated by positive natural impulses, he undertakes a series of dramatic political attacks on monopolists, corrupt governments, tariffs promoted by strong business lobbyists, guilds, colonialists, and ‘the capricious ambitions of kings and ministers’ (1937, 460). Though based on self-interest, a well-working economy, he said, should not cater to the selfish interests of a small class or group. Instead, it furthers the wealth of the nation as a whole ― and it is not a great step from here to the idea of democracy, of rule ‘of, by, and for’ the people of the nation.”

    “Beginning with a rational individual”, Adam Smith inaugurated methodological individualism and led the profession straight into the Fallacy of Composition. The fact of the matter is, that NO way leads from the second-guessing of Human Nature/motives/behavior/action to the understanding of how the economic system works.

    What Adam Smith did was a mixture of psychology and sociology ― PsySoc for short#2 ― including moralizing and agenda-pushing but NOT economics proper. Economics is about the behavior of the economic system and NOT the behavior of people. Adam Smith never understood the behavior of the system as a whole, i.e. “the workings of a vast machine”, and he never understood macroeconomic profit.#3 The supply-demand-equilibrium narrative that culminated in General Equilibrium Theory is a bad joke to this day. An economist who does not understand profit, i.e. the foundational concept of economics, is a laughing stock.

    However, the economy is an abstract entity that defies intuitive understanding, and human behavior is something every moron claims to understand from his own personal experience. As a consequence, Adam Smith’s blather about the baker and the butcher and their rational self-interest won the popular vote. The beauty of PsySoc is that one can speculate and talk and moralize about human nature/behavior without ever arriving at scientific knowledge about how the economic system works. People do not like science, people like storytelling and talk shows.

    In his scientific incompetence, Adam Smith took the wrong path. He led economics away from science and helped that it finally became a subcontractor of the disinfotainment industry.#4

    To this day, economics has no scientific truth-value#5 but only political use-value. Politically, Smith’s invisible-hand economics forwarded the illusion of Democracy and the reality of Oligarchy. And this is why “Adam Smith’s idea is still the basis of the discipline of economics”.

    Egmont Kakarot-Handtke

    #1 Econogenics: economists pose a hazard to their fellow citizens
    https://axecorg.blogspot.com/2019/11/econogenics-economists-pose-hazard-to.html

    #2 PsySoc — the scourge of economics
    https://axecorg.blogspot.com/2015/09/psysoc-scourge-of-economics.html

    #3 The profit theory is false since Adam Smith
    https://axecorg.blogspot.com/2017/11/the-profit-theory-is-false-since-adam.html

    #4 Circus Maximus: Economics as entertainment, personality gossip, virtue signaling, and lifestyle promotion
    https://axecorg.blogspot.com/2019/07/circus-maximus-economics-as.html

    #5 Wikipedia, economics, scientific knowledge, or political agenda pushing?
    https://axecorg.blogspot.com/2020/06/wikipedia-economics-scientific.html

    • Econoclast
      December 12, 2021 at 6:52 pm

      Good one: “disinfotainment industry”, which I will use from now on.

    • yoshinorishiozawa
      December 13, 2021 at 4:25 am

      I agree with Edmont in all these points:

      Economics is about the behavior of the economic system and NOT the behavior of people. Adam Smith never understood the behavior of the system as a whole, i.e. “the workings of a vast machine”.

      The beauty of PsySoc is that one can speculate and talk and moralize about human nature/behavior without ever arriving at scientific knowledge about how the economic system works.

      Now, the problem is this: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

      These are almost the same that I am arguing for in many of my comments.

  8. mameerop
    December 13, 2021 at 3:29 am

    I am afraid that both the original post and the significant comment both suffer from not really reading carefully what Smith ACTUALLY WROTE in The Wealth of Nations about the invisible hand — Here is the direct quote: followed by my elaboration of it in an article about the invisible hand as a Political Economy Research Institute (PERI) occasional paper —

    “Another Distortion of Adam Smith: The Case of the “Invisible Hand”
    Michael Meeropol (Political Economy Research Institute, 2004)

    (the article also discusses Smith’s use of the term in THE THEORY OF MORAL SENTIMENTS — aside from a reference in a book about astronomy, those two references are the ONLY TIME Smith uses those words in those two major works about the economy)

    SMITH:
    By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he 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.(I: 475-7)14

    ME:
    It is clear from this passage what Smith does NOT mean when he refers to the invisible hand. Instead of suggesting that international capital flows in search of foreign investments would be a perfectly acceptable method by which to enhance the wealth of a particular nation, Smith is making a detailed practical argument that because of the costs of supervising investments overseas, because of the time involved in turning over capital employed in foreign trade as opposed to domestic trade, the operation of the invisible hand in the context of the 18th century would naturally tend to favor domestic investment and therefore the economic development of the nation.

    Most textbooks commit virtual malpractice by acting as if the “invisible hand” concept from Smith is all about the market creating the “best of all possible worlds” — in fact, Smith was using that concept to suggest that NATIONALISTIC POLICIES were NOT NECESSARY — and the History of Thought literature is replete with articles emphasizing just this point — there is even an interesting summary of Smith’s “nationalism” in THE JOURNAL OF ECONOMIC PERSPECTIVES by Joseph Persky: “Retrospectives: Adam Smith’s Invisible Hands” Journal of Economics Perspectives (1989): 195-201.

    (By the way, until I became aware of these articles, I used to make the same mistake in introducing the “invisible hand” concept to my students —)

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