Monday, November 27, 2006

Chicago Hoisted on its Own Petard

Mark Thoma in Economist’s View at:, asks: “Was Adam Smith Wrong About the Invisible Hand?”

Economics: The Invisible Hand of the Market, [a review] by Peter Steinfels, NY Times: Duncan K. Foley [has a] ... new book... [F]or his survey of more than 200 years of economic thought, ... he chose the title “Adam’s Fallacy: A Guide to Economic Theology.”
Adam? Theology? The Adam in question is ... the founding father of modern economics, Adam Smith.

So what is “Adam’s Fallacy”? ... It is the idea that the economic sphere of life constitutes a separate realm “in which the pursuit of self-interest is guided by objective laws to a socially beneficent outcome,” Professor Foley wrote, a realm unlike all the rest of social life, “in which the pursuit of self-interest is morally problematic and has to be weighed against other ends.”

To which Mark Thoma comments:

The attacks on economics get tiresome. The main thesis is that Adam Smith's invisible hand doesn't work, that the pursuit of self-interest is not guided by an invisible hand to the best societal outcome. There aren't enough details given about why the author believes this to fully evaluate the reasoning behind the assertion, but some of the reasoning is discussed.

The author says:
“These are discussions, above all, of faith and belief, not of fact, and hence theological”
Why does this disqualify economics as a science? Theories aren't facts. Theories can be falsified by the evidence, but no amount of experimental work can ever confirm they are true. All science is, in this sense, based upon "faith and belief, not of fact, and hence theological."

It’s not just that Foley is wrong (I found his views on Adam Smith wrong on several counts), but that Mark Thoma is also wrong in his defence, not of Adam Smith, but of the Chicago version of Adam Smith, somewhat at variance with the scholar from Kirkcaldy.

If Duncan Foley’s criticism of Smith’s so-called folly is about Smith’s alleged assertions about the metaphor of ‘an invisible hand’, then both Foley is wrong (Smith did not have a ‘theory’ of markets involving ‘an invisible hand’, or if he did he never made this clear in anything he wrote, so we don’t know about it) and Mark Thoma is wrong to associate Smith with the testable assertion that markets were ‘guided’, ‘managed’ or ‘operate’ under the influence of an invisible hand.

Scan down Lost legacy Blog this last week to see my take on Smith’s metaphor for a case against the dominant belief in the market’s ‘invisible hand’, which Chicago theory falls at the first hurdle of finding such a theory in Wealth of Nations (or Moral Sentiments, or his ‘History of Astronomy’ essay).

If it wasn’t Smith’s theory, then testing such the Chicago theory might be interesting but it would have nothing to do with Adam Smith.

As for Mark Foley’s own folly in creating a book aimed at undergraduates and general readers based on false notions about one of the protagonists that he features, the best we can say is that it is based on a false prospectus.


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