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3 posts from December 2013

12/19/2013

Spotlight Article from Forum for Social Economics: Vernon Smith on Adam Smith

Vernon smithTogether with the editors of the Forum for Social Economics, this blog is pleased to offer the first of a series of Spotlight Articles, which our journal publisher Taylor & Francis has graciously made available free of charge to allow wide discussion among readers (including readers of this blog). This feature was inspired by the blog PEA Soup and their similar arrangement with the journal Ethics and, more recently, Politics Philosophy and Economics. We hope to feature one article from each issue of the Forum to encourage open discussion in the comments section this blog.

From Forum for Social Economics, volume 42, issue 4 (2013), we feature a paper by Nobel Prize laureate Vernon L. Smith titled "Adam Smith: From Propriety and Sentiments to Property and Wealth":

“Why return to Adam Smith?” Because we learn that he had fresh-for-today insights, derived from a modeling perspective that was never part of economic analysis. Smith wrote two classics: The Theory of Moral Sentiments (1759; hereafter Sentiments); and An Inquiry into the Nature and Causes of the Wealth of Nations (1776; hereafter Wealth). In Sentiments it is argued that human sociability in close-knit groups is governed by the “propriety and fitness” of conduct based on sympathy. This non-utilitarian model provides new insights into the results of 2-person experimental “trust” and other games that defied the predictions of traditional game theory in the 1980s and 90s, and offers testable new predictions. Moreover, Smith shows how the civil order of “property” grew naturally out of the rules of propriety. Property together with what I call Smith's Discovery Axiom then enabled his break-through in Wealth that defined the liberal intellectual and practical foundation of two centuries of Western economic growth.

Also available free of charge are three comments on Smith's article from prominent members of the social economics community:

Sentiments and Motivations in Adam Smith and Vernon Smith, Jonathan B. Wight

Vernon Smith (VS) discovered Adam Smith (AS) late in his professional career, and has adopted ideas from The Theory of Moral Sentiments to explain findings in experimental economics. Most important is the theorized link between moral sentiments and the evolution of property rights and law as foundations for commerce. VS's encounter with AS, while not new, provides a compelling look at the modern laboratory of social science through the lens of the Enlightenment, and cannot easily be encapsulated within a utilitarian framework. This paper provides an overview and commentary on VS's approach.

From Propriety to Property, or is it the Other Way Round?, Paolo Ramazzotti

If we acknowledge that Adam Smith's two major works are related, we will be better equipped to appreciate the features of the economy we live in. The shift from a close-knit community to a more extensive range of economic relations, however, involves qualitative changes that question Vernon Smith's linear causation from propriety to property and human betterment.

Vernon Smith's Explanation of Moral Sentiments, B. Jane Clary

This paper argues that while Vernon Smith is correct in his analysis that Adam Smith's theory of human nature, as expressed in The Theory of Moral Sentiments, provides a much more accurate model of behavior than does that of utility maximization, Vernon Smith's analysis can be much enriched by including a more complete explanation of Adam Smith's model of human behavior to include an analysis of prudence, justice, beneficence, and self-command.

Please enjoy the free access to these Forum articles; we look forward to a vigorous and insightful discussion in the comment section below!

Forum for Social Economics, 42/4 (2013)

FseFollowing are the contents (with abstracts) of the latest issue of Forum for Social Economics (42/4, 2013), including a special open-access section on Vernon Smith's paper about Adam Smith (see here for more).

Editorial

The Methodology and Economics Reform Issue, plus a Symposium on “Smith (Vernon) on Smith (Adam)”, Wolfram Elsner

Spotlight Article (OPEN ACCESS)

Adam Smith: From Propriety and Sentiments to Property and Wealth, Vernon L. Smith

“Why return to Adam Smith?” Because we learn that he had fresh-for-today insights, derived from a modeling perspective that was never part of economic analysis. Smith wrote two classics: The Theory of Moral Sentiments (1759; hereafter Sentiments); and An Inquiry into the Nature and Causes of the Wealth of Nations (1776; hereafter Wealth). In Sentiments it is argued that human sociability in close-knit groups is governed by the “propriety and fitness” of conduct based on sympathy. This non-utilitarian model provides new insights into the results of 2-person experimental “trust” and other games that defied the predictions of traditional game theory in the 1980s and 90s, and offers testable new predictions. Moreover, Smith shows how the civil order of “property” grew naturally out of the rules of propriety. Property together with what I call Smith's Discovery Axiom then enabled his break-through in Wealth that defined the liberal intellectual and practical foundation of two centuries of Western economic growth.

Comments (OPEN ACCESS)

Sentiments and Motivations in Adam Smith and Vernon Smith, Jonathan B. Wight

Vernon Smith (VS) discovered Adam Smith (AS) late in his professional career, and has adopted ideas from The Theory of Moral Sentiments to explain findings in experimental economics. Most important is the theorized link between moral sentiments and the evolution of property rights and law as foundations for commerce. VS's encounter with AS, while not new, provides a compelling look at the modern laboratory of social science through the lens of the Enlightenment, and cannot easily be encapsulated within a utilitarian framework. This paper provides an overview and commentary on VS's approach.

