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Invisible-Hand Explanations and Neoclassical Economics: Toward a Post Marginalist Economics1
... Adam Smith's recognition and respect in the field, however, does not mean that economists sufficiently study and understand the nuance of his work. There are insights in The Wealth of Nations that have either been misinterpreted or forgotten (Keech et al., 2012;Klein, 2009;Koppl, 1992;Medema, 2009;Samuels, 2011). ...
Is everything good in political economy incorporated into modern graduate education in economics? With the transition of the art of political economy into the science of economics, there was a significant narrowing of graduate education curriculum. The prevailing technique in economics, a neoclassical framework focusing on formal empirics, gradually compressed artistic components of economics, including philosophical underpinnings, democratic justifiability, theoretical intuition, comparative institutional analysis, and political economy. Courses on the history of economic thought, which historically played a role in introducing graduate students to the complexities of the art of political economy, are now only offered as an elective. This paper argues, however, that there are still insights to be gleaned from studying the classics of political economy in graduate education. We highlight the tradeoff between theoretical cumulativeness and knowledge, arguing that significant insights from historical works of political economy are often absent in contemporary technical expositions of economics. We explore examples of useful knowledge in political economy that was lost in the transition away from the art of political economy. To remain an operationally valid social science, economists should reintroduce the artistic elements of political economy into the graduate training of economists.
A common perception is that economic theory is based on a methodological individualism, while political economy adopts normative individualism as the standard of judgment. Kenneth Arrow voices this perception in asserting “it is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals [and] not of other social categories” (Arrow 1994: 1). While agreeing with Arrow’s diagnosis that in their actual practice economists do not generally adhere faithfully to the principle of methodological individualism, I shall argue that this is not due to inherent limitations of this principle but to economists’ failure to consistently apply it. And, while Arrow quite obviously considers James Buchanan’s methodological and normative individualism ill-founded, I shall argue that Buchanan’s contractarian-constitutionalist approach is solidly based on a consistent methodological individualism.
Fritz Machlup was a lifelong friend of Friedrich Hayek and an important contributor to the latter’s body of work and worldwide recognition. Machlup was a taxonomist of ideas. This is clear from his categorization of economists (including Hayek and himself) in terms of their contribution to the notion of the production period; his categorization of Hayek’s accomplishments in his report leading to Hayek’s Nobel Prize; his categorization of ideas leading to economic integration and his categorization of his own contributions to economics in terms of economists with whom he might share a Nobel Prize should the Committee seek to nominate him. Always the critic and editor, Machlup also contributed to Hayek’s clarity around concepts like the services of resources and the phases of production/investment. These concepts proved as important to Machlup as to Hayek and Machlup’s student, Edith Penrose. Long-associated with a Penrosean notion of capabilities-driven growth of the firm, the services of resources and phases of production/investment owe their existence to the penetrating discussions of Machlup and Hayek over capital theory, prices and production—and hence invite a deeper investigation of the Austrian influence on her work. Important to a larger theory of economic growth—which became Penrose’s major interest after the publication of a The Theory of the Growth of the Firm, while Machlup was still her mentor—the Machlup and Hayek discussions and publications support the integration of capital theory into the trade cycle. This chapter focuses on a few of those places where Machlup engaged with Hayek on ideas—change, time, production/investment, services of resources, capital theory and the trade cycle—as well as their joint effort to secure a position for Ludwig von Mises, Machlup’s effort on behalf of the US publication of the Road to Serfdom and his work on Hayek’s Nobel Prize.
This paper examines two competing proposals for reforming and reviving confidence in the world monetary system, and the two economists, Robert Triffin and Fritz Machlup, who led the charge, one for centralized reserves, and the other for flexible exchange rates. Triffin would later claim that no one did more to ensure that floating exchange rates emerged the winner in the policy debate than Machlup because of his influence on academic economists and policy makers through the Bellagio Group conferences. The Bellagio Group conferences and Machlup’s leadership role are examined.
Purpose
The purpose of this paper is to examine Fritz Machlup's method and use of scenario analysis in the policy discussions around exchange rate solutions to balance of payments problems.
