Adam Smith

Humanizing Economics?

Saint MartinGuest post by Laurent Dobuzinskis

Do markets foster cooperation and individual autonomy, or are they at best amoral, and at worst immoral? Does economic theory justify selfishness? Does the state have an obligation to promote the general welfare and to correct market failures, or are such efforts counterproductive? And how do economists address these questions? Do they speak with a distinctive voice in comparison to other scholars in the social sciences or the humanities?

Although there is an obvious risk here of overgeneralizing and of ignoring important nuances, examining these questions matters because a) economists are still considered to be the most reliable experts on what makes market work “efficiently,” and b) no viable and compelling alternative to a market economy has been fully worked out yet, in spite of a torrent of critiques of “neoliberalism.” But does this mean that the status quo, with which more and more people are increasingly dissatisfied, must be maintained? If not, what can be done, in both practical terms and in terms of generating innovative ideas that would be inspiring and yet pragmatic? And how do economists, on their own, or increasingly by engaging with a broader community of scholars and practitioners, contribute to this debate?

I provide an account of these debates in my two recently published books (Moral Discourse in the History of Economic Thought and Economic Growth and Inequality: The Economists' Dilemma). This account incidentally is, I hope, fair and balanced insofar as the (philosophically) pragmatic perspective to which I adhere implies that I am skeptical of overtly dogmatic positions. But, as I explain below, I do eventually come off the proverbial fence.

If one takes a very long view of the history of economic theory—as I do in Moral Discourse in the History of Economic Thought—the prominence of these fundamental normative questions has waxed and waned in economic theory. In more recent years, after a period of triumphalism for the neoclassical critics of “government failures,” which has come to as a result of the “Great Recession” and the pandemic, there are signs that a promising intellectual renewal is under way at the crossroads of economics, social psychology, and evolutionary biology.

The contours of this emerging paradigm are still fuzzy, but the “big idea” here is the displacement of the figure of the utility-maximizing homo economicus by a less self-regarding homo reciprocans (Bowles and Gintis 2002), motivated by a search for fair reciprocity. Altruism has not replaced selfishness in these new socio-economic approaches. But self-interest is being redefined as an “enlightened” form of self-interest in which the “self” is constituted by a plurality of mutually dependent interests. Conversely, the rationality of the maximization calculus gives way to a more open-ended reasoning which factors in changing circumstances and adjusting preferences. Fair reciprocity is the key to unraveling complex socio-economic dilemmas. The perceived lack of concern for this deeply seated expectation of fairness is arguably one of the main causes of the current rise of reactionary populism. But this concept can also inform a rethinking of political economy.

In a sense, this is a rediscovery of the concept of “sympathy” which was central to Adam Smith’s works and most classical political economists, including other Scottish Enlightenment thinkers, as well as some early French ans Italian pioneers of the discipline (such as Condillac and Genovesi, respectively). This is a profound insight that draws attention to the considerable extent to which most people care about others but also what others think of them—and this includes the political economists themselves whose theories who were not indifferent toward the human subjects of their analyses. Their advocacy of free markets was unmistakable, but it was tempered by this awareness and was conducive to a reformist/perfectionist approach. John Stuart Mill exemplified the latter; classical political economy, however, was displaced by modern scientific economics at the turn of the last century. Although many neoclassical economists were individually concerned with social problems, as Alfred Marshall certainly was, their methodological commitment to economic “efficiency”—that is, reaching an optimal equilibrium—meant that if there was a tension between “efficiency” and “equity,” they tended to err on the side of efficiency. Economic agents became lifeless automata following the instructions of a maximizing algorithm.

John Maynard Keynes challenged this perspective, but his moral intuitions were diluted in the mathematical models formulated by the architects of post-war Keynesianism. In any event, Keynesianism reached a dead-end in the 1970s. For several decades thereafter until the Great Recession of 2008-2010, neoclassical models reigned largely unopposed within mainstream economics. Of course, critical counteroffensives, mostly from outside of the discipline of economics, were launched by proponents of “social justice.” But their efforts have had relatively little impact on public policy, with the possible exception of environmental regulations. The neoclassical orthodoxy suffered a serious blow as a result of the Great Recession (followed in turn by the COVID-19 pandemic), when a new methodological pluralism came into effect. But within this (relatively) pluralistic context, behavioural/experimental models occupy a central place. They bring to light the complex ways in which people make decisions about their own welfare, sometimes creatively (often being guided by notion of fair reciprocity), and sometimes in naively “irrational” ways.

