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.
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 …
2 Comments:
Ever changing technology is not the only reason for economics not achieving equilibrium. There is also entropy and the constant flux of humankind. Nothing stays still or static. If things did, then we would have equilibrium, and death.
Capitalism's success is due to how well it has done with the equilibrium//disequilibrium cycle.
airth
I agree. Capitalism adjusts to changing improvements in its products and distribution among consumers, as long as it is competitive.
Gavin
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