Sunday, November 26, 2006

Miracles No, Markets Yes

An economist Steven Landburg wrote in "Armchair Economics" about the invisible hand: "It is something of a miracle that individual selfish decisions lead to a collectively efficient outcomes."

And the following are from one article using ‘Thanksgiving’ as a hook to pause in ‘wonder’, ‘surprise’ and ‘admiration’ of markets in action. Harmless? That depends on the conclusions drawn from pausing in awe during poetic moods about natural phenomena.

The article declaims: ‘the miracle of the invisible hand’ and asks: ‘If that isn't a miracle, what should we call it?’ Consider for a moment if the subject was not a metaphor, but a rainbow following a shower of rain, with the inevitable fairy story of the ‘pot of gold’ waiting at the end of it.

Poetry, literary licence, childish wonder, all three? Is it worthy of economics as a science that knowledge about how markets work is presented in the same manner as ‘pots of gold’ and the creation of rainbows by invisible supernatural gods?

In the question of how markets work, Adam Smith (and many others before and since) made contributions that are, and ought to be, well understood today. Yet the adjective ‘miraculous’ is bandied about as if such notions add anything to understanding. By association, too, it adds to confusions best avoided.

Consider the following:

“Adam Smith called it "the invisible hand" -- the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many. Out of the seeming chaos of millions of uncoordinated private transactions emerges the spontaneous order of the market. Free human beings freely interact, and the result is an array of goods and services more immense than the human mind can comprehend. No dictator, no bureaucracy, no supercomputer plans it in advance. Indeed, the more an economy *is* planned, the more it is plagued by shortages, dislocation, and failure"


"It is something of a miracle that individual selfish decisions lead to collectively efficient outcomes."

From Mark J. Perry’s Blog for Economics and Finance, Carpe Diem (23 November) and his article: Thankful for the invisible hand’

Such talk leads to notions of praying for social and economic development. Does it not follow that when markets are regarded (worshipped?) as ‘miracles’ our belief in them ceases to involve people who operate within them or, in parts of the world, substantially without them, and moves to the higher mysteries of invisible gods – a ‘hand’ without a ‘body’ cannot exist – and their favours.

Like the notion of original sin, those without the benefits of the indulgences of the gods are in a self-determined vulnerability to the absence of these benefits, either because of their own ‘sins’ or those of their antecedents. Thus, those communities from which the benefits of markets are absent have only themselves to blame – the poor are poor because they are deficient in some missing qualities that others have.

Even excluding such notions from the thinking of those believing in the ‘miracle’ of the market, one question is always the elephant in the room: why, if markets work by ‘miracles’, why is it that the ‘miraculous’ does not happen to occur by proclamation in those, large parts of the world, often with large populations of people no different in capacity for any others elsewhere?

Markets are not started by ‘miracles’, they don’t need ‘miracles’ to keep going, and they don’t happen by proclamations about ‘miracles’. Smith wrote extensively about markets in the commercial age, about their history and their genesis in the propensity to truck, barter, and exchange, and the division of labour based on the realisation of benefits of exchanging surplus output, and he analysed how prices signal to participants their best immediate actions, all of which appear disconnected from the actions of others, but which are in fact interconnected anonymously to the actions of untold myriad others.

Markets grow slowly and inexorably over long periods, gradually widening and deepening their influence, as they draw in new and old participants in ever more complex layers of interconnections that reveal new and revised opportunities for new exchange relationships, and the termination of old relationships, enhanced by the growth of knowledge and technologies.

Two other matters need correction. One is the absurd notion that it is selfishness that drives people’s actions in markets, reaching its worst rendition in the Greko speak of ‘greed is good’. Whatever the alleged merits of the Holywood scriptwriter’s view it most certainly was not Adam Smith’s; in fact the ‘culprit’ was Bernard Mandeville, described Smith a ‘licentious’ philosophy. It is not selfishness, but mediated self-interest or ‘self-love’. To conclude transactions the parties must take account of the interests of the other party in addition to their own. Two selfish egoists would seldom, if ever, conclude their bargains. No matter what may bargainers believe, they serve the interests of others, not themselves alone.

The other is the unfounded assertion that by acting for their own self-interests they necessarily, automatically, or even consequentially, serve the interests of society as a whole. That would indeed be a ‘miracle’! Self-interests do not always serve society’s interests, even broadly considered, but certainly not narrowly considered. Monopolists, polluters and protectionists all act in their self-interests and self-love, and cannot be said to serve society’s interest. Those notions smack of an apologia for corporate, and personal, responsibility for anything they decide to do (a failing I associate with the Chicago school).


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