Was Adam Smith Wrong About the Invisible Hand?

Another "economics is a speculative philosophical discourse, not a deductive or inductive science" argument:

Economics: The Invisible Hand of the Market, by Peter Steinfels, NY Times: Duncan K. Foley [has a] ... new book... [F]or his survey of more than 200 years of economic thought, ... he chose the title “Adam’s Fallacy: A Guide to Economic Theology.”

Adam? Theology? The Adam in question is ... the founding father of modern economics, Adam Smith.

So what is “Adam’s Fallacy”? ... It is the idea that the economic sphere of life constitutes a separate realm “in which the pursuit of self-interest is guided by objective laws to a socially beneficent outcome,” Professor Foley wrote, a realm unlike all the rest of social life, “in which the pursuit of self-interest is morally problematic and has to be weighed against other ends.”

“This separation of an economic sphere,” he wrote, “with its presumed specific principles of organization, from the much messier, less determinate and morally more problematic issues of politics, social conflict and values, is the foundation of political economy and economics as an intellectual discipline.”

Professor Foley’s book is simultaneously an introduction to economic theory and a critique of it. ... How “Adam’s Fallacy” will serve as an introductory text is for others to decide. What is pertinent here is the author’s contention that economists, all along, have been writing theology. ...

What he means, he wrote, is that “at its most abstract and interesting level, economics is a speculative philosophical discourse, not a deductive or inductive science.”

Historically, economics has not only shed light on how a capitalist market system works, it has also suggested what attitudes people should take about those workings and about the moral conflicts accompanying them.

“These are discussions, above all, of faith and belief, not of fact, and hence theological,” Professor Foley wrote.

“Economics functions in a theological role in our society,” he added in an interview in which he paraphrased Milton, “to justify the ways of the market to men.” Economists, moreover, are “becoming priestly figures, with arcane knowledge” and special powers, he said.

Economic laws are cast as universal and invariable. They are even presented as natural laws akin to those of mathematical physics or evolutionary biology.

From the bedrock belief that the pursuit of private self-interest will ultimately benefit the whole society stems a willingness to abide harsh economic measures and consequences, ranging from large-scale unemployment to the destruction of traditional cultures.

The danger of these “illusory comforts of Adam’s Fallacy,” Professor Foley writes, is that they obscure hard truths. Contemporary capitalism, in his view, is a successful, resilient and adaptive system for creating material wealth. But it is not a stable, self-regulating one. Left to its own devices, for example, it will not “solve the problems of poverty and inequality." ...

Some people argue that economics should employ its own allegedly value-free techniques to produce a menu of options, each with specified costs and benefits, that it submits to the rest of society for moral judgment.

Others argue that the relationship is invariably more dialectical. Other sources of morality have something to say about the technical concepts and methods of economics, and economic theory in turn may shed light on those other sources of morality.

These matters fall outside the reach of “Adam’s Fallacy.” Professor Foley has a more modest aim.

Economists, he wrote, often speak of the need to teach people to “think like economists.” But “thinking like an economist comes hard to many people,” he added, “and I personally am grateful for that fact.”

He wrote the book, he said, “to give people more confidence in their own moral judgments” about economic issues.

The attacks on economics get tiresome. The main thesis is that Adam Smith's invisible hand doesn't work, that the pursuit of self-interest is not guided by an invisible hand to the best societal outcome. There aren't enough details given about why the author believes this to fully evaluate the reasoning behind the assertion, but some of the reasoning is discussed. The author says:

“These are discussions, above all, of faith and belief, not of fact, and hence theological”

Why does this disqualify economics as a science? Theories aren't facts. Theories can be falsified by the evidence, but no amount of experimental work can ever confirm they are true. All science is, in this sense, based upon "faith and belief, not of fact, and hence theological." There's nothing unique about economics in that regard.

The author also says:

Historically, economics has not only shed light on how a capitalist market system works, it has also suggested what attitudes people should take about those workings and about the moral conflicts accompanying them. ... “Economics functions ... to justify the ways of the market to men.”

To say that economics is not a science because some people use it to justify markets is also puzzling. Suppose that biology discovers that a certain disease is spread through hand-shaking. Suppose also, for the sake of argument, that hand-shaking is a controversial cultural practice. If biologists use their results to advocate against shaking hands when meeting, to tell people what attitude they should have about hand-shaking, or if others use the results to justify their ideologies, does that disqualify biology as a science?

What the author has in mind, I think, may be those people who advocate market systems over command and control systems, or systems where government is heavily involved in the private sector, i.e. a welfare state. Some of these people do seem to display an almost religious fervor for the market system.

Though it is rarely taught anymore, there is a branch of economics known as comparative systems. This discipline looks at different ways society can organize itself, capitalism, socialism, communism, syndicalism, anarchism, hybrid systems, etc., and then compare the economic outcomes.

For this argument, let's focus on capitalism and socialism. Suppose that the poorest of the poor are better off under socialism than capitalism, they have a place to live, health care, etc., but average income is very low. Thus, the poor do a bit better overall under socialism, but most people do not fare as well as they would under capitalism. I was trained that I cannot judge which is better. Under capitalism some people would be better off, some worse off, and hence it entails a value judgment to advocate for one over the other. My job is to fully characterize the outcomes, not to say which is best.

But this can be taken a step further. Because mean income is so much higher under capitalism, it may be possible to make everyone better off and nobody worse off by moving from socialism to capitalism, though it would take some redistribution of income to the poor. That we don't do so is a political choice, but capitalism is still the better system since everyone can potentially be made better off.

The point is that the job of an economist is not to "justify the ways of the market to men," or to advocate one system over the other on an ideological basis. It is to understand and then explain how economic systems and markets work so that people can make informed choices. Economists never said that people shouldn't make "'their own moral judgments' about economic issues" as implied at the end of the article.

Finally, I also object to being told that economists:

[A]bide harsh economic measures and consequences ... [such as] large-scale unemployment

There are economists who devote their lives to figuring out how to reduce these problems within the economic system we have chosen. We as a society chose capitalism over, say, a command and control system because it delivers a higher mean income. Economists fully recognize the costs that come with that choice such as those associated with business cycle fluctuations and we do our best to overcome them. We also fully understand the income distribution issues the author noted above so I'm not sure what the objection is there. Nobody ever said we'd end up in the middle of the Edgeworth box.

[See the post below this one for an attempt to explain the claim that "thinking like an economist comes hard to many people."]