Friday, February 18, 2011

A Methodologist Uses an Error Prone Method

Thomas (Tim) C. Leonard, “Reflection on rules in science: an invisible-hand perspective”, Journal of Economic Methodology 9:2, 141-168 2002:

Invisible-hand explanations suggest themselves naturally to an economist they are deeply rooted in the disciplinary ethos. …”

“Scientific rules, and the means for their enforcement, constitute the invisible-hand mechanism, by which I mean: scientific rules induce (partly) interested scientific actors with worldly goals to make choices that (sometimes) lead to epistemically good scientific outcomes.”

“… attempt to use in science studies the name `invisible hand’, which is often a term of derision outside of economics, must distinguish Adam Smith’s sense of the term - unintended if planned-looking beneficial consequences from cognate meanings, such as laissez-faire and Pareto optimality.
(pp141-43) …”

In my more heady-days as a youngish lecturer in economics I, and several colleagues, became interested in economic methodology and we read a range of books from Lactos, Popper, Kuhn, et al.

We were brought down to earth when one of the young Turks had a paper on method in economics (Positive and Normative statements) rejected by a journal of philosophy, with the editor’s put-down comment that the issues he had raised relating to economics had been settled in philosophy for some time.

Since those days I have maintained a distant interest in method in philosophy and economics, hence I read with interest Thomas (TIM) C. Leonard’s, “Reflection on rules in science: an invisible-hand perspective” (HERE)

Tim’s statements above caught my attention, so I read on to the section headed: “SCIENCE AS AN INVISIBLE-HAND PROCESS”.

This seemed familiar after reading some time ago Emrah Aydinonat’s, The Invisible Hand in Economics: how economists explain unintended social consequences, Routledge, London, 2008, an interesting book, not without merit, which nevertheless I found flawed in its basic proposition that Adam Smith was connected to modern versions of ‘spontaneous orders”, and Samulesque invisible hands of perfect competition, Pareto’s welfare propositions, and General Equilibrium.

Thomas (TIM) C. Leonard’s, “Reflection on rules in science: an invisible-hand perspective” suffers from the same flaw. Example:
‘Adam Smith uses the term `invisible hand’ only twice in work published during his lifetime, most famously (and closest to the sense just defined) in the Wealth of Nations.

[E]very individual . . . neither intends to promote the public interest, nor knows how much he is promoting it . . . . [H]e intends only his own gain and [it – sic], and he is, in this as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. (1937 [1776]: 423)

Tim leaves out crucial parts of the paragraph that he quotes (as do most others). The crucial missing words are restored here [in square brackets]:

[As] every individual … [therefore, endeavours as much as he can to employ his capital in the support of domestick industry, and so to direct that industry that its produce may be of greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He …[generally, indeed,] … neither intends to promote the public interest, nor knows how much he is promoting it … [By preferring the support of domestic to foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value] … he intends only his own gain and it, and he is, in this as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.” (Cannan, ed. 1937, p. 423; or Campbell and Skinner, eds. 1976, Oxford University Press, p 456).

The significance of the missing words – and the missing previous 8 paragraphs – is that Tim’s quote removes all reference to the actual case discussed by Adam Smith, namely that of the behaviour of some, but not all, merchants, whose concerns for the security of their capital in foreign trade, lead them to invest in “domestick” industry, the unintended consequence of which is that “domestic” annual revenue and employment is higher that it would have been if they had sent their capital abroad, as Smith explains in the missing eight paragraphs.

This is what Adam Smith’s limited use of the metaphor of “an invisible hand” refers to “in a more striking and interesting manner” (Adam Smith’s Lectures on Rhetoric and Belles Lettres”, [1763], 1983, p 29). Metaphors refer to an object; they are not real in themselves – there is no ‘invisible hand’!

Tim’s slight of hand (repeated ad nausea, since the 1950s by modern economists) is an easily exposed error, particularly for an author writing about scientific methodology! It is equivalent to a scientist doctoring her test results.

