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William Watson: Smithian curiosity keeps economics moving ahead

The fundamental question raised — what are the effects of people pursuing self-interest? — continues to drive the discipline

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All the fuss about the 250th anniversary of the Wealth of Nations, fully justified in my view, may have left some people wondering whether economics, a discipline that sometimes presumes to be a science, really ought to give such weight to a contribution from 10 generations ago. Do physicists still read Faraday? Or chemists Lavoisier? Historians of science certainly do. But haven’t most sciences moved on? Do people still preach from these early contributors’ gospels, as we conservative columnists so often do from Adam Smith?

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One reason for still esteeming Smith’s insights is that his subject is human nature, which we usually assume (though we should test this assumption) doesn’t change. For similar reasons, perhaps, philosophers keep reading Plato. An especially canny ancient Greek or 18th-century Scotsman may well have had as much insight into our nature and its implications as today’s average observer, though obviously that nature is now exercised in a different context.

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Smith didn’t just work from first principles. He was an empiricist. He read widely and observed closely. “I have seen a small manufactory …” is how he introduced his famous discussion of the pin factory and the tremendous productivity advantages, literally exponential, of scale. The Wealth of Nations is packed with considered observations of this sort, many of which will ring true to modern readers. (In fact, there’s an academic debate on whether Smith was fibbing about his visit to the pin factory and was instead lifting his descriptions from the French literature on such things.)

Though economics has advanced a long way since Smith, what still largely propels it is the Smithian question: what are the effects of people acting in their self-interest? And the answers remain as interesting as many of Smith’s were. Consider three recent papers from the National Bureau of Economic Research, the organization that just threw out one of its most distinguished members, Larry Summers, for his association with Jeffrey Epstein.

In one paper, a group of four economists, including Keith Head of the University of British Columbia, look at the effects of subsidies for batteries and electric vehicles and find they often work at cross purposes. Consumer subsidies do encourage people to buy EVs. (We’ve been looking at cars recently: who could buy an EV without a subsidy?) But local-content requirements both on those subsidies and the industrial subsidies that many countries are using to try to build up their battery and EV industries actually raise costs by preventing (Smithian) economies of scale. The result? On average, fully half the effect of the consumer subsidies is lost. We all want to save the world, it seems, but only if we can do it from Windsor.

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Another NBER study, this one by economists at the Chicago Fed, Princeton and the University of Zurich, looks at the male-female wage gap in the U.S. and finds, though they don’t put it quite this way, that it reflects a Smithian process of people making choices that maximize their own well-being. A job isn’t just a wage. It also involves various “non-wage amenities,” i.e., working conditions. Detailed labour market surveys show that, on average, men and women value these job components differently: “Men’s (job) satisfaction is more strongly tied to their wages, whereas women place greater value on shorter hours and family-oriented benefits.”

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But if, in effect, you’re paid more in these other non-wage attributes of your job, it shouldn’t be surprising if your wage component is lower. In fact, after running econometric tests that would have mystified but also intrigued Smith, the researchers conclude that “differences in preferences for non-wage amenities account for nearly 40 per cent of the gender pay gap,” which is not small. It’s also noteworthy that providing more job amenities — letting people work more from home, for instance — may actually increase the gender wage gap, even though it would also increase people’s, including women’s, overall job satisfaction.

Finally, a third recent NBER paper plumbs one of these non-wage job amenities further. In this research, seven economists from blue-ribbon institutions look at the effect that working from home (WFH) has on fertility. One of the advantages of WFH is that it makes it easier to conceive and care for children. Many employers have long suspected that workers-from-home aren’t always exclusively focused on their work. The correlation with fertility suggests that’s the case!

And the effects are big: “Estimated lifetime fertility is greater by 0.32 children per woman when both partners WFH one or more days per week as compared to the case where neither does.” Incidentally, we in Canada are world leaders in WFH. Survey data the researchers present show we are second only to Argentina in terms of average days worked at home per week. They were at 1.8, we were at 1.7. 

Of course, as the second paper suggested, an advantage of letting people work from home and enjoy all the associated non-wage amenities is that you don’t have to pay them as much. 

Though try telling them that. 

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