Tuesday, August 15, 2006

Read Beinhocker's Book, Now!

As I hoped and expected, I am enjoying reading Eric Beinhocker's new book on the 'Origins of Wealth’ (Harvard) despite my reservations posted last week on Lost legacy in regard to his statements about Adam Smith.

While I cannot devote as much time to reading Eric’s book as I would like, because of my major commitment to completing my new book on Adam Smith (I am on Chapter 8), I am managing half an hour or so on most late nights. The other evening I came across a reference to the ahistorical prejudice in neoclassical economics, as taught and practised almost everywhere today.

I completely agree with Eric’s assessment and reproduce below a couple of paragraphs from Chapter Four of my ms on Adam Smith, in which I am discussing Smith’s Lectures on Jurisprudence and Wealth of Nations in respect of his historical explanation for the development of the Division of Labour and where I have commented immediately before on why his approach has greater significance for the economics than generally appreciated (I have heard economists respond: ‘So what?’ when I have raised this topic with them).

From chapter 4: Adam Smith by Gavin Kennedy:

“[Smith’s] interest in and focus on the division of labour derives from his philosophical method of looking backwards, not forwards, as set out in his Ages of Mankind. The student notes of his Lectures lack the polished prose of Wealth of Nations but much the same ideas are presented, in a slightly different order, than how they appeared in his book twenty-three years later. This approach is distinctive in Smith’s political economy and is in total contrast to modern neo-classical economics, in which there is not the slightest hint of interest in the origins of human economies. The elements of these are taken as datum and for granted. Economic agents are assumed to have factor endowments and they interact according to set rules, and in their consequences they conform to mathematical functions acting at infinite velocity and with total certainty between states of equilibrium, from which universal and eternally valid predictions are derived. Real people, real societies, real influences (political, religious, environmental, historical and psychological – I hesitate to mention sociological), and real time are all absent by assumption, or just not even mentioned.

The neoclassical paradigm is in total contrast to Smith’s backward looking, explanation and not prediction philosophy, and, inadequate in terms of the deeper modern knowledge of the subjects he covered as it undoubtedly it may be, his approach at least had the virtue that using it he produced in Wealth of Nations an analysis of the obstacles to economic growth in 18th-century Britain, with detailed practical policies to improve its performance within the limitations of the political system that existed, and not one assumed away as in a neoclassical growth models (Harrod-Domar, Solow), believed wrongly by their creators to be correct and relevant for all times and places, when in fact it was neither correct nor relevant for any time and place outside of the abstract model.

At least Newton’s mathematical laws of gravity, complete with their assumptions, were valid not just within the confines of his mathematical functions, but also outside his window in his orchard.”

You absolutely must read Eric Beinhocker's book, The Origins of Wealth: evolution, complexity, and the radical remaking of economics, 2006, Harvard Business School Press, to see why I was pleased that we agree on this point! It has something very important to say and every economist should take note - the neoclassical paradigm is on its way out.


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