Redeeming Economics (11) Smiths Folly

In his book called Redeeming Economics, John D Mueller is strongly critical of Adam Smith. He explains the sources of his confusion.

There are three keys to understanding Smith, both as a philosopher and as an economist: his moral Newtonianism, his philosophical Stoicism, and his Sophistical view of rhetoric.

First, Smith was in friendly competition with his older friend David Hume to do for moral philosophy what he believed Isaac Newton had done for natural science: to reduce all its phenomena to a single familiar principle, like gravity. He was always aiming, as he put it in an unpublished manuscript, “to see the phenomena which we reckoned the most unaccountable all deduced from some principle (commonly a well-known) and all united in one chain.” He wanted an economic system with one basic element, not four.
Second, having rejected his Christian baptism well before writing the Wealth of Nations, Smith was a wholehearted convert to the ancient Stoic philosophy–and Stoics are pantheists.

There are two ways in which the providence of Stoic pantheism differs from the biblically orthodox version of Augustine and Aquinas. First, the Stoic god is not a creator, but the world-soul of an eternal and uncreated universe that goes through endless identical cycles of expansion and contraction. Second, it necessarily follows that humans are not creatures endowed with free will, but rather appendages of God fated to do everything they do, good or bad. According to Augustine’s more logically consistent theory of providence, the order in markets and society comes entirely from the virtue (itself a kind of order) that remains even in bad people as long as they exist.

Finally, Smith was much more proficient (and interested) in rhetoric than in logical, systematic analysis. When first hired by the University of Glasgow as Professor of Logic (he later became Professor of Moral Philosophy), he immediately changed the course to teach rhetoric instead of the prescribed logic and metaphysics. Moreover, as his lectures and unpublished papers make clear, Smith disagreed fundamentally with Aristotle about the nature of rhetoric.

According to Aristotle, the purpose of rhetoric “is not to persuade, but to discover the available means of persuasion in a given case.” Why? “In Rhetoric, as in Dialectic, we should be able to argue on either side of a question; not with a view to putting both sides into practice–we must not advocate evil–but in order that no aspect of the case may escape us, and that if our opponents make unfair use of the arguments, we may be able to refute them.”

Smith’s view of rhetoric, in contrast, resembled that of the Sophists who opposed Plato and Aristotle, by placing a higher value on whether a statement is useful to the speaker than whether it is an accurate description of reality. Smith taught his students, “The Rhetoricall [discourse] again endeavours by all means to persuade us; and for this purpose magnifies all the arguments on one side and diminishes or conceals those that might be brought on the side contrary to that which it is designed that we should favour.” And this, as we will see, is exactly how Smith presents his economic theory.

Smith’s moral Newtonianism induced him to oversimplify the economic theory he had inherited. In his earlier Theory of Moral Sentiments, he tried to reduce all moral philosophy to the single sentiment of sympathy; Smith attempted in the Wealth of Nations to explain all economic behavior by the single principle of labor–but he never achieved a theory that could reconcile these two.
Smith’s philosophical Stoicism accounts for his rejection of some elements of the scholastic outline and retention of others. In the Theory of Moral Sentiments, Smith rejected the scholastic theories of final distribution and utility on the grounds that they presume rational, purposive behavior.

In Smith’s view–and here the pantheism becomes apparent–decisions about ends and means, rather than being decided by human beings, are ultimately dictated to them by an inscrutable Stoic version of providence, which engages the vast majority of humankind in a “deception” about the “real satisfaction” afforded by economic goods. By systematically manipulating human emotion, the Stoic Author of Nature supposedly “rouses and keeps in continual motion the industry of mankind,” luring most people (except the Stoic sage) into vice. The rich are seduced by greed into “selfishness and rapacity,” while the “mob of mankind” is corrupted by envy of the rich. Yet all is for the best. To satisfy their “vain and insatiable desires,” the rich few must employ the envious mob, and so “they are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among its inhabitants.”

Smith’s famous “invisible hand,” therefore, is not a summary of his economic analysis; it is a rhetorical plug that he substitutes where the two elements of economic analysis that he eliminated are required: the scholastic theories of final distribution and utility. Moreover, “invisible hand” is a thoroughly apt metaphor: his philosophy reduces humans to puppets compelled to act by hidden manipulation.

Since Smith treats final distribution and utility by omission rather than revision, it is easy to overlook their significance when we come upon the passages in the Wealth of Nations in which their omission is signaled.

Smith’s elimination of Augustine’s theory of personal distribution from the outline of economic theory is signaled in the passage that includes his famous declaration: “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.”

In Augustine’s theory, the main reason the brewer or baker doesn’t serve his customers from beneficence is not exclusive self-love, but rather the fact of scarcity: if the baker shared his bread equally with every customer instead of charging for it, he would leave himself and his family too little to live on. Augustine’s theory also explains why the brewer or baker shares with his family or friends but not with his business customers: he loves his customers only with benevolence (wishing good to them) with both benevolence and beneficence (doing good to them). He sells his product to customers to earn the means to provide for himself and the rest of his family.

Augustine’s theory of personal distribution explains the essential difference between a gift and an exchange, and provides a measure of how far each of us actually is motivated by self-love and how much by love of neighbor. By treating self-love as the only motive of economic behavior, Smith replaced Augustine’s empirically verifiable theory of personal distribution with an arbitrary and often false assumption: that no one ever shares his wealth with anyone else. Both classical and neoclassical economics implicitly assume that we’ve always already made our choice of persons–and have always chosen “number one”: ourselves.
Smith fails to grapple with the fact that charitable behavior simply does not fit into a theory that reduces all human transactions to exchange and self-love. He never explains why customers never expect their dinner from the butcher’s beneficence, yet his friends occasionally and his children always expect it.

Shortly after dismissing the scholastic theory of final distribution with this assertion about universal self-love, Smith dismisses the scholastic theory of utility by posing what is sometimes called the “paradox of value.” Without offering a solution to this apparent paradox, Smith rhetorically throws up his hands and abandons discussion of value in use, as if the concept were absurd.
This is a case in which Smith “endeavours by all means to persuade us; and for this purpose magnifies all the arguments on one side and diminishes or conceals those that might be brought on the side contrary to that which it is designed that we should favour.” Though Smith twitted Hume in the Theory of Moral Sentiments for retaining Augustine’s theory of utility, students’ lecture notes show that Smith continued teaching it for several years in his own university lectures, posing the same paradox involving diamonds and water he later raised in Wealth of Nations, and easily resolved it along scholastic lines, explaining the difference in value by the combination of utility and scarcity.