Like the original, the new problem also contrasts two incompatible interpretations of Smith. The first interpretation presents Smith as a proto-neoclassical economist. In Whiggish fashion, a continuous line is drawn from Smith to Pareto to the static and efficient allocation of resources that defines modern microeconomic analysis. This vision of capitalism depicts a world defined more by unrestrained competition than unrestrained accumulation of capital. The second interpretation, emphasizing capital accumulation, is the complex systems theory reading. Here, the capitalist system, like other systems large and small is modeled as an organized but decentralized network constituted by scores of individual parts. And like other systems analyzed by complexity theorists, the capitalist system is taken to be adaptive, self-organizing, and unstable. Furthermore, these systems manifest emergent characteristics, which is to say that the micro properties of the individual components are not merely scaled down versions of the system itself. Differently put, changes in scale generate qualitative changes such that there is no one-to-one parallel between the whole and the sum of the parts. Emergence stands in direct contrast to the “isomorphic” relation between people and markets central to microeconomics. By contrast, when emergence is translated to classical political economy it implies a system generated by the unintended effects of the actions of individual capitalists, labourers and landlords. For example, individual capitalists endeavoring to maximize their own rate of profit may generate, once aggregated, a tendency toward the decline in the economy-wide average rate of profit.
In the complex-systems view, Smith’s advocacy of laissez-faire is rooted in the unintended effects generated by individual capitalist accumulation. Capital accumulation will widen the extent of the market, which Smith shows, in the third chapter of the Wealth, to be responsible for the growth of the division of labour (it should be noted that Smith was referring here to the growth of the social division of labour, which emphasizes the availability of different forms of employment. He was not referring to the detail division of labour which describes an increasingly rote division of tasks within one form of employment. Confusingly, it is the later which is described in the pin factory of chapter one). This then increases the productivity of labour, which lowers costs and increases incomes, extending the market and generating further increases in the division of labour in cyclical pattern. Capital accumulation is the original intention; the expansion of the market and the division of labour to the benefit of other capitalists is the unintended effect.
Whether or not this system of positive feedbacks benefits labour remains unclear. The Smithian process of economic development entails the growth of wealth followed by the growth in population, which in turn, may cut into any gains made by labour. While Smith insists on the concept of a subsistence wage, he also insists that subsistence must reflect socially and historically determined standards, leaving open the possibility of absolute gains to labour. In contrast, elsewhere in the Wealth, Smith points to the eventual ‘stationary state’ of capitalist economies where individual capitalists in tight competition with each other unintentionally drive the profit rate down and consequently drag down the wages of labour.
Before this inevitable heat death, the complex-systems depiction of Smith entails what neoclassicals would dub increasing returns to scale. However, Foley notes that widespread increasing returns to the application of capital and labour to land are fundamentally inconsistent with the assumptions underlying the general formulation of neoclassical competitive equilibrium. The evolutionary and dynamic Smith cannot be squared with the static general equilibrium Smith. One of the architects of general equilibrium theory, Kenneth Arrow recognized the other Adam Smith Problem in the Foreward to a book by Brian Author on Increasing Returns and Path Dependence in the Economy:
The concept of increasing returns has had a long but uneasy presence in economic analysis. The opening chapters of Adam Smith's Wealth of Nations put great emphasis on increasing returns to explain both specialization and economic growth. Yet the object of study moves quickly to a competitive system and a cost-of-production theory of value, which cannot be made rigorous except by assuming constant returns.Instead of reading Smith as a theorist of optimal resource allocation as does Arrow, Foley reads him as a theorist of a capitalist development process which is complex, self-organizing and most importantly, non-equilibrium.
In this process, the trajectory of capitalist development remains uncertain. It is a determinant system in that connections between parts can be traced backward ex post, but it is not predetermined in that there is no way to predict the system’s evolution. Foley points to the kinds of questions this type of analysis grapples with, and those which it avoids:
We know that the wolf, for example, must maintain nutritional balance with her environment to live, but this observation does not allow us to predict her life cycle, where she will migrate, mate, or, eventually die. Smith’s vision of capitalist economic development is analogous: he can explain the metabolic processes, accumulation and competition, that support the evolution of the capitalist economy but not its history, the specific development of its technology, or its sociology.Foley also admits to his political attraction to complex-systems theory. The following quotation might imply a hope for some kind of market socialism, which could explain his interest in Oskar Lange and the socialist calculation debate. Yet, that debate was defined by the static neoclassical conceptualization of optimality. Perhaps instead, complexity theory allows for a new way to parse through the old problems of democratic socialism:
Theory suggests that it is impossible to control complex, adaptive, self-organizing systems by directing the behavior of the individual entities that comprise them. Traditional conceptions of social policy, on the other hand, depend precisely on an ability to link individual behavior and aggregate outcomes. The methods of Classical political economy offer some hope of surmounting this apparent dilemma. We may be able to design systems that influence the self-organization of society as a complex, adaptive system in particular dimensions, even though we must give up any hope of stabilizing the actual evolution of the system in the hope of attaining once and for all such goals as justice and equality.
I would argue, in fact, that there is much to be gained from this shift in understanding. We avoid the Scylla of utopian fantasies of an end to the dialectical historical development of human societies, which, in the complex systems view, will continue indefinitely. But we also elude the Charybdis of conservative complacency in the face of the very real moral and social problems capitalist society creates and reproduces. What we need is a better understanding of the process of self-organization that are amenable to our influence.
