Wednesday, January 30, 2013

Remember, there is no invisible hand

And I don't mean that it's a metaphor and it's not "real". I mean there is no such metaphor in the way we normally think about it. I noted this on Coordination Problem the other day.

I hope most of you are familiar with the arguments of Gavin Kennedy. I agree completely with him on this. When people like Kenneth Arrow refer to "the invisible hand", I take it to be the shorthand we've adopted for Smith's claims that private action leads to public good. That was all over the Wealth of Nations. But the actual passage discusssing the "invisible hand" has nothing much to do with it.

As a matter of terminology, I don't personally mind that we've adopted "the invisible hand" to mean that (that's why I was quoting Arrow and Hahn uncritically on this last night). It's a nice phrase, after all. But as a matter of history of thought I've always agreed with Kennedy on this.

Thanks for reminding us, Gavin!


  1. And I assume you've never thought Martin Luther King was dreaming about racial equality?

    1. Aristotle wrote of metaphors: “But the greatest thing by far is to have a command of metaphor; . . . it is the mark of genius, for to make good metaphors implies an eye for resemblances”

      By that test, it seems to me, Smith was not trying to use the metaphor in the sense attributed to him. As Daniel writes, Smith was writing about other matters.

      Perhaps Daniel can put his talents to use and trace down the "genius" who first misquoted Smith or perhaps more accurately used Smith's words to imply that Smith wrote things he had not written?

      Now, we all know that Smith was wrong.

      Soros says it best (Open Society), "I interpret history as a reflexive process in which the participants' biased decisions interact with a reality that is beyond their comprehension."

      Unfortunately, Soros missed this lesson from Aristotle and has yet to create a metaphor strong enough to offset Smith's words. His choice of the word "reflexive" is just not a strong metaphor.

    2. Not sure I follow Bob.

      The invisible hand was buried deep in the book and used in a way that has little to do with how we use it today. On that I agree with Gavin.

      That having been said, I am not on the same page with Gavin insofar as I really don't think it's such a bad thing that we've come to call it "the invisible hand". I certainly agree with Gavin that Smith never thought that markets always and everywhere give us good social outcomes (neither, for that matter, did Kenneth Arrow).

    3. re: "Perhaps Daniel can put his talents to use and trace down the "genius" who first misquoted Smith or perhaps more accurately used Smith's words to imply that Smith wrote things he had not written?"

      In the fine tradition of the division of labor, I'll outsource that one to Gavin. I believe it first came up in the late nineteenth century, but that's recollecting some old posts of his.

  2. I think "reminding" is a bit of an understatement for what Gavin has done on this point. Words like "jihad" and "jeremiad" come to mind as more fitting choices.

  3. @AH and DK,
    Late 19th century IH reference: Maitland, Smart, Leslie, Ingram, Bonar. Specific references to IH include Pigou, Gray, Lange, and Samuelson. (Kennedy 152-153) from his 2008 book.

    "Now, we all know that Smith was wrong." Could you elaborate more on why Smith was wrong?

    1. low information commentator

      I don't believe in ghosts, do you

    2. Smith was wrong because people's biased decisions interacting with a reality that is beyond their comprehension does not necessarily lead to the best outcome for society.

      For example, if A and B bargain over the price of a synthetic CDO, or tulips, and A performs optimally for his own interest, this has nothing to do with the outcome for society of the investment.

      People working for their own ends may promote a better outcome for society or it may not. There is no invisible hand, merely coincidence.

  4. Daniel, I think the following:

    ==> What modern economists mean by "the invisible hand" is that people acting in their narrow interest unwittingly end up promoting the general welfare. This is EXACTLY what Smith meant by the phrase.

    Are you saying the above is wrong? If so, why? I almost think that is a paraphrase of the famous passage from Smith. I have absolutely no idea what you're talking about in this post.

