Sunday, August 03, 2008

Californian Water and the Invisible Hand

It's not often that a clear statement of what an author thinks the metaphor of the invisible hand means is posted in Blogland, but I think today's effort is remarkably clear of how its use (attributed to Adam Smith) is misleading.

Spreck Rosekrans posting on the Water sisweb Blog (HERE) writes:

On the Water Front: What would Adam Smith do? (part 1) for ‘Planning and Management’:

To be smart about how we manage any natural resource, it is important to "internalize the externalities", i.e. make sure the costs of pollution and environmental degradation are fully included in decision-making.

Under such a system, the famous "invisible hand" of economist Adam Smith would encourage rational use of limited resources without excessive environmental destruction. Water management in California and the west is the result, however, of a "first in time, first in right" policy that has little to do with economic efficiency.


Comment
The logical disconnection of ‘the famous "invisible hand" of economist Adam Smith’ is exposed here. The proposition is: If ‘we’ (presumably by some policy direction of some kind) ‘make sure the costs of pollution and environmental degradation are fully included in decision-making’ it would ‘encourage rational use of limited resources without excessive environmental destruction’.

Now think about that. It says if the policy is adopted and everybody (or even the majority) implements it, then there would be ‘rational use of limited resources’. Now ask: why is that consequence the result? I think the sensible answer is that the consequence follows from the adoption of a policy of ‘internaliz[ing] the externalities’. In other words, the consequence follows from adopting the policy.

Question: what does the invisible hand do in this process that is not completely determined by the adopted policy and its necessary consequence?

Ergo: the invisible hand is a metaphor for what happens without it; it has no explanatory or contributory role in the connection between a policy and a consequence. To argue, or worse, to believe, that it does anything is a myth.

Of course, Smith had a different view of how individuals choose from their self-interests – which may have no connected intensions about the outcome for society – when they act in a specific manner. He argued that people may individually act in a certain manner (in the two cases he referred to, it was risk avoidance in Wealth Of Nations, and because the rich landlords could do no other in Moral Sentiments without becoming self destruction) which could (not, would) in the aggregate benefit society.

In Wealth Of Nations (WN IV.ii.9.:p 456) the benefit was because the whole national output is the sum of each individual local investment; in Moral Sentiments (TMS IV.1.10: p 184) it was that by feeding his ‘employees’ they lived to re-plant the crops, tend and harvest them, next season.

In Californian water, apparently, the actions of past and present individual users of water on their "first in time, first in right" policy produces an outcome that is economically inefficient. Clearly, the current consequence is a result of the adoption of the ‘wrong’ individual policies. It has nothing to do with invisible hands; if such abstractions actually existed, instead of being a mere metaphor, they are not working.

Why? Because metaphors do not exist! And Adam Smith never said that they did! That is a myth invented in the second half of the 20th century by Chicago economists.

[Readers interested in reading my paper: ‘Adam Smith and the Invisible Hand: from metaphor to myth’ should contact me at gavinATnegwebDotcom and introduce themselves. The paper is to be read at the 40th Anniversary conference of the Journal of the History of Economic Thought in Edinburgh in September].

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2 Comments:

Blogger Spreck Rosekrans said...

Professor Kennedy:

I was interested to see that you read my blog posting about how Adam Smith would (we hope) manage water in a dry state like California. I defer to your expertise and criticism of my characterization, though believe readers understood the point - that water would be more efficiently managed if if were priced properly.

Spreck Rosekrans

12:33 am  
Blogger Spreck Rosekrans said...

Professor Kennedy:

I was interested to see that you read my blog posting about how Adam Smith would (we hope) manage water in a dry state like California. I defer to your expertise and criticism of my characterization, though believe readers understood the point - that water would be more efficiently managed if if were priced properly.

Spreck Rosekrans

12:35 am  

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