From Propriety to Property, or is it the Other Way Round?, Paolo Ramazzotti

If we acknowledge that Adam Smith's two major works are related, we will be better equipped to appreciate the features of the economy we live in. The shift from a close-knit community to a more extensive range of economic relations, however, involves qualitative changes that question Vernon Smith's linear causation from propriety to property and human betterment.

Vernon Smith's Explanation of Moral Sentiments, B. Jane Clary

This paper argues that while Vernon Smith is correct in his analysis that Adam Smith's theory of human nature, as expressed in The Theory of Moral Sentiments, provides a much more accurate model of behavior than does that of utility maximization, Vernon Smith's analysis can be much enriched by including a more complete explanation of Adam Smith's model of human behavior to include an analysis of prudence, justice, beneficence, and self-command.

Articles

Methodenstreit 2013? Historical Perspective on the Contemporary Debate Over How to Reform Economics, Peter M. Spiegler & William Milberg

The general failure of economists to predict the financial crash of 2008 has given rise to a wide-ranging debate over the need for methodological reform. But has this debate been adequate to the task at hand? We introduce a framework for classifying methodological debates according to their scope. The scope of debate is especially important in a time of economic crisis, when it is unclear what kind of disciplinary reforms are needed. We find that the current debate is confined largely to the methodological level, taking the incumbent ontology and epistemology as given. We contrast the current debate with two other moments of internal questioning in economics—the Methodenstreit of the 1880s and Keynes' innovations of the 1930s. These were more fundamental, ontological debates, and the contrast with the current debate indicates that reform in economics is likely to be minimal and slow in the wake of the crisis.

Panglossian Paradox: How Paradigmatic Purity Compromises Policy Effectiveness, Ann E. Davis

Ethical systems are embedded in paradigms. The call for an ethical approach to economics must ultimately address the nature and critique of the existing paradigm, rather than focus simply on individual behavior or policy prescriptions. The existing paradigm has its own ethical norms and foundations, even if not widely understood or acknowledged. The norms and paradigm must shift together as part of the same process of critique.

Core Concepts of Institutionalist Public Finance: Problem Solving, Institutional Analysis, Strategic Choice, and Stakeholder Engagement, Charles J. Whelan

Citizens and policymakers in many nations are becoming increasingly concerned about large budget deficits and mounting long-term fiscal policy challenges. At the same time, slow economic growth in the United States and Europe is causing some people to demand more government spending (and lower taxes) and others to question the efficacy of fiscal policy. Against that backdrop, institutional economists are exhibiting renewed interest in the field of public finance. This article responds by outlining four core concepts of institutionalist public finance: problem solving, institutional analysis, strategic choice, and stakeholder engagement. What distinguishes the perspective of institutionalism from that of neoclassical economics, today’s dominant economic paradigm, is described in the course of the discussion. The core concepts of institutionalist public finance offer a coherent approach to the study of fiscal policy questions. Those concepts were first fashioned decades ago, but remain relevant: institutionalism continues to provide a solid basis for constructive analyses of fiscal challenges.

“The Benefits of Capitalism and Freedom Will Survive the Financial Crisis and This Seminar,” Robert D. Auerbach

My meeting and subsequent long association with my mentor and friend, Milton Friedman, some of his contributions to economics, public policy, and the Chicago School, are described. The meeting with Friedman was due to a late night passenger in my Checker cab, Abram Lincoln Harris, Jr, a prominent economist whom, I was told, was a founder of the Association of Social Economics that cosponsored the seminar where this paper was presented. I had studied under Abba Lerner at Roosevelt University. Lerner was instrumental in bringing Keynesian economics to the United States. Due to the intervention of Harris and Friedman I was able to study under outstanding economists at the University of Chicago without paying tuition. Descriptions of Friedman's views, including his negative income tax that led to the passage of the largest means-tested anti-poverty program in the United States and some of his other views on the efficient market and rational expectations theories are described. His belief in the benefits of capitalism and freedom will survive this financial crisis under conditions I describe.

12/05/2013

Review of Social Economy, 71/4 (2013)

RSEFollowing are the contents (with abstracts) of Review of Social Economy (71/4, 2013).

Articles

Economics, Ethics and Thanatology: Lessons from the Ancients, Donald G. Richards

The normative presuppositions motivating rational choice decision-making based on optimizing objectives amount to a thin account of ethical economic behavior. Ancient thought offers insights that can provide a firmer basis both for personal, individual choice as well as for public policy. After a brief review of Epicurean and Stoic ethical principles, a comparison is made of modern economic and Hellenistic conceptions of rationality and rational behavior. These competing conceptions are then applied to an examination of a contemporary public policy problem, namely health care, particularly as this applies to “end-of-life” issues. The argument concludes that decision-making based on a eudaimonic conception of the good has the potential to provide us with a more efficient health care system as well as one that more satisfactorily addresses the needs of the chronically ill and dying patients who account for a highly disproportionate share of health care expenditures.

