Russ asks about my Smithianism

Russ asks what is Smithian about my perspective:

"What is Smithian about me is that I start with what Dan Klein calls a "presumption of liberty." I also have little faith in precise models of human behavior. I believe that good social science is narrative in nature using facts and observations about the world. I am suspicious of politicians who try to engineer economic systems from the top down. I think people are a mix of self-interested and altruistic but the self-interested part dominates. What induces altruistic behavior is a desire for respect. I believe people (even economists) are prone to self-deception. I think the division of labor is limited by the extent of the market and is likely more important for creating prosperity than Ricardian comparative advantage.

What's on your list?"

The presumption of liberty (where he starts) is a good place for me to start too. From my perspective we presume liberty - we are not awarded liberty by the state. That's not to say I believe in natural rights. When the state acts it acts because free people empowered it to to achieve our ends, under the strictures of constitutional restraints (ideally).

As far as "precise models of human behavior", I don't have faith in these as deterministic accounts, but I do have faith in them as representations of less precise theories that help us to understand human behavior. I think this is exactly how Smith would view things. For example, take Smith's high esteem for the "precise model of human behavior" offered by Quesnay (a sort of proto-Keynesian model, in fact!). He seems to have the same reaction that I do to economic models today. So I'm not sure it's especially Smithian to "have little faith" in models, as Russ puts it. But it is important to know what they're used for.

The economy is a very complex phenomenon. Without mathematical models its very hard to ensure that all the assertions you're making are sensible and consistent. It is sufficiently complex that we are never going to get a deterministic model, but nobody really has a serious hope of keeping everything straight and sensible if they don't discipline their economics with equations and mathematics. Without that all you've really got is gussied up man on the street musings. But with math you can make sure that you are putting together a sensible argument and not just offering an impressionistic set of passages.

I strongly agree that good social science is narrative, using facts and observations about the world (the latter being particularly near and dear to my empirical heart). Of course it's not limited to narrative (see my discussion of models above). In my view one of the unsurpassed examples of narrative along with observation is Friedman and Schwartz's Monetary History, and I think it is also apparent in the natural experiment literature which really is an attempt to use neat little stories to demonstrate the veracity of a theory in a rigorous way. Adam Smith, like Friedman, was also a master of narrative (to bring us back to the point of the post!).

I have nothing to disagree with in the rest of Russ's post. I also am suspicious of politicians who try to engineer the economy from top down. Our institutions have evolved over time and while that doesn't mean they are inviolate my regular readers know I'm suspicious of radical changes that are motivated by utopian expectations.

I also think people are self-interested but altruistic and that self-interest dominates. I'd add that self-interest is not the same as "greed". I am not sure if I agree that the desire for respect is what induces altruism (although certainly it can). I'm not sure if this puts me on the outs with Smith, but if it does that's OK. I think people genuinely care about each other, and that that co-exists with our self-interest, and that economists who study the economics of care (like van Staveren, Grown, Folbre, etc.) are doing tremendously important work that has only recently captured my imagination and spirations.

Russ ends on a theme that is also near and dear to my heart - that the division of labor is limited by the extent of the market, and that these forces are more important in the long run than Ricardian forces.

I had known this part of Smith very early on, of course, but it was really driven home for me by Paul Krugman about a decade ago at this point. Reading Krugman on geography and trade for a class paper was what first really got my excited about economics, and Krugman talked emphatically about why Smith was in a lot of ways a lot more important than Ricardo. This is trade, but for Smith it also applied to growth in general, which is why I also value work by people like Paul Romer who ties Smithian themes on increasing returns and growth to scientific progress. This has been a big reason why I've fallen in love with the science and engineering workforce as my own research interest. This optimistic, market-oriented, innovation-driven view of growth is why (even though some of its predictions are off), Economic Possibilities for Our Grandchildren is still one of my favorite writings of Keynes.

But aside from this headline stuff, something else I love about reading Smith that isn't on Russ's list is all the little insights that you get reading him. Efficiency wages are in Smith. Credit rationing is in Smith. Of course there's lots in there on market power. Hell, if we wander out of Wealth of Nations and into his History of Astronomy we get a Kuhnian account of scientific development (and a third, less remarked on reference to an "invisible hand"!). So what I like about Smith is that he understands and expounds upon the sense in which the social world is a complex place. That's satisfying enough as a reader of Smith, but when he anticipates things like Stiglitz's work or Kuhn's work in the 20th century (which in turn has had its impact on me), that is truly impressive to me.

UPDATE: I forgot one of my favorite senses in which I am a Smithian economist! I feel that one of the most important ways that economists can contribute to debunking popular fallacies is in pointing out when people commit fallacies of composition. Avoiding fallacies of composition is critical to social science in general, and economics is no exception. This was the heart of Smith: free pursuit of self-interest benefits everyone. Debunking these fallacies of composition is of course also one of the things I like most about Keynes.