JONATHAN SCHLEFER DEMOLISHES THE INVISIBLE HAND
San Jose Real (12June) in Biashacker: “How to Hack Social Bias for Positive Change” HERE
posts “There Is No Invisible Hand by Jonathan Schlefer” from Harvard Business Review. It is well worth reading in full. My extracts are limited out of respect for HBR copyrights but you should follow the links and take in Jonathan Schlefer’s exposition, which takes on the modern economist’s claim on their own terms:
“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. Let banks charge much more than 5% interest, and they will lend to “prodigals and projectors,” precipitating bubbles and crashes. Let “people of the same trade” meet, and their conversation turns to “some contrivance to raise prices.” Let market competition continue to drive the division of labor, and it produces workers as “stupid and ignorant as it is possible for a human creature to become.”
In the 1870s, academic economists began seriously trying to build “general equilibrium” models to prove the existence of the invisible hand. They hoped to show that market trading among individuals, pursuing self-interest, and firms, maximizing profit, would lead an economy to a stable and optimal equilibrium. …
…in 1954, Kenneth Arrow, at Stanford, and Gerard Debreu, at the Cowles Commission at Yale,developed the canonical “general-equilibrium” model, for which they later won the Nobel Prize. Making assumptions to characterize competitive markets, they proved that there exists some set of prices that would balance supply and demand for all goods. However, no one ever showed that some invisible hand would actually move markets toward that level. It is just a situation that might balance supply and demand if by happenstance it occurred.
In 1960 Herbert Scarf of Yale showed that an Arrow-Debreu economy can cycle unstably. The picture steadily darkened. Seminal papers in the 1970s, one authored by Debreu, eliminated “any last forlorn hope,” as the MIT theorist Franklin Fisher says, of proving that markets would move an economy toward equilibrium. Frank Hahn, a prominent Cambridge University theorist, sums up the matter: “We have no good reason to suppose that there are forces which lead the economy to equilibrium.” …
… “The failure to model the invisible hand is ironically powerful. Any given economic model might well be implausible. But if the brightest economic minds failed for a century to show how some invisible hand could move markets toward equilibrium, can any such mechanism exist? Something outside markets — social norms, economic regulation, Ben Bernanke in his happier moments — must usually avert disaster.
Jonathon Shlefer arrives at the same conclusions as I do on Lost Legacy that there is no such entity as an “invisible hand” working in the economy to achieve all or any of the things attributed to it since the 19th century, when Adam Smith’s use of a metaphor was wedded to 18th century one-sided notions of “laissez-faire” and then extended to “general equilibrium” as economists followed the mathematical imperatives in their notions of the economy as a stable system.
I think Jonathon’s case is well stated and I agree with his assessments of the unlikely, indeed certainty, of the inevitabilities of mathematical reasonings promoting notions of the physics of equilibrium in the natural world that are misleading when applied to the behaviours of humans in the social economics of the real world.
Follow the link and see if you agree with Jonathon - and me.
I would, however, query the following sentence if I was in a seminar with Jonathon:
“Let market competition continue to drive the division of labor, and it produces workers as “stupid and ignorant as it is possible for a human creature to become”
He is quoting from WN V.i.f.50: 781-2, in which Smith make a strong case in favour of the education of young boys, particularly those from the manual labouring class, who without elementary education of any kind, end up in work consisting of a “few very simple operations, frequently to one or two” and “has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur … and generally becomes as stupid and ignorant as it is possible for a human creature to become”. Smith adds that “the great body of the people, must necssarily fall, unless government takes some pains to prevent it” (p. 782).
I suggest this is the wrong slant about what Smith was highlighting. It was not so much the division of labour that was the problem; it was instead the absence of basic education among the children of the labouring poor (see pages 785-6) where he discusses quite bold initiatives for the mass education of all male children, on the model alreay applying in Scotland since the sixteen hundreds, in the form of “little schools” in every parish. Scottish children among the labouring poor had had albeit minimal education on reading, writing, arithmetic and smatterings of Latin for over 100 years beforw Smith wrote Wealth Of Nation during c.1762-76.
Such scheme to educate the poor was unheard of in England, which if applied in every English Parish, all 60,000 of them would require Government finance to supplement the amounts raised by local Charities, bursaries, legacies, and parental contributions.
It was not a problem primarily confined to the division of labour - which had lasted for millennia - it was a problem of the near total lack of educational provision. The clue is in the title of the chapter
concerned: “Of the Expense of the Institutions for the Education of Youth” (p. 758). Note Smith’s hair-raising warning of the possible consequences of neglecting the widespread ignorance of the labouring classes as they grew older (pp. 785-6) and p. 788, where he warns of the risky political consequences of the lack of education because they could become exposed to what he called “the delusions of enthusiasm and superstition” which can “occasion the most deadful disorders” and “interested complaints for faction and sedition” where the “safety of government depends very much upon the favourable judgment” of the common people and therefore with education “they should not be disposed to judge rashly of harshly of capriciously” of their government (p. 788).
In short, these often selectively quoted observations by Smth which are too often seen as his criticism of the division of labour (for example by such as Chomsky) when a careful and clearer reading of this chapter suggest quite otherwise.
With that caveat, read the article by Jonathan Schlefer in Harvard Business Review (thanks to San Jose Real for the lead).