Wednesday, April 11, 2012

Economic Religion: The Invisible Hand

Jonathan Schlefer "is author of The Assumptions Economists Make (Belknap/Harvard, 2012). The former editor of Technology Review, he holds a Ph.D. in political science from MIT and is currently a research associate at Harvard Business School." So he's not an idiot, in other words. Writing on the Harvard Business Review, he notes the non-existence of one of economics most cherished ideas, the Invisible Hand. 

The concept of this "Invisible Hand" is central to Libertarian theory. It is used with almost reckless abandon, as this article from the not intentionally ironically titled Reason Magazine indicates, "The Invisible Hand of Population Control: The tragedy of the commons meets economic freedom." Of course this particular article deals with the idea of Malthusian food shortages as something that should merely be allowed to happen in deference to the virtues of a free market, even if sober social policy might avert it.

But Schlefer's piece puts a lie to this kind of Libertarian bullshit:
One of the best-kept secrets in economics is that there is no case for the invisible hand. After more than a century trying to prove the opposite, economic theorists investigating the matter finally concluded in the 1970s that there is no reason to believe markets are led, as if by an invisible hand, to an optimal equilibrium — or any equilibrium at all. But the message never got through to their supposedly practical colleagues who so eagerly push advice about almost anything. Most never even heard what the theorists said, or else resolutely ignored it.
Of course, Libertarians will hem and haw and point out that the free market was never really free, government regulation is the problem, not too much economic freedom (the only kind of freedom worth having, apparently.) A commenter on Schlefer's piece, Jon E. Boy, writes, "We do not have a free market, therefore Schlefer's entire argument is moot."

This kind of doubling down on deeply held but ultimately wrong beliefs is the kind of thing we see in all religion, including Libertarianism.

3 comments:

  1. I recall my college macro-economics class. We discussed Smith and the Invisible Hand at one point during the term.

    We all came to the conclusion it was so much hooey on Smith's part and that Government regulation and policy guides the economy, not some indeterminate force.

    Of course the fiction that corporations are people only accelerated the corruption of government.

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  2. The Invisible Hand was conceivable when the average consumer could interact with the average producer. If the producer made a bad product the consumer could take his business elsewhere. The consumer could shame the producer. The multinational corporation, as it exists today, wasn't around in Smith's time.

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  3. And worse, corporations are incapable of shame.

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