This paradigmatic shift at the empirical level opens up intriguing normative perspectives. If there is no good reason for limiting one’s horizon to self-interested motivations and narrowly “rational” calculations as the only “realistic” hypothesis for modeling socio-economic problems, it follows that there is no good reason for reformers not taking advantage of this quasi-natural disposition to act cooperatively. The policy instruments I emphasize in Growth and Economic Inequality follow from a shift from traditional redistributive programs to asset-based interventions (or predistribution). Injustices are not caused merely by the unfair distribution of incomes, but more fundamentally by an unfair allocation of capital resources (i.e., wealth). Predistribution would enable individuals and households to acquire capital and/or offer them opportunities to have some say about how capital is used by those who own most of it. Some examples include: a “stake-holder” grant (a lump-sum provided to young adults to invest as they wish) or a basic income guarantee; facilitating access to home ownership; and a generalization of the German codetermination system which empowers employees of large corporation by giving them seats on the boards of these corporations. The overall outcome would be what some Italian economists (such as Luigino Bruni) call a “civil economy.”

Wrapping up this post, I would like to draw a parallel between my intellectual journey and that of theorists such as Vernon Smith (Smith and Wilson 2019) and Deidre McCloskey (2021), who see recent developments as an invitation to revisit Smithian sympathy in an effort to “humanize” economics while remaining faithful to the core tenets of classical liberalism. But in my case, I’ve gone one step further by (tentatively) siding with the Italian civil economy tradition (Bruni 2006; Bruni and Zamagni 2016; Calvo 2018) which insists, albeit perhaps a little too naively (Martino and Müller 2018), on responsibilizing decision-makers and on mobilizing civil society in the development and implementation of predistributive initiatives.

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LAURENT DOBUZINSKIS teaches political Science at Simon Fraser University (Canada). His research interests include the history of political and economic ideas, the philosophy of social science (e.g., complexity theory), and public policy. Although leaning toward classical liberalism, his works reflect a preference for “nonideal theory” as a framework for achieving a pragmatic synthesis of complementary perspectives on civil society, markets, and political institutions. He is the author of The Self-Organizing Polity: An Epistemological Analysis of Political Life (1987), Moral Discourse in the History of Economic Thought (2022), and Economic Growth and Inequality: The Economists’ Dilemma (2023), as well as of articles and book chapters on an eclectic range of issues concerning practical and theoretical developments in political economy, from the role of think tanks to a basic income guarantee to the uses of game theory.

References

Bowles, Samuel and Herbert Gintis. 2002. “Homo Reciprocans.Nature 155 (January): 125-128.

Bruni, Luigino. 2006. Civil Happiness: Economics and Human Flourishing in Historical Perspective. London: Routledge.

Bruni, Luigino and Stefano Zamagni. 2016. Civil Economy: Another Idea of the Market. Newcastle upon Tyne: Agenda Publishing.

Calvo, Patrick. 2018. The Cordial Economy: Ethics, Recognition and Reciprocity. Cham: Springer Nature.

Dobuzinskis, Laurent. 2022. Moral Discourse in the History of Economic Thought. London: Routledge.

Dobuzinskis, Laurent. 2023. Economic Growth and Inequality: The Economists' Dilemma. London: Routledge.

McCloskey, Deirdre N. 2021. Bettering Humanomics: A New, and Old, Approach to Economic Science. Chicago: University of Chicago Press.

Martino, Maria Guadalupe and Christian Müller. 2018. “Reciprocity in the Civil Economy: A Critical Assessment.” Journal for Markets and Ethics 6, No. 1: 63-74.

Smith, Vernon and Bart J. Wilson. 2019. Humanomics: Moral Sentiments and the Wealth of Nations for the Twenty-First Century. Cambridge: Cambridge University Press.


