Friday, July 27, 2012

Cracks in the Invented Invisible Hand Consensus?


I posted the following short comment on Daniel Kuen’s Blog, “Facts and Other Stubborn Things” HERE 
It is not clear to me just who Daniel in criticising
Daniel  writes: “I don't see how you can read Smith as implying some optimal general equilibrium. Smith argues that by pursuing private interests, economic agents promote general welfare. This is obviously true whether a "perfect" Arrow-Debreu general equilibrium holds or not. Identifying the two with each other is a mistake. The contribution of Arrow-Debreu was to rigorously demonstrate the general equilibrium outcomes of a certain type of model of the market that is (rightly) widely in use. Any departure from that optimum ought not to be confused with a non-existence of the invisible hand forces that Smith referred to.
Comment
The fact is that Smith's specific (only) reference in Wealth Of Nations referred to some, but not all merchants, from their concerns for the "security" of the capital if sent abroad in the "foreign trade of consumption", preferred to invest in "domestic industry" (mentioned four times by Smith, twice in the relevant sentence in para 9).  Their 'insecurity" led them ti invest domestically and his had the "unintended" consequence that it added to domestic "revenue and employment" arithmetically: the whole is the sum of its parts.  Smith considered this a public benefit. He didn't say anything beyond this.  It said similar consequences applied in "many other" situations, without specifying them.
To suggest that this is a general unintended consequence of self-interested actions, leading to "Pareto Optima", "General Equilibrium", as many modern economists do, or that even "selfish" motives lead likewise, is an absurd attribution to Adam Smith.  He details again and again how the "self-interested" actions of "merchants and manufacturers" lead to higher prices, less competition, and lower domestic employment in such “self-interested" policies as tariffs, protections, prohibitions, monopolists, colonial preferences, the one-sided Combination Acts, the Settlement Acts, Wages set by the magistrate allies of employers, established religions, Primogeniture, Entails, chartered Trading Companies, all of which self-interestes actions directly act against the general interest,  Yet, daily - nay hourly - modern economists are reported, and media sources, continue to pour out nonsense about the existence of an invisible hand in, variously, the market, price systems, supply and demand, and so on. 
That lay-people come to believe in such a fictitious "invisible hand" - let alone that credible figures from our ranks of economists also believe it - though cracks are appearing in the former monolithic consensus sparked of by Paul Samuelson from 1948 - is disappointing. 
I look forward to their recantations of their apparent belief in the fiction of Adam Smith's so-called invisible hand.
Gavin
PS: I posted my reply and afterwards,when preparing my post for Lost Legacy, I realised I had mistaken the thrust of Daniel's original post.  The above is edited to make clear that I am criticising the thrust of modern economists, not Daniel's posted comments.

3 Comments:

Blogger dkuehn said...

I am criticizing the author of that article for equating Smith and Walras/Arrow/Debreu.

I do see value in the latter for helping us better understand the properties of the neoclassical model (which, we should always rememebr - is a model, not reality). Maybe you disagree with me on that or maybe you agree. But I definitely agree it's not the same as Smith.

I do think Smith generalizes the invisible hand more than you imply. What is the point of the discussion of the butcher, the baker, and the brewer if not that private self-interest, in a market, generates public good?

And it really shouldn't be so offensive to suggest this. Smith draws on Mandeville who makes the same point.

I have a follow-up post, quoting your comment, that hopefully clarifies this.

8:01 p.m.  
Blogger Gavin Kennedy said...

dkuen

“I do think Smith generalizes the invisible hand more than you imply. What is the point of the discussion of the butcher, the baker, and the brewer if not that private self-interest, in a market, generates public good?”

Au contraire. Smith’s point is far more fundamental to his thinking than your comment above appears to suggest. Mere self-interest is not enough. That stops at ‘self-love’. More is required, which you can read in what he says in that paragraph – linked to his previous paragraph in Wealth Of Nations.
Smith does not suggest we argue for, or demand, our self-interest; he advises you merely telling them of your own! Two egoistic self-interested would-be bargainers would never come to an agreement about the contents and price of your dinner, where neither would move or trade for the exchange.

[Smith’s advice on bargaining and my observation of thousands of actual bargaining in business around the world led to my career in business, and at Edinburgh Business School, as a consultant/ practitioner in bargaining until I retired in 2005].

Note Smith’s insightful description of the nature of the Smithian bargain: “Give me this that I want and you shall have this which you want”. In short, bargaining is a process of mediation of each party’s wants to sufficient of the other party’s wants to find an agreement: “If you give me [some] of what I want, then I shall give [this] that you want”. The passage is not about naked self-interest generating “public good”.

Finally, I modified my posted flawed comment on Lost Legacy immediately I reviewed my post on your Blog, taking closer account of your original post. I hope this clarifies my error in jumping in too quickly (we must always correct errors when we become aware of them – this happened either side of a family celebration while on holiday in France).

I shall post a corrective response on your web site later today – after half the family departs for a flight home this morning.
Gavin

6:49 a.m.  
Blogger Blue Aurora said...

Sorry to nitpick sir, but you spelled his name incorrectly. It's "Kuehn", not "Kuen".

P.S. Gavin Kennedy, have you seen "The Economist as Philosopher" video discussion between Robert Skidelsky and Nicholas Phillipson?

1:18 p.m.  

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