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Adam Smith Kahneman

Here’s a letter to the New York Times:

David Brooks properly applauds Daniel Kahneman, the late Amos Tversky, and other behavioral economists (“Who You Are,” Oct. 21).  But it’s untrue that “Before Kahneman and Tversky, people who thought about social problems and human behavior tended to assume that we are mostly rational agents.”

While too many economists – from George Stigler on the right to Paul Samuelson on the left – committed the methodological offense of assuming a wholly unreasonable degree of human reasonableness, the single most significant economist of all time did not: Adam Smith.  One can’t read Smith’s works without recognizing that the father of economics was acutely aware that people’s mental processes routinely deviate from what later economists defined as “rational.”*

And the fact that Smith was a behavioral economist long before behavioral economics was cool is significant.  It reveals that an understanding of human foibles, passions, and cognitive quirks does not (contrary to today’s irrational presumption) necessarily strengthen the case for greater government intervention.  Smith, remember, strongly advocated keeping markets free.  He did so not because free markets are perfect or because individuals are “rational,” but because free markets are less imperfect than regulated ones and because he wisely distrusted any of us disposition-effected, loss-averting, confirmation-biased, hyperbolic-discounting, and otherwise foible-infected humans with the power to order each other about.

Donald J. Boudreaux

* See, e.g., Nava Ashraf, Colin F. Camerer, and George Loewenstein, “Adam Smith, Behavioral Economist,” Journal of Economic Perspectives, Vol. 19, Summer 2005, pp. 131-145.

Also, don’t miss Bryan’s and Arnold’s takes on Prof. Kahneman’s new book.

UPDATE: My colleague (and EJW‘s) Dan Klein wisely reminds me of the relevance of the final paragraph of Ronald Coase‘s essay “Adam Smith’s View of Man“:

It is wrong to believe, as is commonly done, that Adam Smith had as his view of man an abstraction, an “economic man,” rationally pursuing his self-interest in a single-minded way. Adam Smith would not have thought it sensible to treat man as a rational utility-maximiser. He thinks of man as he actually is-dominated, it is true, by self-love but not without some concern for others, able to reason but not necessarily in such a way as to reach the right conclusion, seeing the outcomes of his actions but through a veil of self-delusion. No doubt modern psychologists have added a great deal, some of it correct, to this eighteenth century view of human nature. But if one is willing to accept Adam Smith’s view of man as containing, if not the whole truth, at least a large part of it, realisation that his thought has a much broader foundation than is commonly assumed makes his argu- ment for economic freedom more powerful and his conclusions more persuasive.