Russ Roberts on Adam Smith and the Limits of Mainstream Economics

Life is material, but matter is not all of life.

Russ Roberts—economist and host of the excellent EconTalk podcast—wrote a penetrating essay last week on what we can learn from Adam Smith’s first book, The Theory of Moral Sentiments.

According to Roberts,

[N]ot everything that is important can be quantified. I worry that as economists, we too often are like the drunk at 1 am looking for his keys under the glare of a streetlight. You go over to help and when you fail to find the keys you ask the drunk if he’s sure if he lost them here. Oh no, he responds. I’m not sure where I lost them. But the light’s better here.

While there are exceptions to this rule—Roberts himself being one of them—economists, in general, suffer a bit from this light’s-better-here problem, overlooking what can’t be quantified.

This is where Roberts thinks Smith can help:

Smith argues that we want the respect of those around us and we want to earn that respect honestly by how we actually behave rather than how we are perceived. We want our true self to be the source of our reputation. A single sentence sums up Smith’s view of our motivation:

Man naturally desires, not only to be loved, but to be lovely.

He continues,

Smith makes a bolder claim that this urge for respect from others is the source of our well-being. He writes:

The chief part of human happiness arises from the consciousness of being loved.

So consider the following. If Smith is right and if the the [sic] chief part of human happiness arises from the consciousness of being beloved, then what happens to people who are not beloved, not loved, not respected, not honored? What happens to people who no one pays attention to, people who struggle to find respect, honor, love? What happens to people who feel as if they do not matter?

With this question at the center, Roberts shows how policy-makers, whether conservative or progressive, too often fall into the light’s-better-here problem in the cases of mass shootings, minimum wages, and the opioid crisis. They argue over data and ignore the dignity of the persons at the center of these social problems. His reflection recalls for me how economic historian Ross Emmett has summarized Frank Knight’s view of the importance—and limits—of economics: “Life is economic; economics is not all of life.”

Paul Heyne warned of the danger of the light’s-better-here approach as well:

Such a rigid adherence to an untenable position severely restricts dialogue and inquiry and transforms suspicion into conviction for many who are beginning to wonder whether economics is not more ideology than science.

While I’m a bit more sympathetic to the possibility of value-free analysis, I wholeheartedly agree that to stop there puts economics in great peril. Only economists are content with considering economic questions apart from any moral foundation, framework, or context.

The average person balks at such a thought experiment: the economy, the real-life one made up of actual people and their friends and families and neighbors and coworkers, doesn’t exist in a vacuum. It is a deep miscalculation to presume to address their struggles while bound to such limited parameters.

In their book When Helping Hurts, Steve Corbett and Brian Fikkert describe the contrast between the ways the poor across the world view themselves and the way in which middle-class North Americans define poverty:

Poor people typically talk in terms of shame, inferiority, powerlessness, humiliation, fear, hopelessness, depression, social isolation, and voicelessness. North American audiences tend to emphasize a lack of material things such as food, money, clean water, medicine, housing, etc…. [T]his mismatch between many outsiders’ perceptions of poverty and the perceptions of poor people themselves can have devastating consequences for poverty-alleviation efforts.

In other words, not just economists but middle-class North Americans have a light’s-better-here problem too. They might not be modeling data, but they still over-focus on the material and measurable. Roberts points this out as well:

[E]conomists on the left and the right argue mostly about material well-being and most economists stay there under the streetlight because that’s where the data will always be best. So do non-economists. They use data like a cudgel to bludgeon the opposition, cherry-picking studies and facts to suit their story. The rest of the story, the part that can’t be quantified, is often ignored.

Roberts’ essay immediately reminded me of that quote from Corbet and Fikkert. It makes such a difference when we put “shame, inferiority, powerlessness, humiliation, fear, hopelessness, depression, social isolation, and voicelessness” in the center of our social discourse. It prevents us from always grasping for our preferred, patent, easy policy answer.

It helps us see that while policy matters, policy is not all of life. Things like faith, family, and friendship come into the foreground when the limited role of the material and measurable is put in its place. Another way to put it: life is material, but matter is not all of life.

Roberts concludes with an on-point biographical note about Smith:

Adam Smith never married. He had no children. Most of his life he lived with his mother.

But he was loved by not just his mother. He was respected and honored by the greatest minds and some of the most powerful people of the day — David Hume was his best friend. Smith was often alone. But he doesn’t seem to have been very lonely. He certainly was loved and lovely.

He only wrote two books in his lifetime, but oh the impact they’ve had. Together, they teach us something fundamental about what matters in this world. We would be wise to keep his wisdom close at hand when we think about public policy. We would be wise to remember the limits of looking only where the light is.

And, I would add, any reader would be wise to read Roberts’ full essay here.

This article is reprinted with permission from the Acton Institute.