------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (June 2010)

Steven G. Medema, _The Hesitant Hand: Taming Self-Interest in the
History of Economic Ideas_.  Princeton, NJ:  Princeton University
Press, 2009. xiii + 230 pp.  $35 (hardcover), ISBN:
978-0-691-12296-0.

Reviewed for EH.NET by Steven Horwitz, Department of Economics, St.
Lawrence University.


With _The Hesitant Hand_, Steve Medema, professor of economics at the
University of Colorado at Denver, has given us what will likely be
seen as the definitive history of the relationships among
self-interest, markets, and government, particularly as they evolved
in the twentieth century from Marshall to Pigou to Coase, Buchanan,
and Posner. Medema takes the reader from Adam Smith’s invisible hand
through the nineteenth century utilitarian pushback and on through the
evolution of welfare economics, the Coase Theorem, public choice, and
the law and economics movement in the twentieth century.  The focus
along the way is how economists have tried to answer the question of
whether, and under what circumstances, self-interest could be relied
on to produce beneficial economic outcomes for all.

One of the most interesting themes of the book is that most of the
major economists who tried to answer these questions were not as far
apart as our modern caricature of them might suggest.  Where Medema is
at his best in this book is suggesting that what we think of as
Smithian laissez-faire, Pigovian welfare economics, and Coasean
analysis do not have nearly as much to do with what Smith, Pigou, and
Coase actually said as the adjectives might suggest.  All of them had
at least some understanding of the advantages and disadvantages of
both markets and government as allocation processes, and all of them
recognized that whether or not self-interest “worked” depended on the
institutional environment in which it operated.

In the opening chapter on Smith and pre-Smithian thought, Medema is
careful to note both the originality and importance of Smith’s
argument for the invisible hand and the various exceptions that Smith
discussed.  The following chapter focuses on J. S. Mill and Henry
Sidgwick and the utilitarian reaction to Smith.  Medema notes that
although they both rejected a strong rule of laissez-faire in favor of
more pragmatic, utilitarian judgments of particular cases, Mill was
still fairly skeptical of whether government could be relied upon to
improve on the imperfections of markets, while Sidgwick had greater
faith in the ability of government to do so.

Out of that Sidgwickian tradition comes the focus of the third
chapter, the early development of welfare economics in the hands of
Marshall and Pigou.  Medema’s treatment of Pigou is particularly
valuable as he makes clear Pigou’s view that market failures created a
“prima facie case” for government intervention, rather than an
automatic rule favoring government intervention as is often associated
with “Pigovian” analyses.  Medema offers a careful reading of Pigou’s
“State Action and Laisser-Faire,” from 1935, in which Pigou analyzes
the viability of interventionist solutions.  Pigou concludes, in
Medema’s words, “that there is no definitive answer that one can give,
a priori, about the magnitude of the problems associated with state
intervention” (p. 71).  This is not the Pigou of Pigovian welfare
economics.

Medema’s chapter on the Italian public finance theorists and Wicksell
that follows is one of the better overviews of that literature that
I’m aware of and nicely places it in the context of the larger story
he’s telling, particularly given its influence on modern public choice
economics, the subject of a later chapter.

The chapter on Coase is in many ways the centerpiece of the book.
Medema brings together both the history of economic thought and the
history of economics to tell the story of the evolution of the ideas
in “The Problem of Social Cost.”  Medema tries to get at what Coase
was actually trying to do, which was to suggest that under the
assumption of zero transaction costs and well-defined property rights,
market participants will always be able to bargain away what at first
appear to be externality problems requiring government intervention.
Medema is also clear that Coase did not think those assumptions were
realistic descriptions of economic reality. The point of the paper was
to show that the Pigovian system was “empty” and to indicate that the
really interesting questions about externalities and self-interest
took place in a world where transactions costs were positive and where
such rights were not well-defined.  As Medema notes later in the book,
it is for this reason that Coase’s work is best understood as part of
New Institutional Economics rather than the Chicago school more
narrowly.

With Coase having poked holes in the Pigovian framework and suggesting
that examining how easily market participants could bargain was the
real question, his University of Virginia colleague James Buchanan and
his associates were working the other side of the fence, developing
public choice economics.  Its lesson for this history, Medema argues,
is that even if transactions costs meant that private bargaining would
not produce optimality, self-interest in politics gave us reason to be
skeptical that intervention could improve on those outcomes.  In this
chapter as well, Medema combines close readings of texts with archival
material to tell a rich story.

The book ends with a look at the modern law and economics movement and
its evolution to what is now “the economic analysis of the law.”  The
emphasis for Medema is the role played by the Coase Theorem, or at
least the theorem attributed to Coase.  In the end, Medema concludes
that Coase’s own understanding of his contribution takes us back to
the more utilitarian calculations of the classical economists:  “The
task for legal-economic policy here becomes the assessment of the
magnitude and influence of the relative costs of coordination across
alternative institutional structures and the resulting implications
for alternative institutional-policy arrangements” (p. 187).  The
Coase of 1960 is best understood as an extension of the positive
transaction costs world of 1937’s “The Nature of the Firm.”

Steve Medema’s book is a model of fair-minded scholarship and how to
make use of both the history of ideas and the archives to weave
together a somewhat grand narrative on the evolution of the role of
self-interest in economic thought.  Already having won the 2010 ESHET
Best Book Prize, scholars exploring these issues in the coming years
ignore Medema’s contributions at their own grave peril.


Steven Horwitz is Charles A. Dana Professor of Economics at St.
Lawrence University in Canton, NY and his currently working on a book
on classical liberalism and the family.

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