Design/methodology/approach
The qualitative research on which this paper is based is the sociohistorical biographical approach, based on a close examination of published works and archival materials.
Findings
What makes Machlup unique is his focus on the impact to an economic system of discrete human actions, each set of actions associated with a change in exchange rate policy and the operations and institutions necessary to implement it. Impact on the system was evaluated in terms of three values – balance of payments adjustment, liquidity and confidence. In his use of a system's approach, his focus on change and adjustment to change, and most particularly his focus on human action, Machlup is also distinctively Austrian.
Research limitations/implications
This is the first paper generated from the author's far larger planned study of Fritz Machlup and the Bellagio Group.
Practical implications
The collaborative exploration of alternative futures by senior teams has become increasingly important to strategic planning by governments and corporations.
Originality/value
The story of the Fritz Machlup's contribution to exchange rate regimes, international trade and the balance of payments has remained largely untold.
The recent economic crisis has once more underscored the close connection between markets and social life, thrusting this
point at the centre of the analysis of economic and political activity and has once more asked the question of whether and
how individuals are embedded in both. Here I argue that an analysis and partial reconciliation of the positions of F.A. Hayek
and Karl Polanyi on the topic can help in this debate.
KeywordsHayek–Polanyi–Embeddedness–Markets
It is claimed here that the epistemics of constitutional economics has hitherto at best played a minor role but that dwelling on the epistemics might prove useful to understand why the positive branch of constitutional economics is not as far advanced as its normative counterpart. Four possible methods-namely comparative institutional analysis, economic history, conjectural history, and laboratory experiments-are analyzed with regard to their epistemic potential. It is hypothesized that conjectural history promises only little potential while the other three methods can be used to complement each other.
We show that the orderliness of market processes and outcomes, and hence the realization and coordination of individuals'
plans, are dependent on the social environment in which individuals function. In specific, when atomicity and stable (social)
rules are compromised in the case of Big Players, markets are less orderly despite the fact that individuals are behaving
rationally.—The paper provides an account of individual rationality by generating a theory of expectations based on Hayek's
cognitive theory. Hayekian expectations are coherent, competitive, and endogenous. This suggests that expectational analysis
must take account of the context of constraint—the “environment” or what we call “filtering conditions”—within which individuals
function and to which they must adapt. The paper provides a theoretical analysis of expectations at the individual level and
shows that the particular behaviors stemming from those expectations require a specification of the rules governing social
and market activities.
Austrian and post-Marshallian economics share a number of concerns, such as a basic subjecticist stance and an emphasis on the importance of inquiry into the disequilibrium market process. This paper details similarities and differences between these two bodies of thought, and argue that a closer liaison is possible. George Richardson's work is presented as a possible bridge, since his work incorporates both Austrian and post-Marshallian elements. The paper ends by sketching a combined Austrian and post-Marshallian approach to the firm.
Spontaneous order analysis is applicable to patterned social phenomena that are the results of human action but not of human design. For example, the spontaneous, unplanned social orders of the market and common law codes contrast with their planned counterparts, i.e. central economic plans and statutory legal codes. The tradition of spontaneous order analysis can be traced through Mandeville, Hume, Ferguson, Smith, Menger, Hayek, and others. Invisible-hand explanation is the method of spontaneous order analysis. Convincing invisible-hand explanations must be methodologically individualistic and must not rely upon the supposition of any unusual abilities of the participants or unusual events in the process. All steps in an invisible-hand explanation must be plausible accounts of the normal course of events in the society in question. Menger's (1892, 1981, 1985) explanation of the origins of money is the paradigmatic example of an invisible-hand explanation of a spontaneously ordered social phenomenon. Anthropologists may be able to apply spontaneous order analysis to many areas of interest, including economic anthropology, the study of kinship systems, and legal anthropology.
