Collective and Individual Rationality: Some Episodes in the History of Economic Thought Andrew Martin Paul DENIS Thesis submitted in fulfilment of the requirements for PhD in Economics City University, London Department of Economics School of Social and Human Sciences December 2001 2 This thesis is dedicated to the memory of my father, Paul Justin Denis (1924-1982). 3 Contents Lists of tables and figures 5 Acknowledgements 6 Declaration on consultation and copying 7 Abstract 8 Key to symbols and abbreviations used in the thesis 9 1 Introduction 10 1.1 Preamble 10 1.2 Reductionism and holism: a response to Mario Bunge 12 1.3 Policy prescription and social philosophy: reducibility and the invisible hand 19 1.4 The structure of the thesis 28 2 34 2.1 Barry and Hardin: rationality at two different levels? 34 2.2 36 2.3 Iterated and n-player games 40 2.4 43 2.5 Collective and individual rationality 46 2.6 Hobbes and Rousseau 48 2.7 Conclusion 50 3 52 3.1 Introduction 52 3.2 The conditions 53 Condition O 54 Condition U 54 Condition P 54 Condition D 54 Condition I 55 3.3 Proof of the theorem 55 3.4 Scope for relaxing the assumptions 57 3.5 The libertarian response 61 3.6 Little: the argument against the existence of an SWF 64 3.7 Searle and Little 68 3.8 70 3.9 Conclusion 74 4 The Invisible Hand of God in Adam Smith 76 4.1 Introduction 76 4.2 Bibliographical note 78 4.3 81 4.4 Weltanschauung 86 4 4.4.1 All is for the best in this world and we should accept our lot with joy 86 4.4.2 Why, then, bother with considerations of morality? 89 4.4.3 Every cloud has a silver lining 92 4.4.4 Review 101 4.4.5 The invisible hand 102 4.5 114 4.5.1 th Century Philosophes 114 4.5.2 Nature and the natural in Smith 118 4.5.3 124 4.6 Conclusion 128 5 Friedrich Hayek: a Panglossian evolutionary theorist 131 5.1 Introduction 131 5.2 Hayek and Smith 133 5.3 Holism and reductionism in Hayek 136 5.3.1 Shenfield on collectivism and holism in Hayek 136 5.3.2 Hayek and holism 145 5.4 Hayek and evolution 147 5.4.1 Darwinian evolution 147 5.4.2 Hayekian evolution 158 5.4.3 The assumed optimality of evolved institutions 160 5.4.4 Group selection 167 5.4.5 Have Sober and Wilson rescued group selection? 179 5.5 -individualism 181 5.5 Conclusion 187 Appendix: Bibliographical note 188 6 191 6.1 Introduction 191 6.2 192 6.3 Keynes and holism 200 6.4 205 6.5 Did Keynes reject laissez-faire? 212 Appendix: Bibliographical note 215 7 Conclusion 218 7.1 Retrospective: Keynes and providentialism 218 7.2 Results and prospects 222 Glossary 224 References and bibliography 234 5 Lists of tables and figures Tables 1 Payoff matrix for a one- 36 2 Payoff matrix for a one-shot coordination game with ordinal payoffs 40 3 Preferences of the three sets of agents, V1, V2 and V3 56 Figures 1 V1, V2 and V3 59 6 Acknowledgements I should like to thank my advisor, Geoffrey Kay, and my wife, Mary Denis, for their unfailing support and encouragement during the production of this thesis. The inspiration for the thesis originated in work completed in the late 1980s as a student on the excellent MA course in Political Economy at the then Middlesex Polytechnic; I should like to record my debt to the teaching staff on that course, in particular the late Geoffrey Pilling. I should like to thank the following for their encouragement and/or for insightful criticism of various points in the thesis: Erik Angner, William Barber, Stephan Böhm, John Broome, Mario Bunge, Pete Clarke, Paul Coleshill, John Cowley, William Dixon, Sheila Dow, Denis Glycopantis, Denis Gray, Alfons Grieder, the late Peter Holl, Allan Isaac, Steve Miller, Simon Price, Joan Safran, Joe Sen, Adrian Seville, Ron Smith, Ian Steedman, Richard Sturn, Julian Ullman, Jack Vromen, and Rachael Walker. Papers based on various parts of the thesis have been presented at the Economics Department and Interdisciplinary seminars in the School of Social and Human Sciences at City University, and conferences of the European Society for the History of Economic Thought (ESHET), the European Economics Association, the Association for Heterodox Economics (AHE), and the Leeds Postgraduate Economics Annual Conference. I should like to thank the many scholars, too numerous to list, who have participated in these discussions. As is detailed at the appropriate points in the thesis, papers based on the material embodied in it have been submitted to various journals and I should particularly like to thank the editors, and several anonymous referees, for the Journal of Socio-Economics, Constitutional Political Economy, and History of the Human Sciences, for their helpful comments. A debt of gratitude is owed to my students on the final year undergraduate option in History of Economic Thought at City University, London. Their responses to the material of this thesis, as it developed, have been extremely helpful: I should like to thank them for their enthusiasm, commitment and challenging criticism. Finally, I should like to thank John Cowley and Jessica Holding for the invaluable gift of books which had belonged to the late Arthur Clegg and John Cameron, respectively. The views expressed and errors committed here, are, of course, entirely my own and not to be associated with any of the above. 7 Declaration on consultation and copying The following statement is included in accordance with the Regulations governing the Research Studies Handbook, 2000: Appendix ii, (xxx), paragraph 5(e)): I grant powers of discretion to the University Librarian to allow this thesis to be copied in whole or in part without further reference to me. This permission covers only single copies made for study purposes, subject to normal conditions of acknowledgement. Andy Denis 8 Abstract This thesis argues for the fundamental importance of the opposition between holistic and reductionistic world-views in economics. Both reductionism and holism may nevertheless underpin laissez-faire policy prescriptions. Scrutiny of the nature of the articulation between micro and macro levels in the writings of economists suggests that invisible hand theories play a key role in reconciling reductionist policy prescriptions with a holistic world. theorem in soci collective irrationality coordination problems lead to. The source of the dilemma is identified as the combination of interdependence in content and independence in form of the decision making process. Arrovian impossibility has been perceived as challenging traditional views of the relationship between micro and macro levels in economics. Conservative arguments against the possibility in principle of a social welfare function are criticised here as depending on an illicit dualism. The thesis then reviews the standpoints of Smith, Hayek and Keynes. For Smith, the social desirability of individual selfgod who has moulded us so to behave, that the quantity of happiness in the world is always maximised. Hayek seeks to re-establish the invisible hand in a secular age, replacing the agency of a being based on the exploded notion of group selection, cannot underpin the desirability of spontaneous outcomes. I conclude by arguing that Keynes shares the holistic approach of Smith and Hayek, but without their reliance on invisible hand mechanisms. If spontaneous processes cannot be relied upon to generate desirable social outcomes then we have to take responsibility for achieving this ourselves by establishing the appropriate institutional framework to 9 Key to symbols and abbreviations used in the thesis Symbols The delta symbol ( ): X means the change in X, where X = C or M. The prime symbol ('): X' means X plus X, where X means C or M. AD aggregate demand C commodity i the rate of interest M money MEC marginal efficiency of capital MPC marginal propensity to consume Abbreviations of source titles 1 Astronomy -129 COL Hayek (1960) EPS Smith (1980) CRS Hayek (1979) CWXIII Keynes (1973b) CWXX Keynes (1981) CWXXI Keynes (1982) CWXXVII Keynes (1980) EP Keynes (1972a) GT Keynes (1973a) IEO Hayek (1948) KES Hayek (1983) LLL Hayek (1982) Mandeville Hayek (1967b) NSP Hayek (1978a) RTS Hayek (1944) SIP Hayek (1967a) Sup Keynes (1979) TBT Hayek (1978b) Times Keynes (Keynes, 1937a, b, reprinted in Hutchison, 1977) TM Keynes (1971) TMS Smith (1976/1759) TSO Hayek (1952) WN Smith (1976/1776) Other abbreviations AI artificial intelligence ESS evolutionarily stable strategy GE general equilibrium PC predicate calculus SWF social welfare function 1 For details of works by Keynes, Hayek and Adam Smith, please refer to the bibliographical notes attached to the relevant chapters: Section 4.2 for Adam Smith, and the appendices to Chapters 5 and 6 for Hayek and Keynes respectively. 10 Chapter 1 Introduction: Holism versus reductionism in economic thought 2 1.1 Preamble question perhaps the fundamental question for economics. How do (micro level) agent interests and behaviours interact to generate (macro level) social outcomes? Are those outcomes desirable, or should society as a whole, in the form of the state, intervene to modify them? This thesis will investigate these questions and explore the answers that have been given by some characteristic economic thinkers. The thesis thus forms part of an investigation into the views of various writers on the articulation between micro and macro levels in economics, between individual actions and social outcomes, between individual and collective rationality. The thesis begins, in this chapter, with an introduction to some of the fundamental methodological issues underlying the remainder of the work. A consideration of two problems in twentieth-century political economy impossibility theorem will then establish the currency of these themes in contemporary group evolutionary theory of Friedrich Hayek. The question addressed is, What is the mechanism by which these writers supposed that individual (micro) rationality translated into collective (macro) rationality? In conclusion, an alternative twentieth-century response to this issue, that of John Maynard Keynes, will be considered. This structure is dictated by the following considerations. Firstly, the issues of micro and macro, of disjuncture and emergence, of reductionism and holism, and of a providential 2 An article based on this chapter is at point of writing under consideration with the Journal of SocioEconomics as Denis (2001a). 11 or indifferent world, are ones which continually re-emerge in political economy. The two issues with which I start the thesis establish that point by reference to two controversies of the second half of the 20 th t to be of fundamental significance for the rest of the thesis. Arrovian impossibility is not directly of the same level of significance, but does play a useful role here, both in illustrating some of the themes of the thesis, and in highlighting just why contrast, is so important. The bulk of the thesis, the most important two chapters, consider the invisible hand mechanisms of Smith and Hayek. Given the topic of the thesis, the articulation of micro actions and macro outcomes, it was essential to consider the invisible hand, firstly in its original, and secondly in its modern incarnations. In this way we may see what is enduring and what has changed in the presentation of this theme by providentialist political economists. An important finding of these chapters is that both Hayek and Smith reject the reductionist approach adopted, for example, by modern monetarist and new classical writers in favour of a holistic methodological approach. Finally, the chapter on Keynes is required in order to show what happens when a holistic methodological approach is accompanied by an explicit rejection of the invisible hand: in an indifferent, non-providential world we ourselves are obliged to take responsibility for the unintended consequences of our actions. The present chapter introduces the thesis by means of a consideration of a recent paper Firstly, I argue, with Bunge, that schools of thought in economics may be characterised according to their stance on a key methodological opposition: that between holism and reductionism. Secondly, I argue that this choice of standpoint has important consequences for policy prescription. Arguing against a simplistic correlation of reductionism and laissez faire, the case is made for two kinds of methodological underpinning for laissez-faire: firstly, reductionist and, secondly, holist plus invisible hand mechanism. On the basis of these methodological preliminaries, the chapter concludes by outlining the subsequent structure of the thesis. 1.2 Reductionism and holism: a response to Mario Bunge 12 alternative to individuali which makes a number of telling points and is evidence of a growing discomfort with the reductionism of the neoclassical school currently hegemonic within the discipline of economics. However, there are two major points which need to be made with respect to point is that the relation between policy prescription and philosophical standpoint in would lead one to believe. The first of these points terminology and mine is considered in this section, which then proceeds to make some initial comments on the significance for political economy of the opposition between reductionism and holism. The next section looks in more detail at the second question, that of the relationship between methodological standpoint and policy prescription in political economy. sciences: the two most influential, individualism and holism, being fatally flawed, with only the minority approach of systemism offering a viable way forward. The first two are inadequate error of its own, while the third, systemism, manages to synthesise the other two, accepting the criticism each makes of the other. 3 ): he two most influential approaches to the study and management of social overlooks the bonds among people, and holism, because it plays down or even enslaves individu (156-157) 3 Unqualified page numbers in this section and the next refer to Bunge (2000). 13 Systemism, apart from being defined negatively with respect to individualism and holism, is either a system or a component of a system and every system has peculiar (emergent) properties Now, there is nothing in these formulations which is contentious 4 , and the points made are valuable ones. However, I think greater clarity can be obtained by stating the matter depend fundamentally upon the properties of the relata, the substrate-level entities which entity independent of the properties of its material substrate. This, however, is not the way that the term holism will be employed in this thesis. We are equally justified in complaining, with Bunge, that what he refers to as relationships between agents, the fact that individuals are only nodes in systems of such relationships, and the emergence of properties at the macro, or system level. But, when we do so, we are taking a position on an opposition which has implicitly or explicitly underlain a vast amount of methodological discourse in economics and elsewhere: that between holism and reductionism, Bunge is implicitly defining a nonor anti- , which I refer to as holism. Essentially, reductionism involves a strategy of interpreting the things we see in the world, and, in particular, economic phenomena, as congeries of substrate-level entities; and holism is the attempt to understand these phenomena as a whole or system, with emergent properties not enjoyed by constituent components. The terms holism and reductionism as used in this thesis may be defined as follows: Reductionism: the view that an entity at one level can be understood as a congeries, an aggregate of entities at a lower, substrate level, that the properties and behaviour of higher level entities can be 4 Apart, perhaps, from a certain tendency to hyperbole: both debatable and an unnecessary claim for the point being made. 14 understood in terms of the properties and behaviour of its constituent lower level parts, taken in isolation. Holism: the view that phenomena at one level can be understood as emergent at that level, that a higher level entity can be understood as a product of the interrelationships between its component parts. Correspondence relating to previous manifestations of this chapter suggests that some discussion is in order at this point. Firstly, the question has been raised (Bunge, personal epistemological standpoints. As stated, both definitions are epistemological imply that a phenomenon can be understood in a particular way precisely because that is the way it is. In that vein, as well as being explicitly epistemological, the definitions would be implicitly ontological. However, that further step is unnecessary for present purposes. Secondly, the exact definitions of the terms are as controversial as everything else in the debate between the supporters of each point of view. The above definitions are my own, and are as unlikely to please as any others 5 . Correspondents, responding to earlier papers on this theme, have criticised this or that statement about reductionism or holism but, because their criticism was on the basis of other definitions than those set out above, they failed to engage with the points that I am making 6 . I submit that what is critical here is that holism and reductionism so defined can be shown to characterise two living trends in economic thought and to throw up interesting and enlightening questions about the nature of those trends. 5 (1987: 217- -52, 371-72). 6 It would, of course, be open to critics to object to my fallible attempts to set out a logically coherent opposition in sympathy with the literature I had consulted. 15 General Theory, clearly advocates a holistic approach: general theory. I mean by this that I am chiefly concerned with the behaviour of the economic system as a whole .... And I argue that important mistakes have been made through extending to the system as a whole conclusions which have been GT: xxxii7) Keynes sets out very clearly here what he takes to be the distinguishing feature of the two approaches: that, on the one hand, we can derive correct conclusions from the study of micro to macroeconomic phenomena leads to error, and, on the other, that the correct approach is (what we would now call) a systems approach, aiming to examine the the approach he is criticising here, derives from a difference, between the two levels, in what it is legitimate to take as parametric or given (Keynes, 1973: 293). Robert Lucas, on the contrary, is a very clear spokesman for the trend in economics which favours a reductionist methodology. The following is taken from the final paragraph of his Models of Business Cycles: n macroeconomic theory seem to me describable as the reincorporation of aggregative problems such as inflation and the ply disappear from use and the Marshall and Walras, of economic theory. If we are honest, we will have to face the fact that at any given time there will be phenomena that are well-understood from the point of view of the economic theory we have, and other phenomena that are not. We will be tempted, I am sure, to relieve the discomfort induced by discrepancies between theory and facts by saying that the ill-understood facts are the province of some other, different kind Here we have a clear expression of the desire to reduce macroeconomics to microeconomics, and a characterisation of the Keynesian approach as an illegitimate 8 7 Throughout the present thesis, emphasis in passages cited is as in the source unless its addition is explicitly noted. 8 Simon Price (personal communication) has argued vigorously against labelling Lucas a reductionist. 16 Both the passages cited occur in contexts a preface, and the concluding paragraph of a book where the authors are standing back from the detail of the theories that they are presenting, and indicating what they regard as the underlying general features of their approaches. What they choose to highlight in both cases is their selection of a holist or reductionist approach. This, I think, establishes, at least a prima facie case, that the issue is worth looking at and potentially useful in understanding the controversy between various schools of thought in the history of economics. * * * Some examples can be given to show how this controversy continually emerges in economics: deploymen interest, methodological individualism, a hallmark of neoclassical economics, is abandoned. In its place is a more holistic and integrated view of society as an integral dependence of all macroeconomics on microeconomic principles is essential for the (cited in Nelson, 1984: 576). So Dore and Boland agree that the reductionist standpoint is an essential component of neoclassical economics. In a similar vein, Schotter, right at the beginning of a book on Free Market Economics, says tha else, Schotter feels it important to establish the reductionist standpoint of libertarianism. Identifying partial and general equilibrium (GE) approaches with reductionism and holism, respectively, he points out that Lucas has been extremely active in importing GE thinking into macroeconomics. While the latter point is undeniable, the identification between GE and holism is far more questionable. A GE model incorporating the salient points of analysis explored in Chapter 6, below, would indeed but such a model is, of course, very far indeed from what Lucas is trying to develop. 17 Kevin Hoover, on the other hand, in a special edition of The Monist reduction of macroeconomics to macroeconomics in various ways, it cannot succeed in its goal of replacing Feeling it necessary to point out that an example she wants to use for purposes of illustration, although couched in reductionist terms, could be replaced by a more holistic regularities by reference to capacities and relations that can only sensibly be attributed to institutions or to the economy as a whole, with no promise of reduction to features of Nelson (1984) is an interesting case since at first he seems enthusiastic about the possibility of reducing macro to micro in economics: scale phenomena dealt with in macroeconomics must be the results of the total effects of the small scale phenomena dealt with in microeconomics. Therefore, one might expect that bridges could be built by merely adding up the microeconomic laws describing the microphenomena to obtain the macroecono macroeconomics to microeconomics would not be plagued with the kind of ontological -74). His conclusion, 593). Cross a search for finer-grain microfoundations and instead [to] study how complex economic 565). Finally, Hayek, who spent much of his life criticising the linked errors of macroeconomics, economic statistics and socialism, was amongst the most trenchant of theory as the only KES 18 microeconomics which enables us to understand the crucial functions of the market KES General Theory] did not refer so much to any detail of the analysis as the general approach followed in the whole work. The real issue was the validity of ... macroTBT: 100). As we shall see, however, the citation of these passages by no means settles the question of n the methodological issue of reductionism versus holism. * * * -systemism-holism is a profound one, the opposition between individualist, on the one hand, and nonor anti-individualist approaches, on the other, is of more fundamental interest for the purposes of this thesis, and, secondly, that for the remainder of this thesis the reductionism, and the non-individualist approach as holism. Further, I have proposed definitions of reduction and holism and tried to show that the opposition between them is a living issue in economics. The next section takes up the issue of the association, which can be seen to emerge here, and which is asserted by Bunge, between methodological premises and policy prescription. 1.3 Policy prescription and social philosophy: reducibility and the invisible hand A pattern seems to emerge from the examples cited: apparently there is a tendency for libertarians and those on the right of the spectrum of policy views within economics, such as Lucas, to appeal to reductionist methodological premises, while those on the left, those like Keynes adopting a more interventionist stance, are more likely to invoke holistic underpinnings for their theoretical pronouncements. Bunge takes up this point, sm, is one of benign neglect. By contrast, the totalitarian cultural policy, which is based on holism, is one of radical individualists oppose all social planning in the na holists swear by toprights [sc those of the common people]. In either case, the powerless individual, whether 19 account social values (ignored by individualism) as well as individual values (ignored by But there is a paradox 9 here. We have just seen that there seems to be an association between a laissez-faire policy prescription and a reductionist methodology. Nevertheless, starting with Adam Smith{ XE "Smith, Adam" }, a profoundly influential trend, epitomised by writers such as Friedrich Hayek and Armen Alchian, has proposed 10,11 (De Vany, 1996: 427), in which 12 . This emergence seems flatly to contradict the association between laissez-faire and reductionism just noted. This section will explore that puzzle. dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities, but of their WN I.ii.213) Even here, in this well-known and apparently simple statement, there is something mysterious about the relation between micro and macro levels. The butcher, brewer and baker do not care about the dinners they provide, so that, in some sense, the desirable social outcome of feeding the members of society is achieved in spite of rather than because of the motives and behaviours of the food providers. The articulation between 9 expectations about the association, or otherwise, between reductionism and holism, on the one hand, and the various possible policy prescriptions, on the other. 10 Mario Bunge (personal communication) correctly points out that the invisible hand is not a theorem but a postulate: citing works in which it is referred to as a theorem is not to be taken as endorsement of that usage. 11 De V general equilibrium, subject to all the usual caveats of general equilibrium theory (De Vany, 1996: 427). See also Mirrlees (1997: 1311-1312). 12 The reference is to Adam Ferguson (1767) An Essay on the History of Civil Society p187. 13 ter ii, paragraph 2 of the Wealth of Nations). 20 the motivation and behaviour of agents at the micro level and macro outcomes is not even at first blush a trivial or straightforward question. It seems odd that the trend which laissez-faire policy prescription, which as we have seen seems itself to be associated with emergence is precisely what distinguishes the holist from the reductionist approach. The question therefore arises, whether the invisible hand theorem is consistent with the 32procedure part of his philosophical critique of libertarian thinking is as follows. h he defines as follows, each illustrated by a statement from a libertarian 14 logical dilemma arises from the mutual incompatibility of the two theses: The reducibility thesis: the fully developed market economy can be understood as the sum or aggregate of its discrete components, the individual bilateral exchanges at the preferences, it cannot be evil unless those preferences are thems 15 The invisible hand thesis -satisfaction (ie, unrestricted market forces leave agents better off than any alternative economic environment) because an invisible hand transmutes our self-interested behaviour into creatures, the solid basis, the life and support of all trade and employment without exception is evil 16 14 Or at least libertarian-approved: Mandeville has been claimed by Hayek as a libertarian thinker (Hayek, 1966). 15 The reference is to Keith Joseph and Jonathan Sumption (1979) Equality London: John Murray, p 78. to cite an instance of a claim is not in any distaste. 16 The reference is to Bernard de Mandeville in Philip Harth (ed) (1970) Bernard Mandeville: The Fable of the Bees London: Penguin. This contains The Fable of the Bees or Private Vices Made Publick 21 So reductionism says that evil only comes of evil, while the job of the invisible hand is specifically to transmute evil into good 17 . For Sir Keith the aggregate outcome cannot be evil as long as the preferences it is based on are innocent; for Mandeville, on the contrary, the aggregate outcome cannot be good unless the preferences underpinning it are evil, vicious, selfish. Thus Haworth is able to conclude that the libertarians cannot abandon one of its central t attention to the association, alluded to earlier, between methodological standpoint and policy prescription. There are policy implications of the choice between reductionism and holism. And, indeed, the consequences for policy implied by the approach selected, so far from being a mere scholium, are the tail which wags the methodological dog 18 . If one adopts the systems approach and recognises that the unintended collective outcomes of an unplanned, uncoordinated mass of individual actions may have far from desirable features, then the obvious implication is to see whether there is anything we can do about it. The absence of an invisible hand invites the intervention of the very visible hand of state intervention. The reductionist approach, on the contrary, says that, assuming individuals can be counted on to do the best they can for themselves given the constraints Benefits (1724) Mandeville published after the Fable was arraigned before the Grand Jury of Middlesex as a public nuisance. 17 A correspondent finds this statement confusing: I seem to him to be conflating positive and normative x moral value, if any, of property x is irrelevant when considering whether the possession of property x by some macro-level entity or phenomenon requires or contradicts the possession of property x by the substratethe two theses adduced by Howarth. So Joseph says that the macro level outcomes have exactly he same character as the substrate they are based in, while Mandeville says they have exactly the opposite character. 18 Of course, this is not a tight, one-to-one relationship: as Ian Steedman (personal communication) points out, very different policy prescriptions may in various ways be made consistent with similar methodological standpoints. 22 they face, the aggregate outcome of those individual actions will also be the best available: state intervention in the economy is nugatory. There are two possibilities: we could be living in a world where the reductionists are right or one where the holists are right. Needless to say, I think we reside in the latter. If we lived in the former, the macro level would simply reflect the micro level. There would be nothing for an invisible hand to do. The individual would be directly social, or, what comes to the same thing, there would be no separate category of the social. Individual utility maximisation would directly be social welfare maximisation: the distinction between them would be meaningless. Likewise, macro irrationality would be just a summary of micro irrationality: unemployment would either be a product of the product of a rational desire for leisure 19 , and, hence, itself rational. In general, individuals could with confidence be left to get on with it without supervision or intervention. A reductionist world would be a laissez-faire world. If, on the other hand, we were to inhabit, as in my opinion we do, a holistic world 20 , then reductionists would (and do) have a problem. It is fairly obvious that higher level entities are not simply aggregates of their micro components: water does not behave as an aggregate of hydrogen and oxygen; steam, liquid water, and ice do not consist of tiny gaseous, liquid and solid molecules; nor do chairs consist of hard, green, ugly or you would be very lucky if a small change in your program led only to a small change on your screen. Tiny programming errors typically lead to wild and unpredictable results levels. The problem faced by the reductionist is how to reconcile this fact of an obvious disjuncture between levels with the reductionist laissez-faire policy prescription. Libertarians face severe difficulties sustaining a logically consistent reductionism in a holistic world. 19 As the Duke of Edinburgh memorably asserted on the Jimmy Young Programme, and as Robert Lucas still believes (1987: 66-67) 20 of thing. Clearly this is expression is a figure of speech, shorthand for a world in which a holistic standpoint would be appropriate. 23 The invisible hand is one potential solution to this problem. There are two possibilities. Either one can ignore the disjuncture between levels, and adopt a thoroughgoing reductionist methodology and policy stance this seems to be line taken by Joseph, Lucas and Friedman 21 or with Hayek and Adam Smith one can accept that disjuncture, and so adopt a methodological holism, but at the same time postulate a mechanism reconciling that methodological holism with a laissez-faire policy reductionism. Such a mechanism is an invisible hand mechanism. The invisible hand allows us to say, granted that social outcomes are not logically bound to reflect individual behaviour in an aggregative, summary manner, nevertheless a mechanism exists which ensures that in practice they do so. The invisible hand is what allows us to think, and act, in a reductionist way in a holistic world: it underpins reductionism by tacitly conceding holism. Laissez-faire is vindicated, we are inveigled into tying the visible hand behind our back, if we can be persuaded that the invisible hand will do its job instead, and do it better. What I am suggesting, therefore, is the following: the laissez-faire policy prescription does, indeed, embody a reductionist standpoint. However, there is more than one way of sustaining that standpoint methodologically. One can believe, or at least act as if one believes, that the world truly is reductionist in relevant ways and that supposed macrolevel pathology is simply the summation of micro-level behaviour which may or may not be pathological. Laissez-faire is a reductionist policy prescription in the sense that it issues from a reductionist methodological standpoint. Or one can accept that the world is holistic and hence that macro-level pathologies might in principle be emergent at that level, but postulate the existence of an invisible hand mechanism which ensures that the reductionist policy prescription of laissez-faire is nevertheless valid. The latter strategy combines methodological holism with policy reductionism. * * * 21 Although few of us attain to consistency, and it is always possible to find holistic-sounding formulations in reductionist writers the difficulty lies in interpreting them. 24 following the terminology I adopt, read reductionism) of the neoclassical economists are well taken 22 . But the simple, oneto-one relationship between this reductionist standpoint and a laissez-faire policy t exist. Compare the standpoints of independent households also Haworth, 1994: 8). For Hayek, on the contrary, foci in CRS: 59). So, on the definitions proposed earlier, Hayek subscribes to a very clearly holistic, and Friedman to an equally clearly reductionist methodological standpoint. Yet they still both endorse the same basic framework for policy prescription: laissez-faire. And in bracketing Smith with the neoclassicals in the reductionist camp (148), Bunge is simply in error as we shall see in Chapter 4. Writers such as Smith and Hayek are methodologically very distant from the crude reductionism of Joseph, Lucas and Friedman. They tacitly recognise a holistic world by invoking invisible hand mechanisms. For Smith the invisible hand is literally the hand of an omniscient and omnipotent deity desiring nothing other than the maximisation of human welfare. For Hayek, writing in a more secular age, the invisible hand mechanism takes the form of an evolutionary process based on the exploded group selection theory of VC Wynnepts to distinguish his own stance from that of Keynes, his anxiety to head off a line of thought leading from the holistic or systems thinking premises he shared with Keynes to an interventionist policy prescription, lead him to make the crudely reductionistic statements about macroeconomics and microeconomics which we noted earlier. The resolution, then, to the puzzle identified at the beginning of this section is as follows. We can understand the contradictory association between an appeal to reductionist methodological underpinnings and an assertion of a holistic invisible hand mechanism on the basis of a dual foundation. The first part is a factual hypothesis about the nature of the world we actually inhabit, namely, the systems view of the world, the hypothesis that the world is a holistic one with all that this implies about the scope and potential for collective intervention in the economy. The second part concerns the laissez-faire policy 22 Although it may well be a rhetorical error blandly to dismiss monetarist macroeconomics as akin to 25 prescription of the reductionist camp, a policy prescription which both depends on and supports the reductionist methodological stance. Taking the two points together, we can see that some mechanism has to be introduced to mediate between a holist world and a reductionist policy prescription: the invisible hand does the job. The invisible hand, whatever its precise content, whether it comprises the hand of a deity as in Smith, or the result of an evolutionary process as in Hayek, allows us to assert that, in practice, the world can be treated as if it were reductionist. The logical inconsistency which Howarth has correctly identified is an internalisation of the inconsistency between reductionist laissez-faire programme and holistic world. It is illogical because it is attempting to do what is ultimately impossible, namely to reconcile the irreconcilable. The alternative to both of these approaches is to combine recognition of the holistic nature of the world we live in with acceptance that there is no invisible hand. In this view, rational individual self-seeking behaviour is by no means either the necessary or the sufficient micro substrate for the desirability of social outcomes. Rather, behaviour must be directly social if desirable social outcomes are to be obtained. According to Keynes, for example, egotistical activity uncoordinated by the state may lead to inefficient outcomes. The price system aggregates rational individual actions but the aggregate is an unintended outcome as far as those individuals are concerned. There is no particular reason why unintended outcomes should necessarily be desirable and often they are not. Individuals take responsibility for maximising their own welfare, given what everyone else is doing, but somebody 23 has to take responsibility for organising the aggregate outc own ... the invisible hand is merely our own bleeding feet moving through pain and loss CWXX: 474). Marx, on the other hand, takes the argument a stage further by arguing, on the contrary, that there is, indeed, a design which is not our own, a design without a designer. Like unlike Hayek, because it is not our own design, it is alien to us. In the absence of directly social activity, atomistic behaviour spontaneously arranges itself into a self- faith healing (156)! 23 Specifically, a universal class in a position to act on behalf of society as a whole. 26 individual humans thus becomes dominated by an interest alien to that of the individuals comprising it. * * * The conclusion of this section, therefore, is that while reductionist approaches may be safely dismissed, embracing holism is no guarantee of getting it right. There is holism and there is holism. Methodological holism combined with the deus ex machina of an invisible hand mechanism can still sustain the inappropriate and unwarranted reductionist policy prescription of laissez-faire. The bulk of this section has concerned the holismreductionism dyad, at the cost of ignoring the distinction between what Bunge calls ct the reductionist assumption that the properties of entities are just aggregates of the properties of substrate entities, but we also reject the assumption that the pattern of relationships constituting a system is substrate-neutral and in some sense logically prior to the properties of the substrate entities. The implication is that writers in the invisible hand tradition, such as Smith and Hayek, adopt precisely this assumption. As far as Smith is concerned, the case is made in Chapter 4, where the invisible hand is interpreted as literally the hand of an omniscient, omnipotent and benign deity. As far as Hayek is concerned, the issue is dealt with in Chapter 5, where I argue that, for Hayek, macro level objects are understood as independent entities in their own right, owing nothing to their material bases in individual behaviour. In both cases the overall macro-level pattern is divorced from the need for a mechanism, such that micro level incentives are consistent with behaviour which sustains that pattern. The consequence of this analysis is that the association between methodological standpoint and policy prescription asserted in Bunge (2000) can be challenged. There is and laissez-faire, on the one hand, nor both and from material foundations in self-seeking substrate activity) are associated with laissez27 faire policy prescriptions from mild to radical intervention. the methodology of economics article, however, can be faulted for an over-simplification and misunderstanding of the relation between methodological premises and policy consequences. There do exist reductionist free marketeers of the kind Bunge describes: the pronouncements of Friedman, Lucas and Sir Keith Joseph fit this pattern. But to lump holists such as Smith and Hayek in with them, is both mistaken and allows us to ignore the fundamentally ideological role of invisible hand mechanisms in allowing economists to retain some approximation to efficiency as their default notion of how the capitalist economy actually works. 