Thursday, December 31, 2009

Hurray! Joe Stiglitz Stamps on the Invisible Hand

Joseph Stiglitz (an Economics Nobel laureate and university professor at Columbia University. Author of:”Globalization and Its Discontents” and “The Roaring Nineties. His latest book, Freefall, will be published in January ) writes (31 December) in China Daily

Harsh lessons we may need to learn again

The best that can be said for 2009 is that it could have been worse, that we pulled back from the precipice on which we seemed to be perched in late 2008, and that 2010 will almost surely be better for most countries around the world. The world has also learned some valuable lessons, though at great cost both to current and future prosperity - costs that were unnecessarily high given that we should already have learned them.

The first lesson is that markets are not self-correcting. Indeed, without adequate regulation, they are prone to excess. In 2009, we again saw why Adam Smith's invisible hand often appeared invisible: it is not there. The bankers' pursuit of self-interest (greed) did not lead to the well-being of society; it did not even serve their shareholders and bondholders well. It certainly did not serve homeowners who are losing their homes, workers who have lost their jobs, retirees who have seen their retirement funds vanish, or taxpayers who paid hundreds of billions of dollars to bail out the banks

At last! A major modern economist sees the light about the fiction of the “invisible hand”, usually, with knee jerk regularity, attributed to Adam Smith, as if he made the metaphor mean what most modern economists insist it to mean: the invisible guiding influence in the commercial/capitalist economy that creates that wonderful ‘miracle’ that no matter what your motivation it ensures that it benefits ‘society’.

The sheer implausibility of this modern assertion (invented in Chicago in the 1930s, and then carried forth across US campuses everywhere – in Britain there was a slower uptake) from the 1950s to today.

That Joe Stiglitz has stepped out of line, no doubt to be rubbished by many colleagues (‘how dare you say there is no Santa Claus – take that you spoiler of children’s happy illusions … [biff, bang and butt]. Of course there is an invisible hand (and an invisible foot too) and everybody who knows anything about Adam Smith and markets – except for some cranks - says there is’.

It’s about the current crisis and the moral dimension of who gained most, as if nothing has happened or changed, and who lost out.

UPDATE: The 2009 Prize for the best contribution to restoring Adam Smith's Lost Legacy is awarded to Professor Joseph Stiglitz.

UPDATE 2: The Stiglitz annnouncment that the invisible hand does not exist is reproduced at Business Insider (Silicon Valley) HERE

UPDATE 3: It's at The Huffington Post too HERE:

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Blogger Brian Woods said...

Its official,'those things' do exist!

Re: Mumbai Traffic Congestion

"Motivated by a meeting they wish to keep, men wade into the fray, examining the crystalline structure of the traffic, looking for gaps, irregularities, wiggle room. Because there’s always wiggle room. Six inches here, a foot there, and this makes all the difference. It’s reverse Tetris: move one this way, move another that way, and suddenly some cars are free.

The amazing thing is this: these men don’t coordinate their actions. They don’t formulate strategies. In fact, they probably think they’re working against each other—as passengers in trapped cars, they care about helping the other cars move only insofar as it helps get their own car on its way." [Marginal Revolution.]

Cantillon's virtual entrepreneurs waving their Smithian invisible hands!

Best wishes for 2010.

Brian P

8:26 pm  
Blogger Gavin Kennedy said...

Brian P
Thanks for your contribution.

Are you saying (worse, believing) that there is an invisible hand guiding jammed traffic into lossening the tangle?

Really Brian. Your quote from Marginal Revolution clearly states how they tend to untanlge when after much manouvering, back and forth, sideways and wheel turning, if there is a way, physically, to become untangled, and enough time to find it (no bumps, and scratches, which stops drivers who argue and shout at each other, and block others.

Even when there is no observable blockage, just too much traffic, as you slowly move to the front you often find an open road ahead with gaps between cars that have escaped the blockages.

There is actually a maths of queues, from memory of my stident days, which shows why traffic slows everyone into long lines.

I used the city bypass everey evening between 5 and 6 pm, when traffic was bunched and slow. The suburban roads could take me, perhaps, quicker, but I learned to turn onto the busy city bypass evern though the traffic was slow and slower. By sitcking in the nearside lane all the way, and not switching lanes as one line moved faster than another for a while, I found the journey took between 15 and 20 minutes, a slow crawl all the way, but no hassle, less stress and heard a full news bulletin.

I like your reference to Cantillon, but not to "Smith's invisib;e hands" --- but a bit of seasonal levity is always welcome.

Guid New Year to you


9:31 pm  
Blogger Brian Woods said...

Gavin: Thanks for the lengthy reply. I am still reading (and re-reading) ASLL + the man himself. ASLL provides a very useful focus for a better understanding of what AS was writing about in IiWoN.

I was just tickled by the MR commentary - I had this wonderful image of 'gesticulating persons'.

I will be 'real careful' about the invisible hand metaphor. If I encounter any refs to same I shall endeavour to alert you.

Thanks again for ASLL.

Brian P

2:59 pm  
Blogger entech said...

I have recently watched Joseph Stiglitz at the University of Edinburgh enlightenment series. He not only said that invisible hands was not good or bad but simply invisible because it wasn't there, He also said that Adam Smith would turn in his grave at the things being done in his name.

The university is very generous in making so much available, but that is the true function spreading knowledge. Enjoyed Dan Dennet as usual. I need a large glass of ambivalence and soda to watch Chomsky, always interesting but can't make up my mind with him.

12:47 am  

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