Sunday, October 25, 2009

Excellent Writing But Still Mythical

Atanu Dey writes a highly readable and lively piece on “Why education matters” HERE

I am sure that there is no secret cabal of powerful people with evil glints in their eyes plotting to keep Indians illiterate. But individual behavior motivated by private incentives - micro behavior - have consequences at the social level - macro outcomes - that are not intended by individuals. The most famous example of this is Adam Smith's "invisible hand" - the market mechanism that grinds out the socially beneficial outcome even though an individual is only interested in his or her own welfare. So also, there could be what we can call the "invisible fist" of the government which can pummel the life out of a society even though no single government official is doing anything more than making his or her life comfortable.”

Atanu Dey writes well and complains that 33 per cent of Indian adults are illiterate. An alarming statistic for any country and doubly so for the world’s largest democracy.

His clever construction of the possible reason why government action fails to address the illiteracy problem by drawing a parallel with the invented notion of an “invisible hand” in the economy, wrongly attributed to Adam Smith by modern economists is well stated. But good writing is still vulnerable to the evidence.

Because Adam Smith didn’t write anything about the “invisible hand” being a “market mechanism” that “grinds out the socially beneficial outcome even though an individual is only interested in his or her own welfare” - see numerous posts in Lost Legacy that expose this myth – it was at root a myth created by well-meaning modern economists as part of anti-Soviet planning propaganda during the Cold War (and over enthusiastic mathematicians carried away with their 'proof' of general equilibrium applying to the real world).

Their motives were laudable – Stalin’s Soviet planning was backed by repressive civil violence and threatened to cause World War III (and IV and V, etc.,). But by their apparent endorsement of unrestrained behaviours their own unintended consequences created a mythical monster that self-interest, elided by epigones in selfishness, worked out, Panglossian-like, for the “best of all possible worlds”, covering over a plethora of externalities that damaged the interests of the rest of society (pollution, environmental destruction, monopoly pricing, protectionism, and local wars arising from them.

By associating Adam Smith with the invented myths, they traduced his reputation too. Most economists actually believe that Smith was the author of the myth. He wasn’t.

Yet many climb on the bandwagon that the current recession ‘exposes’ the ‘failures’ of following Adam Smith’s policies, in particular ‘laissez-faire’ (which he never supported – nor mentioned even once), ‘lack of regulation’ (when in fact he specifically advocated the exact opposite where it came to bank policies “which might endanger the whole security of the society”; see WN II.ii.94: 324) and the mythical “invisible hand”, mere metaphor for an entirely different set of circumstances).

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Blogger Unknown said...

Gavin, thanks for your comments on the matter of markets and invisible hands. I am going by this quote of Smith:

“By directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

My point was that micro-motives have unintended macro-consequences. In the case of policy makers in India and education, the fist invisibly leads to bad outcomes.

Even if Smith did not talk about a market mechanism, I think that the market mechanism works like an invisible hand.

But I confess that I have not yet read your posts -- which I intend to do.


5:15 am  
Blogger Gavin Kennedy said...

That quotation is part of an 8 paragraph explanation about how some, but not all, merchants prefer to home trade to foreign trade, and why they do so. Roughly it is their risk-avoidance of the greater risks in foreign trade to Europe, India, and the colonial trzde to North America and the Caribbean.

Read all 8 paragraphs (pp 452-56, Book IV, Wealth Of Nations. The outcome is due to the arithmetical law of the whole is the sum of its parts.

You may believe legitimaly that the the metaphor of an invisible hand is a description of a market mechanism, but that is not what Smith wrote.

For him it was a mere metaphor and as such did not add anything to his explanation of domestic versus foreign trade.

Enjoy reading about this subject in Wealth Of Naitons and here on Lost Legacy.


9:50 pm  

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