Monday, August 23, 2010

Ray Love Explains His Case

A Correspondent writes: By Ray L Love: (paragraphs inserted for readability)

As it turns out, Wiki has a quote from Stiglitz that further explains his position on this very issue:

"The Nobel Prize-winning economist Joseph E. Stiglitz, says: "the reason that the invisible hand often seems invisible is that it is often not there."[10][11] "Stiglitz explains his position:" "Adam Smith, the father of modern economics, is often cited as arguing for the "invisible hand" and free markets: firms, in the pursuit of profits, are led, as if by an invisible hand, to do what is best for the world. But unlike his followers, Adam Smith was aware of some of the limitations of free markets, and research since then has further clarified why free markets, by themselves, often do not lead to what is best. As I put it in my new book, Making Globalization Work, the reason that the invisible hand often seems invisible is that it is often not there."

"Whenever there are "externalities"—where the actions of an individual have impacts on others for which they do not pay, or for which they are not compensated—markets will not work well. Some of the important instances have long understood environmental externalities. Markets, by themselves, produce too much pollution. Markets, by themselves, also produce too little basic research. (The government was responsible for financing most of the important scientific breakthroughs, including the internet and the first telegraph line, and many bio-tech advances.)"

"But recent research has shown that these externalities are pervasive, whenever there is imperfect information or imperfect risk markets—that is always."

"Government plays an important role in banking and securities regulation, and a host of other areas: some regulation is required to make markets work. Government is needed, almost all would agree, at a minimum to enforce contracts and property rights."

"The real debate today is about finding the right balance between the market and government (and the third "sector"—non-governmental non-profit organizations.) Both are needed. They can each complement each other. This balance differs from time to time and place to place.[11]" ---

So, it seems that Dr. Stiglitz 'does' consider the invisible hand metaphor to imply that by "free markets", and by, the "pursuit of profits, [firms] are led, as if by an invisible hand, to do what is best for the world". In other words, you are using a quote from his writing out of context to align his position with your own. There is a subtle deceit involved here because the title suggests ('Stiglitz is Right') that Stiglitz is endorsing your position on what A. Smith meant by the 'invisible hand'... when, Dr. Stiglitz is suggesting nothing of the sort. Then you repeatedly distance yourself from his other views as if this distancing validates the quote taken out of context. Please explain.

I am also curious about how you get around the obvious fact that the very paragraph containing the invisible hand metaphor ( see David's comment) begins with, and repeats, the term: "every individual". Which, you argue, actually means: "some" ("traders", "merchants") in a variety of ways? There is not a 'way' though, to transform the word 'every'... to mean 'some'.

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2 Comments:

Blogger Paul Walker said...

Gavin. Can I make a couple of quick comments based on Ray's message.

First I wrote with regard to Stiglitz's view that he thinks that: "there are market failures and thus we need government actions to correct these."

From Ray's posting we have:

""But recent research has shown that these externalities are pervasive, whenever there is imperfect information or imperfect risk markets—that is always."

"Government plays an important role in banking and securities regulation, and a host of other areas: some regulation is required to make markets work."

Externalities are "always" there. And government has to act to correct them.

In addition I also noted that "Stiglitz's understanding of markets and "market failure" is a neoclassical understanding. He believes in, and uses as a benchmark for market failure, the fundamental theorems of welfare economics and as I have noted before, Mark Blaug argues that Smith's notion of markets has noting to do with these theorems."

All of Stiglitz's research and that of Akerlof, to which I assume Stiglitz is referring in the quote above, is within the neoclassical framework, which Smith would not have been happy working within. The world of the first and second welfare theorems is not the world of Adam Smith.

Thus I would argue that Stiglitz's view of the "invisible hand" is a neoclassical view in which the hand is "real" and this is what he is arguing against. He isn't arguing for Adam Smith's view of the "invisible hand", he is arguing against markets as an efficient allocated of resources where efficient is defined by the neoclassical model.

So I think Ray is right when he says "[...] it seems that Dr. Stiglitz 'does' consider the invisible hand metaphor to imply that by "free markets", and by, the "pursuit of profits, [firms] are led, as if by an invisible hand, to do what is best for the world"." Is this not the view of the invisible that Paul Samuelson has left us?

1:00 p.m.  
Blogger Gavin Kennedy said...

Paul
Yes, it was Samuelson, Economic 1948, who led modern economists to the welfare theorems attached to his wildly inaccurate assertions about Adam Smith and the metaphor of an invisible hand. It is now commonplace to present Smith's use of this particular metaphor as part of perfect competition, a notion not found in Adam Smith. Worse, he was supposed to be thinking in equilibrium lines.

Blaug is right on the non-Smithian welfare theorems. Here Stiglitz is wrong.

Gavin

4:13 p.m.  

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