1.4 The structure of the thesis From what has been said above, it is clear that a major part of the thesis must be concerned with the problem of the invisible hand. It is mandatory, then, to return to the locus classicus of the invisible hand in the writings of Adam Smith. This will occupy a followed, in Chapter 5, by a close examination of the position of a leading twentieth century invisible hand theorist, Friedrich Hayek. The thesis concludes with an examination of the consequences of adopting a holistic perspective while rejecting engagement in the economy. Before turning explicitly to the invisible hand itself, however, I examine two episodes in twentieth century political economy where developments within game theory and the theory of social choice were perceived as Within modern neoclassical economics controversy has been aroused by the discovery of appears to show that it is impossible to devise a procedure which can be relied upon to aggregate individual preferences into clear and acceptable collective preferences. And 28 leads in general to collectively desirable outcomes not just as a theoretical possibility but as a plausible description of a pervasive phenomenon. Considerable energy has been with the supposition of a ubiquitous and benevolent invisible hand. One response to such difficulties, however, has been to jettison the idea of collective rationality altogether. Libertarian writers such as IMD Little, argue that only individuals can think or prefer one thing to another, and concepts of collective rationality and social preference are therefore devoid of meaning. The question as to whether a collection of individuals, a society, can have interests and preferences distinct from those of the individuals of which it consists, has parallels with two related questions in psychology, philosophy and computer science, namely, (a) how brains can be conscious when individual neurons are not, and (b) whether artificial intelligence is possible in principle. Both questions relate to the validity of the computational theory of mind. agents when such dilemmas arise: that decision-making is interdependent in content but independent in form. The decision affects others but is taken as if it only affected the individual decision-maker. In Chapter 3 attention is turned to the problem of Arrovian impossibility, and, in particular, to the criticism of Arrow by libertarian thinkers. Taking IMD Little as a principal exponent of this view, a parallel is drawn between his rejection of the notion of a social welfare function and the rejection, by writers such as John Searle, of the possibility of artificial intelligence. Chapters 2 and 3 take the form of an extended review of Barry and Hardin (1982). What, then, do we learn, with respect to the issues outlined above, from these two dilemma and Arrovian impossibility to the reductionist programme. The conclusion drawn is that both are, in fact, incompatible with the reductionist programme, but that conflicting interests of the agents involved, whereas the Arrow theorem is based only on conflicting interests, and (b) to the tension between social content and private form of 29 the decision making process. Secondly, the chapters draw attention to a particularly extreme liberal response to these challenges, and provide an explanation of why that response is wrong. pose considerable difficulties for the reductionist programme. In part this is an empirical 24 and non-single-peaked preferences in the world? One possible approach for the reductionists is to say that these do not in fact occur 25 . However, I am not aware of any major attempt to put this argument and therefore will ignore it here. A second possibility is to pick holes in the argument, trying ll in the fact that independent choice behaviour by rational agents should sometimes lead to Paretodefect] is the solution of the Pr unsuccessfully, been made to circumvent the two propositions. The point is that there is no absolute or logical paradox involved, but both Arrovian impossibility and the the sense in which the Good Samaritan is a paradox. Belief in the possibility of automatic mechanisms which aggregate (a) individual preferences to achieve a consistent notion of what is socially desirable, and (b) individual actions to achieve socially desirable outcomes, is incompatible with these two results. A third approach, taken by the more extreme proponents of laissez-faire, is to deny collective rationality and social welfare, to deny, that is, that any meaning can be attached to these phrases. According to this view, only individuals can be rational or have preferences. The lesson of Chapters 2 and 3 is that this tactic, which illegitimately privileges a particular level, that of the individual agent, is fundamentally untenable. 24 ie, one shot games and multi-player iterated games: just those versions where reciprocity cannot lead to the cooperative solution. 25 Binmore (1994) and Axelrod (1984) are based on repeated two-player games, and much of what they say ceases to apply once n-player (n > 2) games are admitted. 30 Chapter 4 is devoted to an examination of the invisible hand in the work of the writer who invented the term. Adam Smith is revered as the father of modern economics. I shall argue that analysis of his writings, however, reveals him to be a representative of the 18 th preoccupied with the need to preserve order in society. His scientific methodology emphasises reconciliation with the world we live in rather than investigation of it. He invokes a version of natural law in which the universe is a harmonious machine administered by a benign deity. Nobody is uncared for and, in real happiness, we are all substantially equal. No action is without its appropriate reward in this life or the next. The social desirability of individual selfthat is, by the hand of a god who has moulded us so to behave, that the quantity of happiness in the world is always maximised. In Chapter 5 attention turns to a prominent twentieth century exponent of the invisible hand. While Adam Smith proposed that individual self-seeking would lead to socially kindly god, Friedrich Hayek seeks to re-establish the invisible hand in a secular age, replacing the agency of a deity with an evolutionary mechanism. A process akin to natural selection ensures that individual behaviours leading to undesirable social inconsistent in his deployment of this evolutionary mechanism: only its for him benign effects are acknowledged, while its undesirable consequences are blamed on a culture of state intervention. What is the specific contribution which these two chapters make to the overall thesis? I argued, earlier in this introductory chapter, that the notion of an invisible hand is fundamentally ambivalent: at once it sustains reductionism, and the laissez-faire policy prescription implied by it, while tacitly conceding the holist case: social order is emergent. What we want to know is, precisely how this automatic mechanism operates; how the invisible hand is to reconcile individual behaviours in the interest of the greater good of society. In Smith and Hayek we see two allied but distinct answers to this question. In the 31 God has a very simple structure, indeed he is reduced almost to a cipher. Repeatedly and unambiguously we are told that, at least for practical purposes, God has a utility function of one argument: total human happiness 26 . The machine grinds out the summation with perfect accuracy for ever. It is the totality which is always primary for Smith; individuals are assigned very subordinate roles. Deprived of any real freedom or autonomy, they are human welfare. Is Smith then in the reductionist or holist camp? I argued above that the role of the invisible hand is to reconcile the reductionist programme with a holistic world. This is certainly the case for Smith. Smith admits a holistic world. His imagery is, in tune with his times, mechanical rather than organic: the world is a great machine rather than an organism. invisible hand allows him to assume that the maximisation of human happiness takes place automatically all we need to do is give each other enough space for the invisible hand process to work itself out. Macro level rationality is the spontaneous reflex of micro level rationality. with the modification that a form of evolution is to replace the deity as the mechanism driving the invisible hand. Not only the allocation of resources between competing ends, but also the institutional environment within which that allocation process takes place, are subject to variation and selection. Only those allocations and institutions most conducive to human welfare survive this weeding and sifting process. Once again, the reductionist programme is reconciled with a holistic world. Social order, and other properties of the macro level, are emergent at that level, but they are born perfect and fully-formed. We have no need to intervene at the macro level. Social welfare is again maximised automatically by individual utility maximisation. 26 this utilitarian character, while God himself has additional objectives, such as enjoying virt account. 32 What this, at first blush more plausible, account omits is how individual self-seeking behaviour leads to institutions and allocations which are just what society requires. Indeed, just as in Smith individual interests were pre-reconciled by God, so that aggregation was unproblematic, so, too, Hayek admits that this will only work for interests that are already reconciled. He then goes on to build his entire system on the wholly unjustified assumption that, indeed, they are thus reconciled. The thesis concludes with a presentation of the policy stance of John Maynard Keynes and an examination of its links with his underlying social philosophy. The argument is that Keynes shares the holistic approach of Smith and Hayek, but without their reliance on invisible hand mechanisms. If spontaneous processes cannot be relied upon to generate desirable social outcomes then we have to take responsibility for achieving this ourselves. Individual self-seeking behaviour will lead to socially desirable outcomes only if the institutional framework is right. Setting up the institutional framework in which or, what comes to the same thing, abolishing the existing institutional framework which atomises individuals implies large-scale collectivisation of the economy. 33 Chapter 2 27 2.1 Barry and Hardin: rationality at two different levels? The purpose of this chapter and the next is to show that the issue of the articulation between the micro and macro levels does present problems for contemporary economics. An appropriate place to begin our investigation of the problems facing the neoclassical view of the micro-macro articulation of levels is a book of readings (Barry and Hardin, 1982) on precisely this subject, Rational Man and Irrational Society? edited by Brian Barry and Russell Hardin, political scientists at the University of Chicago. and collective decisio book are therefore concerned with the micro-macro dichotomy: the failure of rationality at the micro level, the level of the individual agent, to guarantee rationality at the macro level, the which rational individuals, attempting to do the best they can for themselves, do worse than if they had tried to do the best they could for all the agents taken together. Arrovian impossibility shows that there is no rule which can always aggregate individual ordinal preferences into social preferences without producing some perverse result, such as that the social ordering is just a restatement of the ordering of a particular individual, or that the society is indifferent between every alternative presented to it. Both results have been regarded as shocking and as deeply damaging to liberal notions of economic and political processes. They have been held to exemplify a contradiction between individual 27 An earlier version of this chapter appeared as Denis (1996a). 34 thought to throw up problems for the concep 28 ). Barry and Hardin are supporters of the libertarian view that, if there is a conflict between individual and collective rationality, we should keep the former and drop the latter. Their response to the supposed dichotomy between collective and individual rationality is to assert that it is based on an illicit extension of the concept of rationality from the assumptions that its relation t practical problem challenging us to construct institutions which avoid it. y should be seen as a reaction to the discovery that the concept of rationality cannot be extended indefinitely to solve all problems of conduct much is expected of the notion of rationality. There is no a priori reason to expect that, if people have very diverse ways of conceiving the bases for ranking some states of affairs above others, it will be possible to aggregate these And a similar po not v the There is more than an echo of the Kantian procedure about this. Kant argued that and that the purpose of philosophy, therefore, was to seal off those areas where this was al channels: science [sc metaphysics], which checks its tendencies towards dialectic, and ... prevents the ravages which a lawless speculative reason would infallibly commit ... [T]he supreme office of censor which it [metaphysics] occupies, assures to it the highest authority and importance. This office it administers for the purpose of securing order, harmony, and 28 Unqualified page numbers in this chapter and the next refer to Barry and Hardin, 1982. 35 well-being to science, and of directing its noble and fruitful labours to the highest possible aim -81) In the same way, Barry and Hardin note that thinking consistently about the aggregation of individual preferences and behaviours leads to paradoxes contradictions between microand macro-level rationality. Instead of seeking an intellectually satisfying resolution of the paradox, we are advised to drop the issue: there is obviously something wrong with the concept of collective rationality so we had better stop using it and turn instead to the practical problems of constructing institutions. An intellectual problem is replaced by a practical one. As we shall see, however, Barry and Hardin differ from Kant and, as we shall see, from Adam Smith in that K rationality to society as a whole, we cannot ask whether society is acting rationally to maximise its happiness and the idea of human happiness in the aggregate itself becomes vacuous. 2.2 Table 1 Payoff matrix for a one- In the payoff matrix shown in Table 1, above, the cells indicate the ordinal payoffs to the two players, X and Y. Each of the four outcomes is ranked between 1 and 4 for each player, with 1 meaning most preferred by that player. The payoff for X is presented first in each cell. Hence the top left cell shows the payoffs if both cooperate, and the top right X Cooperate Defect Y Cooperate 2, 2 1, 4 Defect 4, 1 3, 3 36 cell those if X defects and Y this outcome is X ost desired outcome and Y X cooperates and Y defects, the outcome, represented in the bottom left cell, is reversed. If both players cooperate they both get their second best outcome and if both defect they get their third best outcome. These ordinal preferences can be illustrated by any cardinalisations which preserve the rankings. There is no need for any symmetry or equality of the cardinal utilities attached to each outcome for the two players. A one-shot, two-p Table 1. We make the following two assumptions: (1) The payoffs indicated accurately capture the preferences of the players. In other words, any fellow feeling, moral views, pleasure in cooperating per se, etc, are all already included in the ranking. (2) Each player is rational: he actually behaves in the way which maximises his own utility. Often a third assumption is specified: that moves are simultaneous in the sense that each p formally unnecessary: we shall see shortly that each player has a dominant strategy to defect and this is entirely robust to relaxations of the simultaneity assumption. Suppose Y cooperates. The best that X can do is to defect: he gets his first rather than his second best outcome. Suppose now that Y defects. The best that X can do is still to defect: by doing so he will now get his third rather than fourth best outcome. So X has a dominant strategy: whatever Y does, he does best by defecting. Since Y is in exactly the same position, he also has a dominant strategy to defect. Yet if we compare the outcomes on the main diagonal (ie those outcomes where the players make the same move) we can see that if both defect, both get a less desired outcome than if both had cooperated. There are four possible outcomes: CC, CD, DC and DD, where DC, for example, means that X defects and Y cooperates. Three outcomes (CC, CD and DC) are Pareto-efficient, 37 as any change to another outcome would make at least one player worse off. Only DD is Pareto dominated: a change to CC would benefit both players. The onedilemma selects the single Pareto-inferior outcome. Unlike the other three outcomes, DD can also be seen as a Nash equilibrium: it is the only outcome in which each player is doing the best he can, given the actions of the other player. relied upon to acts rationally and pursues his own self-interest, the societal outcome is worse than if each individual does not. In short, the invisible hand of individual maximization seems to game realistically portrays situations that arise in society and inspection and introspection would indicate that it describes a situation all too frequently met with in real life then socially inferior outcomes will be the norm. the assumptions gives rise to a host of similar games generating sub-optimal outcomes. If moves are sequential instead of simultaneous, for example, appropriate adjustment of the payoffs available gives us the centipede game a game which can never get started 29 even though both players would benefit from playing (Kemp and Philp, 1996). The -type macro-irrationality can be illustrated by reference to two points made by Schelling, the author of Reading 5. The first point simply draws attention to the fact that clashes between micro and macro conceptions of rationality in his own best interest given what everybody else is doing, yet all could be better off if the all made opposite choices ... [W]e should probably identify as the generic problem, not the s in which equilibria achieved by unconcerted or undisciplined action are inefficient the situations in which everybody could be better off, or some collective total could be larger, by concerted or 29 A correspondent correctly points out that formally the game does get started in that the first player faces a decision whether to play or not, and if he decides not to play, that is his move (and the last one of the game), so by not playing, he has played and the game did get started (and terminated instantaneously). I submit that my use of words is more transparent. 38 As an example, he refers to the problem of what to call the time: whether we choose to discussion, namely, that Schelling draws attention to the problem intrinsic to the coordination problem. We may note, to anticipate a later discussion, that a coordination problem is exactly what arises when a decision is interdependent in content but independent in form. The decision has social consequences but is taken as if it had only individual consequences. If the individuals concerned could coordinate their decision-making so that the payoff matrix could be changed to reflect the choices of just one (aggregate) player amongst two (or more) actions problem of coordination ... arises in those situations in which there is more than one set equilibrium rightly prevalent in economics, that of Nash equilibrium, then, as pointed out above, there is only one equilibrium: DD. Gauthier is using equilibrium in a looser sense in order to include the idea of the socially desirable outcome as an equilibrium. The is not an equilibrium.) The decision on what to call the time is a classic case of a nominal variable having real of time thus: more important that we all have the same time than what time it is. But that does not mean it is a pure coordination game, if we understand by that one in which all equilibria are equally good. Without organisation we will be locked in standard time all the year A simple payoff matrix for a coordination game, such as what to call the time, or which side of the road to drive on, might be set out as follows. The assumptions made here are the same as for the two player, one-shot game made above, with the addition of the simultaneity assumption. Whether a one-shot, 2-player game has any real significance will be addressed shortly. 39 Table 2 Payoff matrix for a one-shot coordination game with ordinal payoffs In the payoff matrix above, X and Y do not care whether to use GMT or BST so long as both use the same time system. The outcomes on the main diagonal where they both use the same time-naming convention are their equal first choices, and the off-diagonal outcomes their equal third choices. If players only communicate by means of their moves, and they face a one-shot game, then they face a probability of 0.5 that they will coordinate successfully. The key point about these games the one-shot, 2coordination games is the failure of reciprocity: there is no way in a onedilemma game that either player can influence the behaviour of the other. Without reciprocity we cannot have coordination. 2.3 Iterated and n-player games In the case of an iterated game the decisions taken by players in any period can now be related to decisions made by the other player in the previous iteration. Each player now has to consider what it stands to lose in the future if it defects now and if that defection causes the other player to defect in the future. If either (a) the rate at which the player discounts future benefits is very high, or (b) for practical purposes, we still have a one-shot game. Assuming this is not the case, cooperation becomes a viable strategy. The problem is that one does not know the own moves. It has been claimed on the basis of experimental evidence (Hofstadter, 1985 Ch X GMT BST Y GMT 1, 1 3, 3 BST 3, 3 1, 1 40 29 and Axelrod, 1984, 1990 Ch 2) that the best strategy is one, such as TIT-FOR-TAT, defection and thereafter forgives by returning to cooperation 30 . These last two are necessary worse) and therefore can treat the game as a one-shot. To resolve the pri dilemma, the supergame must extend into the indefinite future to avoid the problem of backward induction. If the players know when it is going to end, they will defect on the final game, they will defect in the penultimate game, and in the one before that. The iteration unravels back to the present and defection becomes the dominant strategy once more. The technical name With two-player iterated games with high probability of future rounds and shallow discounting of the future, however, there is a real basis for cooperation. Robert Axelrod makes this scenario the entire basis for a theory of The Evolution of Co-operation in the biological open to a very laissez-faire interpretation. If social problems which might otherwise legitimise state intervention are characterised by indefinitely iterated 2dilemmas, then we can expect rational agents to learn to cooperate with each other, rendering state intervention unnecessary. One way out of the quandary of the pr number of periods. One way back into it, however, is to extend the number of players: -person single play game, commonly should cooperate in iterated play. In general, in an n-person singledilemma, defection is narrowly rational. In iterated play it may not be. Whether it is n becomes very large, it is increasingly implausible that cooperation will be narrowly rational even in iterated play. Hence, in the dynamic analysis, narrow rationality can lead less likely as n incr -34) 30 These contentions by Axelrod, et al, have been severely criticised by Ken Binmore (1994: 194-203). s have themselves been criticised by Matt Ridley (1996: 72-73). 41 assumption that by doing so you will influence your antagonist to cooperate, thereby obtaining more desired outcomes for both players. Cooperation depends on reciprocity. But as n becomes large, it becomes impossible to influence the behaviour of other two can be large enough to forestall cooperation, as the paper by Rapoport (Reading 3) single defector gets the largest payoff and the single cooperator suffers the most severe punishment, it is all but impossible for all three to The players face two problems: how to discriminate between players whom one wishes own behaviour can perceptibly reward or punish other players. A competitive market, n producers, where n is very large, and each producer would like all producers together to reduce output but is not prepared to reduce output unilaterally. In spite of it being an iterated game, cooperation cannot emerge because every producer would want to defect and there is no mechanism to punish just defectors. too optimistic: two-player games certainly do exist, but there is no reason to believe that many of the important institutional dilemmas faced by humanity are not more realistically modelled as multiplayer games. In the key issues addressed by Keynes (Chapter 6 of this thesis), for example, agents must decide whether to save or to spend and whether to hold their assets in the form of bonds or money. These decisions clearly impact on many other agents and constitute multi-player iterated games. Such situations cry out for state intervention for example, to alter the payoff matrices by means of appropriate penalties for defection and incentives for cooperation. In the sequel, therefore, references to derstood without distinction as oneshot, two-player games, finite iterated games, or n-player iterated games; that is, as just those situations where the dilemma is manifest. 42 n interest between the two players. But this common interest cannot be implemented because of its fragmentation into two atomistic players. The agents act irrationally from the collective point of view because they are compelled by the structure of the game to make their decisions at an inappropriate lower level of aggregation. As an aid to perspective, before looking at the issues of interest, where the micro-macro dichotomy poses problems for human society, I will make some prefatory remarks on individual and collective rationality in a natural world context. 2.4 -155). For the purposes of argument, Dawkins postulates some aggregate overwhat it is that is being maximised in the natural world. His conclusion to this exercise in reverse engineering is that there is no such overobserve has precisely the properties we should expect if there is, at bottom, no design, no Dawkins, 1995: 155). This does not mean that the world is senseless or chaotic: on the contrary, the structure and behaviour of the entire organic world can be explained by reference to a single principle, the survival of DNA. Each gene is a maximiser of a utility function with one their descendants are the genes we expect to see in the world. The animals we are Dawkins, 1995: 127). This individual, self-interested rationality leads to incoherent, purposeless behaviour as soon as higher levels of aggregation are considered: to be well designed to kill antelopes. The teeth, claws, eyes, nose, leg muscles, backbone 43 designing cheetahs was to maximize deaths among antelopes. Conversely [in the case of] an antelope we find equally impressive evidence of design for precisely the opposite end: the survival of antelopes and starvation among cheetahs. It is as though cheetahs had been 995: 122-123) Even at the level of a single species, or groups within a species, the attempt by individuals to maximise the number of their descendants leads to inefficiency. Dawkins takes the example of the elephant seal. In the elephant seal the females are monopolised by 4 percent of the males in a harem system. The sex ratio is about 50:50 even though 96 percent of the males make no contribution, and, indeed, consume more than half the en a little attention to the economic efficiency of the community would dispense with the bachelors. Instead, there However, if males were in a minority, it would be to the advantage of an individual to have male offspring: the expected number of offspring of males is greater than that of females. Thus individuals who tended to have male offspring would be selected for until the sex ratio was equal again. An unequal sex ratio is not an evolutionarily stable strategy. But the consequence is massive inefficiency: devoting themselves to useful work, squander their energy and strength in futile struggles as concerned with rearing children. If males diverted into useful channels the energy that they waste competing with each other, the species as a whole would rear more children for ated precisely a multinot that genes make individual organisms or groups of organisms behave in ways in some sense contrary to their own interest, though that may be the case. The essence of the problem is that genes, individually maximising their future replication, do not collectively maximise their future replication. If somehow the elephant seal genes could cooperate instead of blindly competing with each other, the population could support a skewed sex ratio and make far more efficient use of its resources. The population would be more successful within the species and the species within its overall 44 environment. The probability of any randomly selected gene in the gene-pool surviving into subsequent generations would be increased. But they cannot do it. Individually rational behaviour by genes leads, in this as in many other cases, to collective behaviour which is irrational for those same genes. To put it another way. Genes want to survive. 31 Individual behaviours are selected which maximise the transmission of the DNA responsible for those behaviours into the future. But the only evolutionarily stable strategy for the DNA is to do the best it can, given what all the other DNA is doing. However, at the collective level, the DNA is not not In particular, if 96 per cent of males in the species is redundant, then it would be better for the species to dispense with them. The ideal sex ratio is 2:50, or 200/(2+50) per cent = 3.85 per cent males 32 . Individually it is rational to invest in male offspring if the percentage of males falls below 50 per cent. Collectively it is rational to invest in males only if it falls below 3.85 per cent. Choosing female offspring with a probability of 0.9615 is cooperation and choosing female offspring with a probability of 0.5 is defection cooperated they would all enhance their replication over the Pareto-inefficient Nash equilibrium. In the case of partial cooperation, however, the cooperators would individually do worse than if there were no cooperation, and the defectors better. Hence cooperation cannot arise gradually, and if, somehow, it did arise, it would be vulnerable to invasion by defectors. Cooperation is not an evolutionarily stable strategy. This section, therefore, illustrates a natural-world case where agents act rationally at an individual level, but irrationally at the aggregate level because the decision making is independent in form but interdependent in content. It also gives substance to the view 31 -329). 32 4% of males are productive, and males constitute 50% of the population, therefore, for each hundred elephant seals 4% of 50%, or 2 males should be retained to mate with the 50 females. So the ideal sex ratio is 2:50. The 2 males as a percentage of the population of 52 (50 females plus 2 males) is approximately 3.85%. As a decimal fraction this is 0.03846; taking this away from unity to get the desired probability of female offspring gives us the figure of 0.9615. 45 which could be a gene or a species, a person or an institution, a nation or even a civilisation. 2.5 Collective and individual rationality We are now in a position to look in more detail at the Barry and Hardin view of essentially that collective rationality does not exist the term is an unwarranted opens with these comments: he circumstance that the question out that in the context of non-constantattention, namely individual rationality, which prescribes to each player the course of action most advantageous to him under the circumstances, and collective rationality, which prescribes a course of action to both players simultaneously. It turns out that if both act in accordance with collective rationality, then each player is better off than he would have been had each acted in It is true that Rapoport immediately spoils this with references to ethical considerations, either the rankings of the two players already impound all considerations of morality, or impounding them changes the rankings, releasing the players from any dilemma. But Rapoport is correct in asserting the contradictory claims of rationality operating at two different levels. is an irrefutable case here for saying that means-end rationality requires one to play the noncooperative strategy in a one- They then refer to the to morality which follow it. After some discussion of ethical considerations and the Kantian categorical imperative, they sum up as follows: 46 the forbearance of others ... that if you know the other prisoner has not confessed you need not be identified with the pursuit of self- rom the individual point of view in the one- accurately represents utility payoffs it is irrational to cooperate because of some external moral principle. But that is not the point. The point is that Rapoport was correct to distinguish between individual and collective rationality and to point out the conflict between the two. It is a simple fact that the individually rational outcome, DD, is Pareto inefficient, that is, it is socially irrational. out the consequences to the individual players of acting on its strictures: -interested individual is for the other player to fo choosing that option rather than being left free. But the (384) In this last statement Barry and Hardin effectively concede the case they have been contesting, namely, that there is indeed a conflict between individual and collective rationality. And, more precisely, that there is no spontaneous mechanism or institution to -interested actor, except inasmuch as he will hope Again Barry and Hardin miss the point. The point is that collective rationality is individually rational choice is DD, the collectively rational choice is CC, and since there can be no mechanism for the collective interest to be realised other than through the actions of individuals, the latter is not achieved. 47 2.6 Hobbes and Rousseau author of Readi dilemma-type situations poses problems for the identification of rationality with individual utility-maximisation, Gauthier seeks to draw out a distinction between two kinds of ration distinguishes between interdependent and independent action, which he identifies with activity in civil society and in the state of nature respectively. The rational modes of behaviour appropriate to these contexts are individual utility-maximisation in the state of tional persons with full knowledge will perform actions leading to an optimal 33 that agreement alone is insufficient to move from the state of nature to civil society, and that force is required to underpin such agreement: require each person to But Gauthier disagrees with Hobbes. Hobbesian man, socialised only by force, despite a change in appearances, actually remains in the state real difference between the state of nature and civil society must be a difference in man, e of nature to civil society produces in man a very remarkable change, in substituting justice for instinct in his conduct, and 34 Hence, for Gauthier, civil morality. 33 The reference is to Hobbes (1651) Leviathan Ch 14, 15, 17 34 Jean-Jacques Rousseau Du contrat social (1762) I, viii; trans Gauthier. 48 The problem with this is that Rousseau does not say, in the passage cited, that the transition from state of nature to civil society is accomplished by a change in morality, but, on the contrary, that the change in morality he refers to is achieved by the transition from the state of nature to civil society. The change in morality is a result, not a cause. avoided in a society with the moral values which Gauthier endorses (and I with him), because the payoffs attached to the different outcomes would not have the form of a represe and there is no way that players can escape from the dilemma by incorporating a further moral dimension into their decision making. Thus Barry and Hardin are able to use what Gauthier calls constrained maximising (eg playing the cooperative move in a is rational maximising of any sort in the absence of genuine interdependence between the choices of the parties, that is to say in the absence of a real ilemma setting interdependent? Clearly, Barry reciprocity. When that sort of interdependence is present, when there is reciprocity, then there is no Equally clearly, however, there is some element of interdependence at work here. When one player makes a decision, that decision has consequences for the other player. There is an externality at work: the private costs and benefits of each possible move, those affecting the individual player, do not fully reflect the social costs and benefits, those affecting both (or all) players. Again, without this condition, there would be no dilemma: each p can summarise the problem by saying that decisiongame is interdependent in content but not in form. The decision affects others but is taken as if it only affected the individual decision-maker. 49 economic transaction that agents make can be said to have some element of this substantial interdependence combined with formal independence. While it is possible to imagine a barter transaction in which no-one other than the two agents involved had any interest, every transaction involving money must necessarily impact on other agents throughout the economy at the very least influencing the demand for money. The scope for macroeconomic externalities is thus considerable. We have already seen that situations where there is a coordination problem and consequent sub-optimal outcome. But it is also the case that if the problem lies with decision making that is interdependent in content but independent in form, then the solution implies bringing form and content back into mutual accord. It is difficult to see how this can be done by removing the substantial interdependence. That would seem to involve a shift to a Robinson Crusoe economy without even the company of a Man Friday. Removing the formal independence on the other hand given the ubiquity of partially overlapping and partially conflicting interests which lie at the heart of the human condition must surely imply very widespread intervention in and detailed supervision of the workings of the economy by central authority. 