Knowledge and the Wealth of Nations

Did He or Didn’t He? (He Did!)

admin — Mon, 21 Jan 2008 00:36:34 +0000

Prof. Gavin Kennedy, of Heriot-Watt University (emeritus) and Adam Smith’s Lost Legacy, has called my attention, indirectly, and Paul Walker, of Anti-dismal, directly, to an error in Knowledge and the Wealth of Nations. On page 40 of that book, I assert that Adam Smith never visited a pin factory. The full paragraph reads this way:

The first three chapters and the plan of the book provided the whole kernel of what today we would call a theory of growth. Much stress has been laid over the years on the significance of the description of the pin factory. In fact Smith never visited one. Apparently he based his account on an article in an encyclopedia. Never mind that Smith was widely traveled and sharply observant everywhere he went. His failure to expend much shoe-leather in this case has occasionally been cited to discredit him. Such cavils entirely miss the point.I say indirectly, because it was Tim Harford of the Financial Times who unfortunately was on the receiving end of Kennedy’s indignation. Harford is the author of a new book, The Logic of Life: the Rational Economics of an Irrational World, in which he applies economic reasoning to various realms of everyday life. He tells me that he depended on my assertion when writing this passage in the run-up to a discussion of the advantages of specialization in marriage: Adam Smith, the father of modern economics, traveled around Europe as tutor to the Duke of Buccleuch. (His employer was the Duke’s stepfather, the British chancellor Charles Townshend, a man who set a political time bomb by imposing tea duties on America and appointing a customs commissioner to Boston.) But despite his travels, Adam Smith never actually visited a pin factory. While sitting at home in Kircaldy, he was inspired by an entry in an encyclopedia. The passage is no less important for that.Prof. Kennedy, on the other hand, draws our attention (and yours) to this passage in the first chapter of The Wealth of Nations (emphasis added): To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day.Clearly, Smith visited a factory of some sort. He was not the sort of man to make things up. How did I commit my error?I am pretty certain that, when I wrote that passage, I was thinking in a general way of my old and dear friend Charles P. Kindleberger, from whom I first learned much of what I know about various controversies of historical economics. Specifically, I was remembering an essay that he wrote for Thomas Wilson and Andrew Skinner to commemorate the bicentennial of the publication of the appearance of Smith’s great work in 1776.As usual, Charlie set out his thesis concisely and joyfully in the first paragraph of “The Historical Background Adam Smith and the Industrial Revolution:”

An early version of this paper focused on the dispute, if one may call it that, between historians of economic thought who sometimes seek to demonstrate that Adam Smith was fully aware of the industrial revolution taking place around him as he wrote The Wealth of Nations, and economic historians who think he was not. It is true, as Samuel Johnson put it, that “in lapidary inscriptions, a man is not upon oath,” and piety demands that the guest of honour be given the benefit of the doubt. Nonetheless, I propose to dismiss this question quickly, with an open-and-shut verdict for the economic historians.I am, however, pretty certain that it was the recollection of this zinger a few pages farther on that caused my fingers to slip. CPK was nothing if not memorable: It may well be true, as Viner says, that “Smith was a keen observer of his surroundings and used skillfully what he saw to illustrate his general argument”…. But it is surely going too far to say with Max Lerner in his introduction to the Modern Library Edition: “Smith kept his eyes and ears open… Here was something that gave order and meaning to the newly-emerged world of commerce and the newly-emerging world of industry… Smith took ten more years. He could not be hurried in his task. He had to read and observe further. He poked his nose into old books and new factories.” That last sentence is half right.Prof. Kennedy wonders if perhaps Harford or I were the victims of Murray Rothbard’s famous essay “The Myth of Adam Smith,” republished a few years ago by the Ludwig Von Mises Institute in An Austrian Perspective on the History of Economic Thought, and ably rebutted by Kennedy himself in a vigorous series of posts (go to the January 2006 archives and read from the bottom up, starting with January 13). Far from it, at least in my case, and, I am pretty certain, in Tim’s.When I wrote those words about Smith’s acuity, I was in fact thinking of the historian’s inevitable tendency to disparage theorists – the longest-running and most fruitful argument with Charlie that I had. You remember these things pretty clearly when contradicting your favorite teacher (though I was his friend, technically, never his paying pupil), even if he is not around any longer to argue back.

That Smith relied on secondary sources to some extent for his discussion of the pin factory is well established. His authority for the eighteen distinct pin-making operations apparently was the entry in the 1755 Encyclopédie of d’Amlembert and Diderot, whose seven volumes he bought for the Glasgow University Library before June of 1760. W.B. Todd, textual editor of the Oxford University Press edition Wealth of Nations, mentions in a footnote that a passage “very similar” to the one that eventually appeared in The Wealth of Nations is to be found in an early draft of the book, composed before April 1763 – before, that is, Smith traveled to France with the Duke of Buccleuch.

In that draft, Smith conjectured that “where the processes of manufacture are divided among 18 persons, each should in effect be capable of producing 2,000 pins in a day,” or 36,000 pins (according to the footnote on p. 15 of my facsimile of the 1976 Oxford edition.) The same numbers are employed in the two versions of the Lectures on Jurisprudence, 1762-3 and 1766, he says.

