Monday, July 27, 2009

New Book by Steve Medema Looks Promising

Real Time Economics(“Economic insight and analysis from The Wall Street Journal”)carries a Guest Contribution: “The Invisible Hand Isn’t Broken

“The free market has gotten a bad rap, but the invisible hand was never meant to be completely unfettered, writes Steven G. Medema, professor of economics at the University of Colorado Denver and the author of “The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas” [Princeton University Press, 2009] HERE:

"The idea that the self-interested behavior could be good for the economy did not originate with Smith, but he provided the theoretical ammunition for this view and remains the historical figure with whom it is most closely associated. Smith’s view of things was that businessmen do indeed pursue their self-interest, but that such behavior can redound to the best interests of society as a whole — higher national wealth, lower goods prices for consumers, etc. — if that self-interested behavior is encased within a competitive market environment. This, of course, is Smith’s famous “invisible hand” argument, which has been championed by some as an argument for minimalist government and derided by others as a myth that has been disproved by events."

"But as convinced as Smith was of the utility of the market for promoting economic growth attended by benefits that extend across the population, he was not a champion of unfettered markets. Smith wrote at a time when various government schemes of protection established monopolies across the economy, which generated higher prices for consumers at the same time that they enriched the narrow classes of protected businessmen. He advocated the competitive process as an alternative to that system.
Smith saw an important role for the state within the market process. He was well aware that the unfettered pursuit of self-interest had many pitfalls associated with it, and he wrote at length about the need to embed the market system within an appropriate legal and moral environment, even going so far as to recommend legal ceilings on interest rates to prevent banks from lending large amounts of society’s financial capital for the pursuit of excessively speculative ventures”

Not quite there yet but definitely moving in the right direction.
From an automatic relationship of individual self-interest to social benefits (usually aided, directed even, by an invisible hand, there is a clear sign that this relationship is qualified by its dependence on the content of the self-interest embodied in it and its context (rule of law, justice, degree of competition, and types of behaviours).

Smith gave over 60 instances of self-interest working against the interests of other individuals in Wealth Of Nationssee footnote 3, Self interest is not always benign as far as Smith was concerned, but not a lot of modern economists seem understand that (most of them have never read Wealth Of Nations).

The Wall Street Journal article recognises this in part – follow the link to read Steve Medema’s important new book – I am about to start reviewing it for Lost Legacy and shall post my review soon.

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