What Had Adam Smith to do with Modern General Equilibrium Theory?
Paul Walker posts (27 June) at the Anti-Dismal Blog HERE
“There is always
much discussion of what Adam Smith meant or said about this or that. One of the
most discussed ideas is the "invisible hand". (Take a look at Gavin
Kennedy's blog
for extended discussion.) A new working paper looks at The Past and
Present of the Invisible-Hand Proposition: From 'Scottish Political Economy' to
Axiomatic General Equilibrium Analysis. It is by Arash Molavi Vasséi.
The abstract reads,
"The present study
raises the following questions: To what extent is axiomatic general equilibrium
analysis a rational reconstruction of Scottish Political Economy as defined by
the writings of David Hume and Adam Smith? How much is gained and how much lost
by the axiomatic transformation of the invisible-hand proposition? What are the
implications of negative results like the Sonnenschein-Mantel-Debreu
demonstrations for the Scottish point of view? Did it reach deadlock, or is
there still hope for the dominant trajectory in the history of economics? In
contrast to the rich historical literature on the invisible-hand proposition,
the present study does not level any paradigmatic criticism at neo-Walrasian
analysis. Rather, by focalizing the most important results against the backdrop
of Scottish Political Economy, it provides some flesh to the bones of axiomatic
economics and, insofar, may inform theory choice within the neo-Walrasian paradigm.
Naturally, the answers to the questions raised are complex and do not fit into
an abstract. Instead, the reader is referred to the final section, which lists,
interrelates, and discusses the major results of the study."
I'm not sure that
Smith would have believed in any invisible-hand proposition so I'm not sure
that its even meaningful to ask what is "lost by the axiomatic
transformation of the invisible-hand proposition?" In a working paper of my own
I write,
"For Smith
competitive markets were the most prominent mechanism for coordinating and
motivating people to maximise the grains that result from increased
specialisation and an expanded division of labour. Well functioning market
institutions leave individuals free to pursue self-interested behaviour, but
guide their choices by the prices they pay and receive. For economists, the 200
years following Smith involved a search for conditions under which the price
system would function well, conditions under which it would not descend into
chaos.
The formal
(neoclassical) model that arose from this search is one which abstracts
completely from any form of centralised control in the economy."
But I add the
footnote,
"For Adam Smith
this would be an abstraction too far. Smith knew of the importance of
institutions to the proper functioning of the market economy. Mark Blaug points
out that “[ . . . ] Smith’s faith in the benefits of ‘the invisible hand’ has
absolutely nothing whatever to do with allocative efficiency in circumstances
where competition is perfect `a la Walras and Pareto; the effort in modern
textbooks to enlist Adam Smith in support of what is now known as the ‘fundamental
theorems of welfare economics’ is a historical travesty of major proportions.
For one thing, Smith’s conception of competition was, as we have seen, a
process conception, not an end-state conception. For another society, a
decentralised competitive price system was held to be desirable because of its
dynamic effects in widening the scope of the market and extending the
advantages of the division of labour - in short, because it was a powerful
engine for promoting the accumulation of capital and the growth of income”.
(Blaug 1996: 60-1).
Thus
the question "[t]o what extent is axiomatic general equilibrium analysis a
rational reconstruction of Scottish Political Economy as defined by the
writings of David Hume and Adam Smith?" would have the answer, very little.”
Comment
I
have a copy of Arash Molavi Vasséi’s paper on my desk awaiting my reading it with the intention of posting a comment. But Paul’s post arrived making my unfinished response
somewhat redundant, hence, I took the liberty of re-posting Paul’s excellent response
from Anti-Dismal. I recommend
readers bookmark Paul’s Blog for keeping up with most of the economics blogs
worth reading, as well as Paul’s regular posts on a wide-range of topics on
economics and the history of economic theory.
[Paul's paper, he mentions in his critique above is: “The Past and Present of the Theory of
the Firm” by Paul Walker University
of Canterbury - Economics and Finance May 21, 2012” HERE http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2000431&download=yes]
Perhaps needless to say, I
also agree with Paul’s critique of Arash Molavi Vasséi's “The Past and
Present of the Invisible-Hand Proposition: From 'Scottish Political Economy' to
Axiomatic General Equilibrium Analysis”.
2 Comments:
Gavin. Thanks for the supportive comments. I don't think I have ever seen Hume linked to GE in anyway before. Smith yes, albeit wrongly, but not Hume. Morishima argued that Ricardo's work could be seen in GE terms but, ignoring Smith, this is the earliest I've seen GE dated. Of course this is all well after Hume.
"How much is gained and how much lost by the axiomatic transformation of the invisible-hand proposition? "
That sounds like a thermodynamic question, pointed at the second law - entropy.
Adam Smith's invisible hand metaphor, as Gavin explained, is about insecurity, businessmen being insecure about investing abroad, hence they invested domestically, all led by an invisible hand.
The investing domestically does established a sort of equilibrium by keeping jobs and innovation at home. But in present economics conditions investing only domestically is not that prudent an idea. Domestic returns on investment have not always been ideal since workforces in mature economies have grown stagnant, become overpaid and less productive. Under such conditions business investors would be foolish not to invest elsewhere, where costs are lower and returns on investment are better.
So today's invisible hand has become bias in the other direction by also investing non-domestically, thus creating a disequilibrium for domestic economies. But there is a silver lining in that the investing abroad creates competition for domestic industries, thus motivating them to reinvent themselves by improving production and lowering costs.
The invisible hand metaphor in the modern world explains the phenomena of roaming investment capital, fleeing entropy and disequilibrium in one place in search of security and equilibrium in another. It plays a revitalizing role by pitting markets against each other.
Another thing the invisible hand has done, in its perverse movements, is integrate the world through capital flows and the expansion of capitalism. In this way it has united the world, made it more stable and thus less likely for nations to go to war with each other, all unintentionally.
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