The Lakatosian methodology of scientific research programmes (MSRP) is intended to circumvent the epistemological difficulties associated with various brands of falsificationist method, of which the most important is the Duhem-Quine problem. We reject the view that Lakatos’ MSRP needs to be re-interpreted before it can be used to appraise economic theories. A correct understanding of Lakatos’ distinction between the hard core and protective belt of a research programme leads to the recognition that conflicting theories can be accommodated within the same programme. This avoids much of the confusion encountered by some economists who have attempted to develop taxonomies of economic theories within a Lakatosian framework, but have made the mistake of overpopulating the discipline of economics with a plethora of spurious research programmes. Many of the latter are more usefully treated as subdisciplinary demi-cores within an overall neoclassical programme.
There are essentially two types of social science explanations of politics and institutions. One approach is to focus on the behavior of the rational individual agent and treat macrostates as outcomes
Discoverers of “market failures” as well as advocates of the general efficiency of a “true, unhampered market” sometimes seem to disregard the fundamental fact that there is no such thing as a “market as such.” What we call a market is always a system of social interaction characterized by a specific institutional framework , that is, by a set of rules defining certain restrictions on the behavior of the market participants, whether these rules are informal , enforced by private sanctions, or formal , enforced by a particular agency, the “protective state,” in J. M. Buchanan's (1975) terminology.
All living things experience the fleeting caress of time. It brushes all our affairs as we grow, mature, age, and die. Living
each moment, our days irretrievably pass away, and although everyone experiences time’s flow, authentic analysis, or even
speaking of it, remains difficult. Perceiving time only as we rush along with it, we can never step back to reflect upon it.
Nevertheless, economists cannot proceed without addressing time’s central role in volition, choice, and action. Just as time
permeates our lives, it must permeate our discourse. By imposing a particular structure on us, it imposes an analogous structure
on any truly dynamic economics.
This paper develops a model that accounts both for the existence of money, defined as a generally acceptable medium of exchange, and for the survival of some barter exchange in economies in which money exists. In contrast to Jones' (1976) seminal article in which individuals are restricted to fix trading strategies before entering the market, the present model assumes that individuals have conditional trading strategies that allow them to effect exchange according to the types of trades they encounter in the market. The analysis shows how decentralized market forces generate money and lead to a unique level of monetization.
Abstract. Thesis (Ph. D.)--Auburn University, 1988. Vita. Includes bibliographical references (leaves 125-131).
The paper develops an explanation for the emergence of media of exchange through the unconcerted market behavior of individuals. Individuals are assumed to accomplish their ultimate exchanges through trading sequences which minimize the expected time spent searching for complementary trading partners. If individual perceptions of the trading environment are appropriately restricted, then the equilibrium pattern of trade will be some mixture of direct barter and use of a common good as medium of exchange. Although full monetization is always a locally stable exchange pattern, the economy may remain in universal direct barter or partially monetized states.
That a society of greedy and selfseeking people constrained only by the criminal law and the law of the property and contact should be capable of an orderly and coherent disposition of its economic resources is very surprising. Marx called such a society anarchic and so it is. Yet ever since Adam Smith economists have been concerned to show that such anarchy is consistent with order and indeed with certain desirable outcomes. Smith proposed that the market system acted like a guiding - an invisible - hand. It was invisible since in fact there was no actual hand on the rudder. The metaphor which he chose was exactly opposite.
The institutional features of models of unregulated monetary systems have often been arbitrarily and implausibly assumed. This pap er instead provides realistic grounding for important features by con structing a logical evolutionary account of free banking. Sophisticat ed and orderly arrangements are shown to emerge from competition and the pursuit of less costly methods of payment. The emergence of stand ardized commodity money is followed by the development, in turn, of b asic money-transfer banking, easily transferable bank liabilities, an d clearinghouses. The features of an evolved free banking system diff er from those assumed in recent models of competitive payments system s. Copyright 1987 by Oxford University Press.
Order Defined in the Process of its Emergence
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Are General Equilibrium Theories Explanatory?
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The Neoclassical Economic Research Program : Some Lakatosian and Other Considerations
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Mathematical Formalism and Economic Explanation
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Appraising General Equilibrium Analysis
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