Pioneers of Financial Economics: Das Adam Smith Irrelevanzproblem?

Poitras, Geoffrey, Jovanovic, Franck, History of Economics Review

Abstract: This paper is a contribution to the debate surrounding the steady decline in importance of the history of economic thought within the economics curriculum. The relevance of the history of financial economics to this debate is examined and a 'histories of economic thought' strategy is suggested to improve the future prospects of the subject. In the process, Das Adam Smith Irrelevanzproblem is identified and discussed. Das Irrelevanzproblem is concerned with the question: why do Adam Smith and other classical political economists continue to play such a central role in traditional thought when the relevance of these thinkers to modern economics, particularly new additions such as financial economics, is so limited? This paper demonstrates that the history of financial economics commences at least a century prior to The Wealth of Nations and is largely independent of the traditional thought which commences with the role of Adam Smith as the leading Enlightenment thinker on issues relevant to political economy.

1 Introduction

The steady decline in importance of the history of economic thought is well known (Cardoso 1995, Barber 1997, Blaug 2001). The subject has largely disappeared from the graduate economics curriculum. Important history of economic thought journals are excluded from citation indexes commonly used to measure scholarly output, threatening the future well-being of scholars working in the area. Job prospects for junior scholars specialising in the history of economic thought are bleak. While the decline is evident, the causes are less clear. For example, Roger Backhouse (2002) attributes the decline to dramatic institutional changes in the modern university while Blaug (2001) identifies 'the philosophical overhang of positivism' and the 'economics of economics' as reasons. Faced with a falling demand, the subject has experienced dramatic pressures for 'revisioning' from within. This has generated lively and sometimes acrimonious debate over whether the history of economics is part of the much wider 'history of ideas' or 'history of science' (Schabas 1992; Hands 2001). The detractors argue that the history of economic thought is most appropriately aligned with economics. As Blaug (2001) observes: 'No history of ideas, please, we're economists'. This paper examines the relevance of the history of financial economics to this debate and suggests a 'histories of economic thought' strategy to improve the future prospects of the subject. In the process, Das Adam Smith Irrelevanzproblem is identified and discussed.

Das Adam Smith Problem is concerned with the consistency between the two major works of Adam Smith, The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776) (WN). (2) 'Das Problem' epitomises the central importance of Adam Smith in classical political economy. This importance is amplified by the hallowed role that classical political economy has in the traditional approach to the history of economic thought ('traditional thought', hereafter). In contrast, Das Irrelevanzproblem is concerned with the bias introduced by static chronicling of the history in terms of individuals and associated texts, rather than by an evolutionary approach to history that reflects the germination and propagation of ideas used in modern economics. In traditional thought, the same specific individuals and texts, such as Adam Smith and the WN, constantly play a pivotal role. This static approach to the history resists the evolutionary approach based on chronicling 'the genesis of ideas and the evolution of methods' (de Roover 1974, p. 366). The perspective of 'Das Irrelevanzproblem' leads to substantively different questions than those addressed in 'Das Problem'. In particular, why do Adam Smith and other classical political economists continue to play such a central role in traditional thought when the relevance of these thinkers to modern economics, particularly new additions such as financial economics and econometrics, is so limited? In a use-oriented academic world, what is the 'use' in stressing the role of Adam Smith, David Ricardo or J. S. Mill in the history of economic thought when these thinkers have limited relevance to the methods and ideas used in modern economics?

Despite the reference to Adam Smith in the title of this paper, those seeking a discussion of the financial economics of Adam Smith will be disappointed. Following Poitras (2000), WN had little to add and ignored much of what had been contributed to financial economics up to that time. Rather, this paper documents a relevant and useful history of financial economics that commences at least a century prior to WN and has a history that is largely independent of the traditional thought which commences with the role of Adam Smith as the leading Enlightenment thinker on issues relevant to political economy. (3) Once Das Irrelevanzproblem is identified, fundamental concerns are raised about potential reasons for divergence between histories with comparable time-lines. In particular, tools and concepts used in financial economics, especially the central role played by uncertainty and the pricing of securities with contingent payoffs, are of little concern to the neo-classical economic analysis emphasised in traditional thought. Following Frickel and Gross (2005) and Poitras and Jovanovic (2007), resolving Das Irrelevanzproblem leads to a connection between the history of a subject and the networks that control the academic venues and outlets that define a subject. For example, in modern times the Chicago school was systemically connected to the rise of modern finance, in addition to being involved in a range of other post-WWII changes in economic science.

