SHOE Archives

Societies for the History of Economics

SHOE@YORKU.CA

Options: Use Forum View

Use Monospaced Font
Show Text Part by Default
Condense Mail Headers

Message: [<< First] [< Prev] [Next >] [Last >>]
Topic: [<< First] [< Prev] [Next >] [Last >>]
Author: [<< First] [< Prev] [Next >] [Last >>]

Print Reply
Mime-Version:
1.0
Sender:
Societies for the History of Economics <[log in to unmask]>
Subject:
From:
Mohammad Gani <[log in to unmask]>
Date:
Fri, 11 Sep 2009 08:21:15 -0400
Content-Transfer-Encoding:
8bit
Content-Type:
text/plain; charset="iso-8859-1"; format=flowed
Reply-To:
Societies for the History of Economics <[log in to unmask]>
Parts/Attachments:
text/plain (125 lines)
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

ATOM RSS1 RSS2