The bitterness of Adam Smith

Under the influence of Amartya Sen, we have been “nudged”  towards a reassessment of the relative merits of “The theory of moral sentiments “ (TMS) and “The Wealth of Nations” (WN). Sen has done a lot to bring Smith’s early work out of relative obscurity where it was consigned by two centuries of success of the Wealth of Nations and to remind us of Smith’s reputation of a moral philosopher rather, or in addition to, being the founder of modern political economy.

Having recently reread WN (previously I had read only the first two books), I have no doubt that the Wealth of Nations is a vastly superior and more mature work. It is not, I think, because I am an economist and scarcely able to judge TMS. It is just that the underlying atmospherics in the two books are very different. In TMS, Smith, still in thrall, I think, to his professorial role of a moral (and to some extent religious or theistic) teacher, tries hard to put a bright gloss over the vicissitudes of the world. His rejection of Mandeville’s philosophy in the latter part of TMS is contrived and weak despite a strong language used (“pernicious system”, “ingenious sophistry”) and one senses a basic discomfort with the rejection of something that Smith has come, I believe reluctantly, to approve of, or at least to see some merit in. This will become clearer in the Wealth of Nations.

The atmospherics of the WN are entirely different. Not only is it a work of a more mature person (Smith was 53 when the book was published), but the atmosphere  there reminded me of Nirad Chaudhri’s definition of human’s third age as one of “stern, almost exultant despair”. For in the Wealth in Nations there are no “good guys”. It is almost entirely the “world of tyranny of evil men” (as Samuel Jackson would say in “Pulp Fiction”).

The government  comes, of course, for special criticism: its rapacity in putting up high tariffs, its foolishness in following mercantilist policies, its pettiness in constraining the system of “natural liberty”, its attempts to decide where people should live (the law of settlement, a hukou-like system was then in existence in Britain), its myriad rules and vexations are dissected with righteous anger.  

Next to it in terms of “badness” is aristocracy: ”Entails are thought necessary for maintaining this exclusive privilege of the nobility to the great offices and honours of their country; and that order having usurped one unjust advantage over the rest of their fellow-citizens, lest their poverty should render it ridiculous, it is thought reasonable that they should have another” (Book 3; Ch. 2, p. 491).

But businessmen are no better. As soon as they are given half a chance, perhaps just after having gotten rid of some particularly nefarious government regulation, they are back to plotting how to “restrain” the market, to pay suppliers less, destroy  competitors, cheat workers (see today’s IT companies, Walmart, Amazon). In the famous quote,  “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices” (Book 1, Ch. 8).  

In their mad ambition,  they try to rule the world (see Davos): “…the mean rapacity, the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind” (Book 4, Ch. 3, p. 621). Short of the world they try to rule countries: companies of merchants (the British and the Dutch East India Companies) grew immensely rich by mismanaging and exploiting India and Indonesia:  “The government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatever” (Book 4, Ch. 7, p. 722).

            And their profits are often a price for general impoverishment:  “Have the exorbitant profits of the merchants of Cadiz and Lisbon augmented the capital of Spain and Portugal? Have they alleviated the poverty, have they promoted the industry of those two beggarly countries?” (Book 4, Ch. 7, p. 779).

            Businessmen depend on lobbyists and politicians. Those who support them (read K Street and Mass Avenue in Washington DC) will be praised: “The Member of Parliament who supports every proposal for strengthening this monopoly is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance” (Book 4, Ch.2, p. 595).

Those who try to oppose their drive for monopoly profits will be destroyed:

            “If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists. (Book 4, Ch. 2, p. 592).

Are “do-gooders” and religious orders (read NGOs) any better? They are treated with implacable irony: “The late resolution of the Quakers in Pennsylvania to set at liberty all their negro slaves, may satisfy us that their number cannot be very great” (Book 3, Ch 2,  p. 496); or  “I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it” (Book 3, Ch. 2, p. 572).

Adventurers and soldiers who conquered colonies attracted by the promise of quick gain (see military “contractors” today) “commit[ed] with impunity every sort of injustice in those remote countries” (Book 3, Ch. 7, p. 795). Led by their selfishness they destroyed a great occasion for the beneficial encounter of two civilizations: “The savage injustice of the Europeans rendered an event, which ought to have been beneficial to all, ruinous and destructive to several of those unfortunate countries” (Book 4, Ch. 1, p. 563).

Human selfishness, rapacity, need for pillage crosses places and times: the crusaders were “the most destructive frenzy that ever befell the European nations” and they were spurred on by the merchant republics of Venice, Genoa and Pisa for whom the crusade “was a source of opulence” (Book 3, Ch. 3, p. 513).

There is no end of “badness”. Even  Smith’s most famous invention (the invisible hand) takes place despite the natural selfishness of men (“he intends only his own gain”). Note that through the invisible hand, we fulfill a project which was not part of our original design, i.e., our original intention was selfish but we could not satisfy it except by catering to the needs of others. And of course we do not count on “the benevolence of the butcher…but [on] his regard for own interest”. We do not count on butcher’s benevolence because Smith knows that that benevolence is not there, while we can be sure that self-interest is.

Market and the invisible hand indeed turn out to be the almost miraculous contraptions that transform this landscape of hard men, inured to bleakness, pursuit of self-interest and cheating, into a tolerably civilized society where people, on surface at least, treat each other with consideration. But, I think, there is no doubt to anyone who has read the Wealth of Nations that this is only a veneer.  Once it cracks, we are quickly back in the animal kingdom, as we indeed got there during wars, colonial conquests or crusades. And this is perhaps an additional, strong, reason for the importance of market economy, commerce and general economic accoutrements of civilization which. making use of our worst instincts, transform them into a tolerable or respectful behavior. I think that by the time he wrote the Wealth of Nations Smith must have come to agree with Mandeville about private vices and public virtue.