2.7 Conclusion In this chapter I have sketched out a number of propositions. In particular, that coordination problems are endemic in both the natural and social worlds and that the collective irrationality such problems lead to is epitomised by the prisoners dilemma. The mistaken application of the concept of rationality to a sphere where it has no meaning, but from the correct insight that behaviour in prisoners dilemma-type contexts is dilemmas and, more broadly, in coordination problems in general, is the combination of independence in form and interdependence in content of the decision making process. A group of agents having a common interest may be unable to implement that interest if it is fragmented into a number of parts, each of which is compelled to make decisions at an inappropriate lower level of aggregation. Finally, if correct, this argument implies a 50 search for solutions in the direction of extensive supervision of the economy by central authority. The next chapter, on Arrovian impossibility, continues the discussion begun here. 51 Chapter 3 m 35 3.1 Introduction the view that individual rationality of economic agents will, in general, lead to collective rationality at the level of the economy as a whole. I also argued that the attempt to explain away the problem, by attributing it to a mistaken extension of the concept of rationality from the individual to the collective sphere, was ultimately untenable. In this chapter attention is turned to the problem of Arrovian impossibility, and, in particular, to the criticism of Arrow by libertarian thinkers. Taking IMD Little as a principal exponent of this view, a parallel is drawn between his rejection of the notion of a social welfare function and the rejection, by writers such as John Searle, of the possibility of artificial intelligence. As in Chapter 2, a principal reference point is the collection of writings on Rational Man and Irrational Society edited by Barry and Hardin (1982). The background to the debate over the Arrow impossibility theorem is as follows. Consumers have preferences over the alternative consumption bundles with which they are faced. Modern microeconomics is based on the idea that everything we need to know to discuss consumer behaviour can be obtained from ordinal rankings by the consumers of these alternative consumption bundles without any need to know how much they enjoy a bundle, or how much more they enjoy this bundle than that. An older, cardinal, theory required that, in principle, these levels and differences in utility were measurable. The liberal tradition had for long held that alongside all the particular interests in society, there was a general interest, the interest of society itself. With the 35 An earlier version of this chapter appeared as Denis (1996b). 52 cardinal utility theory this conception of a general interest received an obvious interpretation: Benthamite utilitarianism said just add up the utility levels of all the individuals in society and that total represents the welfare of the whole of society. Then any policy can be judged according to how it increased or decreased that total of social welfare. Significant difficulties with the measurement and interpersonal comparison of utility levels led to the abandonment for the most part of cardinal utilities and the adoption of the weaker, and hence more robust, ordinal theory. Although it was now no longer obvious how to construct a social welfare function (hereafter SWF), it was assumed that this was merely a technical problem and that the task could still be accomplished in principle. Arrow, however, in a number of publications, in particular the two editions of Social Choice and Individual Values (1951, 1963), showed that it was in principle impossible to derive any SWF purely from individual rankings of social alternatives which satisfied certain elementary criteria, such as consistency and nondictatorship. This was a great shock and, indeed, it would not be an exaggeration to say that some theorists despaired at this result. Plott sets the tone here in Reading 12 (of Barry and Hardin, 1982): e hole, researchers ... began digging in the ground nearby ... What they now appear to have been uncovering is a gigantic cavern into which fall almost all of our ideas about social actions. Almost everything we say and/or anyone has ever said about what society wants or should get is threatened with internal inconsistency. It is as though people have been talking for years about a thing that cannot, in principle -32) tains that the Arrow results, and others like it in the theory of social choice, undermine the whole tradition of (230). A major purpose of this chapter is to evaluate this response. 3.2 The conditions conditions O, U, P, D and I. The argument proceeds via a reductio ad absurdam: we assume that all the conditions hold and then demonstrate that they lead to a 53 contradiction. Relaxing any of the conditions removes the impossibility of deriving a SWF, but, in general, such SWFs will exhibit perverse features. The conditions are expressed in many different ways in the literature and what follows is based on Barry and specified in this form are not genuinely primitive: condition O, for example, contains criteria of both uniqueness and transitivity. Transitivity by itself could be expanded into two (or more) conditions. The uniqueness criterion is replicated in Condition I, rendering the latter partly redundant. Condition O The SWF is a unique Ordering of the alternatives facing society based only on individual orderings. An ordering is a consistent ranking. In particular this implies transitivity for both preference and indifference. If society prefers x to y and y to z, then it prefers x to z, and so on. Condition U The social choice rule must have Unrestricted domain: it must work for every logically possible combination of individual orderings. Condition P The social choice rule must be Pareto-efficient: if one individual prefers x to y and all other individuals either prefer x to y or are indifferent between x and y, then the SWF must prefer x to y. Condition D There must not be a Dictator, that is, a person whose preference of x for y is always (in every logically conceivable constellation of preferences) the social preference, for any x and y, regardless of the preferences of others. 54 Condition I The social ordering of any pair of alternatives x and y is a function solely of the individual orderings of x and y: it is Independent of irrelevant alternatives individual orderings of x and z, for example. 3.3 Proof of the theorem One further concept is needed: that of decisiveness. If a group or individual is decisive over x and y, and prefers x to y, then society prefers x to y preference may be 36 . We also assume that society consists of a finite number of individuals. The proof then proceeds by showing that (a) if there is an SWF which satisfies conditions O, U, P, and I (that is, all except non-dictatorship), then for some constellation of preferences there must be a decisive individual, and (b) if there is a decisive individual then he is a dictator. Consider any pair of alternatives, x and y, where society prefers x to y. It cannot be the case that everyone in society prefers y to x, by condition P (Pareto). There must be a set of decisive individuals. If only one person prefers x then the set only contains one person; if everyone prefers x then the set of all the individuals in society is decisive. Normally, it will be a set of intermediate size, but that is irrelevant. There will thus be a (non-empty) decisive set for each pair of alternatives where society is not indifferent between the two. Consider the set of all of these decisive sets. From the assumption that society consisted of a finite number of individuals, this set of decisive sets must have a smallest member, or a subset of equally large smallest members, in which case we pick any member of this subset. We can show that there must be a possible pattern of preferences for which this smallest set of decisive individuals has only one member. We will suppose initially that this smallest decisive set, V, has more than one member, and show that this leads to a contradiction. Suppose V is decisive over x and y, and that 36 Decisiveness is not the same as dictatorship. Decisiveness holds if there is one pair of alternatives and one individual or group such that the individual or group can make the choice between the two every pair of alternatives. 55 it (and hence society because V is decisive) prefers x to y. This must lead to a contradiction. Since it consists of more than one member we can divide it into two parts, one, V1, consisting of one member and the other, V2, consisting of all the other members of V. We also give the name V3 to the set of all the members of society not in V. Condition U, unlimited domain, tells us that the SWF must work for any logically possible pattern of preferences. So we can pick any pattern of preferences we like. Suppose the pattern of preferences is that for V1, x > y > z 37 , for V2, z > x > y, and for V3, y > z > x. For convenience of reference this information is set out in Table 3. Table 3 Preferences of the three sets of agents, V1, V2 and V3 Rank V1 V2 V3 S S' 1 x z y x x 2 y x z y } y, z 3 z y x z Now, we know that V is decisive over x and y, so for society x > y. this is shown in the column headed S. But where does society rank z? Suppose society preferred z to y. Only V2 prefers z to y both V1 and V3 prefer y to z so that would make V2 decisive. But V2 is one person less than V, the smallest decisive set, so that is not possible. So society either prefers y to z (Column S) or is indifferent between y and z (Column S'). Hence society must prefer x to z, given x > y and y z, by transitivity (condition O). These two alternatives (x > y > z, and x > y = z, are shown in columns S and S', respectively, of Table 3. But now V1 is decisive since both V2 and V3 prefer z to x. However, V1 consists of only one person, so the assumption that the smallest decisive set, V, consisted of more than one person turns out to be self-contradictory. We have shown, therefore, what was required, that there is a pattern of possible preferences such that there is a decisive individual. That completes the first part of the proof. 37 56 The second part of the proof shows that a decisive individual is a dictator. Suppose A is decisive for x against y and that he also prefers x to z. Also suppose, invoking condition U, that everyone prefers y to z. Condition P says that society prefers y to z. If every individual prefers y to z, it would certainly be Pareto-inefficient for the SWF to prefer z to y, or even to be indifferent between them. Hence, x > y > z for society and so, invoking transitivity, x > z. But condition I, independence of irrelevant alternatives, says that the social choice between x and z is independent of individual preferences over y. x is preferred to z by society if and only if A prefers x to z. Hence, if A is decisive for x against y, we can replace y by any other alternative which A finds less desirable than x. Similarly we can replace x by any alternative which A finds more desirable than y. Hence for any possible pair of alternatives, A showed that there was a possible set of preferences such that there was decisive individual. Hence, for this pattern of preferences there is a dictator. But this violates condition D, of non-dictatorship. The concept of an SWF which simultaneously satisfies all five conditions is therefore inconsistent. What this shows is that there is a possible pattern of individual preference orderings such that a social ordering derived from them which satisfies the Pareto and independence conditions must be dictatorial if it is to be consistent. 3.4 Scope for relaxing the assumptions All of the assumptions mentioned are invoked in the proof, so relaxing any will make it possible, in principle, for us to construct a SWF. However, the conditions are generally regarded as quite minimal so the resulting SWFs are unlikely to be attractive. If we are prepared to accept a dictator, for example, there is no problem in constructing an SWF but now the SWF has nothing social about it. The SWF abdicates before the task of aggregating individual preferences. Again, recall that we commenced the proof by considering any pair of alternatives, x and y, where society prefers x to y. If we are unable to do this, because society is indifferent between every pair of alternatives, then we can derive a SWF, which, however, is completely vacuous: x = y for all x and y. This is going to the opposite, but equally useless, extreme. 57 We assumed that society consisted of a finite number of individuals, and if we relax this assumption then the proof fails, for there need not be a smallest decisive set. Or, to put it another way, if the smallest decisive set were infinitely large, removing one member would not leave a residue smaller than the original set. Again the proof would fail. Since actually existing societies consist of a finite number of individuals, this is scarcely helpful. To consider infinite societies we would not to be individual at all but rather infinitely subdivisible, or (b) to regard the individuals composing society to be not just those currently living but also the unborn and/or the dead and even that would be problematic. In neither case would it be possible to establish individual preferences, let alone aggregate them. SWFs violating condition P or transitivity are no more attractive than those already considered. An SWF capable of choosing Pareto-inferior outcomes would clearly not be of transitivity would also lead to irrationality at the macro level. Consider the set of preferences presented in Table 3, which was used in the proof of the impossibility U says that our SWF must apply to this set. Suppose that we examine the three pairs of alternatives, x and y, x and z, and y and z, in turn, and adopt a simple majority voting rule. We will obtain an SWF in which x > y > z > x, in each case by a two-to-one majority. These are referred to as cyclical majorities. Note carefully that this does not say that society is indifferent between the three outcomes which might be unhelpful but would not be inconsistent. What it says is that every outcome is preferred to both alternatives. Permitting intransitivity means that such instances cannot be excluded. In a formal system, once you can prove a contradiction you can prove any statement. So the contamination of irrationality immediately spreads beyond these three alternatives: every possible alternative will be preferred to every other. This is worse than the violation of condition P. Can we make more progress by relaxing condition U? Considerable research effort has gone into attempts to obviate the impossibility result in this direction. For example, we could require the SWF only to work where preferences are single-peaked. This would eliminate the possibility of patterns of preferences such as that in Table 3, since, as can be seen from Figure 1, below, which plots rank in the individual orderings against outcome 58 for the three sets of actors, V1, V2 and V3, the set of individuals composing V2 were assumed to have dual-peaked preferences. Since the proof depended on this pattern of preferences, it will not hold if such preferences are not in the domain to be considered. However, the resulting SWF will have nothing to say about the cases where preferences are not single-peaked. Now it is well-known that the latter, far from being an exotic theoretical possibility, is a practical problem of pandemic proportions. No SWF of any interest can simply remain silent on these cases. One way out would be to say that society is indifferent between all the outcomes in a preference cycle. This is referred to Figure 1 or the three sets of agents, V1, V2 and V3 R V1 R V2 R V3 1 1 1 2 2 2 3 3 3 x y z x y z x y z In the proof of the impossibility theorem, the three groups of agents were assumed to have preferences as shown above. The vertical axis shows the ranking the individual ascribes to each of the three outcomes, x, y and z, with 1 indicating the most preferred outcome. This procedure immediately runs into two major problems: (a) it violates yet another assumption, condition I, and (b) by doing this we have in any case restored condition U and, with it, impossibility. The point here is that it is not possible to tell whether there is a preference cycle without checking preferences between other alternative pairs than the x and y without also knowing that between x and z, and y and z. The social ordering of x and y is no condition U could be satisfied by a rule for one set of circumstances together with a rule for the remaining circumstances plus a rule for deciding when to apply which rule. That 59 is exactly the situation which now obtains. Let us rehearse the relevant part of the proof Suppose that the smallest decisive set, V, has more than one member, and that it is decisive for x against y. This must lead to a contradiction. Since it consists of more than one member we can divide it into two parts, one, V1, consisting of one member and the other, V2, consisting of all the other members of V. We also give the name V3 to the set of all the members of society not in V. Condition U, unlimited domain, tells us that the SWF must work for any logically possible pattern of preferences. We first of all have to decide whether preferences are cyclical or not and then either treat as normal or invoke the new transitive closure rule, as appropriate. Suppose, as before, that the pattern of preferences is that for V1, x > y > z, for V2, z > x > y, and for V3, y > z > x (see Table 3). Clearly we do here have cyclical preferences so we invoke the revised rule and say that society is indifferent between x, y and z. But this contradicts our assumption that V is decisive for x against y. Hence the initial assumption, that the smallest decisive set contained more than one member, turns out to be contradictory. So there is still a pattern of preferences for which there is a decisive individual and, therefore, also, a dictator. The proof still goes through. Condition I (together with the uniqueness criterion associated with it and with condition O) has, of all the five conditions, provoked the most controversy, not to say confusion, in the literature. The reason is, perhaps, that, at first blush, is seems utterly counter-intuitive to exclude the non-uniqueness which goes with cardinal individual -type -poor ordinal preferences, then, surely, it should work that much better with relatively information-rich cardinal preferences. Again, Borda systems, which (pace Barry and Hardin p219) are neither purely ordinal nor cardinal, are more information rich than purely ordinal systems. It seems perverse to rule out such procedures ab initio. To take this view, however, is to lose sight of what Arrow is trying to do. The point is to demonstrate the possibility or impossibility of building SWFs on the basis of purely ordinal individual preference orderings. It is no good showing that such an SWF is possible (or at least not proven impossible) if that possibility was due entirely to leaving 60 the door open for cardinal preferences. That would defeat the object of the exercise. The SWF is impounding into the social ordering some extra information either an arbitrary cardinal preferences. Either way, for the ordinalist project to succeed, such influences must be excluded. Again, the Borda system allows agents to reveal not just their ordering of two alternatives but also some information about the intensity with which that preference is held. Preferences over third, fourth, etc, alternatives are not some grounds albeit inconclusive for believing that the individual who ranks x and y tenth and twentieth respectively, holds his preference for x over y with greater intensity than another individual, who ranks them 16th and 15th, respectively, prefers y over x. Borda impounds this partial evidence on cardinal preferences. Again, if the SWF is only possible because Borda has not been excluded, the ordinalist project fails. It is therefore essential for the conditions O and I to be retained. Dilution here spoils the whole point of the exercise. 3.5 The libertarian response We have already seen the seriousness with which many took the Arrow results. Plott, in the breadth and depth of its consequences, on his interpretation. To understand the extent of the concern Arrovian impossibility has stimulated, we need to get a feel for the scope of the al description of the amount of each type of commodity, the amounts of various types of work done by each individual, the production level of each firm, the type of government agencies and the services provided by each, etc ... The set of feasible options could be a As for the processes which might exist to make choices between the alternatives society is faced with, any other kind of process. There is no need, for example, for the process to be directed in that some judge, administrator, or planner uses the defined social ranking to determine the best option and then directs its implementation. The process could be any type of game, 61 The very comprehensiveness of the Arrow results has forced some writers into a fundamental re-evaluation. Plott states the case for abandoning the very notion of social preferences: 38 would claim that the concept of social preference itself must go. Buchanan (1954a, b)39 was right in his original criticism of Arrow, that the concept of social preference involves an illegitimate transfer of the properties of an individual to the properties of a collection of individuals. For me, the Arrow theorem demonstrates that the concept of social preference involves the classic fallacy of composition, and it is shocking only because the thoughts of social philosophers from which we have developed our intuitions about such matters are subject to the same ways in which this fallacious concept of social preference continually dogs our thought ea of a concepts like social needs, group wants, etc. These are simply expressions of priorities and are thus rankings of options ... Take for example the concept of economic welfare. To different options one attaches a number ... indicating the level of welfare. Certain forms of cost-benefit analysis are attempts to operationalise such a formula. But indicators of social welfare clearly imply a ranking of social options according to the numbers which indicate the levels of welfare. The ranking satisfies all of our principles of social preference, and thus the [Arrow] theorem stands as a criticism of any such formula. The only admissible -45) per se that the impossibility theorem rules out, but comparisons of alternative states of economic welfare based solely on ordinal values preference (in the sense of a preference on the part of society rather than a preference of We can 38 The reference is to Journal of Mathematical Sociology 2: 181-208. 62 sugge false; it is much worse: it is an ideology containing the seeds of dictatorship. phers have interpreted this antagonism to be merely a superficial appearance masking a more essential harmony of interest. This general interest is then identified with the state and used to delude individuals into conspiring against their own freedom to pursue their individual interests. On the one hand we have an identification between the idea of the the general interest and dictatorship. Hence Little is able to locate Arrow in an intellectual tradition leading from Rousseau via Hegel to modern totalitarianism: -puzzle of how one can both be free and be subject to law is a variant of the pseudo-puzzle of how duty and self-interest can be e, plainly, conflict must arise, at least in the absence of complete initial consensus, and since such consensus was obviously absent, they invented the doctrine of a metaphysical consensus. When people actually (ie really) disagreed about some matter affecting the common interest, they were really (ie (1950: 15)40 ses to obey the general will shall be compelled to do so by the here (a step which Hegel took) to maintain that acceptance of the social order (or obedience to the state) is really only selfdanger of this approach. Modern totalitarian philosophy may be not altogether unjustly father -79) Little is far from being isolated in these views. We have already seen how close they are ngless term an illicit extension of the 39 Journal of Political Economy 62: 334Journal of Political Economy 62: 114-123. 63 concept of rationality beyond its proper domain. While Little tars Arrow with the brush of totalitarianism, Barry and Hardin subject him to criticism of a severity bordering on the intemperate in their Introductio (249-51). It is Little, however, who can be taken as a representative of a trend, and it will therefore be worth examining his views in more detail. Later in this thesis, in the chapter on Adam Smith, we shall see that the stick Little uses to beat Arrow, the claim, as Pope puts it, Smith himself and his followers. 3.6 Little: the argument against the existence of an SWF Perhaps the first point to make is that Barry and Hardin misunderstand the context of the debate. With cardinal utility theory it was straightforward in principle to construct an SWF: just add up all the individual utilities. With ordinal utility this was no longer obvious, and the next step was simply to show whether it was or was not possible to construct an SWF within this paradigm. Arrow showed that it was not. Barry and Hardin, Little and Plott ignore this. Thus, for Barry and Hardin, one at a time. One must know the consequences before one can say whether one finds the set acceptable irrelevant alternatives, and we should refuse to be bullied by a priori arguments to the -66) I, as I nda. If we leave it out and we find that an SWF is not in principle impossible, but that possibility is in fact a consequence of the possibility of obtaining more than bare ordinal information about individual preferences, then we simply have not answered the question we set out I. 40 The reference is to Jean-Jacques Rousseau (1950) The Social Contract trans GDH Cole, New York: EP Dutton. 64 A similar argument applies to the other four axioms. They do not need to be accepted whatever that might mean they have to be taken all together or Arrow perfectly legitimate question he has set himself. SWF: (a) as a social decision procedure (legitimate), and (b) as a judgement about social theorem is an objection to social decision procedures, Little complains that it is too extreme viable social decision procedures can and do exist, and (b) to the extent that an SWF is considered as a social preference, which according to Little cannot in principle exist, it is, he thinks, misleading and dangerous to talk about it as though it could. nt, therefore, is to argue that a SWF, if it means anything at all about opinion about what is good for society, not what the society wants: should on my view be regarded as a social ordering only in the sense that it orders states of society ... Instead of writing, with Bergson, W = W(U1, ..., Un), we can write Wi = Wi(U1, ..., Un) (i = 1, ..., n). There is no need ... to introduce a further (social) welfare function of the form W = W(W1, ..., Wn). We can deduce the whole effective corpus of welfare economics from, say, W10 = W10(U1, ..., Un) Because each individual ordering of the social alternatives is now to have the status of a candidate social ordering a possible ordering for society Little must now address the issue of whether, and to what extent, the welfare of others ordering: according to what he himself would get ... But of course there is no need to suppose this ... In fact, quite generally, we may suppose that they arrange all states in order of what they regard as ultimate desirability, taking everything they know and feel into account ... The well-known one of disc Actually, it is completely irrelevant, in the aggregation procedure assumed by Arrow, purely formal procedure aggregating individual preferences without regard to their 65 construction or content. Indeed, if we look at the outcome, there is a potential perversity here. Suppose there are two individuals, A and B, with their own sets of preferences and that the possible outcomes are points in n-dimensional space (where n is the number of issues), designated by a, b and s, representing the two individual interests and the general interest respectively. The Arrow impossibility theorem says that no ordinalist procedure can guarantee to find s. Suppose that we have a constellation of preferences such that an SWF is, in fact, able to find s the theorem by no means prohibits this. If A and B represent their preferences accurately the outcome is s. If, however, one party, say B, instead of representing just his own preferences, puts forward a compromise between his own and A between s and a. B consideration, B is left worse off and, possibly, there is a loss to society as well. On the other hand, if B were to misrepresent his preferences as being further away from A in fact they are, he would be rewarded for this by drawing the social outcome further towards b. Little makes use of his assumption that individual orderings impound opinions about what is good for society, as we shall see. He points out, quite fairly, that an Arrovian SWF must be a formal procedure and hence capable of being mechanised. He asks us to imagine a machine into which we feed all the individual preferences which the machine aggregates according to the formula in order to output a social preference printed on a card. This result could not, he says, consistently be accepted by anyone whose own ordering differed from it. To the potential objection that the individual orderings are just that, individual orderings, and therefore that anyone may accept the SWF as such ion does not, however, apply in the case under consideration, because in this most general version it is presumed that the individual orders take the welfare of others into I always did this (and how could I do anything else, since, remember, we are supposing everything I think significant!) then I should naturally have refused to accept the condition of non-dictatorship. It is in the nature of value judgements that the only order which I can fully accept is one that coincides with my own, regardless of the orders of other people. In - 66 There are two remarks to be made about this passage. Firstly, there is an ambiguity here is the social ordering. This Little cannot understand, since he is unable to conceive of a social ordering in the first place. The second point is that the last sentence, and, indeed the whole drift of the article, is that, if they are to be consistent, everyone must wish to be a dictator. This merely shows that the logical consequence of consistent individualism is solipsism. It is also somewhat ironic, given his remarks linking Arrow and Hegel with totalitarianism. Let us return to the argument about mechanising the SWF. Little begins by citing Arrow ges of abstract postulational methods is the fact that the same system may be given different decision- been fed into it. What significance can we attach to the sentence on the card, ie, to the -order? First, it is clear that the sentence, although it is a sentence employing ethical terms, is not a value judgement. Every value judgement must be judgement of values. If there are n people filling in cards to be fed into the machine, then we have n value judgements, not n + 1. The sentence which the machine produces expresses a ruling, or decision, which is different in kind from what is expressed by the sentences fed into it. The latter express value judgement; the former express a ruling between these judgements. Thus we can legitimately call the machine, or function, a decision-making process. asserting, in effect, that if the machine decided in favour of x rather than in favour of y, then x would produce more social welfare than y or simply be more desirable than y. This is clearly a value judgement, but it is, of course, a value judgement made by the person who calls the machine a SWF. Thus, in general, to call the machine a SWF is to assert we may suppose that the individual who calls the machine a SWF is one of those who has fed his own value order into it. It is clear that this person must be contradicting himself -order coincides with his own ordering ... In other words it is inconsistent both to call the machine a social welfare function and to accept the condition of non- 67 I have already commented on the solipsism Little expresses in the final sentence of this passage. He is simply incapable of raising his eyes above the limited horizon anyone accepting an SWF which was not identical with his individual ordering would be acting inconsistently. He is not asked to accept it instead of his individual preferences, merely to understand that it is what society prefers. But what is interesting about the passage is the assertion, as something so obvious, once stated, that it needs no supporting argument, that society cannot form and hold a preference. Little says that there are n preferences not n + 1. In fact, there are n + 1 preferences, considered formally: n personal preferences and one social one. The latter cannot really be considered as extra, however: it has more the relationship of a whole to its individual parts. What is interesting here is the privileging of the level of the individual person and the denial that the society or the machine or, in general, the system, can have preferences or particularly in his notorious 3.7 Searle and Little In setting up his by now wellobjective is to attempt to discredit artificial intelligence (AI) theory and the computational theory of mind. An AI program, for example one for reading stories in Chinese and answering questions about them, is a formal procedure and can be written down in English. Searle, who knows no Chinese, asks us to imagine him in a sealed book of rules. Chinese texts a story and then questions about it, are passed under the door, although Searle has no knowledge of what they are. He manipulates the symbols on the paper according to the instructions and passes the results back to the Chinese people on the other side of the door. Unknown to him they are answers to the questions about the stories. They are good enough to pass the Turing Test, that is, to convince his Chinese audience at least 50 per cent of the time that the room contains a native68 language Chinese spea and this is the punch-line even if we admit AI programs powerful enough to pass the Turing intelligent understand what they are doing. However good be intelligent because when we, humans, do something it means something to us but when machines do exactly the same thing it means nothing to them. The modern élan vital which is to distinguish, not the living, but the thinking being, is intentionality (Searle, 1980, 1984). Hofstadter, who, together with the philosopher Daniel Dennett, has gone to considerable the (incidentally) animate simulator [Searle]; rather it belongs to the system as a whole ... (Hofstadter and Dennett, 1982: 374-5) It would be out of place to go into more detail here on the original Chinese Room. The Chinese Roo -cast in the Chinese Room format as follows. It is Little, now, who is imprisoned in the room with a book of instructions and who has to process the characters on slips of paper which are pushed under the door. Unknown to him the slips of paper are individual orderings, the book constitutes the SWF and the output which he pushes back under the door is the social ordering. Now, just as Searle thought that no understanding was taking place as he personally did not understand any Chinese, Little can claim that no preferring is going on in the SWF Room, as he cannot perceive it. Just as the answers Searle provides to the questions were not his answers are answers, let alone what they say) so the social preferences provided by Little are not his they are preferences, let alone what they say). All Little experiences is (a) his own preference which has been submitted for pro 69 the utter tedium of carrying out the mechanical processes dictated by the book of rules. The answer is the same: it is not to be expected that Little will experience himself preferring anything since the preference formulated in the SWF Room is not his preference. The preference attaches to the whole system: all the individuals who are asked in some way to code their preferences, the formula for aggregating them, the room and its furnishings, Little (or the computer we would normally expect to do his job), and so on. What is the special ingredient whose absence prevents the output of the SWF Room from being a genuine preference? Little does not tell us. In conclusion, therefore, we have seen that Little adopts an illicit dualism which privileges the level of the individual person. His approach implies that there are two fundamentally diverse kinds of thing in the world: individual humans, which can prefer, and everything else, which cannot. Systemists such as Hofstadter and Dennett have argued strongly that all sorts of systems including genes and memes, and complexes of genes and memes, individual organisms and collectives of individual organisms, species and populations can be sensibly thought of as having interests and hence as preferring one state of affairs to another. For Little, however, the privileged status of the individual is simply an assumption without explanation. 3.8 How serious a prob impossibility theorem by rejecting the concepts of social rationality and of a social welfare function. I have also suggested that this rejection is ultimately untenable, as it illegitimately privileges the individual and adopts a dualistic standpoint. We need now to say something about the seriousness of the challenge the impossibility theorem poses for the invisible hand theorem. In m be locked into a situation where their individually rational behaviour leads to socially sub-optimal outcomes. Further it shows that this occurs when there is interdependence but no reciprocity, when decision making is social in content but privatised in form. 70 which is guaranteed to produce an acceptable SWF, based only on ordinal individual preferences, for every conceivable constellation of preferences. Is this so serious? That depends on (a) whether the constellations of preferences encountered in reality are anything like the constellations that cause the Arrow problem, and (b) whether the restriction to ordinal preferences is a legitimate one. On (a), I have already explained, above, that the problem lies in non-single-peaked preferences, and that such preferences do occur widely in reality. Non-single-peaked (or none. Babies are indivisible, a fact that Solomon was able to use in judging a difficult case. Indivisibilities are ubiquitous in a heterogeneous world. Non-single-peaked preferences illustrated in Table 3 and Figure 1, above or in the example below. Think of them as parties or candidates standing for election. Voting would produce a two-to-one majority for x over y, for y over z and for z over x. Majority voting cannot produce a much paradoxical about it. All it says is that if people have different preferences, they may not be able to agree. Indeed, one can imagine a simpler case: two agents, A and B have preferences over two alternatives regarding a £20 note, (i) that A has the £20, and (ii) that B has it. Again, they will not agree. Nothing very profound seems to be going on here. The paradox of voting, and hence the Arrow theorem, which incorporates it, only illustrates the problems that arise when agents have conflicting interests; the bite in and converging interests. On (b), the seriousness of the challenge posed depends on how strictly neoclassical one is. The neoclassical paradigm depends upon the assumption of ordinal and interpersonally non-comparable preferences. Whether it is right to do so is debatable and has inspired a huge literature, and it would be inappropriate to take up this very controversial issue here. I will simply note that we do actually make interpersonal comparisons so frequently and unselfconsciously as to invite the speculation that the brain contains special organs for that very purpose. If I bang my finger with a hammer, 71 and you lose your leg in a road traffic accident, few would hesitate to say who was likely to be worse off, or who had suffered the larger decrement in happiness. But for those neoclassicals also committed to the ordinalist paradigm, as in fact most are, the Arrow result is indeed a problem. says that in any consistent formal system (of at least the level of complexity of arithmetic) there must be true statements whose truth cannot be proven within the system, that is, it cannot be both complete and consistent. The SWF is a formal system and must at the very least impound arithmetic how else is it to aggregate preferences? condition U) and consistent (condition O) while at the same time satisfying the other three conditions (P, I, D). Gödel proceeds by formulating a statement in a formal language, say, PC (for predicate to prove the statement without proving a contradiction for if one proved that it was not provable, by proving it one would have proved that it was provable. Hence a statement and its negation would both be true and PC would be inconsistent. Hence it is the case that it is unprovable; but that is just what it asserts, so it is also true. So Gödel works by setting up a formal system and then importing a paradox, namely, a setting up a formal system and importing a paradox: the paradox of voting. The paradox of voting, as we have seen, says that if three voters hold the preference orderings A: x > y > z B: y > z > x C: z > x > y then majority voting on each pair yields the binary social preference rankings 72 S: x > y, y > z, and z > x, in each case by a majority of 2 to 1. Hence, for society, every option is preferred to every other option: the social ranking is intransitive (and hence not an ordering). In the Arrow proof, A, B and C are, respectively, one member of the smallest decisive set, the complement of the smallest decisive set, and the smallest decisive set minus one person, A. The decisive set referred to is decisive for x against y. The pattern of choices set out above is then deployed to show that wherever z is placed on the social preference ranking, this must imply that either A or C is decisive, contradicting the assumption that they were both smaller than the smallest decisive set. This result is then used to show that if all five conditions are satisfied simultaneously, the system is inconsistent. Completeness in the Gödel context means that all and only the true statements are provable. Completeness in the Arrow context means that for every possible pattern of preferences there is a unique social ordering. Incompleteness is shown in Gödel by -defeating statement: if it can be proved (ie, if the system is complete) then the system must be inconsistent. Incompleteness is shown in Arrow by -defeating pattern of preferences: if an SWF is derived from it the system is inconsistent. It has been suggested that the Arrow impossibility theorem presents as much a problem for proponents of planning as for those of laissez-faire 41 . This is false, even apart from the cardinal-ordinal issue mentioned above 42 intellect standing outside the formal system in question can detect the truth status of the that the formal system is incomplete. Further, we can see how to make it more complete by incorporating true but unprovable statements into the system as axioms, thereby expanding the system. Similarly, as we encounter paradoxical preference constellations, we can expand the preference aggregating procedure to encompass them by identifying 41 In correspondence in response to an earlier version of this chapter. 