Though they were both students of Knight and Viner, Milton Friedman (1912-2006) and George Stigler (1911-1991) had very different views about the nature and purpose of economics — and hence, of Smith — from their predecessors. For Friedman and Stigler, economics’ scientific power came from its ability to predict outcomes based on two central insights, both of which could be found in “The Wealth of Nations.” The first was self-interest, or what Stigler called the “crown jewel” of “The Wealth of Nations.” According to Stigler, Smith’s idea of self-interest was so powerful that it was “Newtonian in its universality” and had unlimited explanatory power.
The quoted passage is by the exciting young scholar, Glory Liu, who published an important scholarly paper on the reception of Adam Smith in the Chicago school (see here). Liu's WP editorial is a nice introduction to the more complicated larger argument. And I agree with her conclusion that "Smith’s relevance has always been political" (although I would add not only political). Her editorial nicely introduces a larger public to the complex intellectual evolution of the Chicago school, drawing an important (and scholarly well grounded) generational contrast between Viner and Knight (who didn't agree about everything important) and two of Chicago's Nobel laureates, Friedman and Stigler (who also didn't agree about everything important). It's a clever idea to use their treatment of Smith to reveal the contrast.*
Here I want to focus on Liu's treatment of Friedman in her editorial and her piece. For, while Liu is primarily interested in the reception of Smith (and the political ways in which the Chicago schools used him), she does take a stance on Smith's position. I quote the relevant paragraph (from the editorial):
At the same time, political theorists and historians like me have argued that the Scottish moral philosopher didn’t just stand for free markets and that, in fact, [A] Smith’s invisible hand wasn’t a warning about state intervention but state capture. Rather unlike the caricature of Smith who espouses unchecked economic growth, they’ve also argued that [B] Smith was deeply worried about the moral consequences of growing inequality.
The first reference [A] is to a 2018 Aeon piece by another rising scholar, Paul Sagar. The second is [B] to an essay by a leading (more senior) scholar, Dennis Rasmussen writing in the Atlantic in 2016. (That second piece was, in turn, anticipated by Deborah Boucoyannis in her LSE blog, which introduced the findings of her important 2013 paper, and several papers by Lisa Herzog (see, for example here and here).) It's notable how much public attention Smith is getting! As it happens I agree with [B] and so I leave that aside here. But the story about [A] is more complicated. Let me first quote Sagar before I respond to him and Liu:
So, first, I agree with Sagar and Liu that Smith cared deeply about state capture by mercantile interests. But it is worth noting Milton Friedman also agreed about this. In the very (1977) essay that Liu quotes, Friedman writes:
There is a great misunderstanding about Adam Smith, a serious misconception of his role. Because he is known as the father of laissez-faire, because of his emphasis on the “invisible hand,” and because he explained the virtues of the price system, Smith is ordinarily regarded as if he were a defender of the status quo, a representative of the existing institutions, part of the establishment. He was anything but that. Smith was a revolutionary, one of a small minority who attacked the existing order of things. At the time he wrote in the late eighteenth century, Britain was a mercantilist state, in which the government was exercising almost as great a control over economic affairs as the United States government does now. It was a state of affairs in which there were restrictions on imports and exports, there were remnants of the guild system of the middle ages, and so on down the line. Adam Smith attacked this system. His book was a tract for reform, calling for a revolution in the way in which economic affairs were conducted.--Milton Friedman (1977) "The Invisible Hand"
What Friedman writes here is all correct (except, perhaps, the claim that in 1776 "the government was exercising almost as great a control over economic affairs as the United States government does"in 1977). In fact, as I have noted before (recall here and here) it is a key theme of Chicago economists to worry about state capture. These days regulatory capture is entrenched within the critique of neo Liberalism. But the idea of regulatory capture was developed by the Chicago economist, George Stigler [recall this post, too], and is also strongly associated with the so-called public choice literature associated with the Virginia school of (other Chicago trained economists) Buchanan and Tullock and law economics (see this classic article by Coase). That is to say, the intellectual framework of regulatory capture was developed to help understand and criticize the effects of the New Deal and became influential in the aftermath of understanding the successes and limitations of the Great Society by market-friendly economists.
As it happens, in his 1962 presidential address to the AEA, Stigler credits the idea of state capture to Adam Smith! However, he does so, in part, to complain that Smith fails to "demonstrate" empirically "that the state is normally the captive of "partial interests." (3; Liu does not mention the piece in her more scholarly article.) So, Stigler and Friedman agree with (and anticipate) Liu and Sagar that Smith was interested in and worried about state capture and rent-seeking.
Second, Sagar and Liu are correct that the invisible hand (in the version presented in the Wealth of Nations) is offered in the context of Smith's criticism of state capture by mercantile interests. I agree with them that Stigler and Friedman tend to ignore this when they write about the invisible hand.
Third, while it is true that Friedman and Stigler both thought that assuming self-interested agents could be predictive,+ I doubt, as Liu suggests (this is not in Sagar), they thought that positing the invisible hand helped them make "predictions." Since this claim is not (defended) in Liu's original essay in Modern Intellectual History, I am inclined to chalk this error up to the difficulties of condensing a major scholarly achievement into a popular presentation.