  5. Well for some reason I can’t reply directly to a post.

    I think you are misconstruing Smith in this instance with your example. Smith, from what I’ve read, was quite aware of the problems of “people’s biased decisions… [that] does not necessarily lead to the best outcome for society” and offered solutions to help mitigate those problems through intervention in the WON.

    1. This is my last comment.

      For all the super low information voters, I will explain Smith, Keynes, and our current situation, once and for all.

      Smith had two points, relevant here.

      First, he argued that markets can often do a better job than the government.

      Second, he is read to have shown that, by reason of "the invisible hand," the market outcome is optimal.

      He was clearly wrong as to the later. Any connection between the result of a market and outcome is coincidental and is not per se optimal because of some "invisible hand."

      As to the former, events are showing him wrong as well. He never considered, for example, that a government could capture "markets" as a tool the way the Chinese have.

      The reason for Smith's failure is that he did not understand (and of all the dead economists in the Temple of the Gods only Keynes understood) that an economy that uses finance is entirely man made and that we can therefore manipulate its parts (which are not invisible at all). Accordingly, the Chinese can use the power of the government to hold down wages, etc., and produce products and services less expensively than someone like the US and can profit, wildly, if we are stupid enough to buy from them.

      In a few words, there is a Phillips curve between gov't power, as applied, and wages and costs.

      This action by the Chinese does not create any imbalance in China. Unhappy workers who have been exploited is not an economic imbalance. If there is an invisible hand, there it is. A gov't holding down wages (and other costs) doesn't create an economic imbalance.

      There is no limit to how much the Chinese can profit, as long as, per Soros, we remain stupid, acting out of bias and a lack of comprehension, and keep buying.

      Look at our current account balances now. Look at rising gasoline prices, today, and the drag starting again, at the first shootss of spring. We remain locked in a World in which biased decisions are interacting with a reality that is beyond the comprehension of all the low information people here, in the Gov't etc.

      Keynes spoke right to the point. Until we bring out current account down, there are not going to be jobs here. That is true for the US, for GB, for France, and for Southern Europe.

      For the World to recover, we need massive deficits in China and Germany.

      Now, if anyone believes I am wrong, explain why. GB has figured it out and is putting leaving the EU on the table. The Gov't has come to realize that GB only has a long run future if it acts on its on to end its current account deficit.

      Explain how we are going to create jobs here, if we continue to buy goods from China, etc., which appear cheaper, in the short run, because of the power and policies of the Chinese gov't?

      Now, I realize that correlation is not causation, but is you look at the current account balances around the World what passes for evidence around here the rest of the time is overwhelming.

      Note, last, I said short run.

      In the long run, suppressed wages may have political consequences, consideration of which is truly beyond the capacity of the low information voters. Do you ever hear economists asking, Well we could buy cheap from China, but is that in our long run political interest? No, you have low information voters, people suffering man with the hammer syndrome like Don B, write stupid letters claiming we are better off because China is holding down wages.

      To further my point, there is no end to how stupid we are at looking at second, third, and fourth order effects. For example, we just had a President publicly favor a really stupid immigration idea of letting the World's brightest come to the US. Now, there is really going to win the hearts and minds of the other 99.9% in the World. People are smart enough to understand that when we reach into India or Africa and take their brightest people that we are hurting, badly, those who remain behind.

    2. Implicitly, David Glasner agrees, today writing in response to the low information voter John Taylor,

      Taylor seems to be suggesting that, despite low interest rates, the public is not willing to spend because of increased uncertainty. But why wasn’t the public spending more in the first place, before all that nasty forward guidance? Could it possibly have had something to do with business pessimism about demand and household pessimism about employment? If the problem stems from an underlying state of pessimistic expectations about the future . . .

      Daniel, it seems to me the question properly framed and right before you, being, What is the cause of the "underlying state of pessimistic expectations about the future?"

      My answer is the current account balance. Do you have a better answer? If so, what is it?

  6. What "invisible hand" are you talking about? I can't seem to find that analysis in Smith.


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