Forthcoming book: Laurent Dobuzinskis, Moral Discourse in the History of Economic Thought (Routledge)

Moral discourseBy Mark D. White

Out this summer from Routledge is Moral Discourse in the History of Economic Thought by Laurent Dobuzinskis (Simon Fraser University).

From the publisher's website:

Providing an account of the development of economic thought, this book explores the extent to which economic ideas are rooted in moral values.

Adopting an approach rooted in ‘pragmatism’, the work explores key questions which have been considered by economists since the classical political economists. These include: what degree of priority ought to be granted to property rights among all individual liberties; whether uncertainties in economic life justify investing political authorities with the power to stabilize business cycles; whether it is better to trust entrepreneurial initiatives to resolve societal dilemmas or to centralize policy-making in the hands of a benevolent government. The chapters argue that economic thought has evolved from an emphasis on "sympathy" (as defined by Adam Smith) and that there has more recently been a rediscovery of the significance of sympathy reinvented as "fair reciprocity" in the wake of the emergence of behavioural economics and its connection to evolutionary psychology.

This key book is of great interest to readers in the history of ideas, political and moral philosophy, and political economy.


New book highlights Adam Smith's contributions to political theory

Adam smith reconsideredBy Mark D. White

A new book from Paul Sagar (King's College London), Adam Smith Reconsidered: History, Liberty, and the Foundations of Modern Politics, coming out in March 2022 from Princeton University Press, argues that Adam Smith should be understood as a pioneer in political theory as well as economics and moral philosophy (the PPE trifecta, so to speak). Furthermore, Sagar argues that this new focus significantly alters the way Smith's more widely acknowledged contributions should be understood.

From the publisher's website:

Adam Smith has long been recognized as the father of modern economics. More recently, scholars have emphasized his standing as a moral philosopher—one who was prepared to critique markets as well as to praise them. But Smith’s contributions to political theory are still underappreciated and relatively neglected. In this bold, revisionary book, Paul Sagar argues that not only have the fundamentals of Smith’s political thought been widely misunderstood, but that once we understand them correctly, our estimations of Smith as economist and as moral philosopher must radically change.

Rather than seeing Smith as either the prophet of the free market, or as a moralist who thought the dangers of commerce lay primarily in the corrupting effects of trade, Sagar shows why Smith is more thoroughly a political thinker who made major contributions to the history of political thought. Smith, Sagar argues, saw war, not commerce, as the engine of political change and he was centrally concerned with the political, not moral, dimensions of—and threats to—commercial societies. In this light, the true contours and power of Smith’s foundational contributions to western political thought emerge as never before.

Offering major reinterpretations of Smith’s political, moral, and economic ideas, Adam Smith Reconsidered seeks to revolutionize how he is understood. In doing so, it recovers Smith’s original way of doing political theory, one rooted in the importance of history and the necessity of maintaining a realist sensibility, and from which we still have much to learn.


Deirdre McCloskey on Humanomics

Bettering humanomicsBy Mark D. White

In case you missed it, there was a fantastic interview with Deirdre McCloskey—another of my main influences, as well as a longtime friend—conducted by Paolo Silvestri in the Spring 2021 issue of Erasmus Journal of Philosophy and Economics. Their discussion is wide-ranging and insightful, covering much of McCloskey's writing over the years, but a significant focus is on her book Bettering Humanomics: A New, and Old, Approach to Economic Science, released earlier this year by the University of Chicago Press.

In solidarity with Vernon Smith and Bart Wilson (including their recent book Humanomics), and all of them drawing ultimately on Adam Smith, McCloskey argues for a richer economics—"quantifiably serious, philosophically serious, historically serious, and ethically serious," as she writes in the preface to the book—that recognizes the subject of economics as human beings, not mathematical abstracts, which only gets us so far (and reasonable people can quibble about exactly how far that is).

McCloskey takes particular aim at behaviorism and positivism, "both top-down, infantilizing, as in nudging, and industrial planning, and other anti-liberalisms. And both are indefensible philosophically. And both are poor guides to understanding the economy" (p. 202 of the interview). For more on these points, see the discussion between her and Silvestri in the Journal of Institutional Economics (open access), which focuses more on her forthcoming book Beyond Behaviorism, Positivism, and Neo-Institutionalism in Economics (also from Chicago).


