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The charge that Adam Smith's work has been rebuffed by the Nobel-winning research is particularly odd in the case of recipient Vernon L. Smith, a professor of economics at George Mason University, undoubtedly among the most laissez-faire departments in the country. Smith said in an interview with Reason magazine earlier this year that "whether we're talking about politics or economics, or even social interaction, the best systems maximize the freedom of the individual, subject to the constraint of others in the system." Hardly an attack on Adam Smith. In fact, quite the contrary: Prof. Smith's work in the field of "experimental economics" has attempted to demonstrate and predict how people actually behave in various market situations; his research builds on rather than contradicts the insights made by Adam Smith in The Wealth of Nations. Prof. Smith is himself a leading advocate for energy deregulation. The work of the other Nobel recipient, Princeton psychologist Daniel Kahneman, has had a more narrow purpose, namely to demonstrate that people do not always behave rationally with their money. Some of Kahneman's work, unlike Prof. Smith's, does appear to be intended as a critique of market economics, but even it is by no means a refutation of Adam Smith. The Washington Post was one of the few publications that recognized the difference in the two men's work, noting that Prof. Smith "has tended to support the notion that markets, while not perfect, are better at allocating resources and solving problems than various forms of government regulation. By contrast," the Post story continued, "Kahneman and the growing band of behavioral economists have focused attention on the imperfections and failures of markets caused by consumers who behave irrationally rather than in the utility-maximizing fashion assumed by standard economic theory." But according to the Los Angeles Times,
With regard to this experiment, the U.S. News story went so far as to claim that "Adam Smith's invisible hand would have smacked the sellers over the head — classical economics says the right price is what people are willing to pay." Whatever the purpose of this experiment may have been, both of these accounts offer ludicrous descriptions of classical economic theory, which merely states that markets require buyers and sellers to agree upon a price before a transaction can occur — certainly not that sellers are irrational if they do not sell at the price that buyers are willing to pay. In fact, according to classical economic theory, sellers would be expected to ask for more money than buyers. Nor is the fact that some sellers refuse to sell at any price other than the one they set in any way a refutation of that theory. A student in an experiment who has nothing invested in a coffee mug, who doesn't depend on the sale of that mug to recoup any costs or compensate for any losses, is in a perfect position to ask for any amount of money she wants for it. The student holding the coffee mug in this not-so-real-world experiment will either get an absurd amount of money for the coffee mug or she will get a coffee mug. Her decision is neither irrational nor inexplicable according to classical economic theory. In any event, Adam Smith did not believe that human actors always behave rationally in economic situations. That is a view properly attributed to "classical economists" of a very different school. Gertrude Himmelfarb draws the distinction very clearly in her fine essay, "The Idea of Compassion: The British vs. The French Enlightenment" (The Public Interest, Fall 2001). Himmelfarb sums up the approach of French Enlightenment thinkers — such as Voltaire, Jean-Jacques Rousseau, and Marquis de Condorcet — by quoting the French philosophe Diderot from an article in his Encyclopédie: "We must reason about all things, because man is not just an animal but an animal who reasons; . . . whoever refuses to search for that truth renounces the very nature of man and should be treated by the rest of his species as a wild beast; and once the truth has been discovered, whoever refuses to accept it is either insane or wicked and morally evil." In the economic sphere, this reason was supposed to express itself in the behavior of all individuals engaged in commerce, who were expected at all times to act in their own calculated self-interest. By contrast, Himmelfarb writes, the moral philosophers of the British Enlightenment "did not deny reason; they were by no means irrationalists. But they gave reason a secondary, instrumental role." Indeed, as Arthur Herman, in his recent book How the Scots Invented the Modern World, writes, "Contrary to popular misunderstanding, Adam Smith never supposed that man is driven solely by self-interest in a material sense. He knew that many of us, perhaps most, are not. Certainly very few people are so driven that they make great sacrifices and efforts in order to gratify its demands. But enough do to make a difference." It is remarkable, even suspicious, that reporters could so badly mischaracterize the author of Theory of Moral Sentiments and the man who, as Himmelfarb observes, "gave currency to the terms that became the key concepts in British philosophical and moral discourse for the whole of the [eighteenth] century — 'social virtues,' 'social affections,' natural affections,' 'moral sense,' 'moral sentiments,' 'fellow-feeling,' 'benevolence,' 'sympathy,' 'compassion.' " Indeed, the mischaracterization of Adam Smith's legacy is suspicious because members of the media elite are not alone in it. Several Leftist academics have recently begun to try to appropriate Smith for themselves, now that virtually all of their former icons have been discredited. The most recent example of this effort is a new book ominously titled Economic Sentiments: Adam Smith, Condorcet, and the Enlightenment by Emma Rothschild, director of the Center for History and Economics at King's College, Cambridge. Rothschild's husband is Amartya Sen, winner of the 1998 Nobel Prize for economics and author of Development as Freedom, which, like Rothschild's book, attempts to defend government intervention in the economy while portraying Adam Smith as an opponent of "dogmatic" capitalism. Perhaps in awarding the Nobel this year to two thinkers who allegedly buttress the claims of people such as Rothschild and Sen, the economics selection committee was trying to "send a message," just as granting the peace prize to Jimmy Carter was, according to the chair of that selection committee, "a kick in the leg to all that follow the same line as the United States [on Iraq]." If so, the committee made a grave error in giving the award to Prof. Smith. But you certainly wouldn't know that by reading most of the mainstream press. — Eric Cox is managing editor of American Outlook, published by the Hudson Institute. |
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the announcement last week that the Nobel Prize for economics had been
awarded to two American academics whose work has focused on how individuals
behave in real-world market transactions, several mainstream media outlets
used the opportunity to suggest that the work of the two men is a refutation
of the ideas of the most prominent practitioner of classical market economic
theory, Adam Smith. The headline in U.S. News and World Report,
for instance, reads, "Get Real, Adam Smith."
