Saturday, July 20, 2013

Jag Bhalla Nails the Myth of the Invisible Hand in Economics!

Scientific American Guest Blog
Jag Bhalla
[Jag Bhalla is an entrepreneur and writer. His current project is Errors We Live By, a series of short exoteric essays exposing errors in the big ideas running our lives, details HERE  His last book was I'm Not Hanging Noodles On Your Ears, a surreptitious science gift book from National Geographic Books, details HERE . It explains his twitter handle @hangingnoodles Follow on Twitter @hangingnoodles @hangingnoodlesHERE]

“Metaphors are our shortest stories. They are economical explanations that shape our understanding (itself a “mobile army of metaphors”). But badly mixed metaphors from physics and biology animate economics, creating “confusion’s masterpiece.” Another Shakespearean phrase, “invisible hand,” is partially to blame.
Science’s theories—its verifiable stories—also use metaphors. Some are loose analogies, others formal models. Orthodox economics abuses both kinds, misapplying oversimplified evolutionary ideas, like survival of the fittest, within an ill-fitting framework from physics. Its conceptual skeleton is: rational self-interest in competitive markets, led by an invisible hand, creates the best social equilibrium.
Adam Smith made “invisible hand” famous. He first used the phrase in his History of Astronomy: “nor was the invisible hand of Jupiter…employed,” to mean that nothing supernatural was needed to explain physical phenomena. Smith lectured on Shakespeare, and likely knew the phrase from Macbeth (misdeeds are hidden by night’s “bloody and invisible hand”).
But “invisible hand” emergent equilibria in economics, evolution, and physics are crucially different. Self-organization—parts spontaneously creating ordered wholes—seems “natural.” But it’s usually also dumb. Humans can do better.
Evolution’s “invisible hand” story, typically sold as biology’s great “unregulated” competitions (thereby ignoring widespread cooperation) produces unintelligently designed results and regularly delivers foreseeable disaster. Narrowly self-interested competition in biology doesn’t guarantee efficient outcomes. And it can be as dumb as trees in economics. Social coordination can be less wasteful and more productive, if intelligently done.
General Equilibrium theory in economics was developed under the guidance of a physicist, Josiah Gibbs, who Einstein called “the greatest mind in American history”. Gibbs invented statistical mechanics to describe the behavior of large ensembles, like gases. Its metaphoric appeal for economics is obvious. However the “invisible hand” equilibria of physics emerge from parts interacting with uniform predictable consistency. But people aren’t like gas particles or biological billiard balls. We evolved behavioral flexibility and complex interdependent variable reactions.
Newton’s science is, metaphorically and fundamentally different than Darwin’s. Newton’s systems have clockwork causality; they converge on mechanically calculable patterns. Physicists have invented powerful mathematical tools for predicting their development and specific results. But Darwin described an open, generative, and divergent process with less predictable effects. Its general shape is describable by the mathematical methods of physics, but its specific outcomes aren’t so predictable (e.g. evolution, unlike anything in physics, needs game theory).
Evolution gave us capacities for intelligence, foresight, and social coordination. With these we can avoid the dangers of dumb “invisible hand” self-organization. It fits not our nature to ignore them. Such sub-natural metaphors of human nature exclude what’s best about us."
This in exceptional article from Jag Bhalla on the IH metaphor. 
It is the best I have seen, including all of my own.  
It nails the nonsense written by generations of economists (and not a few politicians, even some theologians creeping superstitions into economics).
Read it and pass it on, plus its source at Scientific American, (they are due a Damascene experience) to your own contacts - and send it to your economic theory tutors and colleagues.


Blogger marris said...

This is not a very original (or particularly clever) idea. The counter-argument is that the parts of our social system are *humans*, and there is no a priori reason why our skill at building better physical or biological systems should translate into an ability to build better "human particle" systems.

Saint-Simon, Fourier, and Marx asserted similar claims, and it didn't work out too well.

8:08 pm  
Blogger Gavin Kennedy said...

Thank you for your comment.
However, I am not sure what your comment meant.
"This is not very original..". To which or what do your refer? To what "counter argument" to "what" do you refer?
What "similar claims" didn't work out well?
Best regards

2:13 pm  

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