Fourth, I disagree with Sagar and Liu that in the Wealth of Nations, the invisible hand is itself a warning about state capture. Rather as I argue in my recent book, the phrase 'invisible hand' captures circumstances when (i) an agent produces unintended consequences that (ii) are unknown to him or her; but, (iii) the consequences are, in principle, knowable to the right kind of observer (theoretically informed)** at the time, and (iv) in fact, the agent should have known better. (As an aside, invisible hand processes tend to be short term in Smith and to be contrasted with the more typical unintended consequence explanation/process given by Smith.) In fact, one of the the key underling points is that (mercantile) ideology masquerades as science and, thereby, confuses even those who benefit from the ideology.++
Now, I agree with Liu that Friedman's interpretation of the invisible hand -- Adam Smith was all the rage in 1976-7 due to bicentenary of Wealth of Nations -- as a master metaphor representing the way in which voluntary acts of millions of individuals each pursuing his own objectives could be coordinated, without central direction, through a price system is incorrect. But as an interpretation of Smith, even the passage in which the invisible hand as a phrase occurs, it's not wholly false either: the subsequent passage (the very next paragraph in Wealth of Nations) does claim that government should not direct industry or mercantile agents (as Sagar also notes):
"What is the species of domestick industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."
This gets me to the final point. Liu notes in her conclusion that,
What makes the Smith of Milton Friedman and George Stigler so interesting — some people might say problematic — is not that they aligned Smith with a particular political agenda. It’s that they “economized” Smith in a way that obscured if not precluded the relevance of his moral philosophy and political theory. Stigler once famously quipped that “the correct way to read Adam Smith is the correct way to read the forthcoming issues of a professional journal.” In other words, Stigler believed that you had to read Smith as if he were a modern, 20th-century economist, not (as Smith originally was) an 18th-century moral and political thinker. What’s more, the power of Friedman’s version of the invisible hand derived from the seemingly objective scientific authority of its author, the “father of economics,” Adam Smith. It’s clear, however, that impulse to portray economics — even Smith’s version of economics — as an objective science is deeply embedded in the history and politics of the discipline.
Much of this is right. But there are two potentially misleading and connected features to this quote. First, Stigler's famous quip is offered in the context of an extended argument about the purpose of history of economics (it is a passage that long ago caught my eye): "The purpose in seeking to understand the man’s theoretical system is not to be generous or malicious toward him, but to maximize the probability that his work will contribute to scientific progress. Only if the analytical system is well defined and cleansed of irrelevant digression and inessential error may we determine whether it is a worthy addition to the corpus of the science, or at least a line of investigation that ought to be expslored further." (Stigler "Does Economics Have a Useful Past?" 1969: 221) Now, one may think there are other ways to make the past usable to scientific progress or, perhaps, other purposes for the past. (I think that's compatible with Stigler's position here, but this post is too long already.) Stigler's position does not entail that one need to efface the relevance of Smith's moral and political theory. For Stigler thinks that in addition to the corpus of (progressing) economic science, there are two different projects -- which both he and Friedman call 'normative' economics and the 'art' of economics. From the start of his professional career, Stigler takes these other two projects very seriously so much so that he famously, perhaps infamously, contested welfare economics's claim to being an objective science from his earliest publications onward (recall here; here, here, and here).
And, in fact, Stigler (not Friedman) shared with Smith the idea -- now unfashionable -- that the knowledge that economics produced was knowledge of comparative institutional development and analysis. As Stigler puts it in his AEA address: the "competence" of economists "consists in understanding how an economic system works under alternative institutional frameworks." (2)*** This has many pertinent implications for normative projects associated with political theory, including the possibility and appropriateness to act as an adviser to government. Stigler's immediate example is, of course, Adam Smith, but he criticizes Smith for insufficient evidence for his claims.+++
The reason for Stigler's dismissive attitude is not hard to find. Stigler (1971) thinks that "Smith’s attitude toward political behavior was not dissimilar to that of a parent toward a child: the child was often mistaken and sometimes perverse, but normally it would improve in conduct if properly instructed." ("Smith's Travels on the Ship," 273) The problem is not Smith's tone, but rather, according to Stigler, the giving of policy advice "without taking account of the political forces which confine and direct policy. In the absence of knowledge of these political forces, the advice must often be bad and usually be unpersuasive." What this reveals is that according to Stigler, Smith was a normative, political theorist. ("Political science had been a normative literature for 2300 years before Smith wrote and has continued to remain normative to the present day.") It's just that according to Stigler a different kind of policy relevant political theory is required; Stigler thinks that the art associated with turning empirical economics into normative economics involves taking into account the political forces which confine and direct policy. He claims Smith failed to do so, so qua political theorist, Smith is not an exemplar worth taking seriously according to Stigler.*****
*Liu acknowledges she is not the first to do so. She is drawing on work by Steven G. Medema, “Adam Smith and the Chicago School,” in Emmet, The Elgar Companion to the Chicago School, 40–51.
+I am ignoring some complications.
**This is true of the invisible hand in Wealth of Nations, in The Theory of Moral Sentiments (iii) is the case due to accumulated common sense
++The invisible hand is introduced b repeating an axiom from Smith's own political economy: "the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value." This axiom is de facto denied in mercantilism.
***Of course this does not not exhaust Stigler's or SMith's claims about economics. Stigler changed his mind about this later. When he became an advocate (with Gary Becker) for a more narrow understanding of economic competence.
+++ Stigler goes on to write: "The basic role of the scientist in public policy, therefore, is that of establishing the costs and benefits of alternative institutional arrangements. Smith had no professional right to advise England on the Navigations Acts unless he had evidence of their effects and the probable effects of their repeal. A modern economist has no professional right to advise the federal government to regulate or deregulate the railroads unless he has evidence of the effects of these policies."
*****Stigler missed what he was looking for. My book argues, contra Stigler (1971), that Smith was a master at the kind of speech that Stigler advocates here.
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