Friday, January 12, 2007

Apologies for Differing with Don Boudreaux

Donald J. Boudreaux writes an active, lively and accurate economics Blog, Café Hayek, and also writes syndicated articles which I get from the Pittsburgh Tribune Review. I have often commented here on the good sense that Don writes on economics and issues of the day, most particular on free trade, (his most recent against Lou Dobbs, a protectionist).


Therefore, it is with some mild reservations that I up against Don on the subject of Adam Smith and ‘his’ invisible hand. Not that Don is of the same ilk as the usual culprits on this metaphor. Far from it. His position is eminently clear and well founded. I just do not agree with his nuanced ascription of ‘an invisible hand’ as an element of how Adam Smith said markets work.

Why is this important? Why not just take on the mindless neoclassical misuse of Smith’s quite clear metaphor and leave allies on free trade alone, especially is they are almost ‘right’? Well, one thing for sure, consistency is important. For another thing, nothing I wrote about Don Boudreaux would have the slightest effect on his immense and justified reputation.

Here are the paragraphs in his PTR article:

Asked differently, doesn't human weakness and irrationality make the invisible hand of Adam Smith at least a bit palsied? And, if so, doesn't a palsied hand need some conscious guidance from caring attendants?
No.
The case for the market doesn't require that each of us behave in textbook rational fashion. One of the great benefits of free markets is that they both reduce the frequency of irrational behavior and temper the ill consequences that would otherwise occur when people do behave irrationally
.”


Comment

A little poetic licence is allowed (‘cutting some slack’, as Americans say, I believe). But this last paragraph is problematic:

‘Adam Smith understood that the system is the solution when he wrote that beneficial market outcomes are the result of an "invisible hand." '

It is the extension of the use of the metaphor of ‘an invisible hand’ from what Smith was talking about in both Moral Sentiments and Wealth of Nations that creates an inaccurate impression of his meaning, and perhaps, it is also causes others to make a metaphor into a ‘theory’ of markets, and, in some cases (Jerry Evensky is an example) to associate Smith with theology.

Smith did not use this metaphor in relation to markets. He never wrote that ‘beneficial market outcomes are the result of ‘an invisible hand’. His subjects in relation to ‘an invisible hand’ in Moral Sentiments were about the comparison between the subsistence incomes of landless tenants under late feudalism and their possible incomes if the land was divided equally among all people. No invisible hand was required to meet the condition that the poor were no worse off as landless tenants compared to either the conditions prior to landownership by a few rich proprietors or to a hypothetical equal division of land. In both cases, the situation under rich proprietors from higher productivity would be at least as good, if not better.

Moreover, to be sustainable, landed property in the hands of greedy landlords, had to at least meet previous or alternative arrangements if it was to be sustainable as a social arrangement. As population remained steady or grew (excepting periods such as the Black Death), Smith assertion was obvious. His reference to ‘an invisible hand’ referred to the motives of the players not having any effect on a quantitative outcome that was inevitable if population was to grow.

In Wealth of Nations, the ‘invisible hand’ metaphor states simply that the whole is the sum of its parts, and that if the parts are greater than they would be otherwise, the whole is greater too. Merchants who were risk averse, and in conditions of piracy, fraud and uncertain sea states they had good reasons to be so, preferred to invest locally where they could keep an eye on things, knew the law and the trustworthiness of the people they dealt with. By doing so, local net investment was higher than it would be if they dispersed their capitals elsewhere.

Neither uses of the metaphor had anything to do with markets. If economists wish to extend the metaphor to cover market conditions (I do not see what mystifying it with invisible hands, palsied or otherwise, adds to our understanding of market behaviours) then that is their privilege if on their own account and under their own names. But to pass this notion of as Adam Smith’s is unacceptable. It leads to people concluding, as per HEA meetings last week in Chicago, that Adam Smith was a theologian!

Hayek does not need Smith’s support for the wholly reasonable idea of ‘spontaneous order’. Invisible gods from primitive pagan religion have no place in economics.

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