Saturday, November 28, 2009

Why Use Superstition to Explain Markets?

Mark Perry, professor of economics and finance at University of Michigan (Flint) writes a seasonal piece for (US) “Thanksgiving” (HERE): quoting an example from in Boston Globe in 2003.

Giving Thanks for Capitalism, The Invisible Hand, the Miracle of the Free Market and No Turkey Czars

Like in previous years, you probably didn't call your local supermarket ahead of time and order your Thanksgiving turkey this year. Why not? Because you automatically assumed that a turkey would be there when you showed up, and it probably was there when you showed up "unannounced" at the grocery store to select your bird.

The reason your Thanksgiving turkey was waiting for you without an advance order? Because of "spontaneous order," "self-interest," and the "invisible hand" of the free market - "the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many." And even if your turkey appeared in your local grocery stores only because of the "selfishness" or "corporate greed" of thousands of turkey farmers, truckers, and supermarket owners who are complete strangers to you and your family, it's still part of the miracle of the marketplace where "individually selfish decisions lead to collectively efficient outcomes."

In a 2003 Boston Globe column titled "Giving Thanks for the Invisible Hand" Jeff Jacoby explains below why he is thankful for the miracle of the invisible hand that makes affordable turkeys automatically available so efficiently at Thanksgiving:

The activities of countless people over the course of many months had to be intricately choreographed and precisely timed, so that when you showed up to buy a fresh Thanksgiving turkey, there would be one -- or more likely, a few dozen -- waiting. The level of coordination that was required to pull it off is mind-boggling. But what is even more mind-boggling is this: No one coordinated it...

Adam Smith called it "the invisible hand" -- the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many. Out of the seeming chaos of millions of uncoordinated private transactions emerges the spontaneous order of the market. Free human beings freely interact, and the result is an array of goods and services more immense than the human mind can comprehend. No dictator, no bureaucracy, no supercomputer plans it in advance. Indeed, the more an economy *is* planned, the more it is plagued by shortages, dislocation, and failure.

It is commonplace to speak of seeing God's signature in the intricacy of a spider's web or the animation of a beehive. But they pale in comparison to the kaleidoscopic energy and productivity of the free market. If it is a blessing from Heaven when seeds are transformed into grain, how much more of a blessing is it when our private, voluntary exchanges are transformed - without our ever intending it - into prosperity, innovation, and growth

I wonder where Professor Perry (and Jeff Jacoby) read where Adam Smith called the “invisible hand” the “the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many”, or where he described the “invisible hand” as a “miracle”?

What exactly is the “invisible hand”? Is it always benign? How does anybody know? Is it operated as an intention, a process, or an outcome? Is it divine?
Is it really the case that “the miracle of the marketplace” is where "individually selfish decisions lead to collectively efficient outcomes”? Even the word “efficient” is suspect because it is not one that Smith used (more a neo-classical invention).

Even allowing for the probable fact that Professor Perry’s “Thanksgiving” piece is not intended for technical scrutiny and that it is an example of a snappy piece of journalistic licence intended for popular consumption, I still find it disappointing that the existence of commercial markets for multi-millennia, based on the universal human behaviours of the propensity to “truck, barter, and exchange” (Book I, Wealth of Nations) is wrapped into such unscientific language and thinking as something allegedly “miraculous”, divine, and evidence of “God's signature”, yet how markets work has been known for several centuries.

The phenomenon of social markets which were once “surprising” and then a source of “wonder” has since the 18th century have matured to being “admirable” (Smith’s History of Astronomy, [1744-58], edited by Joseph Black and James Hutton, 1795).

Like the rainbow, which once amazed (‘pots of gold’) and frightened humans in equal measure under thrall of unscientific “pusillanimous superstition”, is now understood as a optical phenomenon to most school children who pay at least a modicum of attention to their lessons. Yet in economics, which claims to be a science, social if not natural, and among mathematical economists in particular, the metaphor of the invisible hand has become a corner stone of neo-classical market doctrine.

Look up almost any of the popular mainstream textbooks since the 1950s and you will find the invisible-hand metaphor spreading its non-secular gloss on a social phenomenon, which is understood by all neo-classical economists, in their cases, perfectly.

It’s a strange old world.

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