Saturday, September 22, 2007

Belief in Invisible Hands Belittle Adam Smith's legacy

Mary Kissel (editor of The Wall Street Journal Asia's editorial page) in Opinion Journal of the Wall Street Journal, writes a nice piece on a bustling market in New Delhi. It is worth reading, except for the usual attributions to Adam Smith:

Passage to India: Adam Smith in a Delhi market.” (21 September):

Shruti is educating me on Adam Smith's invisible hand in a free market--the real kind, that is.

This, mind you, is a market that predates Smith himself. Built in 1650 by the Mughal emperor Shah Jahan's daughter, Jahanara, Chrandni Chowk covers several football fields' worth of space. The shopping conditions aren't attractive; at first glance, many of the crumbling buildings don't even look stable. It's the top-quality goods that draw the crowds. There's no government imposing order. And why should it? As Smith said, there's a "certain propensity" in human nature to "truck, barter and exchange one thing for another," so it's natural that a certain kind of system, guided by an "invisible hand," results. Chandni Chowk must be the perfect place to watch it at work.”

What is with people who feel a need to mystify how markets work?

On the one hand we have neoclassical economists quantifying every variable they can measure (ignoring what they can’t) to prove that their fantasy creations rest in general equilibrium, even though nowhere in the real world are their assumed conditions realised or realisable; on the other hand, we have the same ‘scientists’ claiming that in the real world there is a invisible hand (or is it many invisible hands?), which like Santa Claus must get around the trillions of transactions a day, ‘guiding’ real markets in such a manner that the whole system ‘works’, even though nobody has ever explained how it, or they, does its or their jobs.

For people claiming to be scientists, they behave like people imbued with pagan superstition.

Yet markets work in the context of all the things that neoclassical equations ignore and do so whether the invisible hand is invisible because that is its nature or because it doesn’t exist, which is why it is invisible.

Adam Smith’s explanation from his detailed analysis of markets (Book I and II of Wealth Of Nations) is perfectly understandable without the equations and without belief in invisible hands, a metaphor he used only once for a different purpose in Book IV.

In his posthumous 1795 'Essay on Astronomy' (Essays of Philosophical Subjects, edited by W. P. D. Wightman, Oxford), Smith refers to the three experiences of surprise, wonder and admiration that we go through when we confront something we do not know about. Our first reaction is ‘surprise’ at something out of the ordinary or of which we have no knowledge; ‘wonder’ as we begin to develop ideas about it; and ‘admiration’ once we understand what it is and how it works. Understanding never replaces our admiration, even awe, at its beauty, much as we can know all about the refraction of light and still admire a rainbow as we did when we first saw one.

Pusillanimous superstition’ was Adam Smith’s expression at the reaction of our savage forebears to phenomenon they did not understand, which they put down to the actions of invisible gods who were beyond human understanding. This was his first of only three uses of the ‘invisible hand’ in this case of Jupiter (the Roman god Jove).

Having fully explained how markets work, and how scores of interconnections among different chains of supply co-ordinated themselves without mentioning human guidance nor invisible hands, nor gods nor divine spirits, and, in his terms, having moved on readers of Wealth Of Nations from pusillanimous superstition from their surprise and wonder that markets worked, Smith would be disappointed to note how modern neoclassical economists have re-introduced silly superstition in the form of misappropriating an invisible hand metaphor into a major principle of his economics.

That Nobel prize winners (Stigler, Hahn and Tobin) introduce their version of an ‘invisible hand’ (not Smith’s) into the working of markets is bad enough, but that they explicitly identify it as Adam Smith’s theory (their scholastic authority giving credence to what is sheer nonsense) is worse.

I do not expect Mary Kissel to distinguish between what Adam Smith wrote and what his epigones claim he wrote, so that she writes about the propensity to truck, barter, and exchange and claims that ‘it's natural that a certain kind of system, guided by an "invisible hand," results’, even though that is a travesty of Adam Smith’s thinking. She is only misusing a metaphor as many scholarly economists do every day.

Chrandri Chowk was built in 1650 and has operated ever since as a market place. It is not a demonstration of equilibrium in its transactions’; it is not evidence of invisible spirits at work; there is nothing magical about how it functions; and realising these truths does not diminish our admiration for such market places one iota.

Markets are in the behaviour sets of all humans and they operate in many aspects of human life that has little to do, if anything at all, with buying and selling items. Smith made these points throughout all of his Works, from his history of natural philosophy, his history of languages, his history of morals, ethics and the practices of social harmony and disharmony, in the daily persuasions of life, in negotiated transactions across human behaviours and, of course, in, but not exclusively tied to, commercial markets.

Invisible gods, and their hands, do not guide human activities. Such beliefs belittle Adam Smith’s legacy.


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