So where did Smith visit his “small manufactory,” and when? What accounts for the discrepancy in numbers? – 18 men making 36,000 pins a day in the early accounts, apparently hypothetically, to judge from his grammatical construction; 10 men making 48,000 pins a day in the later, eyewitness version, published in 1776. In an earlier post, Prof. Kennedy wrote:

We know there were nail manufactories close by his mother’s house in Kirkcaldy, Fife, any one of which could have had a small workshop attached that specialized in pins, and was distinguished from the “18 operations” in Diderot in France (“25″ according to Murray Rothbard in “England”) by the precise number of “10″ labourers in Fife, Scotland, some of them doing “two or three operations’.”Perhaps then it was a nail factory that Smith visited. From the second half of his sentence, though, it certainly sounds as though the ten men he saw there, with their indifferent machinery, were making pins — twelve pounds of them, or around 48,000, in a day, at least when they were operating at full capacity. Was the market broad enough to sustain this level of activity for long? Where could you sell that many pins? Perhaps Prof. Kennedy, a lively and energetic scholar, will further investigate Smith’s field trip and write up his findings.(If he does, he’ll probably want to be in touch with Jean-Louis Peucell, of the University of Reunion Island, France. In “Adam Smith’s Use of Multiple References for his Pin Making Example,” in the December 2006 issue of the European Journal of the History of Economic Thought, Peaucelle hints darkly that perhaps the reason Smith wanted sixteen volumes of unfinished manuscript burnt days before he died in 1790 was to cloak the sources of his discussion of the pin factory. He mentions Smith’s assertion that he had visited a factory in passing, mainly in order to dismiss the possibility that the Scot had obtained his numbers there. ["His childhood in the nail making town of Kircaldy may have influenced his choice of a metallurgical activity."] Instead, Peaucell writes, “another hypothesis is now developed.” He spends 22 pages arguing the Smith had obtained 1776 values from one French source and his 1763 numbers from another [and the very expression "division of labor" as well]. Here the detective outlines his case:

Having examined how each text may have contributed to Adam Smith’s writings, we can now piece together their sequence. To begin with, Smith knew of the concept of the division of labour through his readings of classical Greek authors and past English scholars. It is likely that he regularly read scientific journals as they were published. He would have discovered the description of the production process in the Journal des sçavans. The example would stand out given his previous readings. He may have then spoken about it with Adam Ferguson. Smith would have sought additional references on the matter. In Duhamel’s text he would discover the term division de ce travail. In Diderot’s Encyclopédie all 18 activities were clearly set out. He would have had all the information he needed to prepare his Glasgow lectures. During a later trip to Paris he may have found and purchased Macquer’s Dictionnaire. The pin making article would have been of great interest. He would now be ready to write The Wealth of Nations.Plagiarism? “It would seem not,” is Peaucelle’s verdict. But “Smith should have listed his sources.”)In a more serious vein, Clifford Pratten, of Cambridge University, wrote a deft history thirty years ago, “The Manufacture of Pins,” which appeared in the Journal of Economic Literature in March 1980. In the early eighteenth century, Pratten wrote, pin “manufacturies” – of which he estimates there were a hundred or more in the United Kingdom – were concentrated in London, Bristol and Gloucestershire. By mid-century, “much pin production was located in workhouses and organized as a cottage industry.” And by the early years of the nineteenth century,, advances in machine production were causing rapid changes in industrial structure. In 1820, fully a fifth of the workforce in Gloucester was engaged in making pins in eleven factories; fifty years later, the industry was gone, having moved to Birmingham, where fifty pin companies were operating as late as 1900.)

Whether my error is serious or trivial depends on the business you are in. It is, I suppose, a calumny on Smith to say that he never saw to a pin factory, even if in the same breath I gave him credit for getting out and around. Certainly I deeply regret the error. It is still the case that Kindleberger was correct in the essay that made such an impression on me: Smith failed to report a lot of stuff that was going on right under his nose. The great figures of the early Industrial Revolution – Wedgewood, Arkwright, Boulton and Watt – are mostly missing from The Wealth of Nations. But does that demonstrate that Smith was ignorant of the industrial revolution that was going on around him? I don’t think so.

There are many paths to discovery in economics: experimental, mathematical (and statistical), empirical, historical. Practitioners routinely make exaggerated claims for the primacy of each. The point I sought to make in my book – its subtitle was A Story of Economic Discovery – was that the most important insights have derived from some combination of theoretical coherence checked against observations of the real world. That’s the portrait of Smith I sought to convey – gregarious and curious one moment, prone to long silences the next, time he spent not reading or poking his nose into factories, but rather “thinking, thinking, tracing through the long chains of causation.” When these were finally described in The Wealth of Nations, they produced a model, an “imaginary machine,” that convinced a substantial community of thinkers to stop writing as philosophers and begin behaving like scientists.

But I digress.

