January 1, 2015

No idealization, only misunderstanding and misconstrual

Comment on 'The Invisible Hand -- a brilliant idealization proved wrong by reality'

Blog-Reference

For Adam Smith the invisible hand never was an idealization.

“Moreover, Adam Smith used the phrase “invisible hand” on three dissimilar occasions in his writings and in each case it was employed, not to exemplify the Panglossian conclusion that markets always convert private “vices” like selfishness into public “virtues” like income and employment for all, but to demonstrate that, in Robert Burns’s words, 'the best-laid schemes o’ mice and men/Gang aft a-gley'”. (Blaug, 2001, p. 153)

Whatever Smith meant, the metaphor simply took a life of its own. So it has to be taken in the new sense.

The invisible hand metaphor reincarnated as General Equilibrium Theory and the attempt was made to rigorously prove it. This is laudable, because the worst feature of economics until today is the endless wish-wash about metaphors and half-baked concepts. However, this attempt did not succeed.

“It is good to have [the technically best study of equilibria], but perhaps the time has now come to see whether it can serve in an analysis of how economies behave. The most intellectually exciting question of our subject remains: is it true that the pursuit of private interest produces not chaos but coherence, and if so, how is it done?” (Hahn, 1984, p. 102)

So, admittedly economists do not understand how the actual economy works. And from this follows that there is still some scientific homework to be done. For the correct account of how the markets work see (2014).

Egmont Kakarot-Handtke


References
Blaug, M. (2001). No History of Ideas, Please, We’re Economists. Journal of
Economic Perspectives, 15(1): 145–164.
Hahn, F. H. (1984). Equilibrium and Macroeconomics. Cambridge, MA: MIT Press.
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper
Series, 2517242: 1–29. URL