Monday, January 28, 2013

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.

17 comments:

  1. OT: Regarding -> "This has been a big reason why I've fallen in love with the science and engineering workforce as my own research interest."

    I'm confused. Do I understand correctly that you accept increasing economic returns and growth are driven by scientific progress, but don't think favoring STEM degrees in immigration policy is appropriate?

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    1. This gets into the weeds a little.

      I think demand-side interentions make a lot more sense than supply-side interventions because the problem is not in the functioning of the labor market side of things - it's in the market for science itself. STEM immigrants are great, but I don't see an argument for specially priveleging them. I do see many good arguments for funding science, particularly science with public payoffs.

      So I think doubling NASA and NSF's budget would do a lot of good, and that's likely to entice STEM immigrants to come here. Great. But I don't think that just generating more scientists is going to do anything other than glut the market.

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    2. Romer does not necessarily agree on this - he has (in the past at least... not sure if he still thinks this) promoted just churning out more STEM degrees.

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    3. Ok. That makes sense (In the event, its not clear ... I'm not a supply side advocate).

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    4. And by "supply side" here I mean the inputs to the production of science (i.e. - scientists). By "demand side" I'm talking about the demand for science. The problems we know about are pretty much all on the demand side.

      So I'm not refering to "supply side" as it's used to talk about the Reagan administration, for example.

      To make matters more confusing, I think supply-led growth makes a lot more sense than some post-Keynesian models of demand-led growth in terms of long-term growth.

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    5. That "mainstream" and "mainline" dialogs use terms so differently is confusing at best. In the absence of "scare-quotes" or other hints, it should be obvious to me that your comments are of the mainline variety.

      To clarify my perspective on STEM professionals, my company has difficulty locating domestic professionals. Hiring them is an is even more difficult. The quality of individuals we seek would earn anywhere upwards of 2x the median income. Finding foreign citizens for these jobs isn't simple, but is easier. And, we don't have to go to China or India to do so. In recent years we've hired more professionals from Europe than from Asia. Perhaps there just a greater proportion of STEM jobs in the US? Or, might something is amiss with the US STEM market ... maybe out young and bright would like to avoid *math* and *logic* and instead aspire for the legal profession? I'm half joking, but the US does have a usually high demand for lawyers as compared to other economies.

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    6. I am a somewhat bemused. On the one hand I hear from people like Mike the Mad Biologist ( http://mikethemadbiologist.com/ ) that we have a glut of science and technology Ph. D.'s and on the other hand I hear that we do not have enough of them. Tilt! ;)

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  2. Daniel, the presumption of liberty is a fallacy.

    The path of human existence has been to search for human institutions that permit the greatest freedom of individual action. The presumption, if one needs such, is to the contrary: that man can survive and even thrive only if surrounded by working human institutions.

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    1. Free men build certain institutions to guarantee and expand their freedom. Institutions don't grant liberty.

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    2. Daniel, but of course Institutions grant freedom and liberty.

      One can approach the issue in its most simple way. Without black, would white have any meaning?

      Or, in the most complex way: without human institutions, where would we be in terms of any measure of freedom or liberty (starting with the most basic liberty---life expectancy)? We live longer, today, than ever before, and thus have more freedom and liberty, because of advanced health care made possible solely by human institutions.

      If another human wants to deny you freedom or liberty, there is really only one practical solution, a human institution of some sort.

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    3. One thing that makes Confucius so interesting is that he takes the family as his model of government. Human beings are not born free, but born into symbiosis. However, that does not mean that freedom is some gift that is bestowed upon people. Freedom means different things in different cultures.

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  3. See, pre-paradigmatic.

    Chemical engineers do not have these sorts of discussions.

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    1. To reiterate a point I made to you before - economists don't either. The blogosphere is not the profession and a lot of this is on the fringes.

      That having been said, I don't think the physical sciences are the best comparison. Economics is more like ecology or biology where there are some fundamental divisions.

      Granted, the macro/string theory analogy is pretty good - too many theories, not enough data.

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    2. The blogosphere could be representative of the profession; certainly a lot of the fights that exist between economists come out into the open in the blogosphere. Furthermore, Kuhn would argue that the a debate over what is the "fringes" that goes on for sometime is exactly what you'd expect of a pre-paradigmatic science. Sorry.

      What fundamental divisions exist in biology? I almost have a biology minor and I don't recall anything like this in the field. I admittedly know very little about ecology except for some of the basic issues dealt with in my biology 200 series as an undergraduate.

      Yes, string theory and macroeconomics could be roughly analogous.

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    3. re: "Furthermore, Kuhn would argue that the a debate over what is the "fringes" that goes on for sometime is exactly what you'd expect of a pre-paradigmatic science. Sorry."

      But there's not really a debate!

      On biology - I was particularly thinking of recent discussions of the extent and role of epigenetics, as well as punctuated equilibrium vs. gradualism.

      I don't know ecology well either, but it's a better analogy than something more deterministic like physics and chemistry. The point is the economy is an ecology - it's a complex system that we have limited experimental data on where multiple processes could be operating simultaneously, which is naturally going to lead to discussions about the primacy of any particular process.

      If I did the research I did on chimp societies rather than human societies, there would be no doubt that what is being done is science. And I actually have better models and better data than the primatologists do! You're really not going to get anywhere with this line of argument, LSB

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    4. I can only just tell you what it looks like to me. And I'm not trying to convince you of anything or expecting you to change your mind.


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  4. Daniel, out of curiosity, what do you think of Dr. Michael Emmett Brady's assessments of Adam Smith, judging by Dr. Brady's article on Adam Smith in the International Journal of Applied Economics and Econometrics and his reviews on Amazon.com?

    http://www.amazon.com/review/R1IHQ00Z5O8K7E

    http://www.amazon.com/review/R3EM7XF6YJP6DX

    http://www.amazon.com/review/R23OMLE8Z33ZRT

    http://www.amazon.com/review/R26W59LXV245PI/

    http://www.amazon.com/review/R2LJZAP6RPLBLP/

    http://www.amazon.com/review/R1FK3SGP6F6HSM/

    http://www.amazon.com/review/R1ZMWZEDPKG2HD

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1728225

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