A Guide to Further Reading

admin — Wed, 22 Aug 2007 21:06:50 +0000

Knowledge Knowledge and the Wealth of Nations appeared in 2006 without a bibliography,rendering it more suitable to airplane reading than classroom use. That is not such a bad thing for a book about technical economics. (The British Wallpaper guidebook series breveted it ”best long-haul read” last year.) But the fact is that Knowledge has many potential classroom uses.

On the jump, please find a guide to further reading in the rapidly developing literature of growth economics:

Three excellent books for companion reading are:

Introduction to Economic Growth, Charles I. Jones, W.W. Norton, 1^st edition, 1998, 2^nd edition, 2002

The New Division of Labor: How Computers Are Creating the Next Job Market, Frank Levy and Richard J. Murnane, Princeton University Press, 2004

The Mystery of Economic Growth, Elhanan Helpman, Harvard University Press, 2004

Relevant websites: ce="Times New Roman" size="3"><
font face="Times New Roman" size="3">

Daron Acemoglu’s Home Page: http://econ-www.mit.edu/faculty/acemoglu/

Charles Jones Home Page: http://elsa.berkeley.edu/~chad/

Paul Romer’s Home Page: http://www.stanford.edu/~promer/

Economic Growth Resources: http://www.bris.ac.uk/Depts/Economics/Growth/

Against Intellectual Property, Michelle Boldrin and David Levine’s Home Page: http://www.dklevine.com/general/intellectual/against.htm

Other textbooks include:

Economic Growth, Robert J. Barro and Xavier Sala-I-Martin, 1^st edition, McGraw Hill, 1995; 2^nd edition, MIT Press, 2004

The Theory of Externalities, Public Goods and Club Goods, Richard Cornes and Todd Sandler, Cambridge University Press, 2^nd edition, 1996

Endogenous Growth Theory, Philippe Aghion and Peter Howitt, MIT Press, 1998

Technology, Growth and Development: An Induced Innovation Perspective, Vernon Ruttan, Oxford University Press, 2001

Economic Growth, David N. Weil, Pearson/Addison Wesley, 2005

Introduction to Modern Economic Growth, Daron Acemoglu, forthcoming, http://econ-www.mit.edu/files/259

“The Story of Economics,” Chapter 30, Macroeconomics, Olivier Blanchard, 5th edition, Prentice-Hall, 2007.

Other sources, arranged chronologically:

Growth Economics: a Reader, edited by Amartya Sen, Penguin Books, 1960

The Rate and Direction of Inventive Activity: Economic and Social Factors, edited by Richard R. Nelson, National Bureau of Economic Research, Princeton University Press, 1962

Economic Growth and Structure: Selected Essays, Simon Kuznets, W.W. Norton, 1965

Essays on the Theory of Optimal Economic Growth, edited by Karl Shell, MIT Press, 1967

Invention, Growth and Welfare: A Theoretical Treatment of Technological Change, William D. Nordhaus, MIT Press, 1969.

Growth Theory: An Exposition, Robert Solow, Oxford University Press, 1^st edition, 1970; 2^nd edition, 2000

Patents, Invention and Economic Change, Jacob Schmookler, Harvard University Press, 1972

Technological Choice, Innovation and Economic Growth: Essays on American and British Experience in the Nineteeth Century, Paul A. David, Cambridge University Press, 1975

Dynamic Economics, Burton H. Klein, Harvard University Press, 1977

Accounting for Slower Economic Growth: The United States in the 1970s, Edward F. Denison, The Brookings Institution, 1979

Structure and Change in Economic History, Douglass C. North, W.W. Norton, 1981

The Rise and Decline of Nations, Mancur Olson, Yale University Press, 1982

An Evolutionary Theory of Economic Change, Richard R. Nelson and Sidney G. Winter, Harvard University Press, 1982

Inside the Black Box: Technology and Economics, Nathan Rosenberg, Cambridge University Press, 1982

“Dynamic Competitive Equilibria with Externalities, Increasing Returns and Unbounded Growth,” Paul Michael Romer, Dissertation, University of Chicago

Innovation and Growth: Schumpeterian Perspectives, F.M Scherer, MIT Press, 1984

Economic History and the Modern Economist, edited by William Parker, Basil Blackwell, 1986

Technology, Education and Productivity, Zvi Griliches, Basil Blackwell, 1988

The Sources of Innovation, Eric von Hippel, Oxford University Press, 1988

Thinking About Growth: and Other Easays on Economic Growth and Welfare, Moses Abramovitz, 1989

Productivity and American Leadership: the Long View, William J. Baumol, Sue Anne Batey Blackman and Edward N. Wolff, MIT Press, 1989

The Lever of Riches: Technological Creativity and Economic Progress, Joel Mokyr, Oxford University Press, 1990

Growth, Productivity, Unemployment: Essays to Celebrate Bob Solow’s Birthday, edited by Peter Diamond, MIT Press, 1990

Theorists of Economic Growth from David Hume to the Present; With a Perspective on the Next Century, W.W. Rostow, Oxford University Press, 1990

The Competitive Advantage of Nations, Michael Porter, The Free Press, 1990

Restoring Economic Equilibrium, Theodore W. Schultz, Basil Blackwell, 1990

Technology and the Wealth of Nations, edited by Nathan Rosenberg, Ralph Landau and David C. Mowery, Stanford University Press, 1992

