Tuesday, April 27, 2010

The Misunderstood Invisible Hand (Part 94)

amv’ posts in ‘coffehouse eonomics’ (A Tour Guide to Economics–Field Reports of Four Hohenheim Grads) HERE:

'Again the invisible hand: I just can't get enough (amv)'

“Adam Smith‘s ‘invisible hand‘ is a poetic expression of the most fundamental of economic balance relations, the equalization of rates of return, as enforced by the tendency of factors to move from low to high returns.[...] Smith also perceived the most important implication of general equilibrium theory, the ability of a competitive system to achieve an allocation of resources that is efficient in some sense. Nothing resembling a rigorous argument for, or even a careful statement of the efficiency proposition can be found in Smith, however
(Arrow, Hahn 1971: 1-2) [General Competitive Analysis, San Francisco: Holden Day]

Arrow and Hahn in the same article described the invisible-hand ‘as surely the most important contribution [of] economic thought’ for something they invented themselves. For Smith the invisible hand certainly could be described as a ‘a poetic expression’, but it had, for Smith at least, nothing to do with ‘the equalization of rates of return, as enforced by the tendency of factors to move from low to high returns’, nor did Smith actually write anything about ‘the most important implication of general equilibrium theory’, and as for it achieving ‘an allocation of resources that is efficient in some sense’ that is hardly a recommendation – an efficient allocation, or a Pareto optima, could include a grotesque maldistribution of income such that millions starve and a few don’t, but nobody can be made better off without a few others being made worse off.

‘amv’, a graduate, would know about the limitations of welfare ‘efficiency’ criteria, but having bought into Arrow, Hahn and others’ expositions of the ‘invisible hand’, and not having read Smith closely enough, she/he makes a mistake.

‘amv’ even quotes paragraph 9, Book IV, chapter ii, page 456 of Wealth Of Nations, but clearly has not read and understood the immediately previous 8 paragraphs of Smith’s exposition. If she/he had done so, the idea might have dawned that Smith was writing about something other than what Arrow, Hahn, Samuelson others imagined and invented in mid-20th century.

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Blogger Paul Walker said...

Mark Blaug points out "[ ... ] Smith's faith in the benefits of 'the invisible hand' has absolutely nothing whatever to do with allocative efficiency in circumstances where competition is perfect a la Walras and Pareto; the effort in modern textbooks to enlist Adam Smith in support of what is now known as the 'fundamental theorems of welfare economics' is a historical travesty of major proportions. For one thing, Smith's conception of competition was, as we have seen, a process conception, not an end-state conception. For another society, a decentralised competitive price system was held to be desirable because of its dynamic effects in widening the scope of the market and extending the advantages of the division of labour - in short, because it was a powerful engine for promoting the accumulation of capital and the growth of income." (Blaug 1996: 60-1).

Blaug, Mark (1996). "Economic Theory in Retrospect", 5th edn., Cambridge: Cambridge University Press.

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Blogger Skyline College said...

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6:54 am  
Blogger Gavin Kennedy said...

Thanks Paul

An incredibly useful quotation which I missed. I have a copy of Mark Blaug's book since my student days (1960s) and indeed, spent several days with him a year or so ago at a Conference on the History of Economic Thought. We discussed many matters over many informal meetings, mainly about Joan Robinson and her Cambridge colleagues.

I have added the reference to my paper on Samuelson and shall post in on the main page today.


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