Saturday, November 27, 2010

New Critique of Modern Myth of the Invisible Hand

I am reading a most interesting and, from the point of view of Lost Legacy, a most significant book. I refer to Kaushik Basu’s new book, published this month by Princeton University Press, “Beyond the Invisible Hand: groundwork for a new economics” (ISBN 978-0-691-13716-2; see Amazon).

What makes it so interesting to me is its approach. It accepts, indeed celebrates, the Adam Smith ‘myth’, namely the one created by modern economists from the 1950s, that Adam Smith’s use of the metaphor of the “invisible hand” was a “great idea” directly linked to the modern derivation of the Welfare Theorems embedded in mathematical theories of general equilibrium (Arrow, Debreu, etc.). Basu does this without in any way realising or accepting that this myth is itself a myth.

Basu’s interpretation is a misreading of what Adam Smith wrote, as shown countless times on Lost Legacy. The modern myth creates an edifice without foundations. Smith never said what the modern myth requires him to have said – it is a backward projection of modern ideas onto a text that does not support them.

He also presents his version of the modern myth with a startling admission: “it is sobering to recall that [Smith’s] theory of the invisible hand would remain a conjecture for close to two centuries after the appearance of his classic, An Inquiry into the Nature and Causes of the Wealth of Nations, despite the copious writings by Smith himself and his successors in political economy” (p 9). This fact, which is endlessly reported on Lost Legacy, is challenged by modern economists, such as Daniel Klein and David Friedman to mention two distinguished scholars who have appeared on this Blog, and many others at the seminars I have addressed since 2005.

By interpreting what Smith ‘really meant’ or ‘implied’, such critics can and have loaded Smith with the burden of their imaginative assertions about Adam Smith’s meaning, mainly from later authors, but not with definitive evidence in Smith’s texts. Basu adds: ‘It took mathematical economics, and the research of Kenneth Arrow, Gerard Debreu, Lionel Mackenzie and others for it to be given formal shape and proof’. This is roughly where Samuelson introduced the first of his 4½ millions readers of his popular textbook, Economics (1948, p 36: McGraw-Hill), to an early version of the modern myth, and has repeated in through its 19 editions.

Basu also observes that: ‘it is surprising to most contemporary economists who have not read The Wealth of Nations to learn that the invisible hand theory is not central to Smith as it is made out to be” (p 10). Absolutely true, but from which observation Basu draws precisely the wrong conclusions. He suggests that the 19th-century ‘orthodoxy’ (his name for the modern consensus) of “John Stuart Mill and John McCulloch” (to which names he could add Malthus, Ricardo, Marx and almost all other writers after Smith) saw the role of the market absent an invisible hand guiding it.

Basu, however, is correct to note that the 19th-century treatment of Smith as a fundamental ‘free market’ ideologue (laissez-fare, night-watchman state, and all that), was false and so is the claim that the ‘proof’ of his so-called Invisible hand theorem, was a ‘mathematical vindication’ of his alleged ‘belief’ (p 11).

You can imagine my excitement as I read Kaushik Basu’s most promising book (I shall continue reporting on it for more posts on Lost Legacy and I encourage readers to obtain a copy and read I with me).

Its author has stepped towards my criticism of the modern myth, albeit without accepting my position on it, by showing that the modern myth has misled economists into confusing their models with reality (the economy does not function as their maths appear to indicate) and by re-drafting what is closer to what really happens (which “entails a leap of imagination”), he will show where the “Invisible Hand Theorem” ceases to hold, and why. I shall report on how he sets about this, because Basu’s book is the first serious study of the modern myth related to the ‘Invisible Hand’ I have seen anywhere.

I understand the political benefit of not attacking everything about modern economics to get a fair hearing from the profession – and I thereby excuse Basu’s intentions as stated in the first chapter – and I wait to read how he goes about his reconstruction of the welfare theorems for my final judgements.

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1 Comments:

Blogger Bhagirath Baria said...

Am too reading this book. Well, I believe the 'invisible hand' phrase of Wealth of Nations has been exploited unreasonably by the laissez faire Economists. This book will add many more arguments to my stock of ideas, to attack this orthodoxy. Have reached the 2nd chapter as of now. Keep us updated. Regards.

5:26 p.m.  

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