Wednesday, December 15, 2010

An Austrian on An Invisible Hand

Adrian Ravier (Economista) Blog in a interview with Richard M. Ebeling, professor of economics at Northwood University in Midland, (HERE):

“Austrian Economics versus the Mainstream”

Professor R. Ebeling;

As the same time, I found fascinating how the Austrians took up Adam Smith’s idea of the “invisible hand” and applied it to demonstrate the origin and evolution of social and market institutions that are often the unintended consequences of human action. This reinforced the argument against those who arrogantly wished to socially engineer human society. There is far more knowledge and experience at work in social processes, over years and over generations of people, than any planners could ever master and successfully manipulate to any good end.

Austrians certainly have taken up what they call Adam Smith’s idea of the “invisible hand” and, in my view, have joined neo-classical economists, whom they normally criticize, in distorting Smith’s use of the metaphor – transforming it into an ‘idea’, a ‘theory’, a ‘principle’, even a ‘paradigm’.

They add strength to the false notion, common among modern economists, that Adam Smith subscribed to a view that he was anticipating modern theories of general equilibrium. In fact, he only expressed the view that each domestic trader by participating in the national economy, they added to annual ‘domestic revenue and employment’, which simply expresses the every-day arithmetic statement that the ‘whole is the sum of its parts’ – more parts add to a larger total. This is hardly high mathematics.

Where the Austrians are right is in the statement that there are often “unintended consequences” of human motivations and actions. Smith certainly understood that view and expressed it. Where he would be more cautious is in concluding that the actions of individuals are ‘led by an invisible hand’ to ‘always’ result in harmonious or ‘best good’ outcomes (cf. Samuelson, Economics, 1948, p 36).

Smith’s use of the metaphor of an invisible hand had nothing to do with such benign consequences. We should, instead, focus on the ‘unintended outcomes’ of actions. These are truly significant and was one of points that Smith made in Wealth Of Nations.

I have along had reservations about the use of ‘spontaneous’ in association with these ideas. It’s simply the wrong word. Individuals act by choosing from among the possible options that are available, not necessarily on a rational basis – choice can be random, uninformed, wildly ill-advised, fortunate, inspired, lucky, fortunate, unfortunate, and so on. That a change leads to unforeseen outcomes (as in, for example, evolutionary change) is not best described as spontaneous, even if we cannot explain why a change occurred, particularly if it turns out, retrospectively, to be fortuitous. Change can take place after long periods of no change.

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