42 -personal comparisons, if the second half of the slogan is to mean anything. 73 cyclical preferences, taking their transitive closure and impounding the result as a new axiom of the aggregating procedure. This, to be sure, will still leave the aggregation procedure vulnerable to further paradoxical preference constellations, but as soon as one is encountered it can be treated in the same way. If the number of policy options is finite then eventually all comparisons will have been made and we will have a complete social welfare ordering. Otherwise, the result is an infinite regress with each obstacle being overcome, only to give way potentially, at least to a new one. It is, perhaps, in the nature of things that we can get there, not all in one go, but only as an unending series of approximations. 3.9 Conclusion In this chapter I have argued that Arrovian sciences to argue that we should abandon the concept of collective rationality itself. Micro-level rationality is all that we can ask for. The policy prescription, therefore consists of maximum freedom for individuals to maximise their individual utilities, coupled with passive acceptance of whatever emerges at the macro level. As Barry and critique of the idea of a SWF, these writers accuse Arrow, and hence, implicitly, mainstream neoclassical economics, of standing in a tradition leading from Rousseau and Hegel to modern totalitarianism. lity in principle designed to show the impossibility in principle of artificial intelligence. Both arguments fail for the same reason: they involve a dualistic vision of the world in which individual humans are set apart from the rest of nature by some innate quality such as the absence of which is supposed to prevent systems other than individual humans from being conscious or forming purposes. 74 Fi still an important challenge for the neoclassical paradigm, the Arrovian theorem is of less the Arrow combination of conflict and convergence of agent interests. 75 Chapter 4 The Invisible Hand of God in Adam Smith 43 4.1 Introduction The two previous chapters have looked at the midand late-twentieth century response of political economy to two perceived anomalies which have been seen as challenges to In the present chapter attention returns to the roots of this tradition in the writings of the eighteenth century father of nineteenth and twentieth century economics: Adam Smith. Adam Smith has been lauded by the economists both orthodox and heterodox of the last surrounds Smith, endowing his name with an authority not enjoyed by any other worldly example Fischer and Dornbusch (1991: 9, 50, 260), and in the 1996 Nobel Prize Lecture (Mirrlees, 1997: 1311). On the heterodox side, it is well known that Marx, for example, ghly, 501). I want to argue here, however, that there is a very significant apologetic 44 aspect 43 An earlier version of this chapter, and material derived from it have appeared as Denis (1997, 1999a, and 2000). The chapter as a whole is at point of writing under consideration at Research in the History of Economic Thought and Methodology. 44 The question of what it is that is to be defended, or apologised for, is a subsidiary theme of the chapter. Essentially, Smith is trying to defend two potentially incompatible things: the existing system 76 to Smith, which has as yet received little attention, and, further, that this apologetic and macro levels, between individual actions and social consequences. the ease with which Smith satisfies himself that we are living in the best of all possible worlds and just as easy to dismiss such passages as obiter dicta unrelated to his basic theme. Here, for example, is a famous passage, the second, in fact, of the three occasions on given in full: necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting f TMS IV.1.10) So the poor should be content with their lot they are just as well off as the rich in the things that really matter. Perhaps the typical reaction on reading this is to dismiss it as a vulgar aside, a mere personal prejudice, having researches. This, however, would be profoundly mistaken. The thesis of this chapter is an be understood as aiming, not so much at discovery of the world, but at reconciliation with it indeed, he plainly says as much in particular The History of Astronomy, The Theory of Moral Sentiments, and, to a lesser extent, The Wealth of Nations that this was indeed his approach. The next section constitutes a bibliographical preamble discussing the relationship of each of these three works to Weltanschauung. Then a section on The History of Astronomy argues that in his major methodological work Smith presents a view of science as an activity aimed, in the first instance, at reconciling us with the world, rather than at theoretically of the world as a 77 harmonious machine operated by a utilitarian deity. This conception first arises and is presented with great clarity in The Theory of Moral Sentiments; it is then applied to, or rather, simply imposed upon, the social world in The Wealth of Nations. A subsequent section establishes the links between Smith and his contemporaries, showing how profoundly in tune he was with the Zeitgeist of the second half of the eighteenth century. The section also discusses his failure to deal with some critical contradictions in his system. The conclusion notes two possible responses to Smith: that an evolutionary mechanism can replace a utilitarian deity as a mechanism ensuring that macro optimality corresponds to micro rationality; and, alternatively, the recognition that there is no such automatic mechanism behoves us to construct one ourselves. A preliminary caveat is in order. My purpose is not to deny the enormous contribution which Smith has made to the development of economics. That would be absurd. A full account of Smith would present those contributions alongside what (as I argue in this circumscribed; namely, to trace one particular feature, albeit a key feature, thought. The object is to show how Smith believed that the hand of God would invisibly, TMS I.ii.3.4), ensure that uncoordinated (TMS VI.ii.3.1), and to show how this belief is related to his philosophy as a whole. 4.2 Bibliographical note I shall be referring to the two works which Adam Smith published in his lifetime, the Wealth of Nations and the Theories of Moral Sentiments hereafter referred to as WN and TMS, and one posthumous work, known, misleadingly, as the History of Astronomy, and referred to here as Astronomy. The edition of these works that I will refer to is that contained in Adam Smith (1976-1980) The Glasgow Edition of the Works and Correspondence of Adam Smith Oxford: Clarendon Press/OUP (reprinted (1981-82) Indianapolis: Liberty Fund). The relevant volumes of the Works are: 78 Volume I (1976) The Theory of Moral Sentiments, ed AL Macfie and DD Raphael 45 (hereafter TMS); Volume II (itself in two volumes) (1976) An Inquiry into the Nature and Causes of the Wealth of Nations, ed RH Campbell, AS Skinner and WB Todd (WN); Volume III (1980) Essays on Philosophical Subjects, ed WPD Wightman and JC Bryce (EPS). This volume includes the Astronomy, the (1756), and a number of other miscellaneous items by, and about, Adam Smith. This Works is regarded as the definitive edition: enormous scholarly efforts have been work in its most mature and finished form, with variations reported in footnotes and appropriate, to the Part, Section, Chapter, subsection and paragraph to preserve consistency with other editions. Editorial introductions are listed separately in the bibliography to this thesis and referred to as such for the sake of clarity. Adam Smith (1723-1790) published two books in his lifetime. His first, TMS, first published in 1759, was also his last: the 6th edition in 1790 contained extensive revisions and additions worked up by Smith in the last year of his life. WN was first published in 1776; the 5th edition appeared in 1789 and a 6th, posthumous, edition in 1791. The History of Astronomy is a fragment of an uncompleted larger work entitled The Principles which Lead and Direct Philosophical Enquiries; Illustrated by the History of Astronomy, by the History of the Ancient Physics, and by the History of the Ancient Logics and Metaphysics. The fragments come to just under 100 pages, most of which consists of the part on the History of Astronomy, giving the whole its conventional name. Astronomy was first published in 1795 in a posthumous volume entitled Essays on 45 The editors themselves sometimes seem a little hazy as to who exactly the editors of the individual volumes are, and what their order of priority should be. According to TMS: ii, page of EPS the 79 Philosophical Subjects edited by Joseph Black and James Hutton. It was written at various times, but textual analysis reveals that even the later parts were written before 1758, and most likely the main part was drafted in the late 1740s (Wightman, 1980: 7-8). This makes it nearly contemporaneous with the composition of TMS (1st edition, 1759). Shortly before he died, Smith had the bulk of his papers burnt (EPS: 327n), only passing a few to his literary executors for them to make up their own minds on the question of possible publication. In an earlier (1773) letter to Hume, Smith specifically singled out Astronomy as being possibly worth publishing (Wightman, 1980: 27; EPS: 328n). The point here is to establish that the three works referred to can be viewed as the products of a unified system not as disparate milestones on an intellectual career culminating in WN in which TMS and Astronomy have interest only as stages in Smith stance I am arguing against here: TMS, he says, On the contrary: Astronomy and TMS are products of the same period and the same system of thought; the changes in TMS between the first and sixth editions are such only as to clarify and give more substance to this basic system; and the system remained unchanged in its basic outlines after five editions of the WN. - -problem based on ignorance and misunderstanding. Anybody who reads TMS, first in one of the earlier editions and then in edition 6, will not have the slightest inclination to be puzzled that the same man wrote this book and WN, or to suppose that he underwent any radical change of view about in edition 6 of 1790 as in edition 1 of 1759 .... It is also perfectly obvious that TMS is not isolated from WN Indeed, Viner (1958: 215), contradicting his main thesis of irreconcilability between WN and TMS, notes that Smith was a essence of his fully developed doctrine, as expounded in the Wealth of Nations lecture of 1749, at the same time that he was writing the Astronomy, and long before publication of TMS. Contrary to the view which sees major discontinuities between TMS and WN system of thought as a unity, rather than a process. It is that unity which we are to investigate here, and the question to be addressed is: How are micro and macro levels articulated in Smith, how does the invisible hand actually work? 80 4.3 economics sought to capture the essence of the scientific method in order to employ it in the sphere of economic research .... For Smith, the essence of science was the evocation of order, wonder46 (Mirowski, 1989: 198) The Principles which Lead and Direct Philosophical Enquiries; Illustrated by the History of Astronomy; by the History of the Ancient Physics; and by the History of the Ancient Logics and Metaphysics. The full 47 . As far as Smith is concerned in his discussion of successive schools of thought in these Histories, the purpose of a system of thought is not so much to disclose the truth of how the world is, but, principally, to soothe the imagination which had previously been agitated by wonder at the marvels of the world 48 . . measures the value of philosophical systems solely in relation to their Scottish Philosophy and British Physics, 1750-1880 p 123, cited in Raphael and Skinner, 1980: 12) 46 for Smith, wonder was a dis-ease of the imagination, caused by the incoherent appearances of nature, the purpose of 47 used almost 48 As we shall see in the next section, Smith held a harmonious view of nature. He would have denied that that there was any inconsistency between investigating the world and accepting it: investigation would simply reveal harmony. The confidence that reason would confirm the prior wisdom of religion and sentiment permitted Smith, like many philosophers and scientists of the period, from Newton to Hegel, to make genuine discoveries. This ambivalence as to the status of reason leads to a fundamental 168). I submit, nevertheless, that reading works such as the Astronomy allows us to see that it was 81 At the level of appearances, Smith says, the world throws up phenomena which appear incoherent and therefore inflame the imagination. This inflammation is to be regarded as nter anything that is nor familiar or expected, Smith argues, we are struck by the feelings we call Surprise and Wonder. soothe the imagination by suggesting connections between things, and by tracing the unknown back to the familiar, so that the observer may regain his tranquillity: abound with events which appear solitary and incoherent ... which therefore disturb the easy movement of the imagination .... Philosophy, by representing the invisible chains which bind together all these disjointed objects, endeavours to introduce order into this chaos of jarring and discordant appearances, to allay this tumult of the imagination, and to restore it ... to [its former] tone of tranquillity and composure ... Philosophy, therefore, (Astronomy II.12) Or, more pi Astronomy IV.34). We categorizing things we come to be For Smith, therefore, it is just irrelevant to talk about the truth or otherwise of the findings of a science what matters is its success which we should bear in mind when considering the sequence of schools of thought in a science such as astronomy: examine, therefore, all the different systems of nature, which ... have successively been adopted by the learned and ingenious; and, without regarding their absurdity or probability, their agreement or inconsistency with truth and reality, let us consider them only in that particular point of view which belongs to our subject; and content ourselves with inquiring how far each of them was fitted to sooth the imagination, and to render the ded) system as if it embodied real knowledge of the world: 82 ave been endeavouring to represent all philosophical systems as mere inventions of the imagination, to connect together the otherwise disjointed and discordant phaenomena of nature, have insensibly been drawn in, to make use of language expressing the conn (Astronomy IV.76) ion is, as Raphael and Skinner (1980: 19-21) point out, that it would be mistaken, or at best off the point, him, science starts off, as indeed all science must, with the level of appearances: but then, instead of penetrating those appearances to reality, the truth, to the essence of the thing, science remains at the level of appearances, merely contrasting one set of appearances with another. In place of a congeries of apparently incoherent, isolated phenomena, Smithian science gives us a coherent and interconnected vision of the world 49 . But, for Smith, that vision is no more real, no less apparent than either the raw appearances or the connecting principles proposed by rival explanations. The criterion for choosing between these appearances is not their greater or lesser degree of truth, but a purely aesthetic consideration: which is the more pleasing? Thus a scientific explanation of a phenomenon is to be preferred to none, and a later system is preferred to an earlier one, because and to the extent to which they are able to provoke greater admiration (Astronomy II.12). Though much to be preferred to the earlier systems, there is no suggestion the idea is without interest to Smith that the Newtonian system is more profound, indeed, it may well be replaced when an even more pleasing system is gin, up to that summit of perfection to which it is at present supposed to have arrived [with Newton], and to (ibid). In every period, Smith says, science is believed most pleasing. Whether there is any progress in this is left moot. 49 Doing so is already a step towards penetrating appearances to the reality hidden behind them, but we th the discoveries he made despite them. 83 It has been suggested 50 that Smith denies that there is any such thing as the truth, an objective reality to the world apart from the models and images of it which we construct. This in turn, it is argued, is a very modern view of the world, popular, for example among some twentieth century physicists. His disdain for the truth has also been linked 51 . For Smith, there is indeed objective truth, but human, finite minds cannot grasp, or even approach it: only the infinite mind of God can infinite, between the human and the divine. This was a very common medieval view of the nature of infinity; see Rucker (1995: 4), for example, for a discussion of this point in Thomas Aquinas. This contrast will be touched on in the discussion of TMS below; indeed, it forms the basis for the very restricted role of reason and philosophy (the sphere of finitude), relative to that o system. his thought: that they have invented science fiction or any other sort of fiction. But he does contrast an invention by the imagination with a discovery of the truth, and so he implies that scientific Raphael and Skinner make two claims here: (a) that Smith implies that scientific theory cannot be true, and (b) that Smith does not say that scientists are writing science fiction. In my opinion these two claims are incompatible then it must, surely, be fiction. But aside from that, the second claim is actually false. 52 and he meant no sneer by this, for he admired Descartes greatly 53 : 50 By various correspondents in response to earlier versions of this chapter. 51 invisible hand theory, Macfie (1967 scepticism as to the validity of the doctrines of that faith. 52 In a similar vein, David 84 contain a word of truth ... should nevertheless have been so universally received by all the learned in Europe greedily receive a work which we justly esteem one of the most entertaining romances that Lectures in Rhetoric and Belles Lettres (1748-1750), cited in editorial footnote 3, EPS: 244) Again, later, in his (1756: §5), he says of the Cartesian and conclusions, it had the same superiority over the Peripatetic system, [as] the Newtonian EPS p244, emphasis added). Smith regarded the narrative as the appropriate focus for the attention of an investigating philosopher. Although completely untrue, a romance, the principles and as as much an improvement over cuous pretended causes of those wonderful effects, not only do not actually exist, but are utterly impossible, and if they did exist, could produce no such effects as are ascribed to TMS VII.ii.4.14). Contra producing, but science fiction with a particular slant, science fiction with the purpose of soothing the imagination and reconciling us to the world about us. As Mirowski points out, the primary function of science for Smith is the evocation of order. links between his methodology and his underlying intellectual goals. The purpose of redundant, and, in particular, that Sm -economic writings can tell us nothing 1970: 31) 53 See adequate credit as the prime suspect in the smuggling of Cartesian economics into the backyard of 85 writings on methodology set out a research programme which Smith then followed in his psychological (TMS) and economic (WN) the essay on the history of astronomy with a theory of scientific systems is himself 4.4 Weltanschauung 4.4.1 All is for the best in this world and we should accept our lot with joy 54 ; the points where Smith does, and does not, agree with the Stoics, are not, however, germane to the theme presented here 55 . Smith believes that the universe, or Nature, is an enormous, sophisticated and subtle machine. This machine is supervised by an omnipotent, omniscient and beneficent, indeed, a utilitarian 56 , deity. The sole aim of the machine (and, probably, of the deity himself, see TMS VII.ii.3.18), is the maximisation of happiness: immediate care and protection of that great, benevolent, and all-wise being, who directs all the movements of nature; and who is determined, by his own unalterable perfections, to TMS VI.ii.3.1) 54 This assertion has been questioned by some correspondents; nevertheless, I think it clear that Stoicism luence -6). The argument is also set out in Clarke (1996, 1998). In any case, acceptance of this point is not a precondition for understanding or accepting the argument presented in the remainder of the present chapter. 55 See Macfie (1959: 225) for some of the ways Smith modifies Stoic doctrine. 56 Smith himself is certainly not a utilitarian. That would require him to hold a consequentialist view of morality rather than the deontological view he actually does hold. See Sen and Williams (1982: 3-4) for the argument that utilitarianism lies at the intersection of welfarism and consequentialism. It would also require him to believe, what he does not believe, that it is possible for human actions and institutions to increase the total quantity of happiness in the world. The deity, however, is another matter. For more on the relation between Smith a Theory of Economic Policy (Macfie, 1967: 152-161). 86 eternity, contrived and conducted the immense machine of the universe, so as at all times to produce the greatest TMS VI.ii.3.5) So the world is perfect: we do Smith is a true Panglossian. Since the world is really perfect, our apparent troubles stem from our finite, partial view of the world. The purpose of philosophy, therefore, is to cultivate a fine indifference to whatever occurs: mes willing that his own private interest should be sacrificed to the public interest of his own particular order or society. He is at all times willing, too, that the interest of this order or society should be sacrificed to the greater interest of the state or sovereignty, of which it is only a subordinate part. He should, therefore, be equally willing that all those inferior interests should be sacrificed to the greater interest of the universe, to the interest of that great society of all sensible and intelligent beings, of which God himself is the immediate administrator and director .... [Since the] benevolent and all-wise Being can admit into the system of his government, no partial evil which is not necessary for the universal good, he [sc the wise and virtuous man] must consider all the misfortunes which may befal himself, his friends, his society, or his country, as necessary for the prosperity of the universe, and therefore as what he ought, not only to submit to with resignation, but as what he himself, if he had known all the connexions and dependencies of things, ought sincerely and devoutly to have wished TMS VI.ii.3.3) Smith sustains this theme by making use of the analogy of soldiers marching cheerfully off to be slaughtered in defe No conductor of an army can deserve more unlimited trust, more ardent and zealous affection, than the great Conductor of the universe. In the greatest public as well as private disasters, a wise man ought to consider that he himself, his friends and countrymen, have only been ordered upon the forlorn station of the universe; that had it not been necessary for the good of the whole, they would not have been so ordered; and that it is their duty, not only with humble resignation to submit to this allotment, but to The message is clear: what is good is good and what is bad is good as well; everything is for the best, so whatever happens rejoice, and accept. Lest the reader should be passed by the time he came to write WN, I should point out that, though similar ideas can be found in the earlier editions, these passages themselves are taken from Part VI, a new section written by Smith, in the last year of his life, for the 1790 edition. Smith has another tactic for convincing us that all is for the best. His first move is to say 87 introduce an afterlife to balance the books. All our virtue and vice will be appropriately rewarded, if not here, then hereafter: expectation of a life to come: a hope and expectation deeply rooted in human nature .... TMS that it [sc injustice] will be punished, even in a life to come. Our sense of its ill desert pursues it ... even beyond the grave .... The justice of God, however, we think, still requires, that he should hereafter avenge the injuries of the widow and the fatherless, who are here so TMS II.ii.3.12) Smith combines the idea of justice in the hereafter with that of the limits to reason and the scope for religion and sentiment, which we will examine in more detail below. To those such as the wrongly condemned man, Smith says, consolation .... Religion can alone afford them any effectual comfort. She alone can tell them, that it is of little importance what man may think of their conduct, while the allseeing Judge of the world approves of it. She alone can present to them the view of another world ... where their innocence is in due time to be declared, and their virtue to be TMS III.2.12). Indeed, we are not only led to a belief in a life after death by our religious sentiments, but by an intellectual consideration of the idea of justice, itself: injustice, we naturally appeal to heaven, and hope, that the great Author of our nature will himself execute hereafter, what all the principles which he has given us for the direction of our conduct, prompt us to attempt even here; that he will complete the plan which he himself has thus taught us to begin; and will, in a life to come, render to everyone according to the works which he has performed in this world. And thus we are led to the belief of a future state, not only by the weakness, by the hopes and fears of human nature, but by the noblest and best principles which belong to it, by the love of virtue, and by the TMS III.5.10) 4.4.2 Why, then, bother with considerations of morality? The idea that things seem good or bad to us only because of our limited perspective, and everything is good, is extremely important in Smith. However, it does raise the question of why we should then be concerned as to the moral qualities of our behaviour. The argument proceeds in three steps. Firstly, in answer to the question, Why do we approve 88 of moral actions and disapprove of immoral actions?, Smith says that our moral response to an action is a sentimental reaction, that is, it is produced by our instinctive feelings, in particular, the emotion of sympathy. By sympathy we enter, to a limited degree, into the feelings of those affected by the action in question, the victims or beneficiaries: e of the merit of good actions is founded upon a sympathy with the gratitude of the persons who receive the benefit of them ... Gratitude and resentment ... are ... counterparts to one another; and if our sense of merit arises from a sympathy with the one, our sense of demerit [must] ... proceed from a fellowTMS II.i.5.7) These emotions are placed within us by the deity as part of the grand design. Our instinctive response to murder, for example, is directly implanted in us by a Nature seen as an active and conscious principle in the world: human heart ... an immediate and instinctive approbation of the sacred and necessary law of retaliat TMS TMS II.ii.1.10) Secondly, however, Smith tells us that the wise man will recognise that whatever happens to him is for the best, and that however unpleasant it appears, that is only because we as limited beings do not see the distant, but only the proximate, consequences and ramifications of actions. Hence, morality is based only on a consideration of the proximate consequences of the action whose morality we are to appraise. If the first round effects are unjustly detrimental to some person or group, the subsequent ramifications will prove beneficial to themselves or others to a degree that more than counterbalances the evil done at first. Nevertheless, our appraisal of the morality of the y the all-ruling providence of a wise, powerful and good God, every single event ought to be regarded, as making a necessary part of the plan of the universe, and as tending to promote the general order and happiness of the whole: that the vices and follies of mankind, therefore, made as necessary a part of this plan as their wisdom or their virtue; and by that eternal art which educes good from ill, were made to tend equally to the prosperity and perfection of the great system of nature. No speculation of this kind, however, how deeply soever it might be rooted in the mind, could diminish our natural abhorrence for vice, whose immediate effects are so destructive, and whose TMS I.ii.3.4) 89 Thus Smith argues that our abhorrence of vice is due to our failure to follow through all the ramifications of an immoral act. If we were to do so, he implies, we would accept vice with equanimity as generating remote positive effects which at least outweigh the emotional instincts. The third step is thus to find a way to endorse the morality of a moral action. Why should we bother to make the distinction between moral and immoral actions if their effects are the same? Smith has no clear answer to this; he does, however, have two unclear answers. The first approach is to duck the issue and say that this is a positive, not a normative science, that is moral which is considered moral: at present examining upon what principles a perfect being would approve of the punishment of bad actions; but upon what principles so weak and imperfect a creature as TMS II.i.5.10) Essentially, what distinguishes the moral from the immoral here is an aesthetic matter: it is a question of what feels better, even though reason can make no distinction. Perhaps Smith says more than he intends to here for there is a clear logical implication in the contrast he employs: although we, imperfect creatures, may regard this action as moral and that as immoral, a perfect being, conscious of all their most distant consequences, would see matters in quite another light and, presumably, would not make this distinction. That Smith could not accept this implication is shown by his alternative response. For the second approach is, precisely, to argue that by acting morally we place ourselves on the same side, as it were, as the deity: effectual means for promoting the happiness of mankind, and may therefore be said, in some sense, to co-operate with the Deity, and to advance, as far as in our power, the plan of Providence. By acting otherways, on the contrary, we seem to obstruct, in some measure, the scheme which the Author of nature has established for the happiness and perfection (TMS III.5.7) True, this is not very logical, for it evades the question, how we could conceivably displease a god by our choice of action, given that, according to Smith, he is in a position to dictate exactly the mixture of feelings, the strengths and weaknesses and so on, making up each personality, and hence the behaviour to which each person will be led. 90 Again, it seems inconsistent to speak of more and less effectual means for promoting the happiness of humanity when God has already determined to maximise the quantity of happiness in the world; the means chosen are presumably those chosen by him, and hence rsement of morality is sentimental, based on its feeling of rightness, and revealed divine sanction, without rational justification. Morality and virtue are essentially ornaments, having no rational great ornaments of humanity, and which seem to raise it to a resemblance of divine perfection, [are] the love of virtue and TMS III.5.4). In spite of his harmonious view of nature, Smith senses that there is a tension between reason and sentiment, between the logic of his position and his religious feelings. Does side of sentiment: which they tend to produce; that he loves the one, only because it promotes the happiness of society, which his benevolence prompts him to desire; and that he hates the other, only because it occasions the misery of mankind, which the same divine quality renders the object of his aversion; is not the doctrine of nature, but of an artificial ... refinement of philosophy. All our natural sentiments prompt us to believe, that as perfect virtue is supposed necessarily to appear to the Deity, as it does to us, for its own sake, and without further view, the natural and proper object of love and reward, so must vice, of hatred and TMS II.ii.3.13, editions 1-5, omitted in 6.) Smith cannot logically say that virtue is preferable to vice because it leads to the happiness of society 57 , as this would be inconsistent with his claim that God has in any case arranged everything to maximise happiness in the world at every instant. But it is equally quite illogical for him to say that virtue appears to God as it does to us for the only reason it appears thus to us, according to Smith, is that that is how God has made us, in order that we may play our predestined part in the great plan. But there is no supposed to play a subordinate part in. * * * 57 91 To conclude, the message of the present subsection is that, for Smith, morality has an aesthetic basis. For example, Smith lists as one of the four sources of approbation, that to promote the happiness either of the individual or of the society, they appear to derive a beauty from this utility, not unlike that which we ascribe to any well- (TMS VII.iii.3.16) Macfie is at pains to point out that beauty is more important to Smith than usefulness, indeed, utility seems only to be considered to the extent that it, itself, entails beauty. In Smith, Macfie says, pleasant. Here, indeed, Smith is consistent and specific. I that he constantly returns - So what is valuable from the point of view of references to Smith are from TMS VII.iii.1.2) beauty that has final value, utility instrumental value (apart from its own inherent beauty 4.4.3 Every cloud has a silver lining I said in the previous subsection that, according to Smith, God was in a position to choose the mental composition of individual persons, and hence to lead them to desirable behaviours. We now need further to investigate this t TMS VI.ii.2.4). This is important for a number of reasons. Firstly, I need to justify this claim of Panglossian view that everything is predetermined by the deity, predestined to turn out for the best. And, thirdly, because, again, these arguments further illust subsection of this Chapter, and TMS II.ii.3.1ff. 92 mentioned before, that if we are misled by appearances, then this deception, too, is part of the plan and hence a Good Thing. A major instance concerns the predisposition to benevolence and the very much stronger one, not just to obey, TMS II.ii.2.3), which God has placed in our personal make- (TMS to that s TMS II.ii.3.1). While it would be nice if without societydifferent men, as among different merchants, from a sense of its utility, without any TMS II.ii.3.2-3). Nature has therefore endowed men with consciences in order that they may behave justly: consciousness of deserved reward, she has not thought it necessary to guard and enforce the practice of it by the terrors of merited punishment in case it should be neglected. It is the ornament which embellishes, not the foundation which supports the building, and which it was, therefore, sufficient to recommend, but by no means necessary to impose. Justice, on the contrary, is the main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society, that fabric which to raise and support seems in this world ... to have been the peculiar and darling care of Nature, must in a moment crumble into atoms. In order to enforce the observation of justice, therefore, Nature has implanted in the human breast that consciousness of ill-desert, those terrors of merited punishment which attend upon its violation, as the great safe-guards of the association of mankind, to protect t (TMS II.ii.3.4) It is clear that Smith is saying here that Nature, in order to preserve society, has placed in our personalities a desire for justice, even if it is unclear whether this is based on a love of justice for its own sake, or a fear of retribution. A sense of justice is an endowment of nature, but nature seen as an active force in the world, conscious and intentional. Speaking of TMS, Heilbroner says assume human nature to contain such a saving element. The imperatives of duty and the voice of conscience must be there from the start, available to us in critical situations. They 93 must be part of the human makeup, placed there by the Deity that has arranged for our collective well- order is in reality of more basic importance to him. Speaking of the tendency fo It checks the spirit of innovation. It tends to preserve whatever is the established balance among the different orders and societies into which the state is divided; and while it sometimes appears to obstruct some alterations in government which may be fashionable and popular at the time, it contributes in reality to the stability and permanency of the TMS VI.ii.2.10) The assumption is that what is, is likely to be best, and should in general be preserved, even at the expense of justice. Having said that, however, we should note that, for Smith, just as there can be no profound antagonism between investigation and reconciliation, there cannot be any serious conflict between order and justice. Indeed, everyone always gets their just deserts in the end: every virtue naturally meets with its proper reward, with the recompense which is most fit to encourage and promote it; and this too so surely, that it requires a very extraordinary TMS III.5.8) And should such extraordinary circumstances occur, everything can be set to rights, and the books balanced, as we have already seen, in the hereafter. It is precisely this concept of heaven as a mechanism for balancing the books that allows Smith to defend principles, such as the partiality of the orders of society in defence of their own interests, and the instead of on vice and folly (TMS II.ii.3.4), when they conflict with the claims of justice. When Smith speaks of justice he is thinking of order, when he talks of order he is thinking of property: rich, though the acquisition might be much more beneficial to the one than the loss could be hurtful to the other .... by [doing so] he renders himself the proper object of the contempt and indignation of mankind; as well as of the punishment which that contempt and indignation must naturally dispose them to inflict, for having thus violated one of those sacred rules, upon the tolerable 94 observation of which depend the whole security and peace of human society. There is no commonly honest man who does not more dread the inward disgrace of such an action, the indelible stain which it would for ever stamp upon his own mind, than the greatest external calamity which, without any fault of his own, could possibly befal him; and who does not inwardly feel [that such an action] is more contrary to nature, than death, than TMS III.3.6). Thus theft by the poor from the rich even when, as he concedes, it would augment social welfare calls down more Smithian abuse upon their heads than any other crime. (TMS TMS II.i.2.5), is dealt with matter-of-factly without any of the excitement shown in his discussion of theft from the rich. Again, it is well known that Smith regarded the state as an institution guarding the rich from the poor: can be no government, the very end of which is to secure Lectures on Jurisprudence, cited in WN is in reality instituted for the defence of the rich against the poor, or of those who have WN V.i.b.12) This fact, however, has been subjected to the almost comical misinterpretation that somehow this represented a complaint, a plea on behalf of the underdog. Viner (1958: government activity, and Raphael (1985: 8) says that the WN ther from the truth. The context of these passages shows unambiguously that Smith was simply, and, in his view, uncontroversially, setting out how things were and how they should be: enemies, whom, though he never provoked, he can never appease, and from whose injustice he can be protected only by the powerful arm of the civil magistrate continually held up to chastise it [sc the injustice of those enemies]. The acquisition of valuable and extensive property, therefore, necessarily requires the establish Robert Heilbroner gets closer to the real meaning of these passages: aws and government 95 58 contemporaries imagined a society in which exploitation and oppression would not be * * * Theory of Moral Sentiments, Smith develops the doctrine of a beneficent order in nature, manifesting itself through the operation of the forces of external nature and the innate propensities i that Providence has so fashioned the constitution of external nature as to make its processes favourable to man, and has implanted ab initio in human nature such sentiments as would bring about, through their ordinary working, the happiness and welfare of -17) Our strengths are thus implanted in us by divine providence. Not only our strengths but our weaknesses, too, however, are endowed by nature. A particularly striking example concerns the tendency of a fickle public to admire people merely for being lucky: she is either favourable or adverse, can render the same character the object, either of general love and admiration, or of universal hatred and contempt. This great disorder in our moral sentiments is by no means, however, without its utility; and we may on this as well as on many other occasions, admire the wisdom of God even in the weakness and folly of man. Our admiration of success is founded upon the same principle with our respect for wealth and greatness, and is equally necessary for establishing the distinction of ranks and the order of society. By this admiration of success we are taught to submit more easily to those superiors, whom the course of human affairs may assign to us; to regard with reverence, and sometimes even with a sort of respectful affection, that fortunate violence which we are no longer capable of resisting; not only the violence of such splendid characters as those of a Caesar or an Alexander, but often that of the most TMS VI.iii.30) This is a remarkable passage. Adm folly, like everything else, has been given us by God for a reason. The good thing about this weakness is that it reconciles us with our rulers, even those who only achieved this tyrants such as Tamerlane (or Timur Lenk), who reputedly made mountains of his As Smith reminds us, this view of the role of fortune in moral sentiments parallels that of public admiration of the great in preference to the good: 58 The reference is to Smith (1976) Lectures on Jurisprudence Oxford: Clarendon Press, p208. 