The Decline of College

By Jonathan B. Wight

Richard Vedder, emeritus professor of economics at Ohio State, is writing a book on declining productivity in American universities.  A précis was printed in the Wall Street Journal as “College Wouldn’t Cost So Much If Students and Faculty Worked Harder.”

It’s hard to argue with the main points, namely that, compared to 50 years ago:

  • Students study fewer hours;
  • Students get higher grades after learning less;
  • Faculty teach fewer hours;
  • Faculty publish more papers that are read by fewer people;
  • Administrators have come to outnumber teaching faculty.

This is truly a mess.  The ethics of it arises because of misaligned incentives, as Adam Smith wrote about in castigating his own teachers at Oxford.  

In modern America, administrators want to get donations and accreditation.  Accreditation bodies want to justify themselves by pretending they are ratcheting up quality. Faculty quality is mistakenly often construed to mean more publications.  And so on…. [Let’s not even talk about athletics.]

The situation is somewhat worse than Vedder portrays, because the rise of administrators is highly correlated with the rise of meetings and paperwork. While faculty are teaching less, they are caught up in more rigmarole of governance, tenure, promotion, and other time-sapping (but highly important) activities. 

But why pick on colleges?  Exactly the same facts probably pertain to high schools.  When my father graduated high school in 1932, he wrote beautifully using Shakespearean metaphors and knew world history. 

My only pushback to Vedder is that he assumes that the only reason to do research is to create knowledge that will be recognized by others as advancements in thinking. This is a worthy but elusive goal; most researchers, even at prestigious universities, will never publish anything that will be read by future scholars.

A more pragmatic reason for encouraging and rewarding faculty engagement with research is that it keeps a teacher from going stale. A faculty member, through stretching oneself and subjecting oneself to a research review process, must necessarily command more control of the classroom.  At least that has been my experience.  This is not a defense against Vedder’s general critique, only a qualification.

[Thanks to Bacon's Rebellion (https://www.baconsrebellion.com) for the link!]


Market Power

By Jonathan B. Wight

It is a no-brainer that business people don’t really like competitive market capitalism, despite all their exhortations about the value of markets.  Just read any of The Wealth of Nations to find Adam Smith with the same view.  Business people much prefer rigged markets, as long as they are on the inside. 

So it is no surprise that new research finds that converting health care insurance from non-profit to for-profit leads to a rise in premiums (not the fall that would be anticipated because of greater market efficiencies). 

Leemore Dafney reports on this in “Does It Matter if Your Health Insurer Is For Profit? Effects of Ownership on Premiums, Insurance Coverage, and Medical Spending,” in the latest edition of the American Economic Journal: Economic Policy (2019, 11(1): 222–265): 

“I find both the BCBS affiliate and its rivals increased premiums following conversions in markets where the converting affiliate had substantial market share….The results suggest for-profit insurers are likelier than not for- profit insurers to exercise market power when they possess it.”

Next time someone says that markets are a solution that will bring down prices in privatized sectors, remember that context matters.  Context, context, context


Adam Smith on Externalities

By Jonathan B. Wight

A friend recently inquired about Adam Smith’s view on externalities. A much longer post is needed to break apart several important ideas.  First, one would need to disentangle the invisible hand concept from market “efficiency.” (See J. Wight, The Treatment of Smith’s Invisible Hand, The Journal of Economic Education 38(3)(2007): 341-358.)

Second, while Smith does not discuss (to my awareness) externalities arising from environmental pollution, he did write that private market transactions could pollute or corrupt one’s mind. Here are two examples, one negative and one positive.

Negative externalities:  When market forces lead to an extreme form of labor specialization, people become “stupid and ignorant” and this mental weakening has a deleterious effect on civil society.  This is why Smith proposes publicly-funded education as a remedy: 

“The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expense of his intellectual, social, and martial virtues. But in every improved and civilised society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.” (Wealth of Nations)

This is pretty clear evidence that in Smith’s mind private market transactions can produce deleterious effects for third parties, and that there is a role for government in remedying the situation. 