The Mystery of Capital or the Mystification of Capital?, Franklin Obeng-Odoom

In contemporary political economic analyses of development processes, Hernando De Soto's The Mystery of Capital, has been one of the most discussed, albeit controversial, books. Although well received by global development agencies such as the World Bank, a key exponent of De Soto's work, positing that the creation and institutionalisation of individual property in housing and land revives “dead capital” and creates the conditions that will enable the poor to emerge from abject poverty, has been widely criticised. These criticisms show that (1) the thesis is flawed, (2) the flaw is due to implementational problems and (3) the practical implications arising from the thesis are largely neutral and will neither improve nor worsen poverty. Although agreeing with the first criticism, this paper argues that the second critique must be nuanced, and the third is entirely mistaken. Utilising insights from Joseph Schumpeter, Karl Polanyi and Henry George, it makes the case that applying De Soto's ideas through policy would be ineffective in curbing urban poverty, and actually serve to simultaneously entrench and augment it. Moreover, while finding that De Soto's assumption that the poor possess some economic agency is sound and may, indeed, secure socially beneficial outcomes through pursuing innovative and entrepreneurial endeavours, De Soto's conception of such processes remains largely emasculated from broader political economic considerations.

Decomposing Racial and Ethnic Differences in Small Business Lending: Evidence of Discrimination, Naranchimeg Mijid & Alexandra Bernasek

In this paper, we use the Blinder–Oaxaca method for nonlinear models to decompose observed differences in credit rationing of small businesses between white- and minority-owned firms in the USA. We utilize a representative dataset of small businesses from the Survey of Small Business Finances between 1987 and 2003. Our results show that minority owners, on average, have about a 24 percentage points higher loan denial rate than white-owned firms and about three quarters of the difference is attributed to discrimination in bank lending. Although the difference in the probability of getting a smaller loan than requested is only 5 percentage points, this difference is almost entirely attributed to discrimination.

Starting Your Career With a Fixed-Term Job: Stepping-Stone or “Dead End”?, Dimitris Pavlopoulos

This paper uses panel data from the UK and Germany to investigate the difference in the learning effect between workers who enter the labour market with a fixed term and a permanent job. Our results verify the existence of a wage penalty for entering the labour market with a fixed-term contract for the British males (7.1%) and especially for the British females (21.2%). British females also have a very strong learning effect that is especially large for temporary starters. In Germany, the initial wage penalty for temporary starters is smaller than in the UK—4.5% for the males and 3% for the females—and is persistent only for the males. Although initial wage differences are mitigated through the accumulation of skills on the job, this process differs between temporary and permanent starters. This suggests that the type of the starting contract may be a feature of labour market segmentation.

Moral Sentiments, Institutions, and Civil Society: What Can Hegel Contribute to Sen's Theory of Justice?, Ivan Boldyrev & Carsten Herrmann-Pillath     OPEN ACCESS

In his Idea of Justice, Amartya Sen compares the two basic approaches to evaluating institutions, transcendental institutionalism and realization-focused comparisons. Referring to Adam Smith's Impartial Spectator, he argues in favor of the latter and proposes the principle of open impartiality. However, this cannot solve the tension between universalism and contextualization of values that Sen has inherited from Smith. Based on recent Hegel scholarship, we argue that some of the difficulties can be resolved, considering the role Smith played in the development of Hegel's thinking. Hegel's concept of recognition plays an essential role in establishing the possibility of impartiality both on the level of consciousness and on the level of institutional intersubjectivity. Hegel's critique of Kant's formalist ethics (also considered as transcendental institutionalism by Sen) and his analysis of the civil society in the Philosophy of Right, especially his focus on associations and Estates, can serve as a model for making Sen's focus on public discourse theoretically more concise and pragmatically feasible. Hegel shows that universalistic attitudes can only emerge in specific institutional contexts.

Speaker's Corner

Can We—and Should We—Measure Well-Being?, Mark D. White

In this article, I argue that recent criticisms of happiness research in economics can be extended to any conception of well-being used for scientific or policymaking purposes. These criticisms are both practical and ethical: well-being is not only impossible to define, measure, or implement, but its use also offends human dignity through unjust distribution of harm and value substitution. On this basis, I recommend the abandonment of welfare economics and urge social economists to propose new approaches to addressing social problems that are more focused and respect the dignity of persons.

Review Article

The Pursuit of a Measure of Happiness, Mark D. White

A review of Happiness, Ethics and Economics, by Johannes Hirata; The Pursuit of Happiness: An Economy of Well-Being, by Carol Graham; and Freedom and Happiness in Economic Thought and Philosophy: From Clash to Reconciliation, edited by Ragip Ege and Herrade Igersheim.

Book Reviews

Kantian Ethics and Economics: Autonomy, Dignity, and Character, by Mark D. White (reviewed by Stefano Solari)

Individuals and Identity in Economics, by John B. Davis (reviewed by Béatrice Boulu-Reshef)

Durkheim and the Birth of Economic Sociology, by Philippe Steiner (reviewed by Alexander Ebner)