    

All page numbers are from "The Wealth of  Nations", Bantam Classic, 2003; edited with notes and marginal summary by Edwin Cannan; preface by Alan B. Krueger.

The importance of Taleb’s system: from the Fourth Quadrant to the Skin in the Game

Several weeks ago on Twitter I wrote (in an obviously very short form) why I thought that Taleb was  one of  the most important thinkers today. Let me explain in greater detail. Taleb went from (a) technical observations about non-Gaussian distributions of some phenomena to (b) generalization of what this means for our perception of reality and the way we comprehend things (epistemology) to (c) methodology of knowledge and the role of inductive thinking to finally (d) a statement on ethics. To convey this he created a new type of writing. I will leave this last  part undiscussed, but whoever has read Taleb knows that his writing style is absolutely original and like Borges’ can be imitated but never fully mastered.

Let me now explain each of the four points. My original acquaintance with Taleb’s writings (and this may be true for many other people) came from his Black Swan and the sudden celebrity status of somebody who has seen the Great Recession coming. But while this may or may not be true, I think that it is of quite secondary, or altogether minor, importance. What Taleb has done with his Fooled by Randomness and Black Swan is to have directed our attention to a class of phenomena that exhibit very skewed distributions to the right and fat tails. It is important to point out that there are two facts here: high-end values and their relatively great frequency (as compared to Gaussian distributions). 

Following researchers like Benoit Mandelbrot (who worked a lot on Paretian distributions) Taleb argued that the number of phenomena with such asymmetric distributions is much greater than was commonly thought and that lots of our thinking errs by tacitly assuming normal distributors. Like Moliere’s Mr. Jourdain we have become Gaussian without thinking or knowing that we are.  This can have nefarious consequences. Take an example that Taleb mentions. The distribution of personal weight is Gaussian; thus when we build elevators that carry people we can at most assume that there may be, at any given time, (say) eight persons weighting 250 pounds each in the elevator. Let us add another 1000 pounds for safety and we can be pretty confident that an elevator that can handle 3000 pounds will be safe. But then suppose we are constructing a flood dyke. Flood levels are not normally distributed. Moreover even the last highest flood value does not guarantee that the following flood cannot be worse. Building safeguard for floods is much harder: we can imagine that the worst future flood may be five times worse than any that we know, but it could turn out to be ten times worse: “the odds of rare events are simply not computable” (Antifragile, p. 7). The number of such phenomena like flood is huge: income and wealth distributions, size of cities (with all that it implies for urban planning), number of victims in wars etc. 

These are the phenomena where the averages carry very little informational content, and even variances do not necessarily mean much (variance is often undefined in Pareto distributions). “Variance…is epistemologically, a measure of lack of knowledge about the average; hence the variance of variance is, epistemologically, a measure of lack of knowledge about the lack of knowledge of the mean” (Black Swan, p. 353). We are dealing here with what Taleb calls the “fourth quadrant”, the unknown unknowns. 

From that series of observations that represent the core of Black Swan, Taleb moves to the question of how we comprehend things and learn about them. An empirically-based observational approach leads him to prefer inductive, “tinkering” approach to deductive one. Moreover, the tinkering approach was linked in Antifragile to not only robustness (that is, not being negatively affected by volatility) but to a newly defined characteristic of “anti-fragility”, that is of being positively affected (thriving) in conditions of volatility. His view is that only systems that have been created by a long process of tinkering (i.e., evolution) have sufficient resilience to withstand Black Swan events. 

This has also led him to conservative political philosophy, similar to Edmund Burke’s (whom he does not mention): institutions should not be changed based on deductive reasoning; they should be left as they are not because they are rational and efficient in an ideal sense but because the very fact that they have survived a long time shows that they are resilient. Taleb’s approach there has a lot in common not only with Burke but also with Tocqueville, Chateaubriand and Popper (whom he quotes quite a lot). One may notice how a technical/statistical point made by Taleb such as “my field is error avoidance” leads to agreeing with Hayek’s critique of the “conceit of reason”. (I do not agree with this approach but my point here is to explain how I see the logic of Taleb’s system developing).

And to round off his system, Taleb moves to ethics (Skin in the Game), a topic introduced already at the end of Antifragile. Here Taleb’s view is that to be credible one must show by his behavior that he believes in what he preaches. To put it in Rawlsian terms one must affirm in daily life the principles in which he claims to believe. This is also a controversial topic: should we reject Rousseau’s view on how to raise children because he abandoned his own? Should we believe in that (unnamed) economist’s findings that happiness does not increase after $50,000 despite the fact that he avidly pursues high-paying gigs? One might wish to separate scientist’s views from his private behavior, but there is no doubt that an alternative (Taleb’s) view can be also defended and that we tend to find the correspondence of one’s life with professed beliefs to be a strong reinforcement of correctness of such beliefs.

Taleb has succeeded, as I mentioned in the beginning, in creating a full system that goes from empirics to ethics, a thing which is exceedingly rare in modern world. Whether because we are tired of grand systems or because our knowledge has been parceled due to the way knowledge is created and disseminated in modern academia, but very few people are able to create systems of thought that go across multiple disciplines and display internal coherence. This the uniqueness and importance of Nassim Taleb.