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Homo Economicus

John Bradley

Adam Smith: What He Thought, and Why it Matters, by Jesse Norman, Allen Lane, 400 pp, £25, ISBN: 978-0241328491

There are very few people about whom it can be said that they fundamentally changed the way we think about and interpret the world. In the field of natural science, as distinct from that of social sciences, it is easier to identify such revolutions in thought. Prior to any such change, the field of knowledge in question is often in a very unsatisfactory state. Old theories have been found to be inadequate. Data have accumulated, investigators grope their way through a fog towards a better way of thinking, but uncertainty reigns. Out of such uncertainty, and from a synthesis of a mass of uncoordinated knowledge and data, there emerges a dramatically new paradigm that changes the world forever.

One thinks of Isaac Newton’s Principia Mathematica, published in 1642, which brought clarity and simplicity to the way that we think about such diverse phenomena as apples falling from trees and the motions of distant planets. One would include Charles Darwin in this select band, where the publication of On the Origin of Species by Means of Natural Selection in 1859 changed the way that we understand and interpret the natural world and the role in it of living creatures, including humankind. In the early years of the last century, Albert Einstein initiated a major revolution in the way we think about space, time and gravity; here one cannot point to any single publication that heralded the change. In our modern era new findings tend to emerge first in scientific journals, are then discussed within the profession, and subsequently are often interpreted and synthesised by teams of collaborators. Nevertheless, the breakthrough of the Special and General Theories of Relativity are unquestionably associated with Einstein.

The new book on Adam Smith by Jesse Norman provides a welcome opportunity to consider whether Smith’s innovations can be placed alongside those of people like Newton, Darwin and Einstein. In other words, did Smith do for the social sciences, and for economics in particular, what Newton, Darwin and Einstein did for branches of natural science? Here we are not talking about Smith being just one more contributor, even a significant one, to the evolution of what was then referred to as “political economy”. Rather, we ask if the publication of his two great works ‑ The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776) ‑ fundamentally changed the way that people thought about the economy and social society, changed perceptions and had a lasting effect? After all, Newton’s synthesis prevailed for over two and a half centuries before the need arose to reinterpret it as a special case (albeit a very important one) within Einstein’s relativistic theories.

As Norman points out in his introduction, surveys of the present day economics profession show that Adam Smith is widely regarded as the most influential economist who ever lived. Of course, there are lots of famous economists who have made major contributions to the discipline. But it would not be an exaggeration to claim that they all work within an intellectual framework broadly set out initially by Smith in his two major works (but primarily in The Wealth of Nations). Other economists may debate between themselves as to how to apply Smith’s ideas (Marxist economists, for example, would place far less faith in market mechanisms that would, say, Neoclassical or Keynesian ones), or they may prefer to use highly stylised mathematical formulations of Smith’s ideas rather than the discursive and historical narrative style adopted by the man himself. But in a deep sense, intellectually they are all Smithians.

A further hint that points to the importance of Smith is that his ideas made their mark far beyond the narrow boundaries of economics. Norman points to his influence in the fields of philosophy, politics and sociology, in the thought of figures including Edmund Burke, Immanuel Kant, Friedrich Hegel, Karl Marx, Max Weber, Friedrich Hayek, John Rawls and Jürgen Habermas. This signals a theme that runs through the book, uncovering how the economics profession has tended to interpret Smith in an excessively narrow context and to dip into his work in a way that is highly selective and which distorts his more comprehensive vision both of the economy and of the wider society within which economic activities are embedded. At a time when the reputation of the economics profession has suffered badly as a result of the mind-numbing craziness of the global recession of the last decade, an accessible revisiting of Adam Smith is very welcome.

The book has three main divisions. In the first, an account is given of Smith’s life, from his birth in Kirkcaldy in Scotland in 1723 to his death in Edinburgh in 1790. In the second, Norman explores and evaluates his published and surviving works: mainly his two major books referred to above (Moral Sentiments and Wealth of Nations), but including some unpublished lectures on jurisprudence. In the third, he discusses the importance and relevance of Smith’s work today, in light of over 240 years during which the discipline of economics has advanced from his initial insights to the complexity of today’s globalised economies.

The fact that no portrait of Smith was ever made during his life speaks volumes about his modesty and retiring nature. There exists only one image ‑ a side view medallion ‑ made in 1787, three years before his death. His university education was initially in Glasgow, where he studied moral philosophy. He did postgraduate studies at Oxford but, by all accounts, he hated it (other than the access it gave him to the Bodleian Library) and regarded Glasgow as far superior. On moving back to that city he became a professor, entered also into the vibrant intellectual life of Edinburgh (being elected a member of the Philosophical Society), and became close to David Hume, Scotland’s most famous philosopher and author of A Treatise of Human Nature. These must have been disturbed and challenging times: the return to Glasgow came only four months after the battle of Culloden, the final confrontation of the Jacobite rising of 1745.