The Return to Increasing Returns, edited by James Buchanan and Yong J. Yoon, University of Michigan Press, 1994

Increasing Returns and Path Dependence in the Economy, W. Brian Arthur, foreward by Kenneth J. Arrow, University of Michigan Press, 1994

“New Growth Theory Symposium,” with articles by Paul Romer, Gene M. Grossman and Elhanan Helpman, Robert Solow and Howard Pack, Journal of Economic Perspectives, , Winter, 1994

Development, Geography and Economic Theory, Paul Krugman, MIT Press, 1995

Productivity: Post-War U.S. Economic Growth, Dale W. Jorgenson, MIT Press, 1995

Economic Growth: Theory and Evidence, edited by Gene M. Grossman, 2 vol., Edward Elgar, 1996

The Sources of Economic Growth, Richard Nelson, Harvard University Press, 1996

The Economic Laws of Scientific Research, Terence Kealy, MacMillan Press, 1996

The Economics of New Goods, edited by Timothy F. Bresnahan and Robert J. Gordon, National Bureau of Economic Research, University of Chicago Press, 1997

Big Business and the Wealth of Nations, edited by Alfred Chandler, Jr, Franco Amatori and Takashi Hiniko, Cambridge University Press, 1997

The Wealth and Poverty of Nations: Why Some Nations are So Rich and Some So Poor, David Landes, W.W. Norton, 1998

New Perspectives on Economic Growth and Technological Innovation, F.M. Sherer, Brookings Institution Press, 1999

Conversations with Leading Economists: Interpreting Modern Macroeconomics, Brian Snowdon and Howard R. Vane, Edward Elgar, 1999

R&D, Education and Productivity: A Retrospective, Zvi Griliches, Harvard University Press, 2000

Barriers to Riches, Stephen L. Parente and Edward C. Prescott, MIT Press, 2000

The Origin and Evolution of New Businesses, Amar V. Bhide, Oxford University Press, 2000

Lectures on Economic Growth, Robert Lucas, Harvard University Press, 2002

The Gifts of Athena: Historical Origins of the Knowledge Economy, Joel Mokyr, Princeton University Press, 2002

The Free Market Innovation Machine: Analyzing the Growth Miracle of Capitaslism, William J. Baumol, Princeton University Press, 2002

Innovation and its Discontents: How Our Broken Patent System is Endangering Innovation and Progress, and What to Do about It, Adam B. Jaffe and Josh Lerner, Princeton University Press, 2004

Handbook of Economic Growth, Philippe Aghion and Stephen Durlauf, editors, Elsevier, 2005, esp. “Growth and Ideas,” C.I. Jones, http://elsa.berkeley.edu/~chad/JonesHandbook2005.pdf

Understanding the Process of Economic Change, Douglass C. North, Princeton University Press, 2005

Philosophies of development aid:

How It All Began: Origins of the Modern Economy, W.W. Rostow, McGraw-Hill, 1975

How the West Grew Rich: The Economic Transformation of the Industrial World, Nathan Rosenberg and L.E. Birdzell, Basic Books, 1986

Development as Freedom, Amartya Sen, Knopf, 1999

The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics, William Easterly, MIT Press, 2001

Reinventing the Bazaar: A Natural History of Markets, John McMillan, W.W. Norton, 2002

Globalization and Its Discontents, Joseph E. Stigliz, W.W. Norton, 2002

The Birth of Plenty: How the Prosperity of the Modern World Was Created, William Bernstein, McGraw-Hill, 2004

Why Globalization Works, Martin Wolf, Yale University Press, 2004

Helping People Help Themselves: From the World Bank to an Alternative Philosophy of Development Assistance, David Ellerman, University of Michigan Press, 2005

In Defense of Globalization, Jagdish Bhagwati, Oxford University Press, 2005

The End of Poverty: Economic Possibilities for our Time, Jeffrey D. Sachs, foreward by Bono, Penguin Books, 2005

Reviving the Invisible Hand: The Case for Classical Liberalism in the Twenty First Century, Deepak Lal, Princeton University Press, 2006

Escape from Empire: The Developing World’s Journey through Heaven and Hell, Alice Amsden, MIT Press, 2007

The Entrepreneurial Society, David Audretsch, Oxford University Press, 2007

A Farewell to Alms: A Brief Economic History of the World, Gregory Clark, Princeton University Press, 2007

An East Asian Renaissance: Ideas for Economic Growth, Indermit Gill and Homi Kharas, The World Bank, 2007

Good Capitalism, Bad Capitalism: and the Economics of Growth and Prosperity, J. Baumol, Robert E. Litan, and Carl J. Schramm, Yale University Press, 2007

One Economics, Many Recipes: Globalization, Institutions and Economic Growth, Dani Rodrik, Princeton University Press, 2007

Histories of economic thought:

A History of Economic Theory: Classic Contributions, 1720-1980, Jurg Niehans, Johns Hopkins University Press, 1990

History of Economic Thought, Harry Landreth and David C. Colander, Houghton Mifflin Co., 3^rd edition, 1994

