Monday, October 08, 2012

Always Pleased to Read of Those Who Have Woken Up About the Modern Myth of the "Invisible Hand"

Occasionally, just occasionally, at least recently, pieces appear in the media, that question the current obsession of modern economists with the so-called “invisible hand”, which is always attributed to Adam Smith to give it spurious authority (while libeling Adam Smith) to the quite ridiculous assertion that markets, supply and demand, the entire price system, the theories of welfare economics and General Equilibrium, and anything else they are too lazy to explain, are due the “miraculous” workings of a disembodied “invisible hand”.
Before this occasional and recent expression of doubt, the transformation of a simple metaphor, well-known in the seventeenth and eighteenth centuries in a theological context, was almost unanimous among mainstream modern economists.   This was particularly the case after 1948 (see my recent paper “The Myth of the Invisible Hand – A View From The Trenches”; Download from SSRN HERE) among both mainstream neoclassical, and also among the various “Austrian” strains of axiomatic economics (Mises, Rothbard, Kirzner, and Hayek). Some authors (and this includes both “left” and ‘Right” economists, who thinly disguise their use of the myth of “an invisible hand” by substituting the phrase ‘invisible hand explanations’ for their outright false claims for it to be Adam Smith’s “concept”, “theory”, “great idea”, or “paradigm”.  It was none of these.
Today’s example of a refreshing break with the norm comes from Mark Buchanan (a theoretical physicist and the author of "The Social Atom: Why the Rich Get Richer, Cheaters Get Caught and Your Neighbor Usually Looks Like You," who is also a Bloomberg View columnist).  He writes a revealing piece of which I have no comment about the politics : “Mitt Romney is unwise to believe in wisdom of markets. HERE 
He writes: “It's hardly surprising to see Romney repeating the wisdom- of-markets mantra. His chief economic adviser is R. Glenn Hubbard, dean of the Columbia University Graduate School of Business. Eight years ago, Hubbard co-wrote a paper … proclaiming the arrival of a veritable heaven on Earth through market expansion and deregulation.
"By providing immediate feedback to policymakers, the capital markets have increased the benefits of following good policies and increased the cost of following bad ones," he and a co-author wrote. Good policies result in "higher financial asset prices. Investors are supportive. Bad policies lead to bad financial market performance, which increases investor pressure on policymakers to amend their policy choices." The result: "The quality of economic policymaking has improved over the past two decades, which has helped improve economic performance and macroeconomic stability."
.... Where did such fantasy-based policies come from, and why are they so alluring? Don't blame Adam Smith. His concept of the invisible hand, which conjures beneficial outcomes from peoples' greedy ends, was really meant only as a metaphor. He recognized the need for constraints. As he put it in "The Wealth of Nations": "Those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments." Smith's invisible hand grew into a distinct philosophy starting in the 1950s, when mathematical economists built theories around that idea and made claims about the supposedly "optimal" properties of markets. The rhetoric surrounding this work, with its welfare theorems and proofs of optimality, is far too abstract to tell us anything about real markets or economies, as honest economists admit.
I agree broadly with Buchanan’s account of the common modern myth.  Though I am not much interested that politicians accept the advice of their advisors as to what Adam Smith allegedly said about the IH metaphor, nor am I interested in their political views.  Who becomes the next President is none of my business.   I simply note that belief in the myth of the invisible hand is not just common among Republican and Democratic politicians and commentators; it is also found among both sides of politics and none, and among most strains of economic theory, including “heterodox” economists, neoclassical economists and the various strains of “Austrians”.
Those who see my critique of the myth of the “invisible hand” as “too narrow” should take note of the unintended consequences of letting their far “too broad” laxity about the atrocities committed against the truth and Adam Smith’s good name.  They live with what they create in their mysticism about how the economy works, or doesn’t, as the case may be.  Buchanan has woken up to the fraud.  There is no invisible hand operating in any economy.


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