Let us see, the invisible hand, twice.
Pat Gunning wrote:
… . . the invisible hand is not really about
scarcity and resource allocation, is it? Is not
more accurate to say that it is about how the
division of labor -- or in today's world -- the
diversity of human capital expands?
Hello Pat, I am not sure what you refer to by the
expression ‘the diversity of human capital
expands’. It would be greatly helpful (to me) if
you could please expand our intellectual capital
by showing how the expansion occurs. Here is how
I thought the theme of invisible hand worked.
* For Adam Smith, one major task was to
explain the ‘coordination’ of the plans of buyers
and sellers without the presence of a central
planner in the operation of the law of market.
Price flexibility seemed to work out this
coordination without the presence of a planner or
even an auctioneer, as the buyers and sellers
acted out of self-interest to adjust prices and
quantities. With that adjustment, allocation
would be set right, and division of labor would be efficient.
* I do not know how Walras would insert the
auctioneer other than making the invisible hand
visible in the persona of the auctioneer.
Apparently, Walras needed to untangle the
fundamental logical contradiction between the
premise that agents are price takers (as
optimizers in the neoclassical world) and that
they are price makers (in the classical Smithian world).
* Hayek’s idea that knowledge was dispersed
in society, and Kirzner’s idea that alert
entrepreneurs would like to put this knowledge
into work in the pursuit of profit opportunities
they discovered would make the entrepreneur
somewhat visible. It would not be made fully
visible, because the subjectivist succumbed to
the instrumentality of the price signal: the
entrepreneur then was somewhat reduced to a
puppet dancing to the price signal much less than
the enterprising hero making prices. Take away
this instrument (such as under communism) to pave
the road to serfdom (and destitution) through
misallocation. Restore this signal from the
interfering police state to open the road to Friedman’s freedom.
* If Keynes did not have much faith in the
ability and willingness of the invisible hand to
carry out prompt equilibration, one could suspect
that he sought another instrument in the other
hand of the invisible hand: money (while the
older hand carried the price signal). Keynes
suspected that the hand that handled the price
signal was quite sluggish, especially as by
virtue of the animal spirit, people read the
future in some manner and allowed investments to
run away from savings. In other words, Keynes
needed some kind of invisible eye (looking at the
future) to help the invisible hand (managing the present).
* Even if Friedman could rein in the
Keynesian animal spirit and make it the mother of
‘adaptive expectation’ and then if Lucas could
give it a sex-change and make it into a highly
virile chauvinist called ‘rational expectation’,
price signal alone would no longer suffice. At
stake is money as the MOP (means of payment),
mopping up the debris of uncoordinated trading
plans left after the price signal was set right.
My friend, barter is impossible under indirect
trade, and I submit humbly that indirect trade
covers more than 99% of all observed trades.
Here, money is necessary as the only possible
means of payment. This means that when all prices
have been set at equilibrium the market is still
unable to deliver the goods from the sellers to
the buyers, unless the instrument of money is
available to accomplish the transfer of value.
* I beg your pardon to make the matter of
indirect trade visible so that people can see why
money is another instrument besides price to
clear the market. Suppose that all prices are
precisely equilibrium prices and all demands are
precisely equal to supply. However John wants to
sell 1 dollar of food and buy 1 dollar of cloth,
while the seller of cloth Paul wants to buy 1
dollar of medicine and the seller of medicine Tim
wants to buy 1 dollar of food. No barter is
possible here between any pair of agents. No
question of credit arises because every agent has
a real good worth 1 dollar against the intended
purchase of just 1 dollar worth of something. If
there is money, John can sell the food to Tim and
get money, and then sell the money to Paul and
buy cloth. Then Paul can sell the money to Tim
and buy the medicine. If you take the money away,
all goods will fail to sell and hence all agents
would be unemployed until the money arrives.
* Ultimately, the invisible hand must be
answerable for prolonged involuntary
unemployment, because it plainly fails to
coordinate demand and supply by price signals
alone. There is nothing wrong with price signal
(as opposed to Keynesian fear of price rigidity
built without a theory of price), but there is
the problem of arranging the means of payment. I
would like to say that there are two invisible
hands, respectably called the arbitrageur sending
price signals and the seigneur sending money. If
we could put them together in sync, I would hope
we could also begin to understand the development
process in which the two invisible hands of
arbitrage and seigniorage together allow human
capital not just to find employment, but also to expand.
* Oh Dear Pat, I would die the luckiest of
man if you could give me a theory of population
multiplier out of the invisible hand, so that as
people become more productive, they also become
more numerous, as attested by facts of history.
Gosh, it would be the most erotic story in economics. Let us hear it, yep.
Mohammad Gani
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