Secret Origins of Modern Microeconomics: Dupuit and the Engineers, Robert D. Ekelund and Robert E. Hebert, University of Chicago Press, 1999

How Economics Became a Mathematical Science, E. Roy Weintraub, Duke University Press, 2002

Parallax journalistic views:

The Weightless World: Strategies for Managing the Digital Economy, Diane Coyle, Capstone, 1997

The Death of Distance: How the Communications Revolution is Changing Our Lives, Frances Cairncross, Harvard Business School Press, 1997

Why Economies Grow: The Forces that Shape Prosperity and How to Get Them Working Again, Jeff Madrick, Basic Books, 2002

The Weightless Society, Charles Leadbeater, Texere, 2000

Next: The Future Just Happened, Michael Lewis, W.W. Norton, 2001

The World Is Flat: A Brief History of the Twenty-first Century, Thomas L. Friedman, Farar, Straus & Giroux, 2005

The Origin of Wealth: Evolution, Complexity and the Radical Re-making of Economics, Eric Beinhocker, Harvard Business School Press, 2006

The Soulful Science: What Economists Really Do and Why It Matters, Diane Coyle, Princeton University Press, 2007

Back in Business

admin — Wed, 21 Mar 2007 00:22:56 +0000

One of the problems of writing Knowledge and the Wealth of Nations had to do with deciding how to deal with the many realms in which parallel discussions had gone forward about the same time. What to say about the related work in international trade? In industrial organization? In growth accounting? In economic history? In the law schools? The business schools? Consulting firms? The Society for the History of Technology? The History of Science Society?

How central to understanding what had happened was the argument over the significance of the QWERTY keyboard? How important for the reception of the new work were the subtle antipathies toward of Chicago, London, and Cambridge, Mass? What significance attached to the rival achievements and competing claims on our attention of Peter Drucker and Michael Porter? Of Jane Jacobs and Manuel Castells? Of John Kenneth Galbraith and F.M. Scherer? Of Janos Kornai and Peter Albin? Of Jonathan Hughes and Thomas Hughes? Of Daniel Bell and Alfred Chandler? Of Brian Arthur and Nicholas Negroponte? Of Dale Jorgenson and Zvi Griliches? Of Richard Nelson and Sidney Winter? Of Julian Simon and Peter Bauer? Of Mancur Olson and Edward Prescott? Of William Ethier and Xiaokai Yang? Of Karl Shell and William Nordhaus? Of Philippe Aghion and Peter Howitt? Of Nathan Rosenberg and Joel Mokyr? Of Douglass North and Ronald Coase? Of Richard Easterlin and Ester Boserup? Of William Baumol and Edmund Phelps? Not to mention Arthur Laffer and Robert Mundell, those bold “supply-siders” who argued that cutting taxes would automatically lead to faster growth?

For the most part, I solved these problems by ignoring them, in order to concentrate on the adventure of high economics. As I saw it, the really interesting story was one about mathematical (or formal) reasoning and natural language. As a graduate student in the 1980s, Paul Romer had approached the problem of economic growth straightforwardly, seeking to account for the ubiquity of falling costs. In the end, the equations that Rome wrote took a fundamental new distinction, between rival and nonrival goods, and placed it at the center of economics, with far-reaching implications for policy. This was, as I saw it, the main line of advance.

In his Principles of Psychology, there is a terrific chapter (XXI – “The Perception of Reality”) in which the philosopher William James divides the world into various “sub-universes”of meaning – the world of sense, of physical things; the world of science, as conceived by the expert; the world of abstract truths, of ethical, aesthetic, metaphysical and mathematical propositions; the world of “idols of the tribe,” of prejudices and illusions common to the community; the supernatural worlds of various religions; the worlds of individual opinion, “as numerous as men are”; and the worlds of sheer madness and vagary. Everything that is could be assigned to one world or the other, wrote James. “The popular mind conceives of all these sub-worlds more or less disconnectedly; and when dealing with one of them forgets, for the time being, its relations to the rest.” The task of the philosopher is to determine the relation of each sub-world to the rest.

Journalism is one way of bringing into register multiple realities within the various sub-universes of everyday life. Prizes are another. Still another is collision between law and economics. There is always philosophy. The last words, of course, in each succeeding generation, belong to the historians.

Mutual Forgiveness vs. The Merciful Padding of Blather

admin — Mon, 26 Jun 2006 20:50:30 +0000

This page was created to make some sort of response to the reception of Knowledge and the Wealth of Nations: A Story of Economic Discovery, enlarging and elaborating mostly, annotating occasionally. To those who formed the expectation that its discourse would be incessant, or even regular, I apologize. I’ve have been traveling, visiting, working in other realms.

Mostly, however, I’ve been discovering how fundamentally antithetical is the world of the blog to the ethos of writing for publication. This disjunction was described supremely well by the novelist John Updike in a little essay that appeared yesterday in the New York Times Sunday Book Review, adapted from an earlier speech to booksellers.

The electronic marvels that abound around us serve, surprisingly, to inflame what is most informally and noncritically human about us — our computer screens stare back at us with a kind of giant, instant “Aw, shucks,” disarming in its modesty, disquieting in its diffidence.

