Brad Delong is Absolutely Right; Duncan Foley is Absolutely Wrong

In Radical Notes, Dipankar Basu, writes on “DeLong on "Adam's Fallacy":

“So what is Adam's Fallacy? It is the claim, according to Foley, that the pursuit of self-interest, which is morally problematic in most human interactions, is unambiguously socially beneficial in the context of competitive market interactions. This claim, which consolidated itself in the writings of Adam Smith, has been passed down from generation to generation in various forms and various guises, and has been accepted and used, according to Foley, by economists of virtually all political persuasions.

But why is this claim a fallacy? It is a fallacy in three senses. First, it is a logical fallacy because neither Adam Smith nor any of his followers who use this claim - often implicitly - have ever managed to prove it rigorously and robustly; at best it remains an unproved assertion. Second, it is a moral fallacy because it "urges us to accept direct and concrete evil in order that indirect and abstract good may come of it". Third, it is a psychological fallacy because it leads us to deny the iniquitous manner in which costs and benefits are distributed in society under capitalism.”

Comment
Foley’s fallacy commences from the assertion that Adam Smith wrote that: “the pursuit of self-interest, which is morally problematic in most human interactions, is unambiguously socially beneficial in the context of competitive market interactions.”

Smith was well aware and wrote a great deal about the problem that ‘merchants and manufacturers’ were liable to pursue their self-interests by reducing competition in markets and that Perfect Liberty would not be a strong enough condition to resist these tendencies. The neoclassical theory of perfect competition excludes the real world by its assumptions, which Duncan Foley knows well.

In the real world, and throughout the c. 8,000 years of history (and almost certainly all throughout pre-history – covering a few million years), the ‘vile rulers’ of mankind imposed their self-interests on the rest of the human population. And Adam Smith fully understood this and said so.

To criticise Smith for the above misattributed fallacy and that it was ‘consolidated … in the writings of Adam Smith’ is a fallacy of breathtaking impertinence, bordering on crass ignorance (a charge which Duncan Foley only escapes by virtue of his distinguished academic pedigree).

If there is one thing that emerges from reading Smith’s well-known works it is that he had no illusions that the recommendations he made for changes in the arrangements prevalent in the commercial societies of Europe up to the last quarter of the 18th century, were a prelude to Utopia or Oceania, or were likely ‘ever’ to be adopted (WN IV ii.43: p 471). Far from it, as Duncan Foley would realise if he read and thought about what Smith actually said, instead of deconstructing his corpus from his familiarity with Chicago neoclassical theory.

You will not find anything in neo-classical, or post-neoclassical endogenous growth theory, but highly sanitised, even sterilised, versions of Smithian ideas on self-interest, divorced from his writings on the context in which political economy operates in society. That requires that you read all the (large bits) of Wealth of Nations and Moral Sentiments that modern economists avoid and treat as untouchable.

You get a hint of Smith’s actual thinking about the practical and lasting problem of overstating as a necessary condition the beneficial effects of self-interest:

“Mr. Quesnai … seems to have imagined that [society] would thrive and prosper only under a certain precise regimen, the exact regimen of perfect liberty and perfect justice. He seems not to have considered that in the political body, the natural effort which every man is continually making to better his own condition is a principle of preservation capable of preventing and in correcting, in many respects, the bad effects of a political œconomy, in some degree, both partial and oppressive. Such a political œconomy, though it no doubt retards more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of the bad effects of the folly and injustice of man; in the same manner as it has done in the natural body, for remedying those of his sloth and intemperance’ (WN IV.ix.28: p 674).

Perfection is not a necessary condition for society to benefit, and history shows that perfection does not obtain in human societies, and probably never will, because of the ‘follies’ of man. No science dependent on such a necessary condition would have practical relevance for political economy or the affairs of mankind. Perfect competition and models derived from it are not compatible with Adam Smith, were not ‘consolidated … in the writings of Adam Smith’, nor did he assert that self-interest was ‘unambiguously beneficial in the context of competitive market interactions’ (which is a folly of perfect competition and general equilibrium theories created over a century and more after Smith died), and if they have ‘been passed down from generation to generation in various forms and various guises’, that is the responsibility of the proponents of the neoclassical paradigm, resident at Chicago, Harvard, MIT and Yale, etc., but not the responsibility of the man who resided in Kirkcaldy.

Some actions originating in self-interest (and for self-betterment) are beneficial for society, but many, many are not, and Smith waxes long on the explicit details of the corruptibility of self-interest, which definitely is not beneficial for society.

Smith did not need “to prove it rigorously and robustly”, because he never asserted it in the first place; he did not urge anybody “to accept direct and concrete evil in order that indirect and abstract good may come of it" – quite the reverse in fact; and nor did he ask anybody “to deny the iniquitous manner in which costs and benefits are distributed in society under capitalism” – again, quite the reverse; he railed against the misdistribution of the revenues of 18th century commercial society, and of previous regimes too (‘capitalism’ had not yet having been invented by 1790).

In short, Foley’s fallacies are directed at the wrong person, as I continue to point out. Brad Delong is on the right track in critiquing Foley’s charges (I don’t agree with every one of his points, but I am pleased to see a notable economist is unconvinced by Foley’s diatribe against Smith), and am happy to say that Brad Delong is much more right than wrong, while Foley is overwhelmingly wrong and not a smidgen right on Adam Smith.

[Read the whole comment on Brad Delongs’s review of Duncan Foley’s ‘Adam’s Fallacy’ commented about on this Blog several times earlier (see archives) and to read Dipankar Basu, visit: http://radicalnotes.com/content/view/31/30/