96 despise, or, at least, to neglect persons of poor and mean condition ... is ... the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in TMS I.iii.3.1) And they were wrong since, as we have seen, even injustice can be part of a higher Good. Smith, himself, incidentally, was happy to contribute to this contempt for the poor (though the case of the rich who become poor was another matter altogether): overty, excites little compassion. Its complaints are too apt to be the objects rather of contempt than of fellow-feeling. We despise a beggar; and ... he is scarce ever the object of any serious commiseration. The fall from riches to poverty, as it commonly occasions the most real distress to the sufferer, so it seldom fails TMS III.3.18) -given and has its sary both to establish and maintain the distinction of ranks and the TMS I.iii.3.1). upon the respect which we naturally conceive for [the greatly fortunate ... the rich and powerful] .... The peace and order of society is of more importance than even the relief of the miserable .... Moralists ... warn us against the fascination of greatness. This fascination, indeed, is so powerful, that the rich and the great are too often preferred to the wise and the virtuous. Nature has wisely judged that the distinction of ranks, the peace and order of society would rest more securely upon the plain and palpable difference of birth and fortune, than upon the invisible and often uncertain difference of wisdom and virtue. The undistinguishing eyes of the great mob of mankind can well enough perceive the former: it is with difficulty that the nice discernment of the wise and the virtuous can sometimes distinguish the latter. In the order of all those recommendations, the TMS VI.ii.1.20) So even this particular weakness, which Smith has earlier damned in the most severe be a ruling stratum, and Nature has judged it best to have an obvious one to which the masses can easily be led to give their loyalty. There is a further point concerning the admiration of wealth which il view that deceptive appearances can still be desirable. For Smith, the outward 97 appearance of great disparity in wealth between the rich and the poor conceals a very large measure of real equality in welfare. In the passage from TMS (IV.1.10) cited at the human life, they [sc the poor] are in no respect inferior to those who would seem so by divine providence or by the rich who are, in turn, led by divine providence so that we all get an equal that great happiness and grief are occasioned not by a state or condition but by a change in condition. -failing certainty with which all men, sooner or later, accommodate themselves to whatever becomes their permanent situation, may, perhaps, induce us to think that the Stoics were, at least, thus far very nearly in the right; that, between one permanent situation and another, there was, with regard to real happiness, no essential difference .... Happiness consists in tranquillity and enjoyment. Without tranquillity there can be no enjoyment; and where there is perfect tranquillity there is scarce any thing which is not capable of amusing. But in every permanent situation, where there is no expectation of change, the mind of every man, in a longer or shorter time, returns to its natural and usual st TMS III.3.30) He illustrates the point with an anecdote about an imprisoned count who amused himself it is only changes which matter, is reflected in his statement, reported earlier, that the poor are, at best, ignored, while the impoverished rich are pitied. Smith draws the conclusion that much of the evil in life can be attributed to failure to understand this point: both the misery and disorders of human life, seems to arise from over-rating the difference between one permanent situation and another. Avarice overrates the difference between poverty and riches .... The person under the influence of those extravagant passions [sc avarice], is not only miserable in his actual situation, but is often disposed to disturb the peace of society, in order to arrive at that which he so foolishly admires ... [although] in all the ordinary situations of human life, a well-disposed mind may be equally ... contented .... In all the most glittering and exalted situation that our idle fancy can hold out to us, the pleasures from which we derive our happiness, are almost the same with those which, in our actual, though humble station, we have at all times at hand, TMS III.3.31) But in even this cloud there is a silver lining! It is in the extremity, or extravagance, of the emotion that the problem lies. Merely to be deceived by appearances, on the contrary, is often desirable: 98 condition of the rich .... He is enchanted with the distant idea of this felicity .... and, in order to arrive at it, he devotes himself for ever to the pursuit of wealth and greatness .... Through the whole of his life he pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquillity, that is at all times in his power, and which, if in the extremity of old age he should at last attain to it, he will find to be in no respect preferable to that humble security and contentment which he had abandoned for it. It is then ... that he begins at last to find that wealth and greatness are mere trinkets of frivolous utility .... And it is well that nature imposes upon us in this (TMS IV.1.8-10) h leads people to fulfil what they think are their own purposes, only to find they were fulfilling the purposes of a Hegel 59 Sabine, 1951: 519), both whom are known to have read and admired Smith 60 . This becomes clear in the first few pages of TMS (I.i.1.1-13), where we find that, according to Smith, the whole structure of moral sentiments is built on illusion. The basis for morality is sympathy, that is, our ability to a limited extent to enter into the emotions of other people. But this participation in the pains and pleasures of others is achieved solely by an act of the imagination, divorced from the material causes of those pains and pleasures in the person we sympathise with. This sympathy even extends to fictional characters, people in the past and the dead people, that is, who are incapable of feeling pain and pleasure in the first place, as well as to the insane, who are incapable of comprehending the degradation their illness has brought them to, and persons experiencing what we can never experience, such, if we are male, as a woman in labour. TMS I.i.1.13), the TMS I.i.1.11). We place ourselves, in the imagination, in the position of the other person, without in fact being in that position, and often without it being possible that we ever could be in such a position. We cannot help 59 the term itself is not employed there. 60 For Hegel, see the favourable comments on the political economy of Smith, Say and Ricardo in The Philosophy of Right (Knox, 1952: §189 and Addition); for Burke, see the long extracts from his review of TMS and letter to Smith of 1759 in Raphael and Macfie (1976: 27-28). 99 it: it is a god-given compulsion from which even the most hardened criminal is not completely immune (TMS I.i.1.1). ividual humans in an extremely cavalier manner, subjecting them to all sorts of illusions and deceptions, and other weaknesses and indignities, and in general treating them like puppets, often with quite deleterious consequences to the individual in question, supposedly in the interest of maximising human welfare. A classic case of this occurs at the end of the first chapter of TMS, where he applauds even the fear of death inciples in human nature [is] the dread of death, the great poison to the happiness, but the great restraint upon the injustice of mankind, which, while it afflicts and mortifies the TMS I.i.1.13). In connection with this we should perhaps recall the value which Smith really placed on the individual in the context of the overall system of which he is part. Before his God, TMS II.ii.3.12 61 ). Again, in The History of the Ancient Physics laws, directed to the conservation and prosperity of the whole, without regard to that [sc Astronomy: Physics 9). o consider the unrestrained by respect for individual lives and individual suffering in pursuit of what we TMS bestows upon it ... a rank and dignity TMS TMS VI.iii.8) Passages showing a quite militaristic outlook on society (TMS VI.ii.3-4), passages 100 introduced in the 6th edition of TMS above. Twentieth century indivi Smith: one wonders whether they have read him. As Alec Macfie says, individualist, is the very reverse of the truth. For him as for Hume, the interests of society Macfie, 1961: 23) * * * The message of this section is thus that, according to Smith, people do things for apparent reasons the real reasons being often hidden from them, and it is desirable that they should do so. They act justly from a sense of justice, but the reason why justice has been given us in this way is so that society may subsist; we admire the rich, the fortunate and the powerful, instead of the wise and virtuous, because it is in our nature to do so, but those feelings have been implanted in us to reconcile us to our lot; we mistake wealth for happiness, and are led to do so, so that trade and industry may flourish; we investigate the world thinking to discover its truth, so that by means of ever more pleasing stories about the world we may be reconciled to it. 4.4.4 Review Weltanschauung: 1 The universe is a machine administered by a deity. 2 The sole purpose of the machine is to maximise happiness. 3 All parts of that machine, including individual people, play their allotted roles. 4 We do what we do because it is what we are led to do by the feelings implanted in our nature by the deity. All is part of the plan. 5 Even human folly and weakness are part 6 Everyone has nearly the same level of happiness. 7 We should therefore be content with our lot. 61 eds 1-5 only. 101 8 The failure to realise this, mistaking wealth for happiness, leads people to be industrious: the economy depends on their being so deceived. 9 People mistake wealth and good fortune for wisdom and virtue. 10 This allows them to be reconciled to class distinctions and oppressive rulers. 11 We like morality and dislike immorality because we only see their proximate effects on human welfare. 12 This weakness is also a good thing as (a) it allows us to be moral and hence on the same side as God, and (b) morality, particularly justice, is a prerequisite for society. 13 Appearances are part of the divine plan. In the next subsection we will see how 4.4.5 The invisible hand Astronomy. There is a contrast between the role of the invisible hand here, on the one hand, and in TMS and WN, on the other: the Astronomy heathen gods. Fire burns, and water refreshes ... by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters. But ... irregular events were ascribed to his favour or his anger .... Those ... intelligent beings, whom they imagined, but knew not, were naturally supposed ... not to employ themselves in supporting the ordinary course of things, which went on of its own accord, but to stop, Smith says that this was because humans acted in this way to change the course of events which would have occurred without human intervention and so primitive peoples responsible for only the exceptional, with his own view of the whole world, including 102 societies and individuals within it, as a great machine designed and managed for the best interest of all by a divine administrator: confounded mankind, that they despaired of discovering in her operations any regular system. Their ignorance, and confusion of thought, necessarily gave birth to that pusillanimous superstition, which ascribes almost every unexpected event, to the arbitrary will of some designing, though invisible beings, who produced it for some private and particular purpose. The idea of an universal mind, of a God of all, who originally formed the whole, and who governs the whole by general laws, directed to the conservation and prosperity of the whole, without regard to that of any private individual, was a notion to Astronomy: Physics 9) So, firstly, not only the irregular, but, and much more importantly, the most regular occurrences are the work of the deity; and, secondly, human actions, too, far from being contrary to nature, are profoundly in harmony with it. Natural events and human actions alike and without exception 62 it [s - (Macfie, 1971: 598). In contrast to that in the Astronomy in TMS and WN is TMS, has already been given at the beginning of this chapter. In WN he says: 63] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than WN IV.ii.9) 62 We shall see later that Smith does admit exceptions and in this he is logically inconsistent. 63 ie, every capitalist. Smith naively adopts the standpoint of the individual capitalist and momentarily forgets that there exist other agents, who have no that the first of the two arguments for individual liberty which Smith gives here, is essentially a mercantilist argument: we do not need government intervention in foreign trade to give preference to domestic industry, because individual capitalists will be led by the invisible hand to prefer domestic industry without intervention. 103 In both cases he claims that the invisible hand will ensure that the unintended outcome of self-seeking behaviour will be socially desirable. Without it, in the TMS case, individuals would be subject to large differences in welfare; and in the WN case, the total wealth available to society would be smaller than it actually is (and more of it will fall into the hands of foreigners 64 ). It should by now be clear that the use of the phras universe is managed by a deity determined on the utilitarian objective of the maximisation of happiness, and our emotions and motives are predestined by that deity to lead us to behave in a manner consonant with the divine plan. The administration of the plan is carried out by God but, of course, we cannot see anything: his hands are invisible 65 : e that Smith gives to the covert intervention of the invisible hand requires no separate treatment. We have already seen how agents are ocially desirable ways, how the unintended consequences of our desire for justice, or riches, make society possible. The notion of an invisible hand is of a piece with this philosophy. This is essentially the view of the invisible hand, and of the continuity of the invisible hand between TMS and WN, taken by Peter Gay: conducted the immense machin private inclination and obey his most powerful passions, and yet benefit the social order. By taking care of his own happiness, man is led to promote the happiness of others this is the notorious without intending it, without even knowing it. All is for the best in the only possible world that God could have made. The Wealth of Nations, Adam Smith keeps these philosophical concerns alive, but with greater subtlety than before, with far greater respect for harsh truths and for the exceptions that modify all rules, and with an impressive command of social realities. Like Diderot, Adam Smith learned much in the 1760s; like Diderot, he did not discard his essential 64 it. 65 Smith even furnishes us with an account of why God is invisible (TMS III.2.31, eds 3-5 only). If we could see him, Smith says, we would be so dazzled that we would be unable to go about our normal business. 104 Heilbroner reads Smith in much the same way. The theme of the invisible hand, he writes, Moral Sentiments [m]an is by his human nature incapable of foreseeing the consequences of his actions beyond a very narrow range. How then does he know what course to follow, when he cannot use his faculties to anticipate the outcome of his own actions, much less those of his fellow actors? The question is answered in much the same way as the provision of a sense of duty and conscience. The Deity, when he created the world, gave to humankind a surer guide than nd refers to the means by despite the frailty of its reasoning powers. The means are a number of powerful instincts and promptings that the Deity has instilled within us, which we obey because we have to, quite unconscious of their longaction that would otherwise require a Godlike 60) The Wealth of Nations evidence of the Invisible Hand. No participant in the market has in mind power to effect the orderly p rowth starts as a consequence of the Invisible Hand, which has implanted within us that all-important confusion of wealth -153) ation of Frankly, we do not believe it; rather we have learned that the interests and the prosperity of the individual may be in conflict with the well-being of the community, that no such 147). Latter day Smithians, however, wishing to propagate a very different interpretation of one unfortunate appearance in The Wealth of Nations unfortunate because it has been so totally misrepresented. There is no question, either in the specific context where he used the phrase or in the larger context of the argument of the entire book, but that the invisible hand is the hand of competition, which places immense pressure on individuals to behave (Rosenberg, 1990: 21) metaphor (or even simile), for competition, is extremely widespread. The invisible hand had, as we have seen, everything to do with divine guidance, and Rosenberg makes no 105 on of competition by no means exhausts the notion of the invisible hand, to which it is wholly subordinate. which a free market economy is kept on an even course despite the absence of any ghostly economic planner. Without it, neither morality nor social order would be A much earlier version of this chapter followed conventional usage in referring to a metaphor { XE "Smith, Adam" } the equilibrium state has been said to be created by a consistent in flagging any such comparison by the use of simile instead of metaphor. Smith intended us to read his statements in WN and TMS Had he desired anoth as as if as though are frequently inserted into the passage in WN in question in a presumably unconscious misrepresentation as simile of what Smith saw only as literal truth. See, for example, -interest would be Again Smith{ XE "Smith, Adam" } was his insistence that the freedom of individuals to was no as if not say that. 106 Raphael, one of the editors of the Glasgow Edition TMS, is, like Rosenberg, phrase for vivid effect, to give us a picture of an imaginary controlling device, but he knows very well that the effect comes about automatically through the interplay of theism controlled the working o religious language simply in order to make his readers appreciate the remarkable character of the phenomenon. I do not mean that he deliberately placed a false halo around it. He was led by an invisibl -67) As we have seen, the invisible hand concept certainly was theological, and the meaning: the theological interpretation is the first and most obvious meaning to strike the reader of what Smith actually wrote. It is the nontheological interpretation, the interpretation which says that, in spite of what Smith wrote, he actually meant something different, which requires demonstration. What is remarkable is the regularity with which those writers who wish to separate the invisible hand from the invisible mind which guides it simply resort to assertion without setting out the case for the their alternative interpretation. Raphael says that the working of the God with the workings of competition. This failure to see divine intervention in the ordinary, automatic, day-to-day workings of the world, including the economy, is just doubt Smith would say that the beneficial results [of the invisible hand] are ultimately due to nature or the divine author of nature, but he does not mean that God pulls the God. This is correct. God, in Smith, does not intervene directly, unmediatedly, in human affairs. We do not know what Smith did or did not privately believe very likely he shared his friend, David tainly the public Smith of the Astronomy, TMS and WN shows no evidence whatsoever of belief in such miraculous 107 direct intervention. What he does very clearly show is a belief that human happiness is iated by the totality of natural Either God is pulling the strings all the time, and we are literally puppets with no personal autonomy whatever. In this case the correct philosophical response would be utter fatalism and apathy. Or we need some guidance on when to treat outcomes as this section and again later in the chapter. sue concerns Smith, which Raphael is attempting to refute, is that he sanctified the working of the economy by is exactly what Smith was trying to do, and in this he was in step with his generation. it by an invisible hand, effectively concedes the case. To return to the point at issue. Hayek, too, makes it clear that he regards the phrase as unfortunate: of the eighteenth century even provided ... an explanation [of how the (CRS: 392-393). For details of this explanation, supposedly given by Smith, Hayek refers us, in a footnote, Individualism and Economic Order (IEO). Sadly, his promise is not redeemed. What Hayek does and this point will be amplified in the chapter on Hayek is to argue for the spontaneity invisible hand, abstracting from the optimality with which Smith endowed it, and then tacitly to assume that optimality has been established. 108 Blaug, after perfectly reasonably criticising the notion of the invisible hand as involving a fallacy of composition what is good for the individual is necessarily good for society complains that the whole of the Wealth of Nations rests on this kind of naive reasoning, the soand economic efficiency, turns out upon examination to be identical with the concept of But the whole point is, that comp balance had already been pre-reconciled by a kindly Great Administrator of the system of the universe. While it is perfectly true that the whole of WN and that part is precisely the doctrine of the Macfie, too, deprecat most t TMS and WN are irreconcilable by scouring WN laissez-faire. On the basis of an apparently impressive mass of such exceptions Viner argues that there is a change of methodology between TMS and WN: in the former we have the theistic invisible hand type of argument (which I ascribe to both WN and TMS), where a natural harmony of interests is deduced from the assumed attributes of the deity; in the latter we have an inductive invisible hand theory, only valid where the facts justify it. Now, it is true that there are many exceptions to the desirability of laissez faire policies in WN exceptions, indeed, to which twentieth century Smithians and invisible hand theorists would do well to give more attention and Viner performs a valuable service 109 by collating them. Nevertheless, they remain exceptions methodology varied so abruptly between the psychological and economic aspects of his scientific work, and without a single hint anywhere that he was simultaneously adopting such contrary standpoints in the two disciplines, does unacceptable violence to the unity th a clear conception of the nature of scientific thought; it is also the case that he carried out the programme implicit within it with relentless consistency throughout his life. If there had been only one edition each of TMS and WN, then, while still incorrect, the case would appear more plausible, that Smith changed his position between 1759 and 1776. However, this is not the case, and at the end of his life, in 1790, Smith was still saying substantially the same things in his revisions to both books as he had in their first discount the sixth edition of TMS can be seen to be implausible in the extreme. As Macfie argues on the critical question of the role of the invisible hand in TMS and WN invisible hand ... [is] exactly carried over from the Moral Sentiments into the Wealth of Nations 66 ; see also ibid: 223-4.) that it is impossible fully to understand the Wealth of Nations without recourse to the Theory of Moral Sentiments seems to me, Viner himself must share some of the blame for the partial occlusion of that fundamental insight into the meaning of the invisible hand in WN. The discussion raises two serious issues, however. Firstly, it is the case that the WN, and the theistic explanation of it does not appear at all. A great deal of empirical material, however, does appear, and, while the overwhelming bulk of that material is directed towards showing the superiority of the laissez faire system, he does indicate exceptions to its desirability. It is easy to see how modern, nineteenth and twentieth century readers of WN in isolation 66 110 other works and from those of his contemporaries, should assume that this was a predominantly empirical study drawing the conclusion that in general, free competition was a good thing. It is easy to overlook the fact that the empirical material only plays the role of illustrating a preconceived order. Smith does not in fact anywhere make the inductive judgement that, as a generalisation, individual self-seeking behaviour leads automatically to socially desirable outcomes on the contrary, this is assumed beforehand and illustrated by details of many empirical circumstances where it is asserted, over and over again, that this has occurred, or would occur if only enterprise ot only in the WN but in TMS and Astronomy as well, that we can clearly see the a priori and deductive nterests are prereconciled by the invisible hand of a benevolent deity 67 . Whatever the stylistic and presentational differences between TMS and WN, this faith remains the starting point of and here [sc in WN] remains to control the individual conflicts and excesses of competition, and to safeguard The second point is that the supposition that there is a divine plan, in which all agent return to this point in Section 5c, below. In brief, the point is that there is a difference between two kinds of inconsistency. Viner alleges an arbitrary inconsistency in which Smith switches, without comment, between two fundamentally contrasting standpoints. Why should Smith have done this? In my interpretation, however, Smith is inconsistent because his standpoint compels him to be: the inconsistency is implicit in his world view. He has adopted that standpoint and has to live with the consequences. The exceptions he notes were, in general and in modern language, those associated with externalities, public goods and market power. Smith was faced with the choice of being dogmatic even in these circumstances the invisible hand will sort things out, which is what his theory actually implies, or moderate dropping the theory without explanation when its consequences strain credulity. Wisely, he chose the latter: a more rigorous and 67 In TMS ndamental doctrines of the Wealth of Nations ... and the famous work cannot be properly understood without some knowledge of the Theory 111 intellectually consistent approach would have made WN far less plausible, palatable and effective for its purpose. Hegel, deducing the State, in the Philosophy of Right, from the theological category of the Idea elaborated in the Science of Logic, should, in faith to his system, have reproduced the Prussian state exactly as it was. As is well known, however, he could not resist idealising the existing state and ended up with an improved, more consistent version. By breaking the link between the ideal and actual in this way, he only showed that his mode of procedure was capable of being used to deduce and justify whatever state system one desired. Smith is in the same position. Within his system, natural liberty, which gives the invisible hand its operational scope, must be absolute. If the constrain its movements, however mysterious and obscure they may be 68 . The macro universal happiness of all rational and sensible beings, is the business of God and not of TMS VI.ii.3.6). In WN, however, Smith says eople, it may be said, from receiving in payment the promissory notes of a banker ... is a manifest violation of that natural liberty which it is the proper business of law, not to infringe, but to support. Such regulations may ... be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the WN II.ii.94) government intervention? If God gets it wrong here, where else does he get it wrong? Is there really a god governing our lives after all? The idea of an invisible hand evaporates leaving us with something much more mundane and imperfect: an accidental and unreliable coincidence between individual and social interests, the spontaneity 68 In another context, Flew says that the variety and contrariety of conclusions drawn from a single 112 proposition without the optimality proposition. This issue will be revisited at the end of the chapter. * * * in Mary Shelley (1818) Frankenstein Ch XII, Thomas Hardy (1874) Far From the Madding Crowd Ch 42, and in HG Wells (1898) The War of the Worlds Ch 6, to give just three examples in each case in utterly pedestrian contexts. Raphael (1985: 67) gives an instance of its use in the early eighteenth century, when a captain wrote in his log that the the guiding hand of an unseen god ensuring the desirable social consequences of selfseeking behaviour was a commonplace of late eighteenth century social commentary is shown by Hayek by reference to Smith, Tucker, Ferguson and Edmund Burke (IEO: 7). Taking the last as or not, in pursuing their own selfish interests, to connect the general good with their own Thoughts and Details on Scarcity cited in IEO: 7). The next section looks in more detail at the relationship between Smith and his contemporaries. 4.5 nvironment 69 4.5.1 th Century Philosophes All are but parts of one stupendous whole, Whose body nature is, and God the soul; 69 Much of this section relies on Becker (1932). Becker has been heavily criticised, notably in Peter Gay -210). The points made in this complaint that Becker exaggerates. The same point could be made about Gay. Unfortunately, this is not of Smith (Gay, 1969: passim), or of the Philosophes 207). 113 .... All discord, harmony not understood; All partial evil, universal good: And, in spite of pride, One truth is clear, Whatever is, is right. (Alexander Pope, cited in Becker, 1932: 6670) cfie, 1959: 210). Robert Heilbroner stresses the need to locate Smith in his times in order to understand his works (Heilbroner, 1986: 1). He also stresses that what links Smith and his contemporaries is the conservatism of both: ting to find a great monument of conservative economic thought, and we will not be disappointed Smith is indeed the greatest of all conservative Smith, like all his contemporaries, believed firmly in the need for a well-defined social conserving vision of social continuity and order, the Enlightenment thinkers found the basis for their distinctive brand of philosophical and historical conservatism. [They were] [c]onvinced of the need for indeed, the inescapable necessity of a stratified, propertysociety in wh ]ll the Philosophes, including Smith, share one limit to their social imaginations. This is an inability to imagine that the lower orders might some day exercise sovereignty over society. Democracy, with all its implicit threats to property and hierarchy, was not yet on 1986: 1-3). The Heavenly City of the Eighteenth-Century Philosophers -70), he makes a powerful case that the intellectuals of this period 71 , but that, of St Augustine only to rebuild it with more up-to- 70 The italicised conclud 71 He includes in the term philosophes, amongst others, from France: Montesquieu, Voltaire, Volney, Diderot, Savigny and Rousseau; from Germany: Leibniz, Lessing, Herder and Goethe; from Britain: Locke, Hume, Ferguson and Adam Smith{ XE "Smith, Adam" }; and from America: Jefferson and Franklin (Becker, 1932: 33). 114 modern in its temper .... And yet I think the Philosophes were nearer the Middle Ages, less emancipated from the preconceptions of medieval Christian thought, than they quite realized or we have commonly supposed .... [T]hey speak a familiar language .... But I think our appreciation is of the surface more than of the fundamentals .... [I]f we examine the foundations of their faith, we find that at every turn the Philosophes betray their debt to medieval thought without being aware of it .... They had put off the fear of God, but maintained a respectful attitude towards the Deity. They ridiculed the idea that the universe had been created in six days, but still believed it to be a beautifully articulated machine designed by the Supreme Being according to a rational plan as an abiding place for mankind .... they renounced the authority of church and Bible, but exhibited a naïve faith in the authority of nature and reason .... [T]he underlying preconceptions of eighteenth century thought were still ... essent -31) On the overall aim of the philosophers, he cites Hume with whom Smith shared a mutual admiration and close friendship cker, 1932: 39). Like Smith, Hume was sufficiently concerned with preservation of the social order to be willing to lay down his pen in its service. In his own words: offence theory, however true, which leads to a practice dangerous and pernicious. Why rake into those corners of nature, which spread a nuisance all around? ... Truths which are pernicious to society ... will yield to errors, which are salutary and advantageous the programme just mentioned, philosophical speculations for other subjects, such as 1932: 38Dialogues away in his desk72 ... his contemporaries, could they have looked into that locked desk, would have found ... the brilliant argument that demolished the foundations of natural religion .... Hume ... refused to publish his Dialogues, and never, in public at least, failed to exhibit a punctil 73) 72 Dialogues Concerning Natural Religion remained unpublished until after his death. It was Adam Smith{ XE "Smith, Adam" } who persuaded him to suppress it. The manuscript was originally literary executor, but at the last moment Hume gave it to a nephew who published it. Had Smith laid hands on it he would undoubtedly have burned it. The event had a profound effect on ut ensuring that his own papers were burnt, which was done a week before his death. 73 See also Becker (1932: 79-81), for a similar story about Diderot. 115 ma TMS prioritising reconciliation over investigation. Philosophes faced ure is good, then there is no evil in the world; if there is evil in the world, then nature is so far not good .... Will they, closing their eyes to the brute facts, maintain that there is no evil in the world? In that case there is nothing for them to set right. Or will they, keeping their The philosophers were at a crossroads: reason pointed forwards, to atheism and to the project of rebuilding a haphazard, spontaneous and irrational society in the image of the order they had previously ascribed to nature; the alternative was the denial of reason and a return to medieval Christian faith. Open-eyed, they could adopt an empirical, materialist standpoint, recognising the need to take control of, and responsibility for, spontaneous human institutions; or with eyes closed they could take an a priori stance, Philosophers did in this emergency. They found ... that reason is amenable to treatment. None of this was written with Smith specifically to th but the description fits like a glove. Smith is the epitome of this intellectual retreat of the enlightenment in the late eighteenth century, the retreat from rationalism to romanticism 74 . In every respect, reason is belittled and sentiment and religion brought to the fore 75 . At best, reason only confirms what we know anyway by means of sentiment and religion: 74 TMS. 75 This is not to criticise his rejection of a rationalist account of morality (see TMS VII.iii Ch II Of those Systems which make Reason the Principle of Approbation), epitomised in the title of The Theory of Moral Sentiments, which so far as it goes, is undoubtedly correct, though he is mistaken in the reason he gives for such sentiments arising in the first place. 116 first impressed by nature, and afterwards confirmed by reasoning and philosophy, that those important rules of morality are the commands and laws of the Deity, who will finally reward the obedient, and punish the transgressors of their duty .... [R]eligion ... gave a sanction to the rules of morality, long before the age of artificial reasoning and philosophy. That the terrors of religion should thus enforce the natural sense of duty, was of too much importance to the happiness of mankind, for nature to leave it dependent on the slowness and uncertainty of philosophical researches. These researches, however, TMS II.5.3, my emphasis) Reasoning, for Smith, is artificial, and only sentiment is natural: at the Deity loves virtue and hates vice ... for the effects which they tend to produce ... is not the doctrine of nature, but of an artificial, though ingenious, refinement of philosophy. All our natural sentiments prompt us to believe [the opposite] ... 76 (TMS p91 note, editions 1 and 277) TMS III.3.21). The medieval view of the world, and the role of reason within it the view of the world to which Smith and his contemporaries turned is well summarised by Becker: master dramatist according to a central theme and on a rational plan. Finished in idea before it was enacted in fact ... the drama was unalterable either for good or evil .... the duty of man was to accept the drama as written, since he could not alter it; his function, to play the role assigned .... Intelligence was essential, since God had endowed men with it. But the function of intelligence was strictly limited .... The function of intelligence was therefore to demonstrate the truth of revealed knowledge, to reconcile diverse and pragmatic experience with the rational 1932: 7) Smith, therefore, was in many ways typical of the philosophers of the period on influence on his philosophy, Smith regarded the preservation of the social order as of primary importance. Like his contemporary, Kant, who was also, though in a different direction, influenced by Hume 78 , Smith wanted to place limits on the legitimate field of 76 Smith, incidentally, here clearly ascribes to God his own hypostatisation of the intermediate, the r the end. 77 Editions 3- 78 See Kant (1950: 5 ff; or Academy edition, Vol IV: 258 ff). 