Sunday, December 05, 2010

New Critique of the Modern Invisible Hand Theory Part 3

Beyond the Invisible Hand: groundwork for a new economics by Kaushik Basu, 2010, Princeton University Press Part 3

Moving on from the first two chapters, which deal with the modern myth of the invisible hand without critical questions. Basu compounds his offence against Adam Smith’s legacy by re-naming the welfare theorem (Pareto Optimality) as the ‘invisible hand Theorem’. This theorem had no connection to Adam Smith, with the real world. Basu admits this. The so-called theorem is “ actually a mathematical truism and … has no normative content” (p 24).

This introduces the more positive aspects of Basu’s book: “the limits to orthodoxy”, though he slips back momentarily to describe the “theorem” as “a celebration of individual selfishness”, a perverse statement about Smithian self-interest.

Moving on, Basu’s real target is the “adulatory periphery of the “completely free market”, which Smith did not advocate anyway – he was never a so-called “laissez-faire” theorist. Basu is fighting against a phantom created in his imagination and as the chapter unfolds he covers many themes from modern economic theory worth reading by working economists who are immersed in mathematical dogma about the imaginary world of neoclassical theory.

Smith never showed that ‘”if human beings were completely selfish, society would achieve optimality” p.27), nor did Smith “promise” that by being selfish “we are actually being good to our fellow human beings” (says Duncan Foley [2002, 2]).

Have these people read Moral Sentiments – Smith on the unacceptability of the “justle” – or understood Wealth Of Nations, (p 25-6) on the mediation of self-interest by bargaining?

Quite rightly Basu bemoans the relative scantiness among economists of knowledge about subjects like the influence of ‘norms’ on behaviours which their standard neoclassical training ignores. However, if they had read Adam Smith’s Lectures On Jurisprudence and, of course, Wealth Of Nations carefully beyond a compendium of selected quotations (or had read anything recently by Amartya Sen), they would not suffer from such a deficiency of knowledge about “the role of law and culture” (p. 37).

Basu’s section in Chapter 3 on “Methodological Individualism” is worth reading by all neo-classically-trained economists. Individual utility functions do not simply aggregate across the society, which facilitates the mathematics but not an understanding of the real world. However, the reader should ignore the gratuitous linking of Adam Smith to the theories Basu justly criticises.

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Blogger uRead-bookstore said...

Beyond the Invisible Hand challenges readers to fundamentally rethink the assumptions underlying modern economic thought and proves that a more equitable society is both possible and sustainable, and hence worth striving for. In Beyond the Invisible Hand, Kaushik Basu lays bare the implications of this gross misrepresentation of Smith’s theory which, he argues, has resulted in hampering our understanding of how economies function, why some economies fail and some succeed, and what the nature and role of state intervention might be.
Kaushik Basu

6:50 a.m.  

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