The search for pioneers of financial economics shares features in common with other recent histories of economic thought. For example, a credible history of econometric thought has been captured by Epstein (1987), Morgan (1990) and Le Gall (2007). This exercise in tracing the pioneers of econometrics was facilitated by constructing this history with primary sources appearing largely in the twentieth century. Subjects with longer pedigrees, such as microeconomics, have experienced a gradual reworking of the classical time-line used in identifying contributions, such as Ekelund and Hebert (1999). While any plausible history of microeconomic thought has to include important neo-classicals, such as Leon Walras and F. Y. Edgeworth, who are central figures in traditional thought, this is not the case with financial economics. As a consequence, identifying pioneers of financial economics requires the detailing of a history that does not intersect with traditional thought until well into the twentieth century when financial economics emerged on the landscape of modern economics. Many avenues in this history are still unexplored. Following the blueprint of the history of financial economics constructed in Poitras (2000; 2006), (4) seminal contributions by the likes of Edmond Halley and Abraham de Moivre lie well outside the time-line of traditional thought. Adam Smith has little to do with this history, T. R. Malthus, David Ricardo and Alfred Marshall even less.

2 Das Adam Smith Irrelevanzproblem?

Blaug (2001) is confounded by the decline in importance of the history of economic thought within the profession, 'disparaged as a type of antiquarianism', happening at the same time that there is an increasing popularity of the subject in the wider scholarly community. Can this discrepancy be attributed to confusion over the difference between the (relevant) subject that is increasing in popularity and the (antiquarian) subject that is disparaged? The reverence for the contributions of the classical political economists is unmistakable in Blaug (2001) and Groenewegen (2001), as it is in the voluminous research effort still being dedicated to Adam Smith and other classical political economists. (5) For example, in Blaug (2001) numerous examples are given of how modern economists, such as Robert Lucas (1996), misinterpreted Adam Smith or David Hume. The modern relevance of such 'misinterpretation' is illusive. Even 'The Ultimate Justification for Studying the History of Economic Thought' given by Blaug (p. 156) involves using Coase's theorem as an example; classical political economy is noticeably absent. Blaug (p. 157) concludes: '[h]istory of economic thought is not a specialization within economics. It is economics--sliced vertically against the horizontal axis of time'.

As a rapidly accumulating collection of sources illustrates, slicing vertically into the time-line of financial economics reveals substantively different results as to the importance of the individuals involved in traditional thought. (6) As in the criticisms of Smith by the German Historical School that engendered Das Problem, closer inspection of the history of financial economics reveals flaws in the traditional interpretation of Smith as 'the towering figure of Enlightenment political economy' (Schabas 2003). This is an important part of the story underlying Poitras (2000, 2006). That Smith was revered within the British upper classes and inspired subsequent writers of the texts and pamphlet literature that comprised classical political economy is undeniable. In the century that followed WN, it is difficult to find primary sources for credible classical political economists who do not commence with a glowing tribute to the contributions of Adam Smith (see Poitras 1998). Such is the accepted interpretation given by those who have written the history of classical political economy, that is, traditional thought. Yet, from the perspective of classical financial economics, there is a very different history that does not include any of the most revered classical political economists.

To be relevant, history of economic thought needs to resonate with contemporary economists, speak to their interests. This requires updating and rewriting history to capture the evolution of modern economics. Concepts basic to classical political economy, such as the labour theory of value, are far removed from the landscape of modern economics, in general, and financial economics, in particular, where the more immediate problem of determining the price of a financial security is a central concern. Confronted with the difficulties of pricing the complicated contingent financial claims that are traded in modern securities markets, a history of the methods employed to solve such problems in the past is useful and relevant to modern financial economics. (7) Raymond de Roover (1904-1972), who made an immense contribution to the history of early financial economics (see Kirshner 1974), was close to the mark in saying the history of economic thought was about 'the genesis of ideas and the evolution of methods'. Too often the contemporary history of economic thought is consumed with notions, such as ontology and rational reconstruction, that hold little interest for modern economists. To paraphase Blaug (2001): '[l]ess moral philosophy and epistemology, please, we're economists'. (8)

3 The Search for Pioneers of Financial Economics

The starting point for traditional thought, the beginning of classical political economy, is invariably identified with Adam Smith (1723-1790). The WN has been justly recognised as the first book to develop a comprehensive and cohesive body of economic analysis that was substantively distinct from other related subjects. Contributors prior to Smith are typically categorised as 'precursors of Adam Smith' or 'pre-Smithian economists' or …

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Publication information: Article title: Pioneers of Financial Economics: Das Adam Smith Irrelevanzproblem?. Contributors: Poitras, Geoffrey - Author, Jovanovic, Franck - Author. Journal title: History of Economics Review. Issue: 51 Publication date: Winter 2010. Page number: 43+. © 2008 History of Economic Thought Society of Australia. COPYRIGHT 2010 Gale Group.

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