Wednesday, June 13, 2012

Stiglitz Repents, Or Did He?

 Nobel Prize winner Joseph Stiglitz challenges the influential teachings of 18th-century economist Adam Smith, citing flaws with Smith's metaphor of an "invisible hand" guiding the free market. "The reason the invisible hand often seemed invisible was that it wasn't there," he says. Stiglitz claims an uncritical adherence to Smith's ideas is partially to blame for the current financial crisis." HERE 
I am working on a  matter related to Joseph Stiglitz, Nobel Prizewinner in Economics, and came across this reference to Stiglitz on video. The last sentence struck me as particularly perverse:
“Stiglitz claims an uncritical adherence to Smith's ideas is partially to blame for the current financial crisis.”
 Stiglitz is wrong.  It was not a strict “uncritical adherence to Smith’s ideas” that caused the “current crisis”.  It was quite the opposite.   The modern invention of the role of “an invisible hand” has nothing to do with Adam Smith’s writings  – all two of them. Smith wrote nothing – absolutely nothing - about an "invisible hand guiding the free market”.  
That is what modern economists – presumably also the one’s who taught Stiglitz his economics – asserted from about 1948 to their students who went on to careers in academe, politics, banks, stock markets, media, entertainment,lobbying,  and business. 
There is no such reference in Wealth of Nations about “an invisible hand and markets”.
It was the slavish adherence of misled students, such as Joseph Stiglitz apparently , to the modern myth about Adam Smith’s use of the metaphor of “an invisible hand” that led them to advise that, somehow, “an invisible hand” would generate equilibrium in markets and produce the “public good”.
Waiting for such and imaginary ‘Godot’, who ain’t coming, caused the present crisis.  And Stiglitz only realized that there is ‘”no invisible hand” in February 2010 at the Commonwealth Club of California in San Francisco. See a short video HERE (many other versions abound across the Internet).

One sinner repenteth, but this one blames the wrong people for the mess, including Adam Smith, who remains wholly innocent of the charge.


Blogger airth10 said...

Well, all I can say is that Smith left himself open to interpretation when he wrote "as in many other cases, [he is] led by an invisible hand".

Smith mentions 'self-interest' often. I can't imagine how an individual can serve his/her self-interest without the free market. So in a way the self-interest and the free market are synonymous. Thus, it is ease to mesh the two and believe the invisible hand is working for both.

12:24 pm  
Blogger Gavin Kennedy said...

Self-interest is not necessarily in the public interest. A domestic merchant may perceive (and often did) that by persuading a government to impose tariffs on foreign competitors he will increase the market for his products, hence his profits. An ambitious price may see his self-interest in murdering a rival, but he kicks of a civil war or a violent period of disorder, contrary to the self-interest of the dead rival's family and to others.
Self-interest is not only about markets, or even free markets (indeed, tariffs and prohibitions predominate through commercial history as does 'jealousy of trade', leading to wars).
The IH is a metaphor; there may well be other 'cases' where the same metaphor can apply, provided you show the object referred to in the other cases. Metaphors can be inappropriate as descriptions in many other cases. We judge their applicability by specific details of the 'object-metaphor' relationship.
Self-interest and a 'free market' may be seen as incompatible to some who feel they lose from them (eg monopolists).
There is no 'universal' IH! There is no automatic connection between self-interest and fee, or unfree, markets.

1:12 pm  

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