Tuesday, January 29, 2013

Kenneth Arrow and Adam Smith

"...the notion that a social system moved by independent actions in pursuit of different values is consistent with a final coherent state of balance, and one in which the outcomes may be quite different from those intended by the agents, is surely the most important intellectual contribution that economic thought has made to the general understanding of social processes. [Adam] Smith also perceived the most important implication of general equilibrium theory, the ability of a competitive system to achieve an allocation of resources that is efficient in some sense. Nothing resembling a rigorous argument for, or even a careful statement of the efficiency propositions can be found in Smith, however."  
- Arrow and Hahn, 1971
Arrow of course proceeds to provide some efficiency propositions that most economists would find relevant to think about, and he rigorously demonstrates the point that individuals pursuing their own interests can generate beneficial results for society in a system of market exchange. Adam Smith took an enormous step forward and provided arguments that had been fairly convincing. Walras, Arrow, Hahn, Debreu, etc. picked up where Smith left off. I'm sure they found Smith's arguments plenty convincing, but they were nevertheless able to provide new arguments - and they did.

Is Arrow's efficiency criteria Smith's? No, of course not. They didn't even talk about "efficiency criteria" back then and Pareto hadn't even been born yet (much less Kaldor or Hicks). To point out that this is not precisely how Adam Smith addressed the question misses the point. We don't want to keep providing the same answer, we want to make this Smithian channel of thought deeper, broader, and stronger.

Are the parameters of Arrow's inquiry exactly the same as Smith's? No, of course not. The analytical toolbox gave primacy to some assumptions and made others less relevant. In the end Arrow did not speak to all that Smith spoke to, and vice versa. But again, we don't want to keep providing the same answer in science. We want to take a good answer and make it deeper, broader, and stronger. And that's what Arrow did.

Mark Blaug has called this a "travesty", but Mark Blaug seems to think Arrow's citation of Smith indicates that Arrow thought he was reproducing Smith's argument as opposed to doing constructive work in the same channel of thought. Mark Blaug is a historian of thought, but in calling Arrow's citation of Smith a "travesty" he demonstrates that tendency that we all succumb to sometimes when we hold a hammer: the tendency to see nails everywhere.

I, for one, am always in awe whenever I even dip my toes into the work of someone like Arrow. The suggestion that he is not moving forward Smithian economics because his framing of the issue is not identical to Smith's seems to miss the whole point of "moving forward Smithian economics" to me. The most important element here is that private choices in market exchange are socially beneficial. Arrow has that. The idea that he brings in certain efficiency criteria and assumptions to talk rigorously about this phenomenon doesn't change the fact that he's doing Smithian economics. Smithian economics is about the heart of the theory, not the minutiae of approaching the question that change over time. On the flip side, the idea that Arrow is not moving forward Smithian economics because he only provided his answer to a relatively restricted case is laughable. You try to do better if you are tempted to throw this at him. I know I can't!


  1. This comment has been removed by the author.

  2. Daniel Kuehn’s presentation of the issues raised by Arrow and Hahn’s contributions to General Equilibrium theory for Adam Smith’s contribution is misleading.
    “To point out that this is not precisely how Adam Smith addressed the question misses the point. We don't want to keep providing the same answer, we want to make this Smithian channel of thought deeper, broader, and stronger” Adding: Arrow and Hahn “picked up where Smith left off” and repeats the mantra about making Smith “deeper, broader, and stronger”.
    In general I have no problem with 20th/21st century economists advancing analytical science, for which they deservedly receive the accolades of Nobel Prizes.
    My objection is when they link their work in general equilibrium and Pareto’s Welfare theorem directly to Adam Smith’s use of the metaphor of “an invisible hand”. This leads to misleading associations of Adam Smith authority with modern views of how economic processes work.
    On the association of the invisible hand, see Arrow (1987): “The profoundest observation of Smith”; Arrow and Hahn (1971) “surely the most important contribution of economic thought”; Tobin, (1992) “one of the great ideas of history and one of the most influential”; and Samuelson (1976), who introduced his readers (and their tutors) to the notion that general equilibrium redefined the “the humble Invisible Hand doctrine”.
    These attributions to Smith on the back of modern work are misleading. They are now endemic in public commentary by economists. They make a “doctrine” out of a grammatical metaphor, giving it a life well beyond its role in Smith’s work.

  3. In February, 2011, the American Economic Review (specifically Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba, and Robert M. Solow) named its top 20 articles of the last 100 years. Included therein was:

    Hayek, F. A. 1945. “The Use of Knowledge in Society.” American Economic Review, 35(4): 519–30.


    The "prices as the source of economic knowledge and calculation" theory could be called the "prices are the visible hand" theory.


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