Monday, November 29, 2010

New Critique of Modern Myth of the Invisible Hand: Part Two

Kaushik Basu’s critique of neoclassical economics (of which I am broadly sympathetic) is spoiled by its basic flaw of importing the false premise that the first welfare theorem had somehow been inspired by something from Adam Smith’s use of the metaphor of ‘an invisible hand’, and, therefore, it is safe to associate the assertions drawn from this error by neoclassical economists as fundamental errors attributable to Adam Smith.

Basu has not considered the possibility that neoclassical economists were wholly in error to draw such a link to Adam Smith.

Worse, as a consequence, Kaushik Basu in his own critique of neoclassical economics, he ignores much of Smith’s writings on the self-interest of individuals, its mediation in social contact with others, on the definite moral limits to competitive behaviour, on the immorality of greed (a ‘vile’ characteristic ‘the rulers of mankind’, for which, sadly there was ‘no remedy’) and his oft expressed view that those who laboured and upon whom the rest of society depended were entitled to a fair share in what they produced. He also believed that ‘opulence’ from ‘improved (non-feudal) agriculture’ and the promise in commercial society could bring this about – we call it affluence.

Those associated with ‘market fundamentalism’ and, implicitly, the status of so-called ‘Homo economicus’, a mathematical abstraction unknown to anthropology, let alone to Adam Smith who was, incidentally, someone accomplished in mathematics, according to his contemporaries, were carried away in their ideological contest with the greater errors of Marxist contemporaries in the 1930s and during the Cold War decades.

None of the neoclassical triumph was remotely related to the works of the Adam Smith born in Kirkcaldy. An invented Adam Smith may have been ‘alive and well in Chicago’ and known to George Stigler, but he remains unknown to readers of Smith’s Works and not just familiar with few well-worn quotations absent their context.

The great deception began to take root in the classrooms of our universities and received an immense boost from Paul Samuelson, right lauded as a brilliant exponent of the mathematical approach to economics, as a ‘science’. He wrote:

“[He] was so thrilled by the recognition of an order in the economic system that he proclaimed the mystical principle of the ‘invisible hand’: that each individual pursuing only his own selfish good, was led as if by an invisible hand to achieve the best good of all, so that any interference with free competition by government was almost certain to be injurious” (Samuelson P. A. 1948, ‘Economics: an introductory analysis’, p 36, McGraw-Hill).

Kaushik Basu buys this transmutation of what Adam Smith actually wrote and present it as a ‘central opinion’ which is:

‘a body of intellectual material that describes how a modern economy functions, and assures us that as a system, the current world economic order, founded on individual selfishness and the “invisible hand” of the free market, is right or, at any rate, the best among what is feasible. It may not always function as it should but as an ideal, it is the right one to pursue and uphold” (Basu, K. p4).

There are two problems here. First, both Samuelson (1948) and, 62 years later, Basu (2010), unforgivably, were factually wrong, not about an obscure 18th-century author’s written views, but about, arguably, the world’s most famous name in economics, his works widely available in multiple languages and available in most libraries and online. So no excuses then. Moreover, these works of Smith were also available widely to most other economists.

Secondly, the expressed errors of the two authors above, are also endorsed by most economists both in what they claim Smith wrote and in what many others, including Kaushik Basu, assert is wrong with the ‘central opinion’ of modern economics supposedly based on the mythical views of Adam Smith.

The alleged views of Paul Samuelson and Laushik Basu on Adam Smith are not based on facts, including the central myth of Smith’s use of the metaphor of ‘an invisible hand’.
All this detracts from the chapters that follow in Basu’s new book, which I am now reading. Much of the criticism he now refers to against neoclassical economics are familiar to those who have read wider than the diet of mathematical abstractions that passed as the qualifying criteria for worthiness in our discipline.

I shall return to these issues as I read on. Basu's comments in these fields are worthy of your attention, and I continue to commend his new book to readers:

Kaushil Basu, Beyond the invisible Hand; groundwork for a new economics. 2010, Princeton University Press,



Blogger Bhagirath Baria said...

Dear sir, I wish to bring a spelling error to your notice, in this post:

Last 3rd or 4th paragraph: "The alleged views of Paul Samuelson and Laushik Basu on Adam Smith are not based on facts, including the central myth of Smith’s use of the metaphor of ‘an invisible hand’.

It would be Kaushik Basu. Alphabet K has been written as L.

I also have 3 queries.

1. Isn't Mr. Basu criticizing this body of 'central opinion'?

2. Doesn't this mean he's criticizing even Paul Samuelson & the alike that relate this myth to Adam Smith?

3. Lastly, Doesn't this mean that the author relates the "Myth" with Smith only to debunk it later in his book, rather than committing an error- as you seem to be pointing out.

Finally, can you post the author's reply to your criticisms?

Do spare some time to reply. Thanks in advance.

9:23 am  
Blogger Gavin Kennedy said...

Bhagirath Baria
Apologies for the delay in responding. I only noticed the comment today (Jan 2013).
The 'typo' in the name is unacceptable. Apologies.
I read Kaushik Basu's book as reporting uncritically the assertion that Adam Smith contributed to the Welfare Theorem. I did not read it as also criticising Paul Samuelson's 1948 myths of "selfish" behaviours leading to public benefits, nor that he debunk's it later.
His error was in reporting the myth of the IH without reporting the roe of metaphors as understood in English grammer and as taught by Adam Smith in his Lectures On Rhetoric (1762), p 29.
If Kaushik Basu responds to my criticisms, of course I would publish them (it is my policy to publish all comments, critical or otherwise, on Lost Legacy
Gavin (January 2013).

12:34 pm  

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