Tim Worstall Is Right
Tim Worstall writes in Forbes HERE
“The Death of Macroeconomics: There is No Invisible Hand”
I rather agree with the conclusion here, that macroeconomics is dead. But I distinctly disagree with the reasons used to reach the conclusion, that there is no invisible hand.
One of the best-kept secrets in economics is that there is no case for the invisible hand. After more than a century trying to prove the opposite, economic theorists investigating the matter finally concluded in the 1970s that there is no reason to believe markets are led, as if by an invisible hand, to an optimal equilibrium — or any equilibrium at all.
Let’s take the invisible hand part first. As we all know it comes from Adam Smith and this description is partially true:
Adam Smith suggested the invisible hand in an otherwise obscure passage in his Inquiry Into the Nature and Causes of the Wealth of Nations in 1776. He mentioned it only once in the book, while he repeatedly noted situations where “natural liberty” does not work.
The thing is, he doesn’t use “invisible hand” as a term meaning that a market will reach equilibrium. He doesn’t in fact use it to describe anything about equilibrium or even about how markets might reach optimal, let alone stable, outcomes. In fact, he uses it entirely the other way around.
He’s remarking on the way in which even if you can make greater profits by taking part in the foreign trade people have a tendency to invest their capital in the domestic economy, thus led as if by an invisible hand to boost that domestic economy. That is, the invisible hand is a metaphor for a suboptimal outcome driven by non-economic considerations. In this case, our mistrust of sending our cash off to be looked after by Johnny Foreigner.
In terms of modern day insights the major result of this is that while the incidence of corporation tax, upon the workers or upon the earnings to capital, depends upon the mobility of capital (more mobility, the more the incidence is upon the workers) even in a world of perfect capital mobility in theory we’ll still see some stickiness, this domestic partiality, and thus some incidence of corporate taxation upon capital.
Other than that there’s not much we can gain from Smith’s invocation of the invisible hand.
Tim is right on Adam Smith’s use of the metaphor: “an invisible hand”. He is also right in his observations of so-called equilibrium in markets (follow the link to continue reading his article in Forbes).
I am pleased to see that Tim Worstall, a Fellow of the Adam Smith Institute (as I am too) has come out and made the unequivocal comment on the non-existence of “an invisible hand”, contrary to what is believed with passionate, almost religious, intensity by other scholars in the fraternity of historians of economic thought (who should know better) and the larger fraternity of practicing modern economists and those they influence (political ideologues of all persuasions). I know, because I have been the occasional target of their put-down dismissals.
The other part of Tim’s critique, that there’s no real reason to think that economies reach equilibrium, is also true. This again is not because of invisible hands. The real reason is because of ever changing technology, a major characteristic of modern economies. Follow the link to Tim’s Forbes’ article. HERE
This past month has seen continuing interest in the proposition that there is no such thing as “an invisible hand”. Where that disavowal is connected to exactly what Smith used the metaphor for – to “describe in a more striking and interesting manner” its object, I know we are making some little progress in rescuing Adam Smith’s legacy from the epigones.
Every long journey begins with one little step …