What Would Smith Say?

Sometimes I pity poor Adam Smith. I really do. He’s an accidental icon of all that’s wrong in economics. And let’s face it that’s a lot of wrong to be an icon of. How many times have we all been reminded that his metaphorical reference to an invisible hand performing some wild and strange magic is the root of most modern economics? And how often are we reminded that he used those words just once in a book of over eight hundred pages?

The invisible hand was just not that important to Smith. He didn’t mean to launch economics into a century or more of quixotic and ever more bizarre search for something that he meant as a passing reference to the superficial order he saw around him.

Smith spent no more time on the invisible hand metaphor than he did on other phrases that are much more concrete. How about this one:

“Regulation is in support of the workman, it is always just and equitable.”

Where in the corpus of mainstream economics is this phrase worked up into a fully fledged and extended effort in the manner that the throwaway reference to the invisible hand is?

Well we don’t need to explain much further: economics was and is an extension of politics. It is politics waged by other means. It doesn’t exist as a coherent entity, it exists as variations to be deployed preferentially to support some other argument. And that other argument is usually political.

So early economists latched onto the magic of the invisible hand to explain why state interference was a ‘bad thing’. They worked away at establishing what looked like a scientific explanation of what they called the ‘market system’ or the ‘price mechanism’ and why those magical and, I must admit, mythical phenomena produce an ‘order’ that cannot be improved upon by government intervention. The conclusion of their epic trek into the intellectual desert was that any form of government intervention is perverse, no matter how well intentioned.

Take that you regulatory fools!

Except they could just as easily have started with that other quote I gave above. They could, had they been so disposed, have started with the magic of regulation and its unchallengeable efficacy in the ‘regulatory system’. At least I think so. The real economy is so darned complex and inscrutable that pretty much any grand theory can be created to explain it. There’s sufficient evidence to support all sorts of wild and contradictory ideas. That’s why the economy is so much fun to talk about. It’s an intellectual playground. The only way you can ever actually ‘prove’ a theory is to take a look at its plausibility and especially at the foundational assumptions upon which it stands.

Which brings me back to poor Adam Smith: the ultimate end point of that trek into the market magic desert and the quest for a ‘proof’ of the invisible hand’s status as the ultimate allocator-in-chief in an economy is the edifice known as General Equilibrium. The great crescendo of work that ended up with Arrow-Debreu is nothing short of stunning. It is architecture of the highest order. It is an analytical tour de force. And it proves beyond reasonable doubt that there is no such thing as general equilibrium. The restrictions economists have to place on the world in order to arrive at their hold grail totally destroy its relevance and utility. They have proved the trek was worthless.

Not that they stopped. Economists rarely do. They are too proud of their efforts. Even if those efforts were in vain.

So, having invested so much effort into such an elaborate fiction, and no doubt so embarrassed by its utter futility, they plod on as if nothing happened. They use general equilibrium as if it is indeed general and as if indeed there is such a thing as an equilibrium. Whilst the world around us suggests that neither is remotely a plausible explanation  an actual economy.

But never mind: it keeps economists employed. And it provides useful input for another of my pet peeves about mainstream economics. Which is that marginal productivity theory must be bogus. The employment and remuneration of economists is disproof of it.

Anyway I am plunged into this dishumor by the spectacle of economists ranging far and wide over the current presidential election and, in particular, pronouncing that the reform of the rotten American health care system and its replacement with some form of a single payer system is ‘impractical’.

The evidence from around the world suggest this is not true. Indeed, on the contrary, the evidence suggest it is overwhelming probable.

So why are so many of our leading economists lamenting want they call the ‘misleading’ and ‘impractical’ quest for a single payer system here? What would Smith say?

That they are referring to the political practicality. They are referring to various cultural and institutional rigidities that apparently channel our economy down a path that other economies do not follow. They are, in short, announcing that they believe the economy is deeply and profoundly influenced by its historical and institutional setting.

Which, seems to me, to be a considerable blow to their mainstream thought that economics is somehow independent of such trivia. In fact, were I so bold, I would argue that their own argument against the impracticality of single payer is an admission that their entire mainstream enterprise of so-called ‘positive’ economics unconstrained by mere politics, history, and so on is a farcical and dangerous illusion. It is so dangerous to the commonwealth – now there’s a thought – that it ought to be heavily regulated.

Regulation! What was Smith saying about that? …