Monday, November 28, 2011

Mark Blaug Demolishes the Neoclassical Myth of the Invisible Hand

Frederic Sautet posts an appreciation of Mark Blaug (1935-2011) on the Coordination Problem Blog HERE:
“Mark Blaug (1927-2011), fellow traveller of Austrian economics”

It includes a most interesting quotation from Mark’s excellent Economic Theory in Retrospect (follow the link to read the whole of Frederick Sautet’s appreciation).

Here is Mark Blaug’s quotation:

I contend that perfect competition is a grossly misleading concept whose only value is to generate an endless series of examination questions. Economics would be a better subject if we discarded it once and for all. Having expunged perfect competition, we ought to follow it by also discarding Walrasian existence proofs and the Invisible Hand Theorem of welfare economics. First of all, everyone admits that these beautiful theorems are mental exercises without the slightest possibility of ever being practically relevant: first-best optima are never actually observed and in a second-best world, it is not in general desirable to fulfill any of the first-best optimum conditions; in other words, piecemeal welfare policies may be based on good or bad qualitative judgments but they are not based on rigorous analytical theorems. But once first-best, end-state competition is discarded as irrelevant, as precisely and rigorously wrong, and replaced by process-competition as imprecisely and loosely right, what are we left with? We are left with the content of every chapter in every textbook on imperfect or monopolistic competition, on oligopoly, duopoly and monopoly, in short, on industrial organization as a sub-discipline in economics. In those chapters, firms jostle for advantage by price and nonprice competition, undercutting and out-bidding rivals in the market place by advertising outlays and promotional expenses, launching new differentiated products, new technical processes, new methods of marketing and new organizational forms, and even new reward structures for their employees, all for the sake of head-start profits that they know will soon be eroded. In these chapters, there is never any doubt that competition is an active process, of discovery, of knowledge formation, of ‘creative destruction’. I call this ‘the Austrian view of competition’ because it is most firmly enshrined in the writings of such Austrian economists as Hayek, Schumpeter and, more recently, Kirzner.” (Blaug, M. 1996 edition. Economic Theory in Retrospect. pp. 594-595).

Needless to say, I agree with Mark Blaug’s take on Smith’s use of the invisible hand and his definitive criticism of the gross miss-interpretations by most modern economists and philosophers (and most of the media under their influence) of Smith’s meaning of his use of the invisible hand metaphor, including some leading scholars at George Mason University, Fairfax, Virginia.

Lies travels around the world faster than a satellite, while truth is still putting on its boots.

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