Positive externalities: In The Theory of Moral Sentiments, Smith claims that people make fundamental misjudgments about means and ends (he is a precursor to behavioral economics).  In the story of the poor man’s son, we learn that extreme striving and ambition never produce the expected happiness or peace of mind—it is all a psychological “deception.”  The beneficiaries of this striving accrue to others, namely society at large—through greater wealth and innovation. 

“And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth.” (The Theory of Moral Sentiments). 

No doubt there are other examples of Smith’s awareness of third party effects.  See, for example, this blog about relative standing

[Thanks to Rob Garnett for raising the question.]


The Price of Watches

By Jonathan B. Wight

Critics sometimes complain that Adam Smith’s economics were not very good. The labor theory of value has certainly not held up well in most circles, and Smith was flummoxed by the diamond-water paradox.

But one area where he remains right, apparently, is in his economic history. Kelly and Ó Gráda in “Adam Smith, Watch Prices, and the Industrial Revolution,” (QJE 2016) find that Smith’s rough guess that watch prices fell by 95% over the preceding century was in the ballpark. After adjusting for quality improvements, Smith’s analysis is even closer to the truth.

Here’s the abstract:

“Although largely absent from modern accounts of the Industrial Revolution, watches were the first mass-produced consumer durable and were Adam Smith’s preeminent example of technological progress. In fact, Smith makes the notable claim that watch prices may have fallen by up to 95% over the preceding century, a claim that this article attempts to evaluate. We look at changes in the reported value of over 3,200 stolen watches from criminal trials in the Old Bailey in London from 1685 to 1810. Before allowing for quality improvements, we find that the real price of watches in nearly all categories falls steadily by 1.3% a year, equivalent to a fall of 75% over a century, showing that sustained innovation in the production of a highly complex artifact had already appeared in one important sector of the British economy by the early eighteenth century.”

When we hear justifiable complaints against the dehumanizing effects of the modern industrial system (and Smith was himself such a critic) it should be remembered that there are compensating benefits. In this case, a timepiece has become a much more affordable item for a working person.


More Barbarity in the Treatment of Adam Smith

By Jonathan B. Wight

Just what we need!  More ludicrous and erroneous teachings about Adam Smith!

Smith favored laissez-faire markets, right?  Wrong!

Smith favored unbridled capitalism led by greed, right?  Wrong.

One person’s profit means another person’s loss, right?  Wrong. 

Unfortunately, The Anspacher Theater in New York is hosting The Low Row, an “epic” play about Adam Smith and his alleged degenerate views.  Here is the flyer:

Smith playNeedless to say, the author is profiting handsomely from putting forth outright lies and fabrications (at least judging from the release above). 

People who love the truth should stay away from this claptrap. 


Should the High School Economics Course Include Ethics?

By John Morton Mort morton2

Over one million high school students enroll in an economics course each year, usually in their senior year.  That’s an impressive number.  While these courses vary greatly, three formats dominate.

About 150,000 students take Advanced Placement Economics.  This program consists of a one-semester microeconomics course and a one-semester macroeconomics course.  Because students can earn college credit if they pass a standardized test at a certain level, AP Economics is similar to the college introductory economics course.

Most students take a one-semester course, which is a watered-down college introductory course with personal finance added on. 

The third type of course is a one-semester course focused on personal finance with some economics thrown in.

Despite their differences, these courses all share one feature--they do not teach economics within an ethical context.  This puzzles me.  Adam Smith is considered the “father of economics,” but when he lived, he was considered a professor of moral philosophy.  In the years right after the Enron scandal, there was an interest of economics teachers in teaching ethics, but the interest was short-lived.

What is the study of ethics?  In short, it is the consideration of what is right or wrong.  Ethics is about defining and living a good life.  It’s about making life better for others.  It’s about integrity.  An ethical person wants to make the world a better place.

A study of ethics would seem to be a natural fit in an economics class.  For example, one of the first lessons of economics is that both parties gain when they trade.  The emphasis is on improving our material standard of living.  It seems to me that students should also discuss the effects of trade on peace, virtue, trustworthiness, and discipline.  From another point of view, how important are integrity and responsibility to successful trade?

From my own teaching experience, I know that students respond well to these ideas because most of them hope the world will be a better place with them than without them.