Friday, October 19, 2007

'Benvolent' Invisible Hands Are a Neoclassical Invention not Adam Smith's Naivety

Adrian Cho in ScienceNOW Daily News (15 October) writes, ‘The Economics Nobel: Giving Adam Smith a Helping Hand’,(here):

Scottish philosopher Adam Smith asserted that when everyone acts out of self-interest, everyone will eventually benefit, as if a benevolent "invisible hand" molds the economy. Economists now know that view is naive: They can prove that in some situations, rational people will act in ways that leave everybody a loser. But such dreary outcomes can sometimes be avoided, thanks to work that today earned three Americans the Nobel Prize in economics.”

The fact is that Adam Smith did not assert ‘that when everyone acts out of self-interest, everyone will eventually benefit, as if a benevolent "invisible hand" molds the economy.’

This outrageous calumny is a fabrication by neoclassical economists, including winners of the prestigious economics version of the Nobel prize awarded by the Bank of Sweden each year, who by a tenuous slide of meaning use the assertion to give historical credibility to general equilibrium mathematical equations that do not correspond to the world we live in (and never have!).

For Adrian Cho to assert that ‘Economists now know that view is naïve’ exposes a consequential ignorance of what Adam Smith actually wrote about his use of the metaphor of the invisible hand. There are numerous postings on Lost Legacy that make this point and I refer readers to them.

The fact is that Adam Smith’s Wealth Of Nations is literally littered with his examples of significant instances of people ‘act[ing] out of self interest’ to the detriment of everyone else, and from Smith’s historical account it is clear that this has always been so. In Wealth Of Nations, Books I and II, which analyse how markets work in the world he lived in, how they have always worked, and still work, he provides 51 specific examples of the self-interests leading to results far short of them ‘benefiting’ anybody other than themselves.

This contrasts with the single use of the metaphor that has been interpreted variously by some classical and all neoclassical economists as a ‘concept’, a ‘theory’, and even a ‘paradigm’! Hence, this month’s winners of the Nobel prize for ‘economics science’ were not showing Adam Smith’s naivety for believing such assertions about self interest leading ‘always’, or ‘eventually’ to society benefiting.

They were correcting the neoclassical error believed with all the conviction of a religious belief beyond human understanding, as it must be because the role of self interest is well explained as a very human behaviour in both Moral Sentiments and Wealth Of Nations without the intervention of invisible body parts.

That some economists have found in the invisible hand the intervention of a god or a divine spirit in the literary metaphor that was common enough in the 17th and 18th centuries, and long before back into Greek and Roman times, reveals a most unscientific notion totally unexplained or explainable by them or other neoclassical economists.

The negative aspects of self interest when exercised by powerful rulers and monopolists (and polluters!) is indeed ‘dreary’, but it is also normal. Adam Smith's realisation of the prevalence of these historical norms led him to suggest measures, that would curtail them.

Necessarily, this implied legislative intervention - it wasn't going to happen otherwise - and that is why Wealth Of Nations was written to persuade legislators, and those who influenced them, to replace, slowly and gradually, the policies of mercantile political economy , to improve the progress towards opulence, which would reduce absolute poverty, partricularly among the majority of the population.


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