117 action of reason, to find a space for instinct and religious belief 79 . Perhaps the greatest overlap between Smith and his contemporaries lay in their application of the doctrine of natural law. This is the topic of the next subsection. 4.5.2 Nature and the natural in Smith Adam Smith and his disciples ... nature means the totality of impulses and instincts by which the individual members of society are animated; and their contention is that the best arrangements result from giving free play to those forces in the confidence that partial failure will be more than compensated by success elsewhere, and that the pursuit of his History of English Rationalism in the Nineteenth Century cited in IEO: 12 n 15) The reader may have noticed the number of times, in the passages cited above, Smith background or substrate of our activities, nature is seen as a direct manifestation of the adoption and adaptation of the archaic conception of natural law 80 so popular amongst eighteenth century philosophers (Becker, 1932: Ch II; Sabine, 1951: Ch XXVIIff). The late eighteenth century French philosopher, Comte de Volney, defined natural law in eminently Smithian terms: 79 been presented, though not, I think, completely successfully, as a direct precursor of Kant. Macfie (1967: 68 and n 24; 91 n 23) gives the references. the destructive spark which helped to inspire the Kantian reconstruction, Smith may well have contrived ... the revealing light which led to the Critique of Practical Reason ite of it (ibid: 68). He also wrongly clai What greater 80 It is interesting in this context that the very reason that Smith started to study economics was his need tr Interestingly, Physiocracy, with which, of course, Smith had much to do, is a near-synonym for natural law. 118 universe; the order which his wisdom presents to the sense and reason of men, to serve them as an equal and common rule of conduct, and to guide them ... towards perfection Here again we see the universe as an orderly system administered by a god. The order implicit in it, which is presented to both the senses and the reason of humans, issues in both factual statements about the way the world is, and normative statements as to how people are to behave, so as to correspond with the divine will. Again the god is utilitarian, maximising the happiness of mankind. Becker cites this definition as typical of the eighteenth century philosophers, among whom he explicitly includes Adam Smith (Becker, 1932: 33). His commentary certainly applies well to Smith: of Thomas Aquinas. Important if true, we say; but how comes it, we ask, that you are so well acquainted with God and his purposes? Who told you ... that there is a regular and constant order of nature? ... Indeed it is all too simple. It assumes everything that most I keep stressing the primacy of order in Smith, and the same is true of the Philosophes: they wanted to be able to point to an ordered natural world in order to justify the conceptions of social order to which they variously subscribed: -century minds were too accustomed to a stable society with fixed ranks, too habituated to an orderly code ... to be at all happy in a disordered universe. It seemed safer, therefore, ... to retain God ... as a ... guaranty that all was well in the most comfortable of common- (Becker, 1932: 49-50) And if a god did not exist, it would be necessary, as Voltaire (in)famously declared, to invent one. But a god in isolation, separate from the world, was not to the point. Their programme demanded that God directly reveal himself in nature: works. To be enlightened was to understand ... that it was ... in the great book of nature ... that the laws of God had been recorded. This is the new revelation ... This open book of nature was what Jean Jacques Rousseau and his philosophical colleagues went in search of when they wished to know what God had said to them. Nature and natural law what magic these words held for the philosophical century! ... Hume, Voltaire, Rousseau, Volney: in each of them nature takes without question the position customarily reserved for the guest of honor .... Search the writings of the new economists and you will find 119 them demanding the abolition of artificial restrictions on trade and industry in order that men may be free to follow the natural law of self-interest .... controversialists of every 1932: 51-52) Perhaps we can best see the importance of this view of nature in the popular and scholarly response to a figure towering over the eighteenth century, that of Newton. philosophy were published. The point of interest was not the technical detail but the problems the relations between humanity, nature and God. Colin Maclaurin, Professor of Mathematics in the University of Edinburgh, set out the nature of these relationships in his own guidebook, , published in 1775: phenomena of nature, to explain their causes ... and to enquire into the whole constitution of the universe, is the business of natural philosophy .... But natural philosophy is subservient to purposes of a higher kind, and it is chiefly to be valued as it lays a sure foundation for natural religion and moral philosophy; by leading us, in a satisfactory manner, to the knowledge of the Author and Governor of the universe.... of his conduct, in nature, from the very deficient ideas we are able to form of that great mysterious Being .... manner, that mighty power which prevails throughout ... and that wisdom which we see displayed in the exquisite structure and just motions of the greatest and subtilest parts. These, with perfect goodness, by which they are evidently directed, constitute the supreme object of the speculations of a philosopher; who, while he contemplates and admires so excellent a system, cannot but be himself excited and animated to correspond with the general harmony of nature -63) may well be taken as a just expression of the prevailing state of mind about the middle of the eighteenth century. Obviously the disciples of the Newtonian philosophy had ... The deification of nature led, as it was supposed to lead, to the sanctification of the ogramme. Macfie, 120 which the Law of Nature and Stoicism inspired in Scotland was a faith in natural liberty nt references to the TMS (TMS rendered holy, consecrated, and hedged round against the appro (TMS II.iii.3.4). And in WN WN IV.vii.b.44). For Smith, therefore, as was commonly the case in natural law theorists, what is natural is god-given and therefore implicitly good. When Smith describes certain institutional arrangements in WN example, in WN IV.ii.3), he is saying that the former are not just spontaneous, but spontaneous and therefore an immediate expression of the will of God, whereas the latter must at the very least lie under the suspicion of sacrilege. There are many occasions where Smith invokes nature 81 in this way in WN preference or of restraint [of trade by the government] ... being ... completely taken away, the obvious and simple system of natural lib (WN WN IV.v.b.16 82 ). In his lectures as early as 1749 Smith was linking the ideas of an active, beneficent and rational nature in short a teleological nature to the policy prescription of laissezfaire requires no more than to let her alone, and give her fair play in the pursuit of her ends that she may establish h laisser faire , which had been 81 every WN has the second meaning, only that in the many invocations of nature in WN the penumbra of connotation is definitely intended to include this second meaning on many occasions. An excellent discussion of the 82 WN WN I.vii passim, WN IV.i.12, WN IV.ii.3 and WN p453 editorial footnotes 7 and 8, containing references to further passages in WN and the Early Draft of WN. 121 in use in France since the end of the previous century to denote freedom from government interference. But Smith extends the idea of what is natural to include human nature. What is instinct in us was implanted there by Nature, for a purpose and this includes our weaknesses as well as our strengths. Thus, speaking of resentment and its issue in TMS not seem to have dealt so unkindly with us, as to have endowed us with any principle which is wholly and in every respect evil, or which, in no degree and in no direction, can taken to an excess. This tactic, however logical in itself, involves Smith in inescapable contradictions once he attempts to derive his laissez-faire policy prescription from it, as we shall see in the next subsection. So Smith has a similar approach to nature and the natural as his contemporaries. If anything, however, Smith is even more archaic than his contemporaries. Prior to the eighteenth century, according to Becker, somehow be, even if not evidently so to finite minds, good and reasonable. Design in nature was thus derived a priori from the character which the Creator was assumed to have; and natural law, so far from being associated with the observed behaviour of physical phenomena, was no more than a conceptual universe above and outside the real one, a logical construction dwelling in the mind of God and dimly reflected in the minds In the eighteenth century, however, he cites Hume, in the person of Cleanthes in his Dialogues, as epitome the logical process is reversed: must be rational because God is eternal reason; he concludes that God must be an engineer because nature is the new philosophy was that the existence of God, if there was one, and his goodness, if goodness he could claim, must be inferred from the observable behaviour of the world. Following Newton, the Philosophers had all insisted on this to the point of ped Smith in this respect is out of step with his contemporaries. He clearly starts by 122 the deity, and only afterwards claims to be able to support his conclusions by reference to observations of nature itself: the original purpose intended by the Author of nature, when he brought them into existence. No other end seems worthy of that supreme wisdom and divine benignity which we necessarily ascribe to him; and this opinion, which we are led to by the abstract consideration of his infinite perfections, is still more confirmed by the examination of the works of nature, which seem all intended to promote happiness, and to guard against TMS III.5.7) There is no reason to believe that Smith would have seen any opposition between these two approaches deductive versus inductive, a priori versus empirical to the relation between God and nature. But he would certainly have rejected the latter as sole, or even do not perceive the remote ramifications of things. Things, as he stresses in Astronomy, often appear to us to be discordant and unconnected. This is precisely why we need a the most pleasing general explanation available. So it would be a mistake to deduce discordant world of appearances at once comprehensible and safe. Smith in this respect is thus conservative even with respect to his contemporaries. Smith explicitly links the superiority of our natural feelings over the artificiality of reason, to the preservation of social order: re the servants of the people, to be obeyed, resisted, deposed, or punished, as the public conveniency may require, is the doctrine of reason and philosophy; but it is not the doctrine of Nature. Nature would teach us to submit to them for their own sake, to TMS: I.iii.2.3) The message is clear: the natural sentiments placed in us by a benevolent deity, expressed in established traditions, for example, of granting legitimacy to monarchs, are to be heeded in preference to whatever reason may tell us, so that social order may be preserved. In conclusion of this sub-section, we may note how Heilbroner links the philosophes promotion of sentiment over reason with the notion of an invisible hand in Smith: 123 certainly Adam Smith placed the critically important conception of an Invisible Hand an indirect intervention of the Divinity into the mechanisms of social life is based on the inability of human reason to 4.5.3 83 , and we have noted some of them in passing. However, at base, there is one particular contradiction which confronts Smith, in various guises, at every turn. In his version of the stoic theory, everything is instant. In empirical reality, there is obvious suffering and injustice. How is the latter to be reconciled with the administration of the machine of the universe by a beneficent, omniscient and omnipotent god? To quote unanswered. Is he [sc God] willing to prevent evil, but not able? Then he is impotent. Is he able, but not willing? Then he is malevolent. Is he both able and willing? Whence 32: 68). Presumably even the most pious would concede that there must be logical restrictions on what a god can do whether or not he can create a weight so heavy that he cannot lift it, for example, he is necessarily restricted to what is logically possible in what he can simultaneously achieve 84 . It is far less obvious, however, that suffering in general, let alone any specific instance of suffering, is a logical necessity for the achievement of o put the case. Instead, its ours that it was a problem for theories of this kind. He never addressed the issue, however, and failed to present any explicit theodicy going beyond these assumptions. 83 other directions than exactly logical thinking, and he displayed a fine tolerance for a generous measure of i 84 reference is to Saint Thomas Aquinas, 1944, Summa Theologiae London: Blackfriars Ia, 7, 2-4), showing that he, for one, clearly accepted that God is constrained to what is logically possible. 124 Theodicy generally involves at some point an invocation of free will: God had to permit evil if he was to allow man free will and hence moral responsibility. Here again, Smith is on shaky ground, because he has made everything, including human nature, a part of nature; all behaviour, including human behaviour, is natural, and hence god-given. Our behaviour is prompted by the sent Since we do what we are led to do, what we are predestined to do, choice is presumably an illusion. Our judgement of the moral quality of an action, as we have seen, is for Smith essentially a sentimental judgement without rational content. Arguably, it was open to Smith to adopt the compatibilist position of Chrysippus, (whom, incidentally, Smith only mentions in order to flay, rather unfairly, as a traitor to, rather than exponent of, stoicism (TMS VII.ii.1.41)). But Smith carefully avoids addressing this issue, too, The problem for Smith is this: if God is maximising happiness, he cannot at the same time permit either evil and suffering or free will. If he allows suffering, then the quantity of happiness is presumably not at its logically possible maximum; if he allows free will, then he is again not maximising happiness, as he is leaving that to the outcome of the this point, would be to say that God is not maximising the happiness of all living f the dead as well. Everyone has freedom of choice in their behaviour now, but they get their just deserts, in heaven, where also all unjust work. How does punishing sinners in the hereafter contribute to maximising happiness? tormented souls: it cannot deter sinners in this life; it is futile suffering. Finally, the further consequence of the view that everything in the world is part of the nature and the behaviour to which man is led is a part of nature, is that regulation and state planning are just as natural and god-inspired as free trade and laissez-faire. Viner 125 e work of God, and man the product of nature, then all that man does and thinks, all that he has ever done or thought, must be natural, too, and in accord with the his customs ever be out of harmony The concept of the natural only means anything other than fatalistic acquiescence to anything and everything if it is contrasted with something else, something unnatural. in WN TMS. But he cannot sustain this contrast on the basis of his theory. The category of the artificial has no meaning in a theory where the natural is already all-encompassing. This is clearly a critical laissez-faire, but again, he makes no attempt to address the issue. The contradiction can be seen particularly clearly in a paradoxical passage in TMS where he attempts, unsuccessfully, to reconcile his Panglossian view of the outcome of natural processes with the human attempt to remedy na the best which are logically possible, then such faults are inconceivable. Smith says that perfectly suited to the situation of mankind in this life, yet they are by no means suited to TMS III.5.9). In other words, God allocates prosperity by general rules which are designed to maximise human happiness, but the allocations which result, because of the finitude of human minds, do not always satisfy the moral sentiments which he has placed in us. which she herself would otherwise have made. The rules which for this purpose she which she follows are fit for her; those which he follows for him: but both are calculated to promote the same great end, the order of the world, and the perfection and happiness of TMS III.5.9) So nature 85 85 ers and wild animals: Smith is talking about the spontaneous outcomes of social processes, in particular the 126 optimising, happiness-m of nature is happinesssuboptimal. Smith cannot have it both ways. Or, rather, there is one interpretation which would allow him to have it both ways. If he were to say that nature including humanity were designed to optimise, but that nature without man were incomplete, imperfect, suboptimal, which is more or less what Hegel says, then he could reconcile both accounts. Then human action to correct spontaneous market outcomes and redistribute prosperity according to merit would be optimising as it would be the result of both the rules of nature and the rules of man. foundation for the invisible hand mechanism, it by no means follows that it undermines the case for a visible hand of state intervention. On the contrary, his Weltanschauung prejudices, and not his theoretical system, which lead him to prefer one to the other. State intervention is a product of all the human strengths and frailties of those involved in given and designed to lead individuals to act so as to maximise human happiness. There is nothing in the system of thought which Smith presents to say that the invisible hand active in the economic process will be inactive in the political process. Smith cannot have been unaware of these inconsistencies in his standpoint. Yet there is a sense in which he, himself, is not inconsistent in neglecting them. Someone who kept faith with the Enlightenment ideal of following Reason wherever it may lead a Ricardo, for example, a Marx, a Darwin, or an Einstein would have concentrated attention on these contradictions and drawn the logical consequences. But we have already seen that Smith was not in this mould 86 . The late eighteenth century philosophers turned their intellectually unified, logically coherent system of thought, but to paint as pleasing as 86 ntral aim or virtue of 127 4.6 Conclusion The question we started with was, how Smith saw the articulation between individual behaviour at the micro level and social outcomes at the macro level. The answer I have given in this chapter is that the articulating mechanism consists in the agency of a deity. Our behaviours at the micro level are always just what is required for the optimal macro own interests, our own illusions and our own fellow feeling for others, to perform just those actions required to fulfil the divine p Hayek, to the extent that, as representatives of a secular age, they cannot rely on an interventionist god, need an alternative mode of articulation between levels. The most frequently invoked alternative to the extent that the problem is addressed at all is some kind of evolutionary mechanism, but that lies beyond the scope of the present chapter. I have also argue to the apologetic aspect in his political economy. While his belief in a harmonious universe allowed him to make real scientific progress in political economy, without fear that i reconcile humanity with the spontaneous social order and the status quo 87 . He invoked the idea of a divine teleological plan, of the universe as a machine administered by a god, in order to explain away suffering and evil as only the proximate manifestations of chains of connection whose distant ramifications would include more than compensatory benefits. The idea is to convince us that we need do nothing at the macro level. All we should do is pursue our own individual interests at the micro level, and display appropriate levels of patriotism and respect for our leaders. The rich, the powerful and the fortunate all ensure that the big decisions of society are for the best because they 87 That these, the spontaneous social order and the status quo, were not the same thing, did not in ubsequent writers, such as Ricardo, coming after the Industrial Revolution. 128 are taken by the hand and led by God to do so. All is for the best, then, in this, the best of all possible worlds. the speculation that the truth is just the opposite of what he says. Smith claims that the universe is a coherent and harmonic whole administered by a single intelligence. But we as thoug 88 (Dawkins, 1995: 123) Smith claims that human nature and human society are a part of riven by sectional interest then as it is now. His claim is to be understood, not as a positive statement of what is the case but as a normative statement of what is to be ut state, make an optimal contribution to human welfare because guided by the invisible hand of a beneficent, omnipotent and omniscient god. Again, we know of no reason to even suspect that any supernal agency exists, such that we can rely on its intervention to maximise social welfare 89 normative sense: what is required is a higher level human agency which will reconcile our differences and lead us through the pursuit of our own interests to the maximum achievable level of welfare: Moral Sentiments to the Deity great Author of Nature, Engineer, Great Architect, and so on .... Adam Smith did believe (as a matter of faith) in this final reconciler .... Now, there is little doubt that we today do not accept this kind of argument .... The inevitable reaction is that, if the supernatural control is abandoned, human societies must supply their own .... [T]he state 88 gazelle, what is He playing at? Is He a sadist who enjoys spectator blood sport 89 And, even if there were such a power, some might argue, passing up all responsibility to it for our own actions and their consequences in this fashion, might scarcely be the best method of winning its approval. 129 Chapter 5 Friedrich Hayek: a Panglossian evolutionary theorist 90 omplex phenomena ... can be made intelligible only by ... a cosmology, that is, a SIP: 76) 5.1 Introduction Chapters 2 and 3 of this thesis looked at the midand late-twentieth century response of political economy to two anomalies which have been perceived as challenges to the Chapter 4 attention returned to the roots of this tradition in the writings of the eighteenth century father of nineteenth and twentieth century economics, Adam Smith. The question addressed there was, how Smith saw the articulation between individual behaviour at the micro level and social outcomes at the macro level. The answer I gave is that the articulating mechanism consisted in the agency of a deity. Our behaviours at the micro level were always just what was required for the optimal macro outcome because that invisible deity always led us by the hand, through the pursuit of an amalgam of our own interests, our own illusions and fears, and our own fellow feeling for others, to perform just those actions required to fulfil the divine plan. This is what Smith meant The implication I drew is that invisible hand theorists of more recent times, such as Friedrich Hayek, to the extent that, as representatives of a secular age, they cannot rely on an interventionist god, need an alternative mode of articulation between levels. The most frequently invoked alternative, in so far as an explicit alternative is presented at all, 90 An earlier version of this paper appeared as Denis (1999b), and at point of writing material derived from it is under consideration at Constitutional Political Economy as Denis (2001b). 130 is some form of evolutionary mechanism. This amounts to replacing one form of Panglossianism with another. In replacing God with evolution we move from justifying the claim that it was selected by nature. We remain within the Leibnizian paradigm, that this is the best of all possible worlds, only replacing the explanation that it was selected by God all at once with the explanation that it was selected by Nature over a long period of time. The purpose of the present chapter, therefore, is to investigate the deployment by Hayek of an evolutionary mechanism to argue that spontaneous aggregate level outcomes of our activity are intrinsically superior to any outcome we could achieve by conscious intervention at the macro level. in fact distorts the Darwinian theory of evolution and falsifies the standpoint of Adam Smith. This distor established policy prescription. He falsely claims that the Smithian economists can be applying in the biological field the ideas that the Smithians had already established in apparently in order to render respectable a theory of social evolution which leads to laissez-faire conclusions. A theme of the chapter will be the care with which we have to read Hayek. Frequently we will find him saying one thing and doing another. Statements about his standpoint cannot necessarily be taken at face value. Two examples we will meet concern his supposedly individualist methodological stance, and contradictory statements as to the nature of the Darwinian theory of evolution. As with the chapter on Smith, an initial caveat is in order. This chapter is in no way to be construed as an attempt to give an allthe contrary, the focus is on the specific concern of the research of which the chapter, and indeed the thesis, forms part: the question, that is, of how economic theorists have linked micro and macro levels, how these levels are coordinated or articulated. Given, as I argued in the previous chapter, that in Adam Smith individual behaviours are precoordinated by the invisible hand of a wise and benevolent Providence, and further that 131 the more secular twentieth century could not be expected to accept such an explanation, the invisible hand? With respect to Hayek, therefore, I am here concerned only with this one que indeed, the two are in many ways very similar 91 and that intent, to major factual and theoretical distortions. 5.2 Hayek and Smith As we saw in the previous chapter, twentieth century Smithians have had trouble with WN in isolation) could see that what Smith was unpalatable notion in a relatively secular age. Some instances of this anxiety about the given in the last chapter. Hayek was one of those who made it clear that he regarded the phrase as unfortunate. other great Scottish individualists of the eighteenth century even though they spoke of provided ... an explanation [of how the interaction of the efforts of CRS: 392-393). Unfortunately, the explanation that Hayek refers us to is for something different: he has illicitly changed the subject. The invisible hand was the mechanism in Smith which ensured the perfect reconciliation of unconstrained individual motives and behaviour both with each other and with the social interest of maximising human welfare. Two strands can be discerned in this thought: spontaneous order and optimality. The spontaneous order 91 Hutchison says that after the mid- 132 strand says that individual self-seeking behaviour, unconstrained by central authority, may result, not in chaos, but in orderly collective behaviour. The optimality (efficiency, desirability) strand says that this order will be, in some sense, the best that we can get. Clearly, these are very different propositions. The spontaneity proposition is, I think, undeniable, while the far stronger optimality proposition is just false. If Smith had confined himself to the former, that would have been unexceptionable and there would have been no call for divine intervention, nothing for an invisible hand to do. The consequences of individual action would just be the consequences: orderly but often suboptimal collective behaviour. No explanation of the transmutation of base passions into golden outcomes would be necessary as no such transmutation would be assumed to take place. Now the optimality proposition clearly encompasses the spontaneity proposition, and hence, when Smith attempts to sustain the former, he necessarily defends the latter. The bulk of WN is concerned with this defence of the idea of a spontaneous order. Optimality and the invisible hand are there but they tend to be implicit. It is therefore unsurprising that economists, reading Smith through nineteenth and especially twentieth representing the spontaneous emergence of some order, rather than, what it is, an assertion of the optimality of that emergent order. Hayek, however, has pretensions to be more than merely a technical economist an intellectual and a scholar. He has written widely on the Smith-Hume-Ferguson-Burke tradition COL: 61) from which he claims intellectual descent. It is illegitimate for him to slur over the difference between spontaneity and optimality. The question is, how the question and immediately reduces it to the lesser, more innocuous question of the ion of the efforts of individuals can then were satisfied with having supported the spontaneity proposition, but this is not what he does. Throughout his writings, Hayek adopts the same procedure: firstly, focus attention on the spontaneous order, and then slide over to an assumption of its optimality. (Hutchison, 1981: 228 n 17). 133 says it is, an account of the spontaneous emergence of orderly social behaviour in the absence of prior design and central direction of individual activity. On the other, it has invisible hand of God. It is clear that God has to be replaced in the story: the question is, spontaneous order is to be played by evolution. 92 has become the constant source of irritation of the scientistically minded, it describes nevertheless the central problem of the social sciences. As it was put a hundred years after Smith by Carl Menger, who did more than any other writer to carry beyond Smith the elucidation of the meaning of this phrase, most important for its advancement can arise without a common will aiming at their 93 (CRS: 146-147) In this passage Hayek sets up the problem he is going to use a theory of evolution to solve. That problem is how individuals pursuing their own goals fulfil social objectives about which the individuals neither know nor care. This is the problem of the emergence of a spontaneous order. But Hayek immediately identifies this with the problem of the assumption. This says that individuals fulfil social goals, and those goals are just the ones which serve the collective interests of the indiv assumed by Hayek (and Menger) that this is so, the big question being not whether but how socioeconomic and cultural evolution is the 92 Hayek gives no reference here, and the phrase as it stands does not appear in Smith. A similar passage is in WN by an invisible hand to 93 The reference is to Menger (1883, LSE reprint 1933) Untersuchungen über die Methoden der Sozialwissenschaft p 163; trans Hayek. 134 1993: 153). These accounts seem to point in different directions, the one highlighting attention on the evolutionary aspect. In reality both are right, since the whole point of explanation of that order. As we saw in the previous chapter, the deification of nature by the eighteenth century philosophers, including Smith, led indeed, was intended to lead to the sanctification of the particular model of human behaviour that they wished to hold up as natural. In just the same way, the notion of evolution deployed by Hayek is intended, not to provide a scientific understanding of the social order, warts and all, which has emerged from a blind evolutionary process 94 , but to present that order as something with which it is beyond our competence to interfere. Flew gets the ideological, almost theological role of evolution exactly right in his discussion of Social Darwinism: commendable, and that Nature is a deep repository of wisdom, [so] for many the process of evolution by natural selection becomes a secular surrogate for Divine Providence; and ... for some the possibility, or even the duty, of relying on this benign and mighty force presents itself as a decisive reason why positive social policies must be superfluous, and may be wrong 5.3 Holism and reductionism in Hayek 5.3.1 Shenfield on collectivism and holism in Hayek It is a commonplace that the methodological standpoint of the Austrian school, including and, perhaps, especially Hayek, what they insist upon with a fundamentalist zeal which distinguishes them from their more pragmatic neoclassical cousins, is the reductionist principle of methodological individualism. See, for example Garrison and Kirzner (1989: 121-122), and Hodgson (1993: 153-157). With regard to Friedrich Hayek, this 94 here is, at bottom, no design, explore the consequences for our institutions of such a blind, pitilessly indifferent process in a social context would be a 135 metho 95 , p. 221) (Hodgson, 1993: 157). policy individualism. This is not to say that Hayek is entirely consistent or that it is impossible, with care, to pick out a methodological individualism in what he says. On the contrary, perhaps even more than Smith, whose legacy he claims, Hayek seems to have taken literally the 96 . As we shall see, where the internal tensions of his standpoint, the stresses of combining holism and individualism in this way, prove too severe, consistency is the first casualty. The profound intellectual disarray of the Austrian school on the question of holism and reductionism is shown by a remarkable passage in Shenfield (1977). The context for this needs to be made explicit. Machlup (1977a) is a book of Essays on Hayek, presented at a conference of the Mont Pelerin Society in 1975, devoted to the achievements of Friedrich Hayek. The Mont Pelerin Society was set up by Hayek and presided over by him for 12 years, after which he became its honorary president. Perhaps needless to say, something of the nature of a quasi-official Austrian statement of Hayekian methodology 97 . 95 Either the date or page number of this citation in Hodgson is incorrect. 96 , that 97 Shenfield also read the final text of Vol III of LLL showing, again, the close links between Hayek and Shenfield (LLL: xxi). 136 The topic 98 , the allegedly inappropriate attempt to apply natural scientific methods in the social sciences. He argues that scientism depends on an unholy trinity of objectivism, collectivism and historicism. It is with the second of these that we are concerned. Collectivism, he says, Collectivism (perhaps better called holism ... ) ... treats as , as if This confused formulation says at least three things. Firstly it correctly recognises that holism, as its name suggests, attempts to grasp entities as a whole, rather than as a collection of parts, as a unity rather than a plurality. Secondly, however, focusing on particular social entities such as the economy, it suggests that the referent is not in fact an ication is clearly that holism is a misleading way to see things. Lastly, Shenfield suggests that holism ascribes rational artly result of the use of language for a system of the implication being that such attribution is fallacious. This point is neither trivial nor superficial. It is interesting that already an in that applied persisting where they prove useful and fading out where they are not. The result is that society like the physical structure of animals has evolved to a point of much greater 1983: 7 KES) There is a clear theoretical distinction between holistic accounts which view aggregate organisms. The latter implicitly ascribes aggregate entities a greater degree of autonomy. This is both a bigger and a more specific claim. Both views, however, tend to be labelled organic links between individuals lead to macroscopic effects of individual actions 98 What Pop 137 (Carabelli, 1988). Marx would undoubtedly have agreed, but went much further than Keynes, arguing that macro level entities, such as capital and the state, had the autonomy and selfpolitical state is an organism and that, therefore, its various powers are no longer to be part of the much richer orga IEO: 22). extreme: not all versions need see all social level entities as organisms, though, to be sure, some certainly do see some such entities in this light. Adam Smith, for example, believed the world was an organism 99 with every part organically linked to every other and subordinated to the task of maximising human happiness. The world was ruled by a single mind, that of God, whose will was executed by the invisible hand. While we can not mean to say that we should discard holism or organicism sans phrase. On the contrary, while each holism must be judged on its merits, according to its ability to identify the principle connections between the elements of the entity in question, reductionism can be rejected a limine since it itself rejects a limine the relevance of those connections. Having said that collectivism was partly caused by organicism, Shenfield now goes on to examine the roots of collectivism in holism: 'Partly collectivism arises from the essential belief of philosophical holism, namely that wholes are more than the sum of their parts, and that the parts are less real than the wholes, being largely abstract analytical standpoint might put it, this is not an unrecognisable description of holism. It would be 99 That his imagery was mechanical rather than organic is a reflection of the idiom of the time, particularly the influence of the Newtonian scientific revolution, and has no bearing on the content of his theory in this respect. For centuries people have employed the trope of referring to animals as machines without there being any suggestion that they misunderstood the nature of an organism. Two examples spanning the last half-millennium a 138 more correct to say that, in the holist view, wholes are different from rather than more than could, at a pinch, that it does not and cannot exist without me, as a functioning leg, but I could exist without it, though less ably than with it. But this is not the main thrust of holism, which is merely to argue for seeing entities as wholes, as systems of relations, rather than as congeries of isolated parts. Hayek himself is clear on this: greater than the mere sum of it elements are related to each other that the talk about the whole being more than the parts TSO is ... more than the totality of regularities observable in the actions of the individuals and cannot be wholly reduced to them ... a whole is more than the mere sum of its parts but (SIP: 70) consistent with the definition of the term used in this thesis. So Hayek says that the whole is greater than the sum of the parts: to understand the entity in questions we have to understand the system of relations between its parts. And Shenfield says that believing the whole is more than the sum of the parts is holism. So presumably we can agree that o Shenfield, holism is just what Hayek is combating. Or is it? Having identified holism as the philosophical basis of collectivism, itself one of the three legs supporting scientism, the oceeds to admit that the holistic view is correct: its individuals would be if they had no contact with each other. Such a sum would not be a society at all. A society is not a collection of hermits. It is formed because individuals set up relations with each other. It is then not more than the total of its interconnected taken in isolation. But that is exactly what holism says: the whole cannot be understood except concedes the 139 a collection of Robinson reductionist, and individualist, stance, while Shenfield, and, indeed, Hayek, adopt a holistic standpoint. One of the distinguishing features of the Austrian tradition separating it from the neoclassical orthodoxy is supposed to be its greater emphasis on methodology, its more advanced epistemological self-consciousness, its greater sensitivity to the need to establish the philosophical preconditions for the practice of economics. What can we say, therefore when Shenfield, having conceded the case for holism, goes on in the very next sentence to conclude his critique of collectivism with unreality, or as a lesser 100 (Shenfield, 1977: 69) Although introduced by preceded them. No case at all has been presented for regarding the holist standpoint as On the contrary, as noted above, where he actually addresses the issues, he concedes the case. The reference to the lamentable discussion of holism in Popper (1957: 76 ff) does nothing to help. In an epilogue to his discussion of collectivism, a paragraph on collectivism and measurement, Shenfield manages to combine holism and opposition to it in a single sentence: of scientific status. But by treating the objects of its study as wholes, it is led to subject to measurement almost anything except their essence, namely the systems of connection (Shenfield, 1977: 69) 100 The reference is to Karl Popper (1 Economica XI (new series), 140 Shenfield says here, firstl from its relationship with the whole. How such a system can only become visible when we cease to see it as a whole is just incomprehensible. This confusion is adopted almost word for word from Popper (1957: 76). the essence of the objects of study), the implication is clearly that that essence is the one thing that they should be measuring. This begs the question of how one is supposed to eason for scepticism about measurement in social science, which was basically a holistic one. According to Hayek, particular social processes are never so numerous as to enable us to substitute ascertained probabilities for information about the individual events .... in the biological and in the social sciences frequently we cannot rely on probabilities, or the law of large numbers, because unlike the positions which exist in the physical sciences, where statistical evidence of probabilities can be substituted for information on particular facts, we have to deal with ... organized complexity, where we cannot expect to find permanent constant relations between aggregates KES: 25) Here Hayek is making an essentially holistic point: the law of large numbers depends on the independence of the events in question; that is, that the mass of events is a congeries. -level events we are concerned with are connected to each other in an organic way: they are not independent, and hence statistical inference is invalid. n a holistic outlook, is not, however, to say that it is right. On the contrary, what this view ignores is that it displays a constancy or consistency over time in some of its key internal variables, August, 126. 