Smith Never Believed in Homo Economicus

I had occasion to dispute with Professor Colin Camerer earlier this year over his reference to Adam Smith and the so-called theory of Homo economicus, to which his name is associated, incorrectly – he never believed in such a creature. Colin Camerer's defence was that his co-authors of the article were responsible and he did not consider my point to be important in his inter-disciplinary work on neuroscience and economics.

Well, John Cassidy writes an informative article in September’s issue of New Yorker: “Mind Games: what neuro-economics tells us about money and the brain” and reports on more of Professor Colin Camerer’s work (and that of his associates), much of which I agree with, escept where they link it to a critique of Smith’s (non) advocacy of Homo economicus.

I suppose in one sense we have moved on a bit, though I do not know whether this is a result of Colin Camerer’s realisation that links to Adam Smith in such matters are a travesty of Smith’s legacy, or whether it is the way John Cassidy wrote up his report. Top academics can be very sensitive about acknowledging errors, even minor ones.

Here is a short extract from John Cassidy’s article in New Yorker:

‘Economics has always been concerned with social policy. Adam Smith published “The Wealth of Nations,” in 1776, to counter what he viewed as the dangerous spread of mercantilism; John Maynard Keynes wrote “The General Theory of Employment, Interest, and Money” (1936) in part to provide intellectual support for increased government spending during recessions; Milton Friedman’s “Capitalism and Freedom,” which appeared in 1962, was a free-market manifesto. Today, most economists agree that, left alone, people will act in their own best interest, and that the market will coördinate their actions to produce outcomes beneficial to all.

Neuro-economics potentially challenges both parts of this argument. If emotional responses often trump reason, there can be no presumption that people act in their own best interest. And if markets reflect the decisions that people make when their limbic structures are particularly active, there is little reason to suppose that market outcomes can’t be improved upon.’

Comment
Smith is correctly linked to having been concerned with ‘social policy’ and instead of linking Smith to ‘self-interest’ it is left open at ‘most economists agree’. That is true for most of today’s economists trained in neo-classical economics and its simplistic Friedman-ite assumptions of a strange abstract creature ‘Homo economics’. This position is summed up in the article, quoted above’ as:

‘Today, most economists agree that, left alone, people will act in their own best interest, and that the market will coordinate their actions to produce outcomes beneficial to all.’

That statement (not the part that says ‘most economists agree’, but the second part) that ‘left alone, people will act in their own best interest, and that the market will coordinate their actions to produce outcomes beneficial to all’ is not absolutely or universally correct now, and was not true when Smith was alive, though that does not stop ‘most economists’ agreeing with the false idea that this was anything to do with Smith’s legacy. That markets are in general more satisfactory than attempts to control and manage production and distribution by committees, commissars, and planners is acceptable as a proposition, but that requires a context for it to be case (the rule of law, adhesion to norms of trust, reciprocity and fair-dealing, and property rights).

People act in their self interest – they are, said Smith, the best judge of their own interests – but their consequential actions can be detrimental to ‘outcomes beneficial to all’. Indeed, self interest can lead people to act malignly as well as benignly in terms of the interests of other people.

Wealth of Nations has thousands of words devoted to the malign outcomes, both specifically and generally, that flow from the self-interested actions of individuals – ‘Merchants and manufacturers’ are often mentioned in this context when they indulge in monopolising and anti-competitive practices. When individuals advocate to legislators protection for their interests against those of consumers and other merchants and manufacturers who wish to exercise their rights to enter ‘their’ industries, or persuade governments to go to ‘war’ to maintain their monopolies as chartered trading companies, or they defraud banks by the manipulations of bills of trade, or give false measures to consumers, or debase the currency, and so on, they most decidedly do not produce ‘beneficial outcomes’. People operate markets not the arguments of functions or the premise of assumptions.

How, given the evidence, replete in Wealth of Nations, Adam Smith was ever to be quoted as a source for the idea of self-interest always leading to ‘beneficial outcomes’ is a mystery to me, and should be to ‘most modern economists’.

That neuroscience is accumulating evidence that Homo economicus is a false conception is welcome news. It would be another step forward if when mentioning Homo economicus authors – and researchers – would make clear that this abstraction is a creature of modern economists, not Adam Smith.