While Austrian economist Carl Menger was a fan of Adam Smith and defended Smith’s favored economic policies in an article on the 100th anniversary of Smith’s death, I was surprised, on reading Menger, by how critical Menger was of Smith. Moreover, I thought that his two main criticisms were off base.
On page 73 of his Principles of Economics, Menger, in explicitly criticizing Smith, writes:
Indeed, the division of labor cannot even be designated as the most important cause of the economic progress of mankind. Correctly, it should be regarded only as one factor among the great influences that lead mankind from barbarism and misery to civilization and wealth.
This has to be false. Menger argues after this quote that the increase in human knowledge is and will be an important contributor to economic progress. True. But a prerequisite for human knowledge having this effect is an extensive division of labor. Thomas Edison was a huge contributor to economic progress. How far would he have gotten if he had had to do everything himself, including producing light bulbs? In such a case, we would back to Smith’s example of one person carrying out all the steps of making a pin and, therefore, producing fewer than 20 pins a day. Whereas 10 people, each specializing in a couple of steps, could produce 48,000 pins a day.
On page 172 of Investigations into the Method of the Social Sciences, Menger writes:
What Adam Smith and even those of his followers who have most successfully developed political economy can actually be charged with is not the failure to recognize the obvious significance of the study of history for the politician. Nor is it failure to recognize the just as obvious principle that various economic institutions and governmental measures correspond to various temporal and spatial conditions of economy. It is their defective understanding of the unintentionally created social institutions and their significance for economy. It is the opinion appearing chiefly in their writings that the institutions of economy are always the intended product of the common will of society as such, results of expressed agreement of members of society or of positive legislation. (italics added by me.)
This seems to me to be the opposite of the truth.
READER COMMENTS
Jon Murphy
Apr 11 2022 at 5:25pm
Smith makes this point in the Wealth of Nations (Book I, Chapter II, 4th paragraph. Page 28 of the Liberty Fund edition.) It’s the famous “philosopher and porter” quote.
It most certainly is the opposite of the truth. Smith rejects the idea that institutions are only necessarily the result of expressed agreement or positive legislation. It’s not explicit, but implicit throughout both TMS and WN. The whole concept of the “Invisible Hand,” as well as how we develop our sympathetic senses, our virtues, and the institutions that develop them is as much about trial and error as anything expressed.
Neel Chamilall
Apr 14 2022 at 1:19am
@ Jon Murphy:
“Smith rejects the idea that institutions are only necessarily the result of expressed agreement or positive legislation. It’s not explicit, but implicit throughout both TMS and WN. The whole concept of the “Invisible Hand,” as well as how we develop our sympathetic senses, our virtues, and the institutions that develop them is as much about trial and error as anything expressed.”
David Ricardo has often been criticized because his theory of comparative advantage rests upon the assumption of the international immobility of capital. But, what about Smith’s notion of invisible hand as developed in Book IV, Chapter 2 of the WoN which also depends on this same assumption of the relative international immobility of capital?
“(…) every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry (…).”
“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
Neel Chamilall
Apr 14 2022 at 12:56am
Thank you for this post, David.
Though a dedicated Mengerian, I have not read Menger (or Smith, by the way) for almost 20 years on grounds of illness, from which I am slowly emerging. So, I’m offering a few thoughts that are tentative, maybe precarious or even outrightly wrong. I apologize in advance for not being able to follow up on these issues – as I’m taken by other papers.
Concerning the first point, I referred to this passage in Menger’s Principles in response to one of your posts here a few weeks ago and asked if you had any thoughts about it because the meaning of this passage has never been clear to me. And it still is not.
However, and firstly, what is clear to me is that Menger does not say in this passage that the division of labor is not a cause of economic progress. What he says is that division of labor is not, in his view, the most important cause of economic progress.
Secondly, the fact that “a prerequisite for human knowledge having this effect is an extensive division of labor” does not necessarily refute Menger’s claim. What you are highlighting here is the chronological and ontological priority of division of labor over knowledge – which is distinct from the purpotedly superior epistemological theoretical explanation Menger offers of the causes (including the division of labor) of economic progress. In other words, the chronological priority of division of labor over knowledge does not in itself make the division of labor the major cause of economic progress.
Thirdly, and related to what I just said above and to what I say below, I think that Adam Smith’s Wealth of Nations was flawed in its structure. I shall be returning to a paper on which I started working many years ago – before stopping to do so on grounds of illness mentioned above. The title of the paper is “Adam Smith’s Inquiry into the Causes and the Nature of the Wealth of Nations.” For me, the confusions at work in Smith’s classic book – one of which Menger stresses, rightly or wrongly – have much to do with his failure to distinguish clearly between ontological explanations and espistemological explanations, between “nature” and “causes”. But, more about this later.
Concerning your second point, I would like to quote the sentences that precede the one that you italicized: “What Adam Smith (…) can actually be charged with is not the failure to recognize the obvious significance of the study of history for the politician. (…) It is their defective [theoretical] understanding of the unintentionally created social institutions and their significance for economy.” Menger is saying two things here: first, that Smith did study economies from a historical point of view, but second, that his (theoretical) understanding (Verstehen as Menger wrote in German) of unintentionally created social institutions was flawed.
Is Menger wrong here? I do not think he is. It suffices here to contrast Smith and Menger on the origin of money. In the first half of chapter 4 of the WoN, “Of the Origin and Use of Money,” Smith offers a historical account of the origin of money and concludes by writing:
“To prevent such abuses, to facilitate exchanges, and thereby to encourage all sorts of industry and commerce, it has been found necessary, in all countries that have made any considerable advances towards improvement, to affix a public stamp upon certain quantities of such particular metals, as were in those countries commonly made use of to purchase goods. Hence the origin of coined money, and of those public offices called mints; institutions exactly of the same nature with those of the aulnagers and stampmasters of woollen and linen cloth.”
When I compare the first half of chapter 4 of the WoN dedicated to the origin of money to Menger’s writings on the same subject in his Principles, his Investigations, and his classic article of 1892, it’s clear to me that Menger’s theoretical explanation of the origin of money is far superior to Smith’s. Nicholas Kaldor famously said once that economic theory went wrong in the second half of chapter 4 of Smith’s WoN. I venture to say that Kaldor himself was wrong: it actually went wrong even in the first half of that fourth chapter – at least as far as a theoretical understanding of economics is concerned – and to return to the title of my paper on Smith mentioned above, even starting with the very first chapter.
Respectfully
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