141 in spite of changes in environmental variables. This is summed up both in the concept of This, again, is something which Hayek is well aware of. In a subsection of The Sensory Order concerned with the evolution of the sensory order, Hayek briefly considers the purposive action made possible by a developed central nervous system may be premature so long as we do not possess a fully adequate biological theory of the comparatively TSO: 82) His response to this view is to refer in he most promising (Fliessgleichgewicht 101 be reached will in some measure be independent of the initial conditions, seems to TSO: 83). This is essentially both a systems theoretical account of order emerging at the macro level of purposive behaviour and an assertion of our ability to understand it even in the ab dynamic steady state immediately suggests that certain variables will be in stable long-run mutual relationship, which in turn suggests the suitability of appropriate mathematical and statistical techniques. The body of techniques including cointegration, unit roots and error correction mechanisms springs to mind. Hayek with him, is extremely hostile to holistic approaches to economics, while semicovertly recognising that such approaches are methodologically sound. Their opposition is due to the policy consequences which such approaches may entail individual utility maximising behaviour is interdependent, and hence may not aggregate to collective welfare maximising outcomes. The tensions implicit in this inconsistent standpoint soon begin to emerge when Shenfield attempts to apply this approach to the question of the validity of macroeconomics. We should bear in mind that Friedman wrote the Foreword to the book (Shenfield, 1977: xxi-xxiv), and also chaired the session preceding 101 ie, flow equilibrium. 142 Scientism did not deal with, namely the question of the legitimacy or virtue of macroeconomics. Is not the whole of macroeconomics Now objectively the answer to this q clear on this: regard itself as scientific .... [M]icroeconomic theory [is] the only legitimate economic KES: 21General Theory] did not refer so much to any detail of the analysis as the general approach followed in the whole work. The real issue was the validity of ... macroTBT: 100) Shenfield, however, is more cautious. He examines two aggregate level entities, national income and the general price level, for evidence of holism. While the concept of national income is rather grudgingly acquitted, the general price level, Shenfield find holistic fiction because it sets up an imaginary whole which is different from the 102 ). This immediately creates a major difficulty as conservative neoclassical economists, in particular the monetarist school of thought around Milton Friedman, have depended upon the quantity theory of money, which itself depends on a notion of the general price y which -71). How, then, to avoid division in the conservative ranks? How to avoid castigating Friedman as a rank collectivist he nature of may be a few collectivist ... concepts which, when used by those who know the pitfalls of collectivism, may be enlightening. Macroeconomics can have value, but only in the hands Shenfield seems not to notice what he has said here. He has made the value and significance of concepts such as the general price level and the quantity of money 102 Keynes goes further and finds major difficulties with both concepts, such that he decides not to use them in the General Theory (GT: 37-40). 143 depend, not on their content and inner logic, but on the personal characteristics of the theorist deploying them. If we were to take this approach seriously, all debate about ideas must cease and be replaced by discussion of personalities. It would be interesting to know what Hayek and Friedman made of this attempted reconciliation of their theoretical standpoints. It is also interesting to note that, whereas earlier, on methodological terrain, we could characterise Hayek as adopting a holist and Friedman a reductionist stance, they have now at the level of theory entities such as the price level which only emerge at the macro level something which -holist prejudice (though not his real methodology) makes impermissible. This switch demonstrates how profoundly unconcerned these writers are with maintaining methodological and theoretical consistency. Both want to retain policy individualism in a holist world: where they differ is on where to make concessions with -Keynesian macroeconomics to underpin a laissez-faire policy prescription, while to the same end Hayek would prefer to proscribe macroeconomic thought altogether. 5.3.2 Hayek and holism Early in the final version of his magnum opus, Toynbee (1972), sets out definitions of his main terms. Perhaps the most impor SOCIETY is the total network of relations between human beings. The components of society are thus not human beings but relations between them. In a social structure foci in the network o Leviathan, displaying society as a gigantic human figure composed of a multitude of life-sized human figures, is an anthropomorphic misrepresentation of reality; and so is the practice of speaking of h visible and palpable collection of people is not a society; it is a crowd. A crowd, unlike a society, can be 103 This is a vivid presentation of a holist view of society. But what is interesting here for he 103 For a similar criticism of the frontispiece to Leviathan, see Haworth (1994: 13). 144 foci Friedrich Hayek (CRS: 59). of the theory, not of society, but of mind, can be found in his work on theoretical psychology, The Sensory Order. It is extremely significant that TSO was read in draft, favourable references in the text to Ashby, Bertalanffy and Wiener, the pioneers of cybernetics and systems thinking, and to Cannon, a pre-cursor of cybernetics and holistic standpoint emphasising the systematic interconnection of the substrate elements without considering the properties of those elements in isolation (Pask: 1961: 13). All of (1993: 157) remark cited earlier that methodologically Hayek is more a systems theorist than an individualist 104 . At the end of TSO While our theory leads us to deny any ultimate dualism of the forces governing the realms of mind and that of the physical world respectively, it forces us at the same time to recognize that for practical purposes we shall always have to adopt a dualistic view .... [A]ny explanation of mental phenomena which we can hope ever to attain cannot be substitute statements about particular physical events (or classes of physical events) for statements about mental events .... [W]e shall never be able to bridge the gap between physical and mental phenomena; and for practical purposes ... we shall permanently have TSO: 179) We should bear in mind that at the beginning of the book, in defining his terms, he refers 105 ). Taking this into 104 See also LLL: xviii-xix. 105 Later in the book, Hayek forgets that he has defined the microcosm and the macrocosm in this way, and refers to them the other way round the macrocosm as the physical order and the microcosm as the sensory order (TSO: 108, 127). The logic for this seems to be that the physical world, the macrocosm in this alternative definition, incorporates everything, including the microcosms of the sensory orders of organisms within it. This is just one of a host of errors and inconsistencies which will irritate and frustrate the reader of this book. A substantial proportion of the index entries are incorrect and the 145 account, the passage just cited is a lucid and succinct account of the holist standpoint applied to psycho reduction, however, compel us to understand the macro level in its own terms. There is prevailing in a particular part of the physical universe that part of it which is ourselves in practice we are forced to recognise a dichotomy between lower and educe part, of the holistic nature of the world in which we live. This recognition is particularly important as it throws into sharp relief his assertion of individualist and reductionist methodological conceptions when policy issues loom. It also exposes a key aspect of his overall procedure: that, where necessary to defend his laissez-faire policy prescription, of individualism, and to underpin that he realises he needs to assert an individualist methodology. However, such a methodology faces insurmountable incongruities with the way the world is: at some stage the fundamentally holistic nature of the world has to be taken on board if our interaction with it is to have any efficacy whatever. Hence the s the consequence of his partisan policy approach manifests itself in connection with his theory of evolution. We will find that something very similar occurs here, too: Hayek says one thing and does another he is well aware of the implications of the Darwinian theory, but falsifies it when it clashes with his desired policy outcome. 5.4 Hayek and evolution German orthography is haphazard. Elsewhere (CRS: 72), in an extended analogy between the physical and social domains, Hayek uses the terms microcosm and macrocosm to refer to the atomic substrate and aggregate outcome levels respectively. 146 5.4.1 Darwinian evolution ly be understood on the basis of its rôle in his overall intellectual project, and, hence, an understanding of the nature of that project itself. policy prescription, namely laissez-faire 106 . Now to say this is not necessarily to condemn Hayek, although we shall see later that he can indeed be seriously criticised on this score. It is certainly no dishonour, however, to adopt a polemical stance or to allow that stanc economics, from Smith and Marx to Keynes and Friedman have a had a particular policy axe to grind, and have attempted to establish an economic theory to provide underpinning for a pre-existing social philosophy. It is their engagement with policy implications, rather than any aloof, purely theoretical standpoint, which has given what they had to say its coherence and bite. The problems that arise when Hayek attempts to do this, however, will become apparent as we examine his theory. cannot be relied upon to give us an accurate description of his own mode of procedure. We have already seen an example of this in connection with methodological issues: Hayek repeatedly asserts his adherence to one approach, methodological individualism, while in fact adopting a contrary one, methodological holism. When unconstrained by potential adverse policy implications in theoretical psychology, for example Hayek adopts a thorough-going holist account, and traces of this view can be seen elsewhere. When he is discussing society, however, the shutters come down and methodological individualism is proclaimed. That what is key for Hayek is the goal of privileging the level of the individual, and not the methodological approach to be adopted, is shown by 106 Hayek himself denies that he supports laissez-faire, and denies that Hume, Smith or Burke supported it (COL laissez-faire as the negation of all state activity elsewhere he makes laissez-faire mean, not an injunction to leave individuals alone, but to leave the existing laws alone (IEO: 135). On this interpretation, a removal of absolutist and mercantilist laws restricting trade would be a denial rather than an implementation of laissez-faire. Laissez-faire is understood in the same way in RTS (RTS: 13, 27). This, I contend, is an absurd misuse of words. On the meaning of the word which everyone else uses, Hayek is clearly a proponent of laissez-faire. 147 his adoption of holism in psychology, and his claim to adopt individualism in economics. The former implies a systems view of the individual personality, while the latter again, although now arbitrarily, privileges the level of the individual agent. Focus on the abstraction of the individual is the goal, and the selection of methodology is made to suit. We may see another example of Hayek saying one thing and doing another in connection with the theory of evolution. He correctly sets out the principle elements of the Darwinian theory of evolution, but the theory he actually uses is different. We can see this by comparing what he says in COL, SIP, and NSP. In COL, Hayek sets out his evolutionary theory and links it to his major themes. Hume, Smith and Ferguson, he evolved COL Hayek wishes to attract to the tradition from which he claims descent the prestige associated with the Darwinian theory of evolution (Hodgson, 1993: 152). He immediately links have given us an interpretation of the growth of civilization that is still the indispensable foundation of the argument for liberty. They find the origin of institutions, not in co COL: 56-57). evolution laissez-faire for the governmental and property systems which actually exist, Smith argued that all was for the best in this world as the invisible hand of God guided agents to those actions which achieved the socially most desirable outcomes. I said also that in the more secular twentieth century this goal of reconciliation could only be achieved if a plausible and m is to replace the supernatural invisible hand with a natural one, a version of evolutionary theory which can combine the minimal policy prescription of laissez-faire respectability of a Darwin. At the same time he re-writes history in an attempt to show, contrary to what we saw in the previous chapter, that Smith did not make God the linchpin of his system: on the 148 contrary, we are informed, Smith et al had already discovered evolution, and, indeed, had done most of the work for which Darwin later took the credit: of social evolution today is likely to create the impression that we are borrowing the idea from biology, it is worth stressing that it was, in fact, the other way round: there can be little doubt that it was from the theories of social evolution that Darwin and his COL: 59) This is indeed a staggering claim. Although, like much of what Hayek has to say, it is wrapped up in vague phrases this is clearly a claim that the credit for the Darwinian theory should properly go to the Scottish eighteenth century philosophers, principally Smith and Hume. As Hodgson says, multiple precedence is ... without foundation .... It betrays both a misreading of the sources and some misunderst Contrary to what Hayek says, there is no truth whatever in the claim that anything even remotely approaching an anticipation of Darwin can be found in the works of Adam Smith. Many of the things whose origin fundamental feature of our social psychology, make a great deal of sense in an himself had such a perspective, indeed he most certainly did not 107 . As far as Hume is theory and its relation to Darwin In COL of a pre- 107 WN Astronomy There is no sense of diversification of social forms coupled with selection of the fittest ones which would make this an evolutionary process in the modern, Darwinian sense. 149 (COL: 59). In SIP, however, he says natural selection] we must clear out of the way a widely held misconception as to its content. It is often represented as if it consisted of an assertion about the succession of particular species of organisms which gradually changed into each other. This however, is not the theory of evolution SIP: 31). of structure always means a common ancestry ... is emphatically not the main content of (SIP own: the hypothesis innum 18-19). It was thus, not merely the assertion of the hypothesis of descent, but also the explanation of modification, that was the aim of The Origin of Species (Dennett, 1995: 39). So the theory of evolution espoused in COL is now, in SIP gives no hint as to who might be guilty of holding it, and none at all that he himself had recently held this view. If the COL conception of evolution is incorrect, what is the correct conception? ution by natural selection] ... is that a mechanism of reduplication with transmittable variations and competitive selection of those which prove to have a better chance of survival will in the course of time produce a great variety of structures adapted to continuous adjustment to the environment and to SIP: 32) result of evolution is concerned, we have organisms which are well-adapted to their form of that adaptation in some species). 150 The reader might be forgiven for thinking that, at least it is the later formulation which is done so 108 . But this is not so. In 1978 Hayek (NSP: 249-266) reprinted without comment his 1966 British Academy Lecture on a Mastermind, mark the definite breakthrough in modern thought of the twin ideas of evolution and of Mandeville: 250). Moreover of evolution a commonplace in the social sciences of the nineteenth century long before Darwin. And it was in this atmosphere of evolutionary thought in the study of society, effective habits and practices, that Charles Darwin at last applied the idea systematically to be NSP: 264-265). So, again, Hayek is claiming that the Scottish Enlightenment philosophers, this time ular context of society. the biological context, and the rest was history 109 and perhaps more importantly contain not one point of evidence to back up his description of Mandeville as a question of Malthus having articulated this idea with the other necessary components replication, descent and modification to achieve a theory of evolution. And secondly, 108 ground for 109 regularity without design, and that social change can be explained without recourse to deliberate human actions, was discovered by the thinkers of the 18th-century Scottish Enlightenment, notably Adam Ferguson, David Hume and Adam Smith, long before Darwin in a not dissimilar way explained the biological 151 Hayek gives no credit to Malthus for his contribution to Darwinism. As is well known, Malthus strongly rejected the Panglossian optimism of the Smithian tradition which tated more to harmony and equilibrium as in the cases of Adam Smith and Herbert Spencer than to the relentless -278, n4) 110 . So Hayek says different, and, indeed, contradictory things. When in 1960 he reduces Darwinian evolutionary theory to a hypothesis of common ancestry what he it is so that he can link Darwin with the Scottish philosophers, particularly Smith and Hume, and bolster a particular notion of evolution in COL COL: 59). In the passages cited from SIP, he is less constrained. He is citing evolution as an (SIP: 31-35). His point is to argue that, contrary to physical theories, evolutionary theory cannot be used to make specific predictions: because of the limits on our ability to acquire the necessary information, it is not possible to predict the direction evolution will take or to verify such predictions. All we can do is to talk about certain patterns of outcomes which can or cannot be produced and the conditions which would affect them. His interest in this is to say that the study of social structures is of the same kind: a case of pattern, not specific, prediction. Evolution is, again, being used here ultimately to underscore a theoretical point required to generate his desired policy conclusions: the limitations on our knowledge of society preclude central planning 111 . Nevertheless, the 110 Essay on the Principle of Population in the second (1802) and subsequent editions in Poovey (1998: Ch 6). 111 The argument is illegitimate since, as The Sensory Order makes clear, the same limits to selfknowledge apply to individuals as to society plan their activities. 152 link is here far less direct; hence in this context he has no reason to distort the theory and we get a relatively objective account. discussing evolutionary theory in general terms as an example of the study of complex phenomena, he is deploying it to underpin a particular policy agenda. He draws out a tradition going from Mandeville through Hume, Smith, Ferguson, and Burke, as well as Savigny and Herder (NSP: 265), to himself. These thinkers share two things: a notion of independently of their intentions, and a belief in the optimality in some sense (the individuals Hayek mentions vary) of that spontaneous order 112 . The identification of NSP spontaneous emergence of a social order as tantamount to an evolutionary process. The corollary would be that the spontaneous order philosophers are pioneer evolutionary theorists, and Darwin is seen as getting all the credit simply by applying the idea to biological phenomena. One result is to confer the scientific authority of Darwinism on the spontaneous order tradition, and another is to present a fallible social process as something natural and hence right. The idea of optimality is smuggled in under cover of spontaneity. In sum, then, when Hayek is discussing the theory of evolution in an objective way, he is able to give a reasonable account of the process; when he is actually using the theory to buttress his overall system we get something very different. The theory is treated with 112 That what Mandeville says in many places is open to this interpretation is very true. But it is also vices by the dexterous managem if these actions were properly channelled by the government. As a mercantilist, Mandeville had no laissezfaire was a mercantilist or a liberal seems likely: the fact is that he inconsistently adopted both points of view in different places. 153 knows what he is talking about, but it seems that he is willing to distort theory, just as he is willing to distort facts, in order to fit with his desired conclusions. We have seen how Hayek is guilty of a major distortion of Smith, how he recruits Mandeville to his spontaneous order tradition by suppressing contrary evidence, and how a basis of his argument for freedom. But this theory did more. Though his primary aim was to account for the evolution of social institutions, he seems to have been clearly aware that the same argument could also be used to explain the evolution of biological organisms. In his posthumously published Dialogues on Natural Religion he more than hints at such an applicati revolutions, through the endless periods of eternal duration. The incessant changes to a an animal could subsist unless its parts were so adjusted? Do we not find that it perishes ut intermission; is evolution. It was still (SIP: 119) There are three references to evolution and even if Hume had used the term evolution, it would not have meant what we domain prior to 1859. Let us explore this issue further. The object of this passage is to convince the reader that Hume had a full-blown theory of evolution which he applied to institutions and which he toyed with applying to biological phenomena. Yet the article on David Hume in which it appears, contains no evidence or argument that Hume did in fact have an evolutionary theory of society. What we see instead is a demonstration that Hume regarded the emergence of the regular and lawful institutional structure of society as being largely the product of a spontaneous process. The impression that Hayek wishes to create is that the two are the same thing. Now there are certainly links between the theory of evolution and the emergence of a spontaneous human order; evolution is clearly both orderly and rule-governed on the one hand, and spontaneous, in 154 there are very significant differences between the two; the social structure, for example, arises, and must arise, on the basis of the deliberate actions of human beings (even if not as a result of their intentions), but this is clearly not necessarily the case for evolution. A simple identity between the theory of spontaneous orders and that of evolution cannot be assumed: on the contrary, the links between the two, and what divides them, have to be argued for. Dialogues for a theory of evolution in nature. To help us we may call as expert witness the American philosopher Daniel Dennett, who has dealt with precisely this point in his book . Part 4 of Chapter 1 t, 1995: 28-34). After noting, what is surely correct, that Hume himself appears in the Dialogues in the person of Philo, , 1995: 32). And it is true: if we read the Dialogues, or just the passages cited in Dennett, we can see that Philo did come close to the discovery of evolution by natural selection. The extracts Dennett cites show (a) a prescient depiction of the origin of life (an which we actually observe in living things; (c) the claim that defects in form will lead to removal of the form. The latter statement is clearly an idea of natural selection. What this account lacks, what distinguishes it from Darwinism, is the idea of reproduction as combining overall stability of form with some errors: imperfect replication, allowing which must be a severe defect in any putative theory of evolution. Moreover, Philo is ambiguous about the key issue of imperfect replication. Firstly he contrasts the stability of the orders or economies, with the random transpositions of disordered matter. Secondly he implies that there must be changes in natural forms in that defects in them are removed. But if the orders are stable, where do the defects come from? Again, because he says nothing about reproduction, descent with 155 modification, we are left with that version of selection in which an original endowment of variety is gradually whittled away by selection leaving only the forms we see today. A form of selection in which a given pool of objects is sifted, the imperfect forms removed and only the adapted ones remain. In this account nothing has happened to the adapted forms, only to the unadapted ones: the adapted forms were there from the start 113 , can be seen in Lucretius in the first century BC (Lucretius, 55 BC: Book 5, lines 837877; 1969: 191; 1951: 196-198), and in Empedocles more than four hundred years before that (Barrow and Tipler, 1988: 34). In arriving at a verdict on Philo, we need to take three things into consideration. Firstly, itute only a speculation, involving a brief passage, not a worked out judgment is her seriously, without a source of variety for natural selection to work on, in the form of copying with errors, a fully functioning theory of evolution is not possible. Hume has Smith anticipated Darwin. To summarise the results of the discussion so far: Hayek is able to set out the theory of evolution concisely, but when he comes to use it, the theory of evolution he employs is -Hume-Smith-Ferguson NSP: 265, n58) developed the theory of evolution which Darwin then later applied to the biological sphere. This claim is false. In both cases his objective is to identify the emergence of a spontaneous social order with an evolutionary process, in order to present that order as something natural, something which we cannot and should not adapt to our own needs. The arguments in each case have been shown to be 113 n of the new forms is obscure if anything, it appears to be by the continual emergence of new life forms from inanimate matter rather than by adaptation of existing forms. In this sense it is true that adapted forms do not acquire their adaptation from the evolutionary process but acquire it at their origin as life forms. 156 illegitimate. Ultimately the rôle of evolution in Hayek is just that of the invisible hand in Smith: an inscrutable agency which arranges that the unintended outcomes of our actions will be benign. Again, we have an interface between a holistic world and a reductionist policy prescription: our activities as human beings are organically linked to each other but can be treated as if they were independent: if the actions of each individual are directed towards the good of that individual, then the actions of all individuals must tend to the good of all. All the hard work of reconciling disparate interests and behaviours is accomplished behind the scenes by the process of evolution. 5.4.2 Hayekian evolution We have seen that the the COL: 56-57), (NSP COL: 59)? This subsection will investigate these questions further. In order to do so we first need to introduce the distinction between ontogeny and phylogeny terms used by Hayek himself (TSO: 42, for example), but without any apparent consciousness of the significance of the distinction for his theory. Ontogeny is the development of the individual of a species, while phylogeny is the evolution of the species. Now the term evolution developing [of a are included under the catchword evolution in the Shorter Oxford English Dictionary (Onions, 1973: 693) 114 . But there is a key difference between these ideas: ontogeny, the development of the individual from embryo to maturity, has a goal, whereas phylogeny has none. Ontogeny is teleological: the phases which the immature organism normally passes through are means to the end of creating a reproductively mature adult. Once 114 The two definitions are dated to 1670 and 1832 respectively. The second definition still is not the same thing as Darwinism as, indeed, it could not be, prior to 1859 lacking as it does the key notion of natural selection as the cause of the modification of species. 157 that goal, adulthood, is achieved, development ceases. Deviation from the normal ontogeny is in general pathological. Phylogeny is very different: there is no goal in the development, and can be none, since no agency exists to implement the interest of the species. Each individual attempts to survive and to pass on its DNA to successive generations, the best it can, given the character of its environment, including the other individuals of its species. The history of the species is just a list of the ways in which this is permanent change, the process of adaptation to the environment can never be complete. Ontogeny terminates, but the only possible terminus to phylogeny is extinction. It must, then, be clear that the Darwinian theory of evolution is a theory of phylogeny, not ontogeny. Hodgson (1993: 161) makes the case, however, that Ha theory is ontogenetic and not phylogenetic: SIP interpreted as nothing else but an endeavour to reconstruct from regularities of the individual actions Biological ontogeny is precisely the endeavour to explain the development of organisms from the regularities of their genetic endowment, in contrast to phylogeny which considers t Now this argument could easily be extremely unfair to Hayek. Ontogeny and phylogeny are not alternative theories in biology, but complementary. It is true that species evolve, and it is also true that individuals develop to adulthood. Hodgson has clearly identified ayek uses this ontogeny in place whole of like Popper, exhibited great anxiety and dogmatism about the boundaries between one science and another and between science and other related activities. It would be quite plausible for Hayek to relegate phylogeny to some other cognate discipline. We will see shortly that this is not the case. The implication of Hodgs evolutionary, since evolution concerns phylogeny not ontogeny. This is very important 158 outcome: there is a log history. The ontogenetic version of evolution is fully compatible with the Whig interpretation of history, in which the essence and goal of history is the development of evolution with his persistent tendency writings of Walras or Smith, Hayek makes the addition of mere appendage. Darwin is then reduced in stature because he is not significant for the Hayekian theory. Without further clarification, the latter can easily be reduced to the postHumean ontogeny of the emergence of the coherent social order... [O]ntogeny was well established before Darwin. It is thus no accident that Hayek simultaneously upgrades Here we have further evidence that Hayek attempts to annex the prestige of Darwinian evolution whilst simultaneously distorting the Darwinian theory. Hayek's theory is ontogenetic; ontogenetic theories of development in nature and society were extant long before Darwin, and, moreover, are not theories of evolution at all, but a theory of the maturation of an organism. Clearly, twentieth century capitalism has emerged from some kind of developmental process. The question is, whether that process was ontogenetic elevant concept of development is that of ontogeny: we have reached the terminus of history, and the system we have now must be considered optimal. If, on the contrary, phylogeny is the appropriate concept then no such assumption of optimality can be justified: on the contrary the desirability or otherwise of the institutional framework has to be determined by reference to the facts rather than to theological, or evolutionary, invisible hand apologetics. Even Norman Barry, a writer with great sympathy fo invocation of evolution as a failure: meeting ma evidence hardly points to an ultimate triumph of the market order ... the evidence for 159 beginn -47) 5.4.3 The assumed optimality of evolved institutions There is a key passage in COL in which Hayek links the Scottish Enlightenment thinkers, social evolution, and the question of optimality: ionalist tradition assumes that man was originally endowed with both the intellectual and the moral attributes that enabled him to fashion civilization deliberately, the evolutionists made it clear that civilization was the accumulated hard-earned result of trial and error; that it was the sum of experience, in part handed from generation to generation as explicit knowledge, but to a larger extent embodied in tools and institutions which had proved themselves superior institutions whose significance we might discover Scottish theorists were very much aware how delicate this artificial structure of civilisation ncts115 being tamed and checked by institutions that he neither had designed nor could control. They were very far they did sometimes use the last phrase). They knew that it required the artifices of institutions and traditions to reconcile the conflicts of interest. Their problem was how f love, may receive such direction in this case (as in all others) as to promote the public interest by those efforts it shall make towards 116 117 would be reconciled, that had successfully channeled individual efforts to socially COL: 59-60) There are many points to comment on in this passage. Firstly, as we saw in the previous view was a little more complex: it was true, in his view, that man was imperfect but even the imperfections were god-given and contributed to the overall plan. The such by men because of their finite minds: the infinite mind of God, seeing all the 115 altruism and solidarity these two instincts ... which remained the great obstacle to the development of the modern economy .... I could write the whole of economic history in terms of the subduing of these good natural instincts by KES: 31). 116 The reference is to Josiah Tucker (1755) The Elements of Commerce in RL Schuyler (ed) (1931) Josiah Tucker: A Selection New York: Columbia University Press, p 92. 117 The reference is to Edmund Burke Thoughts and Details on Scarcity in Works Vol VII: 398. 160 apparent imperfections to the perfection of the whole. In this sense, then, Smith certainly did believe in the natural goodness of man, despite all appearances contradicting that belief. Again, Hayek distorts what the Scottish Enlightenment thinkers actually said in order to present them as the initiators of an evolutionary trend in social thought. reconcile conflicting interests. The central question of economics and of social science in general does indeed concern how individual self-seeking behaviour is to be led into assured that institutions evolved to secure life, liberty, and property, and that they have the effect of directing self-interest into the service of the community. But we are given absolutely no details no examples, no analysis of the evolution of particular institutions or types of institution. Hayek ought to show, as an example, how, and in what circumstances, some of the institutions we have inherited from the past reconcile selfinterest with the interests of others. But there is no word here on how institutions accomplish this task. spontaneous emergence of a social order with the extreme rationalist account 118 in which every instance of institutional progress occurs as a direct result of the conscious intentions of some social reformer. In this Hayek is correct. It was in the interest of the absolutist regimes and their mercantilist literary representatives to argue that the only alternative to a consciously constructed and imposed centralised order was a chaotic anarchy. The Smithians performed a signal service by arguing that social orders could also arise spontaneously on the basis of self-seeking behaviour. Secondly, however, we have the hypothesis of optimality. The institutions which issue from an extensive process of evolution are said to reconcile individual interests and channel individual efforts into socially beneficial directions. Clearly, they must do this to some extent, or we would not be able to observe spontaneous orders, but the key question is, how well they do this. On this, Hayek is content to remain silent and to 118 This is not the place to discuss whether his treatment of the continental rationalist trend is any nearer the mark than his treatment of the Smithian trend. 