Friday, 24 February 2017

But Adam Smith didn't say that

In a recent posting on the death of Kenneth Arrow Tim Harford writes,
Two achievements [of Arrow's work] are particularly celebrated: his impossibility theorem about the paradoxes of social choice, and his welfare theorems, which formalised the most famous intuition in economics — Adam Smith’s idea that a market produces social good from individual selfishness.
But Adam Smith didn't say that. As the historian of economic thought Mark Blaug notes,
"[ ... ] Smith's faith in the benefits of 'the invisible hand' has absolutely nothing whatever to do with allocative efficiency in circumstances where competition is perfect a la Walras and Pareto; the effort in modern textbooks to enlist Adam Smith in support of what is now known as the 'fundamental theorems of welfare economics' is a historical travesty of major proportions. For one thing, Smith's conception of competition was, as we have seen, a process conception, not an end-state conception. For another society, a decentralised competitive price system was held to be desirable because of its dynamic effects in widening the scope of the market and extending the advantages of the division of labour - in short, because it was a powerful engine for promoting the accumulation of capital and the growth of income" (emphasis added)
In short, it's not clear to me, at least, that Smith would have been much impressed by the work of McKenzie, Debreu and Arrow et al with regard to the approach and results of general equilibrium theory. In fact, in today's terms, I often think of Smith being more Austrian-like than neoclassical-like.

  • Blaug, Mark 1996. Economic Theory in Retrospect. 5th edn. (pp. 60-1). Cambridge: Cambridge University Press.

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