Tuesday, December 24, 2013

Nobel Prize Winner Critiques the Existence of the Invisible Hand

Joseph Stiglitz repeats his 2010 disavowal of the existence of “an invisible hand” (22 December, 2014) in All Africa (Addis Aaba) HERE   
Ethiopia: Do Human Rights Make Economic Sense?”
Perhaps, the single most important idea in economics is Adam Smith's invisible hand, which states that the pursuit of self-interest would lead to the well-being of society. If this were true, it would mean that business leaders would have to ask only one question: what should I do to increase my bottom line?
All other concerns would fall into place as a result of the wisdom of the market. Elevated to a creed, the idea has even more drastic implications: as long as I make a profit, I am still doing God's work - even if I abuse workers' basic rights or despoil the environment in the process.
Much of my own research over the past half century has been devoted to understanding why it is that Adam Smith's invisible hand so often seems invisible. My conclusion, in a nutshell, is that it is invisible because it is not there.
Joe Stiglitz spells out his stance on the “invisible hand” in greater detail in the rest of the article which you should read via the link.  It is parallel to regular statements on Lost Legacy, much of which I agree with, though not all. 
The problem lies in the first sentence: “the single most important idea in economics is Adam Smith's invisible hand”, but that may be a quibble in this context.
Having broken free from belief in the existence of “an invisible hand” it is a small but significant step to take for Stiglitz, but he should drop the association of the “invisible hand” idea with any intellectual connection to Adam Smith’s writings. 
It is a wholly invented modern idea that there is an invisible hand “guiding” an economy.  Smith’s “idea” was much more simple: the invisible hand was a metaphor for the motives of individuals in the only two cases he gives, and that says other individuals in “many other cases” may also do.  The two cases he identifies who acted from those motives led to those actions that had consequences, some of which also had “unintended consequences” that served the overall “public good”, and, crucially, there are many other cases (in Wealth of Nations) which did not benefit the public good, as show in Smith's "violent attack" on Mercantile political economy (WN Book 4).


Blogger airth10 said...

I think theoretically the idea of the invisible hand is correct, that pursuing ones own self-interest leads to the overall wellbeing of society, plus self responsibility. But not everything works according to theory. Nevertheless, the theory is a good starting point. And nothing worthwhile can be accomplished without first having a good all encompassing theory (like Darwin's theory of evolution).

I think the theory that has being attributed to the invisible hand is in the long run a good idea. It is in the short term that it can be problematic as Joseph Stiglitz's argument tries to point out.

5:56 pm  

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