Gregory Mason, an associate professor in the department of economics at the University of Manitoba, posts (8 August) in Winnipeg Free Press HERE
“Raising minimum wage won't fight poverty”
… “This is an example of a self-organizing mechanism, otherwise known in economics as a Nash equilibrium. John Nash, the subject of the movie A Beautiful Mind, won the Nobel Prize for realizing that our individual decisions must account for the decisions of everyone else driving or participating in the economy. A steady state, or sustainable equilibrium, occurs where each of us makes the best decision in the context of everyone else’s best decision.
The "invisible hand" is another possible way of describing a Nash equilibrium. Ascribed to Adam Smith, the popular understanding is that Smith viewed the economy guided as if by an invisible hand.
Further, coupled with his idea that each of us acting in our own self-interest will collectively produce the highest well-being for society, it is an easy leap to conclude that Smith defended a non-interventionist and laissez-faire economic policy.
In fact, part of this story is bunk. Adam Smith only mentions the invisible hand three times in his important books. Indeed, he seems not to have seen this as a useful or central idea. It was contemporary economists who linked the idea of a self-organizing market to the invisible hand, possibly to justify non-intervention in market processes.
COMMENT
Gregory Mason’s article is another piece of evidence that economists are slowly waking up to the major error in attributing to Adam Smith the false idea that he believed that there was a special role for his use of the “invisible hand” as other than as a rhetorical metaphor.
The incorrect attribution to Adam Smith began in the late 19th century (from the 1870s) and later flowered after Paul Samuelson (1948) wrongly attributed false meaning to Smith’s reference to an “invisible hand” that supposedly had remarkable powers well beyond anything envisaged by Adam Smith.
Today, the error is unbiquitous across, and beyond economics.
Adam Smith never “viewed the economy guided as if by an invisible hand”. Such an assertion treats Adam Smith’s use “of an invisible hand” as a simile, not a metaphor. (See: Adam Smith. Lectures on Rhetoric and Belles Lettres, Oxford University).
Moreover, Nash Equilibrium has nothing to do with anything Adam Smith wrote, as Gregory Mason correctly states.
Moreover, “It was contemporary economists who linked the idea of a self-organizing market to the invisible hand, possibly to justify non-intervention in market processes.”
To which “contemporary economists” linked Nash Equilibrium idea of a “self-organinising market”? Certainly, none of Smith’s contemporaries mentioned Smith’s use of the invisible hand. Only in the mid-20th century was that assertion made and believed, thanks to Paul Samuelson’s awesome reputation legitimising his wholly invented error.
How does the invisible hand describe a NE? Isn't the former supposed to be a process or self- organising mechanism? ( I'm only referring to the metaphor and how it is " commonly understood"). Nash, on the other hand, is a characterisation of equilibrium ( as far as I understand it..which isn't saying much). I don't think the actual process of reaching an equilibrium ( even if it exists and is stable) is well theorised in mainstream economics.
ReplyDeleteHi Billoo
ReplyDeleteI don't think that anything Smith wrote can be credited to his anticipation of Nash Equilibrium - thought some modern economists (post-Samuelson) appear to think he did, even beyond Nash Equ. 1 to Nash Equ, 2.
I am not sure than outside the models, Equilibria exists in the real world.
I have long been suspicious about the basic Supply and Demand equilibrium exemplified in the Marshallian Supply and Demand diagram. I understand its construction, of douse, but when I try to envisage its operation in a real market-stall, I am flummoxed!
A seller of oranges and a customer with money enters a transaction when exactly does the equilibrium price apply? Before, during, or after they agree a price? But what of competing stall-holders with sets of different buyers?
If a market is in a Marshall equilibrium, what do we mean in the real world? Is everything sold already, or some stack unsold and some customers unserved?
