The Invisible Hand — a brilliant idealization proved wrong by reality

6 Nov, 2014 at 09:11 | Posted in Economics | 2 Comments

The Invisible Hand is a source of clean economics in a dirty world. Great castles can be built on the Invisible Hand, but a rising tide will wash them away. This is what happened in 2008 …

autoThe many obstacles to the workings of the Invisible Hand amount to an overwhelming criticism. The Invisible Hand is an approximation, usually not applicable in the real world without significant modification …

If rightly read, Smith’s theory proposes the opposite of laissez-faire political practice, suggesting that there is a need for a visible hand of government. It describes both why markets work and why they fail … The Invisible Hand is a brilliant idealization of markets that shows how limited laissez-faire theory is in reality.

Jeff Madrick

2 Comments

  1. No idealization, only misunderstanding and misconstrual
    Comment on Jeff Madrick’s ‘The Invisible Hand — a brilliant idealization proved wrong by reality’

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    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)

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

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    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.

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    “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)

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    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).

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    Egmont Kakarot-Handtke
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    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, 2511741: 1–29. URL http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?
    per_id=1210665.

  2. Marknadens osynliga hand måste sitta på lagens långa arm.


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