Smith taught in Glasgow from 1748 to 1763, during which time he published his first main work, The Theory of Moral Sentiments. The real value of Norman’s book is that it positions and interprets Moral Sentiments as a vital and essential precursor to the later and much better known Wealth of Nations. Indeed, much of what has gone wrong with modern economics can be traced back to indifference to, or often complete ignorance of the kind of moral context that Smith would have brought to Wealth of Nations. Smith was a skilled mathematician, was familiar with the work of Newton and was also the author of an essay on the history of astronomy. He fully understood the difference between a scientific theory, explaining a mechanistic world using abstract mathematics, and an investigation into human and societal behaviour, where morality and social relationships are important. A science of man would always be different from a science of nature. The view that human nature arises within and is shaped by human society is deeply embedded in English empiricism and common law and brought Smith into conflict with European thinkers like Kant and Rousseau.

Unlike the well-paid and lazy Fellows of Oxford colleges, professors in Glasgow had to work hard and were paid directly by their pupils. Smith may not have been a scintillating personality, but he was a popular and influential teacher. However, in 1763 he was offered the position of tutor to the young Duke of Buccleuch with a salary too good to turn down, a pension for life, and the opportunity to travel extensively in Europe with his pupil. He devoted his efforts to researching and writing his second major work, The Wealth of Nations, and had the opportunity to meet many important thinkers of the age such as Benjamin Franklin; Jean d’Alembert, a mathematician; and François Quesnay, the French physiocratic school economist. In addition, he was an adviser to William Pitt, British prime minister in the 1780s. His high standing is illustrated by a famous anecdote where he came late to a meeting with Pitt, Wilberforce, Grenville and others:

It is said that when Smith, who was one of the last guests to arrive, entered the room, the whole company rose from their seats to receive him and remained standing. “Be seated, gentlemen,” said Smith. “No,” replied Pitt, “we will stand till you are first seated, for we are all your scholars.”

Against this background, and amid the financially ruinous wars of Louis XIV and the American War of Independence, The Wealth of Nations was published in 1776. A valuable feature of Norman’s book is its examination of the thought processes that lay behind the composition of that work. “Part of Smith’s genius,” he writes, “is to take his personal experience and to draw out both telling anecdotes and general lessons from it in his writings.”

To the modern reader, Smith’s central ideas are now conventional wisdom: the productivity-enhancing division of labour, market forces, competition, supply and demand, self-interested actions, free trade, the damage caused by monopolies etc. Just as undergraduates master Newton’s laws in Science 101, they also find the essence of Smith’s economics in their introductory text books. But few if any students of economics now read anything about the history of the evolution of economic thought. What their text books gain in terms of mathematical sophistication they lose in terms of depth and insight. Smith looked out at his complex world and tried to make sense of it. Today we live in an even more complex world, but have almost lost the ability to examine it in the way Smith examined his. Norman diagnoses the problem succinctly:

Over time the subject of political economy would become further detached from politics. Indeed, in the nineteenth century a thoroughgoing attempt was begun to recast political economy as the new subject of economics, and to separate out not merely economics and politics, but economics and ethics, in the name of science. As economics became more scientific, so it became more mathematical; and as it became more mathematical so it became more removed from everyday life, from human institutions and human values, and indeed from the idea of value itself.

This problem becomes even more serious if modern readers dip into Smith, pull out some of his more memorable phrases and interpret them in an historical and moral vacuum. Take, for example, the famous reference to the invisible hand (from Wealth Of Nations, Book IV, Chapter V):

Every individual ... neither intends to promote the public interest, nor knows how much he is promoting it ... 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.

Today there is a tendency to interpret this as Gordon Gekko might in the film Wall Street (“greed is good”). The same applies to another famous quote (Wealth Of Nations, Book IV, Chapter II):

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.

Even if Smith had never written Moral Sentiments, it would be impossible to read Wealth of Nations, even in isolation and ignoring its historical context, and draw from it a manifesto for the belief that greed is good or that selfishness is a virtue. Norman tackles this problem by setting out five “myths” that have grown up around Smith. Myth 1 is the “Adam Smith Problem”, or the claim that Moral Sentiments and Wealth of Nations represent two diametrically opposing and irreconcilable points of view. Myth 2 is the claim that Smith was an advocate of self-interest. Myth 3 is that Smith was pro-rich. Myth 4 is that Smith was anti-government. Myth 5 is that Smith was first and foremost an economist. Norman demolishes these myths and shows that people who advance them have largely ignored the central feature of Smith’s worldview ‑ the embedding of market activity within a normative ethical and social framework.

A great merit of Jesse Norman’s study of Smith is that it examines economics from inside the tent rather than from outside. The modern economics profession is too dominant, and many individual economists are too influential, too narrow-minded and too arrogant for it to be possible to have a polite and open discussion of problems with the discipline. Criticism from outside the profession is usually brushed aside as ill-informed and getting in the way of the important work that needs to be done while critics from within risk relegation to the backwaters of the profession where nobody is listening. By going back to Adam Smith, the founding father of the economics profession, Norman makes it possible to have a civilised discussion about how much of modern economic theory is a travesty of the methodology, insight and subtle analysis of the master.

1/11/2018

John Bradley was for many years a research professor at the ESRI and now works as an international consultant in the area of economic and industrial strategy. He regularly advises the European Commission, the World Bank and other international organisations and governments on policy issues related to promoting long-term economic growth and development.

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