I touched on this issue in my paper: Kennedy, G. (2015) ‘Adam Smith’s Use of the “Gravitation” Metaphor’. Economic Thought, 4.1, pp. 67-79. http://www.worldeconomicsassociation.org/files/journals/economicthought/WEA-ET-4-1-Kennedy.pdf
Gavin
Thanks, Gavin. I will take a look at the paper. On Smith I've only read some Fleischacker, parts of Griswold's lovely book and E. Rothschild ( apart from Sen, of course) so it's been great to find your blog .
ReplyDeleteI don't think the models are meant to be about the real world ( giocoli on formalization is good on this). The " human" agents are more like robots ( as Lucas once said).
But even prior to 1950 when the trend to greater axiomatic thinking came about the basic model of exchange was unrealistic. Who, exactly, is the " auctioneer"? And in the basic model of exchange there is no money, uncertainty, powe relations or debt. Price is " implicit" but the actual process of how one gets to equilibrium is, as you point out, weak ( how can anyone be off- equilibrium in the first place?
Also, it assumes goodwill, perfect information, no transaction costs. In a word- if you pardon my French- bull.
Marshall, too, used the idea of gravitation ( I think). Sutton's Marshall's Tendencies has a chapter on this.
Sorry, just to try and answer your question more directly. In theory, under perfect conditions, there would be no excess supply or demand and so, at the given market price ratio no one would want to change what they're doing. Markets clear at the equilibrium price ( or else it would change). In imperfect markets there can be an equilibrium in which the market doesn't clear ( it's called " rationing"). In development economics a lot of the theory explores the various versions of this ( in credit and labour markets, for example).
ReplyDeletebilloo
ReplyDeleteThank you for your comments.
I am Stil wondering what 'equilibrium prices mean in practice.
What does "no excess supply" actually mean?
Are the goods on sale, or have they all been sold at the equilibrium price and the stall empty or are they waiting to be sold?
Do all stocks cease? Do all purchasers go home, the shops empty, and every seller and buyers leave the market?
See my point?
Equilibrium is an abstract construction by maths not evident in the reality of actual markets, as is so-called 'general equilibrium'.
I am no longer convinced that maths and real-world human transactions have much in common.
Gavin
' morning, Gavin.
ReplyDeleteIn practice I don't think it means much and, surprisingly, the whole idea of equilibrium is shrouded in mystery ( existence, stability, how it comes about). As Bowles and others have written, the exchange mechanism - if that's the right word- is actually a centralised one and not modelled on any actual existing market ( this " dis embedding" is a large topic but I can't write about it using such a small keypad!)
I think the picture you're painting is correct. If markets instantaneously clear then there's nothing left to do. Strangers meet again the next day as if nothing has happened ( the discipline doesn't take time seriously..in fact, theory and practices lead to and are dependent on atomisation).
Spot on about the math. When my mother saw my Ph.D she threw it on the table and said, " what's the point of that if no-one can understand it ?( it was all math). There's a nice essay by Morishima's on The Good and Bad Uses of Mathematics. Again, lots to say: satanic mills. The use of math, accounting, and statistics in the history of capitalism is a fascinating topic. For me the question is: does a mechanical approach to life, a mechanical conception of the universe, lead to thinking of ourselves as ultimately nothing but thinking machines. Constantly moving happiness machines, I think the phrase was.
A nice few pages on " algorithmic thinking" in S. marglin' s book on community.
I'm reading TMS ( very slowly). Will pick your brain on it some time in the future ( if that's okay with you?).
I teach a course, ethics and economics, to senior level undergraduates. They're so used to maths by the final year that they find historical and critical approaches to the neoclassical framework deeply troubling. Marshall didn't go far enough when he said " burn the maths".
Gavin, just to support your point:
ReplyDelete[t]here is a vast array of what we would now consider extra-legal activities, such as robbery, thievery, swindling, corruption, usury, predation, violence and co-ercion, along with a range of suspicious and shady practices in the market (monoplisation, manipulation, market cornering, price fixing, Ponzi schemes etc.).
From David Harvey's excellent 17 contradictions. I'm suspect Smith would have agreed.