The printed, bound and paid-for book was — still is, for the moment — more exacting, more demanding, of its producer and consumer both. It is the site of an encounter, in silence, of two minds, one following in the other’s steps but invited to imagine, to argue, to concur on a level of reflection beyond that of personal encounter, with all its merely social conventions, its merciful padding of blather and mutual forgiveness.

Books have edges, Updike says. In the “electronic anthill,” there are no edges That’s the problem, all right. Now that I have become clear about it in my own mind, perhaps I can return to writing periodically on this page, more in the spirit of mutual forgiveness, one hopes, than blather

What the “Supply Siders” Were On About

admin — Tue, 30 May 2006 15:33:19 +0000

My old friend Reuven Brenner (eight books, including History: the Human Gamble, Betting on Ideas: Wars, Invention Inflation, and, most recently, The Force of Finance: Triumph of the Capital Markets) writes from McGill University, where he holds the Repap Chair of Business on the Faculty of Management,

I believe you make a mistake when you misunderstand why the “supply side” so much used that word – though they were talking about innovations, and prosperity all the time. The reason was simple: it was still the heyday of Keynesian vocabulary, and the notion was that governments could manage the economy by manipulating “aggregate demand.” Remember? So on one side it was “demand, demand, demand” and that’s why Bob Bartley and Wanniski thought they needed one simple slogan to counterattack. I remember having discussions about this with Bob. (Indeed, I have always been hesitant of such one-word simplifications. Laury Minard pushed me hard to come up with one describing my work – and it was him who suggested “leapfrogging” – which actually captures both the micro and the country parts well). Newspapers are in the real estate business, so they have to be very economical with words. This has obvious benefits, but disadvantages too.

Brenner has long taken a broad view of entrepreneurship, always to be understood as taking place within a commercial hierarchy. His own sensible ideas on growth are elaborated briefly here, and at satisfying length in Labyrinths of Prosperity: Economic Follies, Democratic Remedies.

What Is a Turnpike?

admin — Fri, 26 May 2006 19:14:01 +0000

Lionel W. McKenzie of the University of Rochester, a significant player in Knowledge and the Wealth of Nations and careful reader of the book, has along sent ”a little paper” untangling the highly-compressed description of turnpike theorems that appears in connection with the series of conferences on growth theory that occurred in the early 1960s. [P. 156: "Exciting new theorems about the existence of "turnpikes" were being proved and disproved (routes by which economies might swiftly move to higher levels of industrial development through forced investment in heavy industy)." ] He writes:

I was surprised when I worked on the notion of a turnpike in economics that it was not already explored by mathematicians as a part of the calculus of variations. However I have found many topics in the mathematics of economics which were not dealt with in the mathematical literature not because they were difficult but because they were too special for general mathematical interest. However I have now noticed that some mathematicians have taken an interest in the general problem as a problem in calculus of variations and indeed have even cited my papers. The general problem of calculus of variations arises when we are presented with a set of functions F and a valuation function v which gives a value to every function in this set and we ask which function f * in the set F satisfies the condition that v(f*) (> or =) v(f) for any f in F. I believe the subject arose from considering in what curve a rope of given length suspended between two points would assume. This problem was transformed into the question of what curve would minimize the potential energy of the rope arising from the force of gravitation. The answer is a catenary.

The problem of optimal growth is concerned with maximizing the utility achieved by consumers given initial conditions and the production possibilities. To simplify the problem many researches treated the production possibilities in terms of periods of given length so that initial conditions were transformed over the period into terminal conditions, which would be the initial conditions of the subsequent period, and a certain amount of consumption during the period. The consumption would provide a certain amount of utility to consumers. The objective is to maximize the sum of utility over the future which may be taken to be infinite. The problem is to choose the levels of output in each period to achieve this maximum. If the future is infinite the sum may still be rendered finite if future utilities are discounted. However even if the sum is infinite an overtaking criterion may prove usable where the objective is to find a sequence of consumptions for which there is no other feasible sequence whose finite sums eventually permanently exceed the finite sums of the chosen path.

The turnpike theorem in this setting says that initial conditions, that is, initial capital stocks, do not matter in the long run but eventually all optimal paths converge. The proof of this proposition depends on the concavity of the utility function for each period as a function of the initial and terminal stocks of the period. This concavity in turn follows from the concavity of the utility functions of each consumer and the convexity of the production set. That is to say, if a certain input of capital stocks and output of capital stocks and consumption goods is possible and another such combination is also possible, then any intermediate combination is possible. This would be true for the Romer model if the set of designs were fixed. It remains true in the Lucas model if human capital is treated like other capital goods. Thus making technological change endogenous does not necessarily invalidate the turnpike theorems.

It is really quite easy to see that a turnpike theorem must hold when utility is not discounted (as in Ramsey) and the utility function is a strictly concave function of the initial and terminal capital stocks each period. A strictly concave function has the property that the value of the function halfway in between two values of the argument exceeds one half of the sum of the values of the function at the two values of the argument. Now assume that by sacrificing utility in the early periods it is possible to move from the second optimal path to the path lying halfway between the two presumed optimal paths and the paths do not converge. Then the utility sum along the intermediate path must eventually exceed the sum of utility along the second path and that path cannot be optimal, by the overtaking criterion. Therefore if both paths are optimal they must converge.

