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Look ma, can't see the invisible hand! 
 
Bad pun may be, but as they say, behind every joke lies a grievance. 
 
The grievance is that there is something missing in the grand scheme of a self-regulated
market mechanism. The carnivorous consumer does not notify the murderous butcher ahead of
time to slaughter the cow, and yet the murder occurs alright? Who brings about the
coordination of demand and supply in the heartful meat market? Without central planning,
how are the actions of strangers dovetailed? There is where some force is operating. What
can it be other than an invisible hand?
 
The disciples of Menger seem to be the most ardent worshippers of the invisible hand. It
struck me as very odd. I once asked my teacher Israel Kirzner why we don't just say that
the entrepreneur or the middlemen is the visible agent who brings about the coordination.
I ended up outside the camp, praying to Menger: Guru, please tell me you don't believe in
unintended consequences of the invisible hand.
 
I found that Menger propagated the Smithian idea of unintended benefit left all over by
the invisible hand, just like Santa. I joked about Santanomics, and I grieved over
Menger's faltering.
 
How can the very master who said that every human action comes from intention could
possibly contradict himself to accept unintended consequences? How could he offer a feast
of spontaneously originating institutions? What happened to intention?
 
Then the joke began to engender, as one grievance began to turn into a couple. I
understood that Menger wasted so much of his energy to fight the German historicists that
his own camp of intention quietly embraced unintended consequence. The proverbial romance
led to subjectivism sleeping with its enemy.
 
Austrian School economists are fond of saying: every major advance in economic science
comes from another step towards subjecitvism. So my quip: when are 'they' going to take
the next step?
 
Forsaken by Menger's Temple, I cried in the wilderness, and at last Guru Leontief inspired
me to use what little math I learned outside the Mengerian camp. And look, I ended up with
a model that Menger ought to have written so that I could merely read it in peace. No more
invisible hand, no more spontaneous origins, no more unintended consequences. Indeed, no
more macroeconomics at all.
 
The key is the idea of agreement, where people actually do negotiate. The invisible hand
metphor would have us believe that the Eve of demand somehow bumped into the Adam of
supply, and spontaneously originated a lovely dovetailing, and instituted the market where
Eve equilibriated with Adam, and gave birth to an unintended benefit. Like the butcher,
Adam the supply did not intend to give any benefit, but Eve the demand got it anyway.
 
I do not believe in the story of accidental romance. To me it is visible that both are
deliberately looking for opportunities to give something of less utility to get something
of more utility, just as Menger taught. Menger said that the same two goods must be
preferred in opposite order by the two agents so that  Eve prefers what belongs to Adam to
what she already has, and Adam prefers what belongs to Eve to what he already has. Not
much is left to finish the story, but those infernal historicists baited the great Guru
rout onto a futile ghost chase, and the story was left incomplete. Exhausted by
ghostbusting, Menger mistold the story.
 
Buyers and sellers negotiate, and make an agreement. Both parties intend what they gain.
The institution is not spontaneous, it is deliberately created by the two adventurous
entrepreneurs who were actively looking for some advantage to take and some to give. When
I dress this in the smallest bit of math, it completely annihilates all macroeconomics,
all of it. Good old Mengerian micro can deal with all that macro wanted to handle, and
could not handle, because it had merely invisible hands to handle what it could not see.
 
Smith's example is half the story. To say that the butcher wants only his profit and does
not intend to give benefit to the consumer is one side. On the other side, should I say on
the other visible hand, the consumer must in fact intend to have the benefit, and
furthermore, must actually deliver a payment for the meat. Now again, the butcher must
accept a payment for the meat he sells. Suppose that he bought the baker's pie. It must be
the case that the butcher prefers the baker's pie to the meat he already has, while the
baker prefers the butcher's meat to the pie he already has. The whole thing is intended
from two sides by two parties. Most importantly, there must be mutual
payment, in which lies the seed of money. 
 
Theory of price as it was left by Smith must now be discarded. The price of meat cannot be
determined by the demand and supply of meat. The interaction of demand and supply can
determine only the quantity, but not the price. The price of meat must be  measured in the
quantity of the pie that pays for the meat.
 
To get the price, the demands and supplies of two goods meat and pie must be considered at
once. Formally, price is determined by a relation of equivalence, which equalizes the
value of the two goods that pay for each other. Then the intention is no longer one
dimensional. The intention to sell must bring its twin, the intention to buy. Putting all
of them together, we end up with a micro that renders all macro redundant. The buthcer's
income is paired with the butcher's expenses on the  pie, as the expenses of the baker on
meat couples with the baker's income from the pie. The micromodel is extended to
endogenize the incme and price constraints, and voila, it does what macro wanted to do but
could not do.
 
The extended micromodel banishes the invisible hand by the visible merchant who buys
without an intention to consume it, and sells without having produced the good, and yet
has a profit intention from being the matchmaker. The market is coordinated, because there
is arbitrage and siegniorage profit from the act of coordination.
 
Smith did not see matchmaking, but a one-sided lonely butcher absorbed in his self-
interest keeping him awake. He did not see the buyer, who must have been a payer too. It
was there to see, he just did not see it. But it is a mystery how Guru Menger forgot to
tell the story he knew so well. I have made it my business to tell the story that should
have been told by Menger.
 
The idea of invisible hand has a fairy tale quality to make it funny, but by Menger, it is
no science at all. There is no invisible hand. No consequence is uninteded. No institution
is spontaneous. In the state of nature, the baker would kill the butcher and eat him
rather than pay him. At least, he would have plundered him. It took a long struggle for
people to establish the right to be paid instead of being plundered. To say that the
market arose all by itself is
counter-scientific, both on account of historical facts and on grounds of logic of
intention.
 
I have come to believe that there is no profit in Smith anymore. After all, his followers
promise that the profit will be zero in equilibrium. We should start with Menger. But we
should not waste our time to fight a pointless war against historicism, but instead tell
the whole story. Using the guidance of Walras and Leontief, we can finish what Menger
started. Then we can avoid the entire misadventure of macroeconomics that begins with the
invisible hand, forgets the matter of payment, fails to see money as a means of payment
and entirely misses the whole business of intermediation by the merchants and bankers. The
metaphor fails even to deliver a correct theory of price.
 
Let us bust this ghost of invisible hand. 
    
Mohammad Gani 
   
 
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