Gavin, just to support your point:
ReplyDelete[t]here is a vast array of what we would now consider extra-legal activities, such as robbery, thievery, swindling, corruption, usury, predation, violence and co-ercion, along with a range of suspicious and shady practices in the market (monoplisation, manipulation, market cornering, price fixing, Ponzi schemes etc.).
From David Harvey's excellent 17 contradictions. I'm suspect Smith would have agreed.
There is NO such thing as supply-demand-equilibrium
ReplyDeleteComment on Gavin Kennedy on ‘Paul Samuelson’s awesome error’
Gavin Kennedy summarizes: “I don’t think that anything Smith wrote can be credited to his anticipation of Nash Equilibrium - thought some modern economists (post-Samuelson) appear to think he did, even beyond Nash Equ. 1 to Nash Equ, 2. I am not sure that outside the models, Equilibria exists in the real world. I have long been suspicious about the basic Supply and Demand equilibrium exemplified in the Marshallian Supply and Demand diagram. I understand its construction, of course, but when I try to envisage its operation in a real market-stall, I am flummoxed!”
Everybody with one iota of scientific instinct immediately realizes that there is something fundamentally wrong with supply-demand-equilibrium and the SS-curve―DD-curve―intersection analytical workhorse of standard economics. Leijonhufvud ironised this construct as totem of the micro/totem of the macro. And already Schumpeter found it necessary to diffuse doubts about the scientific content of the supply-demand-equilibrium approach: “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.”
Orthodoxy is since 140+ years built upon false premises. The microfoundations approach is defined with these hard core propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
It should be pretty obvious that the Walrasian hard core contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). To take equilibrium into the premises and then to establish and discuss the properties of general equilibrium is a methodological blunder that is known since antiquity as petitio principii.
Because the axioms of orthodox economics are false the whole analytical superstructure, including supply-demand-equilibrium, is false. What has to be done is to replace false microfoundations by true macrofoundations. This paradigm shift fundamentally changes the depiction of the market. The new prototype which replaces SS-curve―DD-curve―equilibrium is shown on Wikimedia.#1, #2
Loosely speaking, Orthodoxy defines itself as follows “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” (Krugman)#3 This is bad enough, but that Heterodoxy could not refute and replace this plain proto-scientific garbage in 140+ years shows the abyss of scientific incompetence in its bottomless depth.
Egmont Kakarot-Handtke
#1 Wikimedia, The market prototype
https://commons.wikimedia.org/wiki/File:AXEC104.png
#2 Essentials of Constructive Heterodoxy: The Market
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2547098
#3 The father of modern economics and his imbecile kids
http://axecorg.blogspot.de/2016/11/the-father-of-modern-economics-and-his.html
This comment has been removed by the author.
ReplyDeleteProfessor Kennedy, my name is Bill Thomas. I ran across your name while doing some Adam Smith research.
ReplyDeleteI first read Smith WN about 30 years ago, when I started a corporate development career in pharma. I was a biochemist and wound up starting specialty pharmaceutical companies by negotiating IP transfer. About 15 years ago, I read TMS.
Today, I intend to generate a cross-discipline work on why Smith's economic system, which we pretend to follow, simply won't work without a serious amount of empathy for counterparties (Goczem did a nice job of documenting Smith's thoughts). I believe religious institutions are the only mechanism capable of training and mentoring moral business people, and I intend (at 60 and with only a PGdip in Bible, probably a pipe dream) to make every effort possible to document and publish on this.
Sorry. here's my thought. Smith did not think of the Nash Equilibrium,rather, Nash used the invisible hand to come up with NE. Smith well understood that numerous small transactions compiled to form the economy. We may focus too much on equilibrium, and not enough on the inputs. In enzyme kinetics, my 1970's research area, we are interested in enzyme level, substrate availability, and inhibitor activity. Business decisions, or perhaps the butcher, baker, etc, might be considered the enzymes of an economy.
Smith understood that aggregated moral business decisions produced a moral economy, which one might very well call the equililibrium. Sort of 50,000 foot view versus a quantitative view.
I enjoy your blog.