Of course, in Romer’s model this concavity of the utility function which would follow from convexity of the periodwise production set and concavity of the utility function (presumably the sum of utility functions belonging to the individual consumers) does not follow because the periodwise production sets are not convex. They are not convex because the inputs are not confined to physical goods and labor which would be rival and excludable. The inputs include a list of designs or instructions on how to do things which are nonrival and at least partially excludable. Indeed it is not clear how the notion of convexity could be applied to the list of designs. On the other hand, if in the manner of Lucas you deal with technological change by treating it as a product of a research industry with inputs of human capital and ordinary goods it is possible to think of these industries as having convex production sets where using half the inputs of one process and half the inputs of another would allow the output of more than half the output of designs from one process and half the output of designs from the other. Of course there would be a measurement problem but this is already present with the physical goods where valuations may be used.

Romer’s basic argument against the strict convexity of the production set, that is, the set of inputs and outputs that are possible, is found on page S76 of his 1990 article in the JPE. It is equivalent to consider the set of outputs as a convex function of the set of inputs which he writes F(A,X) where A is the list of designs and X is the set of goods and services, including capital goods and labor services. He asserts that F is indeed concave in X while as far as I can see concavity is not given a meaning for the set of designs, but an increase in the number of designs can increase output. Clearly no problem for the turnpike argument arises if the list of designs does not change, so that the argument proceeds purely in terms of X. Equally I would suppose no problem arises for the turnpike if the view is taken that a new design does not contributes to production until it is embodied in physical goods. Of course, turnpikes are not the major interest of Romer, who wants to explain what underlies the differences in the wealth of nations. Another difficulty arises with the turnpike theorem applied to one country, since one country receives inputs from other countries and supplies outputs to them. If these opportunities remain constant, it is well and good. But if they change with circumstances, the appropriate region for applying the turnpike theorem would seem to the entire collection of countries that trade

Of course, no model is going to represent the real world with accuracy. One merely seeks models that fit at least loosely. Indeed, most of the literature on convergence of countries to similar levels of wealth per capita are macro models, that is, they are aggregated to a maximum extent and cannot possibly represent the real world in any but a very loose sense. The usual setting of the turnpike is a disaggregated model and the convergence is to a complex of capital goods. The message is that with a given technology and a given population along an optimal path the eventual relative composition of the stock of capital goods, including perhaps human capital, does not depend on the initial composition of capital goods, but only on the production functions.

The final theorems on this subject in my book (Classical General Equilibrium Theory, MIT Prerss, 2002) point out that a competitive equilibrium over time with perfect foresight does achieve an optimal path in terms of a welfare function that aggregates the utilities of the consumers in proportion to their respective wealths. Incidentally the French economist Maurice Allais argued that every country was saturated in capital goods given its culture and social structure. I always found that an intriguing idea. A final note, the turnpike for population growth is well known in the theory of demography. That the equilibrium distribution of a population over different ages does not depend on the initial distribution of population over but only on the fertility of the women at different ages. This was first embodied in the writing of Ansley Coale, one of the greatest demographers of recent times, who happened to be a graduate student in economics with me at Princeton in 1939-42.

Both Barro and Romer did much of their best work when on the Rochester faculty. The same is true of Sherwin Rosen (and Bob Fogel who won a Nobel prize. I believe Sherwin was cheated of his prize by cancer.) I call Romer my grandstudent, since his supervisor was Jose Scheinkman whose PhD was supervised by me.

The idea of a turnpike theorem is due to Paul Samuelson when he wrote a paper for the Rand Corporation around 1950. His objective was to give economic meaning to the model of John von Neumann published around 1936, in the reports of the symposium run in Vienna by the mathematician Karl Menger, son of the economist Carl Menger. Incidentally the first proofs of existence of competitive equilibrium were published by me and by Arrow and Debreu in 1954, mine a few months before theirs. The proofs were completely independently done. They were both given at the Chicago meeting of the Econometric Society in 1952. I mentioned their paper, but they did not mention mine, apparently because Debreu, who was present at my presentation, never told Arrow about my paper. This was told to me by Arrow. My immediate objective was to prove the existence and uniqueness of the solution for Graham’s model of world trade, which his students solved by trial and error, but it was applied to the general case of a competitive economy. Graham asked von Neumann to find a solution to his model analytically and von Neumann told him it was impossible, which of course was true. Herbert Scarf finally found an iterative procedure that converges to a competitive general equilibrium, and later versions of this procedure are used in Washington perhaps more often than the Leontief and Klein models. Of course, Scarf deserves a Nobel Prize for this accomplishment (which Leontief and Klein got) but I guess it is no disgrace to join T. S. Eliot, James Joyce, and Marcel Proust among those who did not receive a Nobel prize for their work.

