Cracks in the Foundation: Adam Smith’s Empirical Failures

4 months ago Alger Mag Editor 0

While some contemporary schools of thought have grown steadily over the course of human existence, others have come about more rapidly, sparked into existence by the works of revolutionary thinkers. These fields of study have been blessed by individuals who were present at its infancy, and who accelerated its development by putting forth theories that motivated debates and reflections in perpetuity. Such is the case with Charles Darwin and evolutionary biology, with Sigmund Freud and clinical psychology, and with Adam Smith and modern free market economics. As future generations of scholars expand these fields, the eminence of the original founders grows in the minds of their disciples.

However, while such respect is undoubtedly deserved, it is important to distinguish between an intellectual’s historical significance and the practical relevance of his work. Psychologists have successfully made this distinction: Freud is thought of as an important historical figure who paved the way for clinical psychology, yet it is commonly understood that his findings, often anecdotal and scientifically misguided, do not themselves have much to offer. Darwin’s grander theories have been validated, and his position as the founder of evolutionary biology is unquestionable; yet the minutiae of his On the Origin of Species have either been refined by enhanced modern science or dismissed entirely.

Unfortunately, however, whereas classical economists could have followed the same natural progression, they did not do so. And in their reluctance to confront the shortcomings of Smith’s The Wealth of Nations, to strip Smith of his divine stature and question the validity of his treatise, they have constructed whole bodies of work on dangerously precarious foundations.

A surprisingly neglected characteristic of Adam Smith’s writing is that it was composed in a philosophical tradition; Smith was a philosopher, first and foremost. This observation is not made to diminish the legitimacy of philosophy as a study, nor is it to establish economics as superior; simply enough, it is to point out that the two are different, and that for Smith to have written as a philosopher meant that many of his conclusions are inherently incompatible with economics. The most glaring example of this is the lack of quantitative reasoning in The Wealth of Nations. Indeed, Smith’s work is most moving as a force of prose, not mathematics. As such, the curious phenomenon is how economics has evolved in two paradoxical directions; in the two centuries since the publication of Smith’s magnum opus, classical economists have raised their demand for empirical soundness while simultaneously latching their belief systems around a fundamentally philosophical writing. It is true they have subjected Smith’s free market exaltations to mathematical tests; however, even when doing so, they continuously fail to adjust their admirations accordingly. Research on free market efficiency has remained varied, controversial, and far from indicative of the universal truth ascribed to Smith’s arguments.

What amplifies the egregiousness of classical economists’ attachment to Smith is that their admiration is not only blind, but selective. The fact that economic debates are nearly always political means that ideologues often want to confine Smith neatly into a category with which they can identify. However, The Wealth of Nations, like several other prominent 18th century writings, is a document that is significantly open to interpretation, partly due to its sheer breadth of scope. Smith touches on topics ranging from liberty to civil government, to the power of Great Britain at the time as a colonial force. And when he does write on what we would now define as economics, his prose, and his lack of concrete empiricism, shrouds his original propositions in mystery. For instance, while it is clear that he shared the modern libertarian view of the market as an efficiently self-regulating mechanism, his position on taxation is much less straightforward. In fact, in discussing how to tax the wealthy, Smith claimed that “it is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.” What he described as a model of fair taxation in fact resembled what leftists advocate as progressive taxation. And rather than add the ambiguous qualifications to the rhetoric of their ideological figurehead, classical economists have either shunned certain interpretations of Smith’s passages or ignored the passages altogether. It is not so controversial to suggest that Adam Smith, though a champion of free market economics, was himself aware of the benefits of a careful government.  

I contend that this article is not meant as a polemic against the free market, nor against classical economic ideology. Rather, I propose an adherence to the academic pillars of economics, and the target of my admonishment are those who have strayed from those pillars. Economists, more so today than in any other time in the history of their field, have stressed the importance of empirically verifiable research and of results based on observable realities and the scientific method. And while they are diligent at holding their peers accountable to those standards, they continuously make an exception for the founder of their study.

The Wealth of Nations is a monumental book, and it has much to offer as a theoretical foundation. Indeed, perhaps Smith’s greatest accomplishment is in inspiring scholarly attention to a previously neglected area. Furthermore, my issue is not with Smith himself, for his chosen methodology was typical of his contemporaries, and in fact he applied that methodology more brilliantly than most historical economists. However, Adam Smith’s work is especially troublesome because he is the appointed figurehead of economics; while modern economists approach his contemporaries with a measured admiration that considers the limitations of outdated methods, such caution is inexplicably cast aside for Smith. If economists are to remain the objective scientists they purport to be, then my stating the diminishing validity of The Wealth of Nations should not draw their ire. I concede that if, in time, Smith’s propositions are shown to be valid by empirical methodology, then it is our right as economists, and in fact our obligation, to adopt those propositions. However, until such time comes, it is clear that Adam Smith’s The Wealth of Nations has not yet earned the near-biblical stature given to it by classical economists.

 

By: Yehia Mekawi