Saturday, November 11, 2006

A Strange Notion from Greg Mankiw

A Grad student in economics asks Greg Mankiw, the top Harvard US Professor of economics about what appears to be a barren prospect of doing a PhD in economics given the state of neoclassical economics:

“I am doing my Masters in Economics here in the US and I recently went to a Graduate Economics Students Conference in my city. I sat through a whole day of paper presentations and the one thing that struck me was how incredibly technical, narrow and to some extent pointless, some of the research was. It seemed like in a quest to do something original, a lot of graduate students in economics are diverting all their energy towards coming up with things that have absolutely no implications in this world. Most papers I saw were so narrow and simply forms of academic gymnastics that it seemed like the whole point of research in economics was lost (maybe that is the point of research in economics today).”

To which Greg Mankiw’s responds in part:

1. Economics teaches that activities often run into diminishing returns. That may be true of research in economics. The early economists got the really great ideas (Smith on the invisible hand, Ricardo on comparative advantage, Pigou on corrective taxation, etc.). When we modern guys arrived on the scene, the juicy low-hanging fruit had already been taken.”

To assert that “Smith on the invisible hand” is among “the really great ideas” and an example of “low-hanging fruit” is, well, frankly less than credible. It is, however, par for courses in modern university departments of economics.

Adam Smith’s corpus is reduced to an en passant metaphor? An invisible hand was never during his life-time considered by anyone, including himself, to be more than just a metaphor – an example of his capacity for rhetoric to make a point, not about markets, not even a theory of anything and not even an idea, let alone a ‘really great one’.

For many decades after he died in 1790, nobody drew attention to his so-called idea of ‘an invisible hand’; that came much, much later in the 20th century. How is it he missed it, his colleagues missed it and his immediate 19th-century successors missed it? How can a metaphor, empty of content, ambiguous in the extreme, and only used once in Wealth of Nations become one of Adam Smith’s ‘really great ideas’?

Of what is Greg thinking? And whatever he thinks he is thinking, on what basis in Smith’s great ideas does he think ‘an invisible hand’ had a role other than as a metaphor?

The self-interests of individuals may lead them unintentionally to contribute to beneficial outcomes for society (he gives examples in Wealth of Nations) and he gives as many, if not many more, instances in Books III and IV, for example, of individual self-interests contributing substantial dis-benefits to society, in mercantile policies pursued by governments and legislators under the influence of special interests, of merchants and monopolists raising prices, introducing protectionist measures and reducing competition for their own gain at the expense of consumers and other would-be producers in their own and in foreign countries, and at the expense of reducing economic growth below what it would be if their nefarious self-interests were curbed.

These ideas in the his Wealth of Nations disqualify the passing metaphor of an invisible hand as a candidate for a ‘great idea’ in economics, on or near the same level with Ricardo’s comparative advantage, or even at or near the same level as Smith’s identification of the ‘propensity to truck, barter, and exchange’ as the driving force of economic development and growth.


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