Sex among Rhinoceroses?

admin — Fri, 26 May 2006 15:26:19 +0000

Gavin Kennedy, emeritus professor at Edinburgh’s Heriot-Watt University and blogger at Adam Smith’s Lost Legacy, is upset (May 23 entry) that Knowledge and the Wealth of Nations doesn’t do justice to the subtley of the views of Adam Smith.  It most certainly does not. But then that is not what the book is about.

What it is about – how formal methods, mathematics in particular, have enabled economists to move beyond the ambiguities in the work of early literary economists, Smith in particular, to a demonstrably clearer understanding of the world — Kennedy airily dismisses with a wisecrack. “Of the controversies over the maths of competing economic growth theories, I shall say nothing. Like the sex life of a rhinoceros, they are of compelling interest only to other rhinos.”

I am more interested than most in Smith’s genius — did he or did he not actually visit a pin factory? — but from the first word of its title on, Knowledge and the Wealth of Nations is about knowledge, meaning all that has been grasped by the human mind, and the effect of its growth on human well-being. The punchline, derived from mathematical economics, is that the economics of knowledge differs profoundly from the economics of things (and, for that matter, of skilled people), in that knowledge is nonrival: it can be copied and used in many different activities and by many different people at the same time.

A great deal of wisdom is to be found in Adam Smith, but not that.



The Exceptional Amartya Sen

admin — Tue, 23 May 2006 19:38:49 +0000

Asif Dowla, professor of economics at St. Mary’s College of Maryland, points out an error on page four of Knowledge and the Wealth of Nations, where it is asserted that the American Economic Association has never been headed by anyone who was not an American citizen, “the three who were born in Canada included.” Talk about spurious precision!

Amartya Sen, citizen of India, Nobel laureate, Lamont University Professor at Harvard, was the AEA’s president in 1994. Why was Sen the first (and so far only) non-US citizen to be elected? At the the annual dinner of Economists for Peace and Security last January, Harvard University president Lawrence Summers described him this way:

“Amartya is a singular figure in our dismal science – a master of marshalling impressive arrays of evidence to support his pathbreaking ideas, but also a figure whose ideas and scholarship have transcended the bounds of our discipline to directly affect the lives of millions of people throughout every part of the world. Albert Einstein once said, perhaps indelicately, that, ‘We owe a lot to the Indians, who taught us to count, without which no worthwhile discoveries could have been made.’ I would go one step further – Amartya Sen, ‘immortal’ son of India, has taught all of us that it is simply not enough to count – but that we must never forget the value of that which we aggregate. That the enduring values of the human spirit can’t simply be reduced to numbers, but that through the thoughtful application of knowledge and insight the human spirit can indeed be set free.”

Summers’ graceful summary of the impact of Sen’s research can be found here. And, just in case, a list of past presidents of the AEA is here.

Poetry As Memorable Speech

admin — Sun, 21 May 2006 03:43:55 +0000

Knowledge and the Wealth of Nations is the beneficiary of an especially perspicacious and kind review in the Economist.

The Dismal Origins of a Sobriquet

admin — Wed, 17 May 2006 14:41:10 +0000

Stanford’s John McMillan enjoyed Knowledge and the Wealth of Nations. He writes, “I found no nits to pick, except one: your use of ‘dismal science’ in a chapter heading. You might check out Carlyle’s article ‘Occasional Discourse on the Negro Question.’ Economic analysis was ‘dismal,’ in his view, because its proponents were using to it argue for the abolition of slavery. No one would invoke the phrase if they knew how disgusting its origins were.”

The text of Carlyle’s anonymous 1849 essay in Fraser’s Magazine for Town and Country can be found here on the New School’s excellent History of Thought site. Carlyle argued that slavery should not have been abolished. The relevant passage is this:

“Truly, my philanthropic friends, Exeter Hall philanthropy is wonderful; and the social science — not a “gay science,” but a rueful –which finds the secret of this universe in “supply and demand,” and reduces the duty of human governors to that of letting men alone, is also wonderful. Not a “gay science,” I should say, like some we have heard of; no, a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the dismal science. These two, Exeter Hall philanthropy and the Dismal Science, led by any sacred cause of black emancipation, or the like, to fall in love and make a wedding of it — will give birth to progenies and prodigies: dark extensive moon-calves, unnameable abortions, wide-coiled monstrosities, such as the world has not seen hitherto!”

This is indeed the origin of the famous phrase. And McMillan is right. Carlyle’s essay is a revolting piece of work.

I am not so certain, however, that its disreputable origins should lead us to eliminate ”dismal science” from our vocabulary. The phrase neatly encapsulates what chapter five is all about — the dire implications for the human prospect of the Ricardian and Malthusian models. Presumably this resonance is why the sobriquet endured, while Carlyle’s views racist views were soon forgotten.

It is a good thing, therefore, that for Economic Principals, I am reading The “Vanity of the Philosopher:” From Equality to Hierarchy in Post-Classical Economics, by Sandra J. Peart and David M. Levy. The authors deal extensively with the 19th century alliance between evangelicals (among them, the Exeter Hall philanthropists) and English political economists, united in their support of the presumption of human equality – a good excuse to revisit this topic in the summer.