Redeeming Economics: The Achievement of Vernon Smith

In the tradition of Adam Smith and Edmund Burke, he furthered humane economics.

By Samuel Gregg Published on December 31, 2016

Economics is about selfishness, and how people act it out. How many times have you heard statements like that? Nobel Prize-winning economist Vernon L. Smith, who turns 90 on New Year’s Day, knows better. As he said in his 2002 Prize lecture: “[T]he values to which people respond are not confined to … narrowly defined canons of rationality.”

This is a message which more people need to hear. They might not think that economics are quite so “dismal,” and might give a fairer hearing to free markets. Careful reading of Smith’s Nobel Prize lecture and his many other writings demonstrates just how much he has incorporated ideas about what makes people tick from other fields, ranging from philosophy to psychology, into his study of economics. The overall effect has been to help economics better reflect human reality rather than an artificial homo economicus. All through his career, Smith has tapped sources of knowledge outside his discipline, some of which may surprise you.

Did Your Econ Class Have a Lab Section?

Smith is best known for pioneering “experimental economics.” This involves behavioral experiments in which people are placed in a particular micro-economy in which they can engage in trade, but without knowing the conditions driving supply and demand. Those running the experiments can thus test the validity of particular economic theories, thereby gaining greater knowledge of how economic exchanges actually work.

Over time, experimental economics has established the importance of what Smith and others call “economic institutions,” the formal and informal rules which shape economic life in a given society. Economic institutions, it turns out, really do shape economic outcomes. From laws and regulations to customs and property arrangements, any set of rules will affect (1) the information people have and (2) the incentives that drive them.

Smith’s experiments have also provided considerable evidence that, as he wrote in a 1994 paper, “economic agents can achieve efficient outcomes which are not part of their intention.” So Adam Smith was right. He asserted that in The Wealth of Nations more than 240 years ago.

Adam Smith’s ideas weren’t something Vernon Smith started out eager to prove, since he was, in his words, “raised by a socialist mother, and further handicapped (in this regard) by a Harvard education.” Given, however, what his experiments revealed about what he called “the error in my thinking,” Smith changed his mind. Truth was what mattered — not ego.

The Other Smith

This hasn’t been the limit of Vernon Smith’s engagement with the thought of Adam Smith and the Scottish Enlightenment. The Scottish philosophers were immensely influential upon the American Founding, but also crucial to the development of modern market economies which, when allowed to do so, have liberated millions from poverty.

Vernon Smith emphasizes the Scottish Enlightenment’s close attention to how complicated people are, and how many different motives drive even their economic decisions. He wishes that more economists would read Adam Smith’s other great work, The Theory of Moral Sentiments, a text which Smith revised no less than six times and regarded as his most important book.

The Scottish Enlightenment revolutionized how we think about the nature of reason itself. There is a place, Smith argues, for conscious deductive processes that establish social institutions, such as constitutions. But there is another form of rationality, which is every bit as important. It’s embodied and conveyed through time by habits, customs, and rules. We often don’t fully understand the importance of such traditions, as Edmund Burke noted, until we’ve lost them. A hallmark of Smith’s work is his study of how such knowledge helps to mold political and economic outcomes.

The Ten Commandments are crucial to the creation and survival of capitalism.

Reason and Faith

One means by which such knowledge has been conveyed through time, Smith states, is religion. In a long footnote to his Nobel lecture, Smith stressed religion’s role in shaping the morality needed for cohesive social behavior, “prominently represented by the great ‘shalt not’ prohibitions of the world’s leading religions.” In his Nobel Prize banquet speech, Smith even singled out the Ten Commandments for providing the “foundations for cohesive social exchange.”

On one level, this is an empirical claim. It’s hard to imagine social and economic exchange being sustainable over the long-term in the absence of the absolute prohibitions of, for example, theft and murder expressed in the Decalogue and vigorously reaffirmed by Christ. But Smith’s appreciation of religion’s importance also owes something to his Christian faith.

Until recently, this was not a topic about which Smith has spoken publicly at length. But in a lecture entitled “Faith and the Compatibility of Science and Reason” delivered at the Acton Institute’s 2016 summer university, Smith began by describing how he had been raised in a Unitarian household before, during, and after the Great Depression. Eventually and very gradually, Smith stated, he “was ‘re-born’ and baptized a Christian.”

Smith then argued for the essential harmony between religious faith, science and reason. Drawing on the discoveries of twentieth-century physicists such as Albert Einstein and his colleague the Catholic priest Georges Lemaître (father of the Big Bang theory), Smith noted that the basic claims of materialist philosophy have been disproved by reason and scientific inquiry. He also highlighted similarities between (1) the insights attained via modern physics and (2) the language and logic deployed in the Hebrew and Christian Scriptures to describe God as First Cause and the origin of Creation.

Certainly, Smith said, Einstein was right to claim that the theories designed by humans are important tools for comprehending reality. Yet before there is theory, Smith added, there is thought and reason: a logical sequence which, he said, finds its parallel in the Gospel of John’s opening verse, “In the beginning there was the Word, and the Word was with God, and the Word was God” (Jn. 1.1).

Put another way: human reason cannot emerge from unreason. Ultimately it comes from and reflects the light of the Logos himself.We can be confident, Smith concluded, that life is no accident. “We Christians,” he said, “believe it proceeds from a loving act of our God and our Savior, a faith that is compatible with the engineering discoveries we call science.”

After a lifetime of achievement in the social science of economics, Smith has reminded us that reason and Christian faith should never be seen as necessary opponents. In different but compatible and interrelated ways, both are essentially concerned with knowing the truth: the pursuit of which sets us free.

Happy ninetieth birthday, Vernon Smith. And may peace be with you.

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