A Straightforward Demonstration of Adam Smith's Vast Intellectual Superiority Over Richard Cantillon on Issues Related to the Relative Roles of Uncertainty and Risk in Economic and Decision Theory
37 Pages Posted: 31 Jul 2015
Date Written: July 29, 2015
There simply is no way that Richard Cantillon, in his Essai (1755), can be assessed as being, in any way close to, much less the equal of, Adam Smith as an economic theorist. Adam Smith made uncertainty, as opposed to the linear risk concept based on the mathematical laws of the probability calculus used by Cantillon, the hallmark of his analysis in the Wealth of Nations. This has been overlooked by the economics profession for well over two hundred years.
Unfortunately, economists, in the 1790’s as in the 2010’s, have erred greatly by following in the footsteps of Richard Cantillon and Jeremy Bentham in their approaches to economic decision making .Instead of following Smith and his non-additive, interval valued approach to the use of probability in decision making, based on non-linear risk assessments and uncertainty, economists continue to claim that the hallmark of rationality is the use of the purely mathematical laws of the calculus of probabilities, even when it is known that important information, data, or knowledge is missing or that the quality of the information varies, so that the purely mathematical laws of the calculus of probabilities can’t be applied. Smith’s approach to risk and uncertainty is vastly superior to Cantillon’s strictly linear risk approach and was not matched by any economist until J M Keynes wrote chapter 26 of the A Treatise on Probability in 1921.
Smith’s footnote 3 on p. 106 of the Wealth of Nations, if understood, explains why decision theory has gone down the wrong path since 1790. Smith’s simple and direct refutation of Cantillon’s reliance on the purely mathematical theory of risk assessment also demonstrates the erroneous foundations that underlie the work of Ramsey, de Finetti, Savage, and Suppes.
Rothbard’s canards concerning the originality of Smith’s work are exposed and demonstrated to be false.
Keywords: uncertainty, linear risk, nonlinear risk, decision theory, Adam Smith
JEL Classification: B10, B20, B22
Suggested Citation: Suggested Citation