Wednesday, July 29, 2009

A Confusion of Identities

In the Daily Klos Blog, Patrice Ayme writes HERE:

“SMITH OUGHT TO HAVE LEARNED MORE THAN FRENCH:

Adam Smith, having apparently confused his mastery of French with a mastery of economics, grabbed the word "laissez faire" from the French self christened "Economistes", and thought that this "invisible hand" had solved house management, for the better. Adam Smith did not invent the theory of the "invisible hand", either, it was written down before Smith was born (by Mandeville who subtitled his famous Fable of the Bees, with: "Private Vices Public Benefits" – this striking formulation pretty much extols the naivety of it all).

Well, "laissez faire" and invisibility of manipulators do not provide necessarily with the best housemanagement. Every country that has established a government insured health care system has long known that.”

Comment
Patrice appears not to know that Adam Smith never used the phrase ‘laissez-faire’ at all in anything he wrote, so it seems strange that Patrice thinks he ‘grabbed’ it from French economistes (I think he means the Physiocrats).

Patrice is correct, however, though not in the way he thinks: Adam Smith did not ‘invent the theory of the invisible hand’ – he never had such a theory in anything he wrote.

For Smith it was a metaphor, not a 'theory', and its modern notion was invented by modern economists in Chicago in the 1930 and popularised from the 1940s. Its modern meanings had nothing to do with Adam Smith.

I am not clear how Bernard Mandeville gets into this story.

The rest of Patrice’s article is a long rant about health care ... I gave up reading it.

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3 Comments:

Blogger Don said...

I have a different view of the Chicago School. The recent school is different than the school of Knight and Simons. This is a good essay about Simons:

http://econ161.berkeley.edu/pdf_files/Henry_Simons.pdf

"This failure to recognize that Chicago’s conception of the necessary public foundation
of a competitive free-market economy has shifted is too bad, for there is an ambiguity at the
heart of economists’ conceptions of the state which should be debated and which is thrown into relief by a comparison between Simons then and Stigler now. State action is to be feared:
the state is easily corrupted by rent-seeking interest groups. But the establishment of property
rights and of contract enforcement procedures fundamental for the existence of a market
economy is itself state action of a sort. There are different ways in which property rights
could be defined; there are many possible sets of “rules of the game” for a market economy.
The government acts when we citizens use it to choose one of these sets. If, as Simons argues
following a long tradition that includes Frank Knight, Joseph Schumpeter, and Adam Smith,
competitive markets are fragile in the sense that they often contain the seeds of their collapse
into monopoly, then the particular “foundations” chosen for the market are of prime
importance. One would hope to find that set of rules of the game most hostile to the
development of private monopoly and to the capture of the government by interests that push
for publicly-supported monopoly. Fear of government action that “interferes” with relative
prices thus leads an economist to embrace government action that provides proper
“foundations” for the marketplace. This dilemma may be important, but it remains
unrecognized if classical liberals who hold positions like Simons’ are mislabelled as
“interventionists.”

Knight and Simons are still in the Political Economy camp, from my point of view. Milton Friedman straddles the older school and current school, by putting forth both utopian and pragmatic positions.

As Simons wrote:

"The representation of laissez faire as a merely do-nothing policy is
unfortunate and misleading. It is an obvious responsibility of the state
under this policy to maintain the kind of legal and institutional
framework within which competition can function effectively as an
agency of control. The policy, therefore, should be defined positively,
as one under which the state seeks to establish and maintain such
conditions that it may avoid the necessity of regulating "the heart of the
contract" -- that is to say, the necessity of regulating relative prices.
Thus, the state is charged, under this "division of labor," with heavy
responsibilities and large "control" functions: the maintenance of
competitive conditions in industry, the control of the currency... the
definition of the institution of property...not to mention the many social
welfare activities."

I'm wondering then if you agree with me that the 1930s Chicago School is not responsible for the errors about Smith, but the more recent school is responsible.

Don the libertarian Democrat

1:27 am  
Blogger Gavin Kennedy said...

Don
You are of course right - I often used the shorthand 'Chicago' for sets of policies and interpretative theories with which I disagree (Stigler, Friedman, general equilibrium, among others).

This too blunt and probably lazy too. From several correspondents over the years, whom I have tended to ignore (laziness in not following their clues), my label 'Chicago' is questionable.

From what I see there were several strains of Chicago over the 1920s-1960s and I should overcome handy inertia and find out more.

Many thanks for your pointers to Simons.

Gavin

5:43 am  
Blogger Gavin Kennedy said...

Don
I have now read the Simon's paper which you signposted (many thanks).

An interesting debate for me and for today's context too.

The issues remain unresolved.

Any other papers you might have access to would be most useful.

Gavin

6:56 pm  

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