Wednesday, October 11, 2006

Why George Stiglitz is often almost right and as often quite wrong.

Look at this answer George Stiglitz gave to questions from Guillermo Bona from Switzerland, a reader of the International Herald Tribune (France) on 11 October. He was asked:

“Why shouldn’t we let the free market forces determine what is the best for the world? What is your opinion on the issue on free worldwide market forces vs. regulation”?

Stiglitz:

“Adam Smith, the father of modern economics, is often cited as arguing for the “invisible hand” and free markets: firms, in the pursuit of profits, are led, as if by an invisible hand, to do what is best for the world. But unlike his followers, Adam Smith was aware of some of the limitations of free markets, and research since then has further clarified why free markets, by themselves, often do not lead to what is best. As I put it in my new book, Making Globalization Work, the reason that the ivnisible hand often seems invisible is that it is often not there."

Comment
If George Stiglitz gets Smith on the invisible hand mostly wrong, what hope is there for the answer he gives to Guillermo Bona’s questions?

That Smith is ‘often cited’, does not give any credibility to whatever is added by the citers. The citers could just as easily be wrong – and they are in fact. Smith did not ‘argue’ for the so-called invisible hand; he cited it once only in Wealth of Nations (page 476), which is a lot fewer times than ‘often’, and when he did cite it on one occasion he was not talking about ‘free markets’.

Nor did he argue that in free markets ‘firms, firms, in the pursuit of profits, are led, as if by an invisible hand, to do what is best for the world.’ Where does George get that idea from? Certainly not in Wealth of Nations.

Also note how George slips in, unobtrusively, the words ‘as if’. At no place does use these words. That is a popular myth, as any casual glance at the sole citation in Wealth of Nations would show (and also on the two other occasions, once in ‘Moral Sentiments’ and once in the History of Astronomy, would show).

Indeed, Smith takes many opportunities to show – in detail – how merchants and manufacturers (NB: not ‘firms’!) often use their powers not ‘to do what is best for the world’, but to do what is best for themselves (which Smith never confused with what was ‘best for the world’) by forming monopolies, restrictions on competition and raising prices.
How does a ‘top’ economist like George Stiglitz get Smith so wrong? He notes, correctly, that ‘unlike his followers, Adam Smith was aware of some of the limitations of free markets’, which flatly contradicts his errors immediately preceding correct statement. Does George not realize his contradiction? And who are these ‘followers’ who are not ‘aware’ that Smith was aware of the limitations of people in ‘firms’ (not please, ‘markets’) who distort markets to prevent them working freely?

On the basis of the above, we must include George Stigler among the ‘followers’ of Adam Smith who are not ‘aware’ of what he said about ‘an invisible hand’. Again George is almost right:
‘the reason that the invisible hand often seems invisible is that it is often not there.’
More than this George. ‘The invisible hand’ (actually ‘an invisible hand’) is not just ‘often not there’; it is never there. It does not exist. It never did. Smith knew this. It was for him a metaphor, not a theory, not something tangible, not something invisible but existing out of sight. It was merely a metaphor to show how humans may be motivated to do something that unintentionally creates an outcome they know nothing about individually.

Likewise, in the parable of the ‘commons’, the individual actions of those who graze their sheep or goats on it, can have cause its grazing properties to be ruined by over grazing. Nothing more was meant by ‘an invisible hand’. It was not a predictor (not all commons, incidentally were over grazed!) of anything on all occasions, or ‘often’, of something necessarily so.

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