Tim, however, comes close to understanding aspects of Adam Smith’s teachings, without realizing the irony of his caveats:

“The problem, I suggest, is more one of misconception. Non-economists find it implausible that, absent the guiding visible hand of authority, self interested action can lead to good social outcomes. Or, more to the point, they tend to conflate invisible-hand explanations with a kind of laissez-faire. The conflation may arise from the term’s close association with Adam Smith, and Smith’s seminal role as the proponent of free trade against the mercantile view, the original debate over the proper scope of the state’s role in the economy (Demsetz 1993: 159, 60). But just as it is false to assume that the choice is dichotomous between central planning and anarchy, it is incorrect to cast the original invisible-hand theorists - David Hume, Adam Smith and others we might group into the Scottish Enlightenment - as proponents of vulgar laissez-faire.”

Laissez faire (words Smith never used) became associated with his distant memory as part of a political campaign for ‘free trade’ by the such as the Manchester School in the 1840s and by propagandists for mill and mine owners opposed to government legislation under the Factory Acts, shorter hours, and women and children in the pits.

Smith’s opposition to the manifest distortions of mercantile political economy did not mean he favoured no government interventions at all, nor was he restricted to the 19th-century view of the ‘night-watchman state’. He did not regard all interventions by legislators as disastrous, though he gave plenty of examples of such disasters.

Tim shows signs of recognizing these misguided interpretations, but sticks to his theme of a wider view of what the invisible-hand allegedly meant to Smith. In both examples he gave in Moral Sentiments (feudal landlords and their serfs) and Wealth Of Nations (mercantile merchants in a most uncompetitive economy) he was not dealing with free-markets. The invisible-hand had nothing to do with ‘perfect competition’, nor Pareto’s welfare criteria or General Equilibrium.

If modern economists want to give new meanings to the metaphor of an invisible hand – or even invent some role for it in a theory of ‘spontaneous order’, they are free to do so. What is in question is whether they can also invent an association with Adam Smith. I humbly argue, on methodological grounds that they should not do so, and moreover cannot do so, without massaging Smith’s actual words and meaning.

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Blogger entech said...

“Acting or done or occurring without external cause.” This is how spontaneous is defined in the Concise Oxford Dictionary. Given this definition how is it possible to have an invisible hand lead to spontaneous order? It seems to me that Game Theory and trying to make Economics a mathematical science both make assumptions that effectively destroy their mathematical integrity. They try to make a constant out of a variable.
My knowledge in this field is at best peripheral and would like some guidance. My own maths as a Marine Engineer was all on the practical side, but, I can state definitely that there is nothing spontaneous about building or repairing a ship.

12:42 am  
Blogger Gavin Kennedy said...


I have never liked the idea of “spontaneous”, though I fully accept the idea of an event not being caused by prior design or some mystical and intentional cause (a ‘God’, ‘Providence’, ‘invisible hand’, or such like).

Evolution is complex because change of a state into another state may be both numerous, even of near infinite, possible outcomes. Millions of sperm, except one, may mostly fail to fertilise an egg; an individual may take one of billions of possible actions at numerous moments in a day, week, month, or year; hunters may search for food along any direction out of 360 degrees and stand their ground or make flight when faced with a problem (rising flood waters or in fear run into a desert), and so it goes on each day in each millennia.

My point is that most decisions may not be optimal, few might be. Those decisions that have unforeseen positive consequences may lead to better outcomes than others (what appears positive may prove illusory in the longer term).

Looking at the evolution of settled communities we can see the remains of those that failed to survive in the stone ruins spread across Euro-Asia and Central America. The ice, deserts, lava, and the sea hide many that did not survive for whatever reasons.

There is no semblance of pre-determined, providential, or divine intent in human (or other animal's) life experience. But neither is there a ‘spontaneity’ about which decisions ‘work out’ beneficial, and which become ‘ruinous’. Out of the multitude (billions) of possible actions - outcomes those that work out positively do so because of unforeseeable consequential events that favour some (one) decisions where they do not favour the others.

The future cannot be predicted; we can only evaluate the past and how we got to the present (still leaving much room for controversy). The maths of all theories in economics do not include any term for ‘invisible hands’, ‘spontaneity’, or ‘divine intentions’.

4:05 pm  

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