161 allow the presumption of optimality to remain unexamined. In his theory, the institutions which are handed down by our forbears show their superiority in their very survival: they he argues that individual interests are rendered socially beneficial by the evolution of institutions. But this begs the question: institutions, like genes, survive the selection at surviving, not necessarily at serving our interests. An institution may well survive because, although harmful to the majority, it serves the interest of a minority who happen the Mafia, for example, or Thuggee. The clear old it has survived the selection process of imitation and learning, by means of which institutions, ideas and skills are transmitted to new generations, on the basis of their success in serving the interests of previous generations. The hidden implication is that when one of two institutional forms is selected, then it can be regarded as unambiguously superior to the alternative form. In some sense it reconciles the interests of the individual agents more efficiently. There is no hint that one group of agents may have an interest in on Once this is allowed, institutional change involves victory and defeat for different groups. In that case it becomes impossible to describe such change, without qualification, as it is unproblematic to compare two institutions and sele Sen, discussing this point in Hayek, makes the point that the Smithian argument which Hayek relies on achieve the results intended by individuals ... and then some more. I want bread and will happily give some money for it, and the baker wants money and will give me a loaf of bread in exchange. When we carry out the exchange, we do achieve what we set out to achieve, and in the process we have helped each other ... the market works on the basis of congruence of interests of different participants. That is the essence of the Smithian perspective: different people have a common interest in exchange and the market gives them the opportunity to pursue their common interests ... In most economic problems the interests of the different people involved are partly congruent, partly conflicting. The market mechanism on its own confines its attention only to issues of congruence, leaving the interest conflicts 3: 4-6) 162 As we saw in the previous chapter, market activity in Smith does not reconcile individual agent interests because these interests have been pre-reconciled by the invisible hand of God: exchange realises that pre-existing reconciliation. Now, we can see that Hayek adopts a comparable stand. Agent interests are assumed not to be mutually contradictory: individual agents hold common but merely spontaneously uncoordinated interests. Explaining the evolution of new modes of conduct Hayek says that manners of conduct ... were adopted because somebody who acted on them profited KES: 32). In other words, there was a preexisting harmony of interest between the individual and the group: the individual benefits himself and simultaneously the group by his actions. This is the basic assumption on realise terests by bringing about a coordination of their activities. This allows the optimality of the institutional framework resulting from the evolutionary process to be assumed. Since I have placed considerable emphasis on the optimality assumption in Hayek, it is important to consider the occasions on which it is explicitly raised in his writings. I will refer to two such passages, one in IEO and one in COL. his peculiar knowledge and skill with the aim of furthering the aims for which he cares, and if, in so doing, he is to make as large a contribution as possible to needs which are beyond his ken, it is clearly necessary ... that the relative importance to him of the different results he can achieve must correspond to the relative importance to IEO [A]ny individual can expect from the different uses of his abilities and resources correspond to IEO: 21). This is just an obscure way of saying that the ordinal ranking of the possible outcomes of his a 119 ) must be the same for him and for other people affected by his actions; ie, if he faces a choice between spending and saving, and he decides to save, society in general must not prefer that he spends. In other words, there must be a harmony of interests. If this condition were always satisfied, then self-serving behaviour would always lead to socially optimal 119 ordinal ranking. Whether it does or not, it certainly means at least that, and hence the argument in the text follows. 163 outcomes. So we urgently need to know when we can expect this harmony to hold. such a market the individual making a decision has the same ranking of outcomes of his behaviour as everyone else does. Hayek, in other words, blandly asserts that there is no such thing as an externality. This is just to assume the whole problem away. It also eliminates any qualitative diversity between individuals: each individual has the same ranking of outcomes as everyone else. It is true that Hayek a markets could imply that any market in which the condition fails is defined as claim is empirical, he should justify it empirically which, of course, he cannot do. If it In COL, Hayek allows that the points he has previously made sets of moral beliefs which have grown up in a society will be beneficial .... [A] group or nation [may] destroy itself by the moral beliefs to which it adheres. Only the eventual results can show whether the ideals which guide a group are beneficial or destructive .... It may well be that a nation may destroy itself by following the teaching of what it regards as its best men .... There would be little danger of this in a society whose members were still free to choose their way of practical life, because in such a society such tendencies would be selfideals would decline, and others, less moral by current standards, would take their place. But this will happen only in a free society in which such ideals ar (COL: 67) So, although he admits that suboptimal systems may evolve, firstly, this can only be rationalistically step in beforehand to avert the catastrophe. Secondly he is able to assert by appeal to assumes optimality good for individuals is good for their group and what is good for the group is good for the nation. But of course the behaviour which is Nash for agents within a society whether they be individuals or groups cannot be assumed to be optimal for the society as a whole. Individuals and groups do not achieve pre-eminence in a nation by following rules which it would be in the interest of the nation for everyone to follow, but by 164 following rules which establishment. To conclude, therefore, Hayek does clearly subscribe to the optimality assumption. A IEO: 20) will generate social outcomes which are the best we can get. His theory of social evolution is intended to provide underpinning for this assumption. In view of the link drawn in the previous chapter between the assumption of optimality and the natural law tradition in Smith, it is interesting to note here the very favourable view that Hayek takes of that tradition. In Mandeville, pp 131 ff, he details how the ie, natural law from Greek times up to the present. He postulates a connection between freedom, all free countries a belief that a special providence watched over their affairs which turned Mandeville: 130) 120 Weltanschauung. Hayek summarises the history of the spontaneous order tradition as follows: the spontaneous development of social orders .... [I]t [sc this tradition] led to a systematic questioning of how things would have ordered themselves if they had not otherwise been arranged by the deliberate efforts of government; they [sc the older theorists of natural Mandeville: 131). Thus Hayek claims intellectual descent from the ancient 121 and medieval tradition of natural law. In particular he says of the tradition from which he claims intellectual 120 The preceding ng to Hayek, holding a belief in the ministrations of a special providence illustrates an understanding of social yet more evidence of the quasi- 121 Two examples he gives are Aristophanes and Cato (Mandeville: 130-131). 165 continued or resumed the aim of the older natural law theo SIP: 103-104). 5.4.4 Group selection The idea that institutions, constructed on the basis of individual micro behaviour, are selected on the basis of their success at the macro level, leads immediately to the idea of group selection, so reviled by contemporary biology. This subsection explores the theme SIP: Ch 4: 66-81). Firstly, he explains that rules of individual behaviour constitute the basic units of evolution in society: it is rules which play in social science the role played by conduct of individuals can be d SIP: rules can be transmitted genetically or culturally, and they may be embodied in humans, non-human animals, or even self-replicating von Neumann machines (SIP: 66). In so far as they are genetically transmitted, they are identical to the genes for the behaviour they specify; in so far as they are culturally transmitted, they are synonymous with memes conduct which govern the behaviour of the individual members of a group ... and ... the distinction is well-taken. The system of rules of conduct are the social equivalent of the memotype, while the order of actions corresponds to the phenotype. The system or order of rules is the set of instructions; the system or order of actions is the outcome. They describe the micro behaviour of the individuals composing the society and the macro social outcome, respectively. Contrary to any reductionist view, which would imply a simple, mechanical, and aggregative relationship between memotype and phenotype, between system of rules and order of actions, Hayek stresses the contingent nature of the macro level system arising on the 166 conduct of the individuals with the actions of other individuals and the external SIP: 71). He cites the entropy principle embodied in the second law of thermodynamics as an instance of regular micro level behaviour leading to perfect disorder at the macro level (SIP: 67), and a society in which fixed rôles were filled by individuals selected by lot, as an instance of irregular behaviour at the micro level supporting a perfectly orderly macro outcome (SIP: 69). Moreover, actions of a group of individuals ... and it is at least conceivable that the same overall order of actions may be produced by different sets of rules of individual conduct ... The same set of rules of individual conduct may in some circumstances bring about a certain order of actions, but not do so in SIP: 67-68) These perfectly correct indeed, valuable points, however, are leading up to an incorrect in other words, an organism. And what could be more holist than the assertion that SIP: 71)? Having set out a holistic view of the relationship between the micro and macro levels, in which the link between the two is complex, indirect and mediated, rather than simple, direct and immediate, as it would appear in a reductionist view, he proceeds to break the link between the two altogether. Macro level objects, nothing to their material bases in individual behaviour. It is in this sense that Hayek the substrate-dependence of macromysticism: evolution in this view can operate on the order as a whole even in the absence of any mechanism tying the interest of the individual to that of the whole. By eliminating the tie between macro and micro, Hayek obscures the necessity of such a mechanism. His thesis is that social evolution is evolution which occurs at the level of society, at the level of the group: the cultural transmission of rules of conduct takes place from individual to individual, while what may be called the natural selection of rules will operate on the basis of the greater or lesser efficiency of the resulting order of the group SIP different rules of individual conduct operates through the viability of the order it will SIP 167 COL: 56NSP: 256). Cultural rules are, indeed, transmitted from individual to individual in the sense that only individuals can execute cultural instructions (whether on their own account as principals, or as agents for others such as firms and organisations), although the transmission is mainly mediated by cultural artefacts telephone messages, letters, newspapers, magazines, journals, books, films, TV and radio programmes, e-mail and websites 122 . However, efficiency and viability, successful and more effective are left undefined. Do we mean efficiency for the order or for the individuals working within its framework? It We have a system of instructions. Executing those instructions has consequences. Some consequences are more favourable than others to the continuation and expansion of the system of instructions. Those systems of instructions which we actually find are likely to be those whose execution leads to their own successful replication. What does lead to successful replication depends on the environment. The environment of the system of rules includes its own substrate. Just as a person can only do what their limbs are able and willing to do most people cannot hold their hand in a flame or look at the sun, and no one can fly by flapping their arms a society can only do what its constituent individuals are willing and able to do. The difference is that in the person, the individual components all have the same set of instructions, the same genotype; and their interest is to lever a copy of that genotype into the future. The only way they can do it is by aiding the production and care of offspring. This can only be done by each part playing its rôle in the activity of the whole person. Every part has an interest in cooperating with every other part to fulfil the aims of the whole person. In society it is otherwise. Everyone has their own interest to follow, largely based on tastes and preferences selected for because of their likelihood of leading to successful genetic propagation. So the parts of an organism play the rôle they are required to play if they get the right information and resources they already have the necessary incentive for playing their part in the overall scheme. The parts of a society play the required rôle the rôle required for the successful adaptation of the social system if they get the required information, 122 -61). 168 resources, and incentives. So the system will have a selective advantage if it contains instructions which allocate to individuals (including here every kind of economic agent individual households, firms etc) the appropriate incentives, information and resources. Consider the following thought experiment to show that we cannot assume that the rily the efficient satisfaction of human interests: A well-adapted social system, one which has survived the selective process, must include a system of incentives for individuals to follow. In following these incentives, the individual is necessarily doing something which is both in him the incentive to do it (we assumed at the start that it was well adapted). So, on the assumption that a set of such incentives can in fact exist, there is at least that much mutuality between the individual and the collective. Nevertheless, while it may be in the call it action A given what everyone else is doing (ie, action A is Nash), it may well be that the collection of all individuals could all do better if they were somehow all coordinated to behave otherwise say to carry out action B. In other words, the individual agents find themselves in a multi-player . In this case, we have two systems of rules competing for the allegiance of the population. One system directs them to carry out action A, acting as an isolated human atom, the other requires action B, where the population acts as a collective agent and each individual achieves a better satisfaction of his interests. While none of this may in fact be the case, it is clear that there is no reason in principle for us to assume that the characteristics which are spontaneously selected for in social systems will be more desirable to the members of those social systems than the characteristics with which they might wish consciously to endow them. that the selection process sifting institutions is one which endows those systems of rules which are better able to satisfy human interests with a higher probability of survival and propagation. The thought experiment shows that this assumption is unwarranted. On the contrary, selection of institutional forms of society may well throw up systems of rules of conduct in which the behaviour of each is Nash, but the outcome for all is suboptimal. And, of course, it is precisely the contention of many that that is precisely the situation we face. Hence egs the most important question. To take a single example, it is 169 perfectly clear that the order we have involuntarily constructed is not beneficent towards animals, or we might all be vegans; on what grounds are we to believe that it is beneficent towards humans? Necessarily, Hayek is extremely vague 123 . He cannot specify the mechanism by which mutation and selection is to take place. It may be that there is a set of rules such that if a given society were to implement it, it would have a competitive advantage over other groups. But it may also be the case that the individuals of the society cannot reach that set of rules from their present set by each individual following his own spontaneous interest. It may need coordination at the macro level to achieve it. Selection will never be able to work on this set of rules as there is no spontaneous mechanism which will allow the society to adopt it, without it being imposed on the whole society by central command. To illustrate his thesis that macro level orders are systems of behaviour that have been selected for because they are optimal for the micro level agents, Hayek turns to zoological examples: overall order are those where this order consists in a spatial pattern such as will occur in the marching, defence, or hunting of a group of animals or men. The arrow formation of migrating wild geese, the defensive ring of the buffaloes, or the manner in which lionesses drive the prey towards the male for the kill, are simple instances in which presumably it is not an awareness of the overall pattern by the individual but some rules of how to respond 123 ome kind of selection mechanism, although its specification, along with that of the unit(s) of selection and the criteria of fitness, are note of frustration: Hayek is so obscure, allusive, vague, contradictory and downright wrong that often sual attitude to sources and anisms of rule replication are not clarified or explained. The mere suggestion of his theory and it is necessary to interpolate and to conjecture so as to attempt to understand his 170 to the immediate environment which co-ordinate the actions of the sever (SIP: 69) This is a heterogeneous list of examples. It would be out of place here to launch into a description of their hunting methods were true, it is most unlikely that their tactics could be reduced to a stereotype summed up in a few simple rules, in the same way as geese and buffalo. But that is not the main point here. What is interesting is how these examples contradict his thesis. First model, the arrow formation would be an order of actions which would have evolved because it was optimal for the geese. A better explanation, or candidate explanation, is that perhaps each goose gains by flying in the slipstream of another, and so it follows the rule of doing so, where possible. If this is true, then the arrow formation is an epiphenomenon of following this rule: it confers no cost or benefit on the flight of geese. Now we know that this is not true for Homo sapiens: the patterns of our collective behaviour have a major impact on the fate of individuals. assuming that his facts are correct): it is quite likely that each animal follows a simple rule in certain circumstances of danger the result is a defensive circle which no individual animal intended but which serves all their interests optimally and presumably this behaviour evolved because groups of buffalo which reacted thus were at a selective can not be assumed to hold in general. On the contrary, in situations where it may well hold, such as the buffalo circle, there has to be a mechanism by which it is in the interest of individuals to behave in the way required for the macro level outcome. In the case of the buffaloes this incentive may lie in the consanguinity of the group: each buffalo is a vehicle for much the same assemblage of genes, and so (the gene complex embodied in) each gains if it aids the survival of its fellows. The externality is internalised. Or perhaps it just makes an immediate gain in security for little extra cost by joining a defensive circle. Such links from self-seeking micro behaviour to desirable social outcomes cannot be assumed in groups of humans, but have to be demonstrated on each occasion where it is thought to hold. 171 Hayek thus believes that people do what they do, not because it is in their interest to do so, but because it is functional for the society for them to do so 124 . A conception which clearly denies the necessity of incentives to underpin any posited pattern of individual behaviours. Speaking of the rules of conduct in primitive human societies, he says that reconstructed the overall order which is produced by actions in accordance with them ... all the individuals of the species which exist will behave in that manner because groups of SIP: 70) When we act, what we do is describable, if sufficiently regular, by a rule. But the question is whether the rule is an epiphenomenon, like the arrow formation of the flying geese, a pattern which emerges from generalising a large number of instances of the particular action, or whether the individual actions are executed because of the rule. In the second case, the actions of individuals are functional for the purposes served by the albeit in scare-quotes only 125, p.83) is right to sugg quality; it assumes that the contribution of a rule to the maintenance of a system is specification of a process by which a rule that is advantageous to the system is sustained in It is a basic assumption t, one is simultaneously (and more importantly) carrying through the interest of society; that actions performed by individuals are automatically functional for society. This is to assume all our problems away. from SIP therefore that the same set of rules is appropriate to all. All the individuals now alive behave in the same way: there was variety in behaviour in the past, but not now, as less 124 As we shall see, this involves an impressive negation of the autonomy and rationality, indeed, of the value, of individuals. 125 172 well adapted behaviours have been eliminated. In the past some individuals behaved this way, now all do. The implication is that evolution is convergence to a destination state, rather than permanent flux. This brings together two threads: firstly, the Lucretian vision of evolution which Hume attributes to Philo in the Dialogues, the vision in which selection eliminates less well adapted forms, allowing the pre-existing fitter forms to as the approach to a destination state. On the big issues, the emergence of the market and common law, evolution, and hence history, comes to an end with capitalism. Hayek CRS: 365-400). In a footnote to the passage mple further illustrations of the kind of orders briefly sketched in this section ... in V.C. WynneEdwards, Animal Dispersion in Relation to Social Behaviour SIP: f view is exactly the group selectionist argument criticised by Richard Dawkins: are prepared to sacrifice themselves for the welfare of the group, may be less likely to go extinct than a rival group whose individual members place their own selfish interests first. Therefore the world becomes populated mainly by groups consisting of self-sacrificing famous book by V.C. Wynne-Edwards [Animal Dispersion in Relation to Social Behaviour]... [But if] there is just one selfish rebel, prepared to exploit the altruism of the rest, then he, by definition, is more likely than they are to survive and have children. Each of these children will tend to -run by selfish individuals, and will be indistinguishable from the -8)126 To illustrate the point we may cast our minds back to the case of the elephant seals, discussed in Chapter 2 of this thesis. We saw that the elephant seal species and populations within it are less efficient in exploiting their habitat than they could be, were their genes not caught up in a multiextinct and many mammal species are endangered: it is not beyond the bounds of plausibility that one day the elephant seals will teeter over the edge of extinction when 126 It is relevant to the title of this chapter to note that John Maynard Smith, adopting the same standpoint as Dawkins, chose to denounce the Hayekian, Wynne-Edwards group-selection argument as whole, rather than acti 173 solution to the dilemma cannot emerge and replicate, and displace the Pareto-inefficient defection solution, because no mechanism, no incentive structure exists to make cooperative behaviour Nash. Evolution may very well take place at the group or species level; but for that to happen, there has to be a mechanism within the group which gives individuals adequate incentive to behave in the manner required for the group to prosper. Hayek attempts to suggest such an incentive: of the group, and through this also for the existence and preservation of the individuals themselves, have been shaped by the selection of those from the individuals living in groups which at each stage of the evolution of the group tended to act according to such SIP: 72) This contains two formulations; let us examine the first individuals which are significant for the existence and preservation of the group [are] through this also [significant] for the existence and preservation of the individuals correct: the properties of a particular individual, although they may well be significant for the group when taken together with all the other similar individuals can only be significant to that individual as a result of its significance for society to a vanishingly small degree, if the group itself is of any significant size. And, moreover, selection cannot distinguish between the effects on an Now we may turn to the second formulation are significant for the existence and preservation of the group ... have been shaped by the selection ... from the individuals living in groups which at each stage of the evolution of behaviour, that is, the rules that they follow, even if not the individuals themselves, is descended from the behaviour of individuals in groups which have been successful. Again, behaviour can be successful in two different ways: it can fulfil the objectives of those carrying out the activity, or it can be successful in terms of propagating itself, of getting itself copied by other individuals and groups. We have to 174 former which constitute the template for future expansion. This is the group selection argument, and it is vulnerable to the Dawkins critique mentioned above: this otherregarding behaviour may be optimal for the group, but without individual incentives it is not Nashattempt to provide an incentive structure to underpin the group selectionist argument assumes exactly what was to be demonstrated. Now if groups were run by a central authority, then that authority might be able to set up an incentive structure to preserve the optimal behaviour pattern; the central authority changes the payoffs to individual actions to make the socially optimal outcome consistent with individual self-seeking behaviour. Such a group is also in a position to observe and copy collectively desirable behaviour patterns from other groups, which individual agents certainly are not able to do. As we have seen the group selectionist argument simply cannot work for spontaneous human societies. Hayek recasts his evolutionary argument in teleological terms. There is, he says, possessing a kind of order will exist because the elements do what is necessary to secure the persistence of that order. The parts to the requirements of the whole, becomes a necessary part of the explanation of why structures of the kind exist: we are bound to explain the fact that the elements behave in a certain way by the circumstance than this sort of conduct is more likely to preserve the whole on the preservation of which depends the preservation of the individuals, which explanation is thus entirely in order so long as it does not imply design by a maker but merely the recognition that the kind of structure would not have perpetuated itself if it did not act in a manner likely to produce certain effects, and that it has evolved through those prevailing at each stage who did. or of the motive of the acting individuals. The immediate cause, the impulse which drives them to act, will be something affecting them only; and it is merely because in doing so they are restrained by rules that an overall order results, while this consequence of observing these rul the animal defending its territory has no idea that it thereby contributes to regulate the numbe SIP: 77). This is a revealing passage. Firstly, Hayek had already said that different macro orders are compatible with the same rules of micro behaviour, and different rules compatible 175 with the same order. Now he says that the preservation of the individuals depends on the preservation of the order such that they would not exist without it. Well, no doubt their existence depends on there being some order, but it by no means follows that their survival depends on the maintenance of the particular order obtaining at the present moment. This is the optimality assumption. Indeed, it is an extreme version of the optimality assumption, in which the present order is not just the best we can get, but the only one in which we could survive. This is repeated elsewhere: order), this is due to the elements responding to external influences which they are likely to encounter in a manner which brings about the preservation or restoration of this order; and on this, in turn, may be dependent the chances of the individuals to preserve SIP: 71) Hayek says here that an order exists because individuals behave in a way which preserves it. Perfectly true. But then he goes on to imply that their survival depends on the preservation of the order. This prompts the comments that (a) an order which allows a number of individuals to survive is not definitionally the best they can get: the social outcome could be suboptimal even if the behaviour of each individual in such an order is Nash, and (b) even if their survival depended on the individuals maintaining the order, the individuals concerned would still not do so unless it were individually rational to do so. the adaptation of individuals to the requirements of society. We explain the way people -seeking individuals should do f these actions is of course eyond their knowledge or between the actions individuals would take to satisfy their own drives in the absence of rules, and the rules themselves, which take on the status of a restraint. This breaks with his own procedure, which regards all the actions of the individuals, in so far as they are 176 regular, as the execution of rules. In the version which sees rules as restraints, they can only be imposed by an external authority or force. Thirdly, Hayek claims that teleological explanation is in order, as long as it does not imply a deity. However, so long as the explanation includes no motivation for individuals to behave in this socially desirable way, then it must depend on supernatural intervention. organised in accordance with the general interest of society. But it is Hamlet without the prince: the supernal agency arranging all th cannot stand in for this agency, indeed, without that agency it makes no sense: for group selection assumes individual and general interests already to be reconciled. Contrary to explanation is only valid if it is, at least in principle, possible to specify a mechanism by which actions at the level at which the teleology is thought to hold can be reconciled with the interests of substrate levels. Lastly, it is very fitting that Hayek should cite Smith, at he does at the end, and explicitly link him to a group selectionist standpoint: a footnote at the end of the last sentence of the passage cited refers us again to Wynne-Edwards (1962). The mythical animal fulfilling its own interests at the same time as it fulfils those of a higher entity of which it is the unwitting subordinate part 127 is just that cunning of history. 128 Here, it is not even the interest of the population or the species w oses what he is doing, namely assuming a mystical force which will reconcile our conflicting plans spontaneously to produce a beneficent order at the macro level. 127 point out that he repeats this claim this time about humans in KES: the growth of world population, KES: 52). 128 their consciousness is limited to these and they are absorbed in their mundane interests, they are all the though it is concealed from th 177 selectionist argument which has been rightly subjected to considerable criticism in the biological domain. We have also seen that this is closely associated with the Smithian twists and turns, his falsifications and distortions, his vagueness and obscurity, can be accounted for by his dedication to a particular political programme and his apparent willingness cynically to prefer the support of that programme to all scholarly values of truth and consistency. 5.4.5 Have Sober and Wilson rescued group selection? It is now necessary to turn to an important issue which has been raised in connection with the points made above (Vromen, personal communication), namely whether Sober and Wilson (1998) have rescued the notion of group selection deployed by Hayek. Clearly, if they have, then much of the argument of the present chapter collapses. Now, Sober and Wilson certainly perform a signal service by clarifying the conditions under out crude, reductionist readings of Darwinian writers such as Dawkins. Whether they have anything sensible to say about those Darwinian writers themselves, is another question which it would be inappropriate to explore here. Suffice it to say that Sober and Wilson significantly muddy the water by their systematic usage, from the front cover mean cooperative behaviour. If by altruism we mean, as we clearly should mean, othernot, what its title implies, about the evolution of unselfish behaviour: it is about the evolution of cooperation, that is, the circumstances in which cooperation is the outcome of individual self-seeking behaviour. It is individually advantageous to engage in cooperation when the benefits accruing to oneself as a result of the cooperative behaviour exceed its costs. This can happen, for example, when cooperate. In economic terms, cooperation can arise spontaneously when the externality generated by cooperation is internalised. 178 selection can take place when there is variation between groups, with some exhibiting more, and some less, cooperative behaviour on the part of individual group members, where such cooperative individual behaviour is underpinned by some mechanism ensuring that cooperation is in the interest of selfish individuals. Then more cooperative groups will tend to displace less cooperative ones: cooperative behaviour is selected for. There is nothing in this which contradicts Darwinianism of the Dawkins variety. Indeed, selfish organism theory is a variety of group selection where the group is the community of genes embodied in the organism, as Dawkins makes clear and as Sober and Wilson such mechanisms, reconciling individual and group interests may exist, but to the Panglossian notion propagated by Wynne-Edwards and his followers, such as Hayek, that group selection can exist in the absence of such mechanisms. The critical link between individual and group interest is what I will call connation. It is worth quoting Dawkins, from The Extended Phenotype, at length on the issue: ghting only its alleles at the same locus, and it will unite with genes at other loci only in so far as doing so assists it in its selfish war against its own alleles. A venient to do so, it might unite with particular snail genes. And if it remains true that snail genes are in practice selected to work together with each other and against an opposing gang of fluke genes, the reason is only that snail genes tend to gain from the same events in the world as do other snail genes. Fluke genes tend to gain from other events. And the real reason why snail genes stand to gain from the same events as each other, while fluke genes stand to gain from a different set of events, is simply this: all snail genes share the same route into the next generation snail gametes. All fluke genes, on the other hand, must use a different route, fluke cercariae, to get into the next generation. It is this fact alone s against fluke genes and vice versa. If it were the case that the closer tha 1989b: 221-222, my emphasis) what I call connation is absolutely critical. The difference between parasitism and symbiosis, between a liver fluke and a mitochondrion, rests on shared destiny. The mitochondrion can only place copies of itself in the next generation by aiding its host, the animal cell; the liver fluke is not so restricted and hink about the routes to the future available to social structures, the phenotypic expression of 179 meme complexes. Clearly, those routes are utterly different from the route by which humans reproduce and so those meme complexes cannot be relied upon spontaneously to share interests with humans. The meme complexes embodied in the social institutions which emerge spontaneously can be expected sometimes to be symbiotic with, and sometimes parasitic on, their human hosts. Some interesting examples are given in Blackmore (1999). If the social institutions which emerge spontaneously from the evolutionary process can be parasitic, then the presumption in favour of a laissez-faire policy framework is undermined. Spontaneously emerging forms may need to be modified or replaced by institutions adapted to human interests. In this context, we can return to the question this section seeks to answer: is Hayek a Panglossian evolutionary theorist? Hayek consistent with Darwinian, Dawkinsian thought, or does it rather, as Hayek himself clearly believes, stand in the Wynneasis of their human survival- -complex survival value, the conclusion has to be that nothing in Sober and Wilson gives cause to modify our verdict, last word here goes to - -level units such as cultures, societies or biological ecosystems must be well-functioning organic wholes. Higher-level functionalism always requires special conditions and is vulnerable to subversion from 5.5 -individualism A theme of the previous chapter, on Adam Smith, was that although his policy prescription was one of individualism, this was linked to a methodological holism and combined with some distinctly anti-individualist social attitudes. This section will present already been discussed. Here I want to draw attention to some strongly anti-individualist 180 the adaptation, that is, of individuals to the requirements of society. Hayek repeats this elsewhere: himself as part of a certain system within which KES: 36) So the individual has to adapt to the system, and it is the system that determines the behaviour of the individual. What we think of as value is just a signal to us to act in accordance with the needs of the system. As statements of fact, these assertions, like means of defence of the rich against the poor, sound very radical and subversive. As normative statements, as statements of what should be the harmonic world view, in which individual interests are illegitimately identified with those of the system, which allows him to say this. If the system is optimal for the individuals composing the society, then it is acceptable to require the individual to adapt to it. If the system is necessarily optimal, then there are no social problems. Apparent problems are problems for social scientists only a challenge for them to explain away. To assure individuals suffering the consequences of macro level social problems that such problems do not exist, is to treat those individuals with contempt. We also saw that in the non-harmonic world in which we actually live, the group selectionist argument that individuals behave in the social interest rather than in their own interest implies that such individuals are unaware of the consequences of their actions: they are ignorant or irrational 129 (or both). If individuals were rational and adequately informed, they would follow their own interests and the g 129 Along with anti-individualism, anti- (IEO d argued in the previous chapter that in many ways Kant could be seen as complementing Smith and Hume, particularly in terms of the desire, shared by all three, to limit the legitimate scope of reason. However, I cannot explore this theme further here. 181 sec SIP who did not know what they were doing COL: 58-59, emphasis added). The irrationality thesis is stated even more bluntly in KES: did not understand, they drew upon the aid of supernatural sanctions ... we owe it to mystical beliefs, that we preserved a tradition which was beneficial to us. Thus we owe KES IEO: 8) This is a very close parallel to the argument in Smith, that individuals are deceived by nature for the good of society. Smith says that the individual is deceived into thinking, for example, that wealth will make him happy, and as a result slaves to accumulate wealth, without gaining the expected increase in happiness. This aided society by keeping the wheels of industry turning. Just so, individuals in the Hayekian story are misled by bizarre superstitious notions which upset their lives and cause them untold suffering, so that civilisation may prosper. When we are looking at the status of individuals in a proposed or actual social system, a key diagnostic turns on the question, what constitutes the ends and what the means of the system. Hayek (COL: 63). Again, this is an extremely illiberal and anti-individualist standpoint. Contrary to what Hayek says, the ends we serve arise within us as our natural desires, they are not something we meet externally as something to which we must subordinate ourselves. The system of values within which we work tells us the constraints our actions must satisfy; it tells us one way of coordinating our efforts to fulfil our individual goals so that we all may fulfil them more effectively. It is merely a means to the end of human happiness. To argue that the culturally determined system of what at some point in time is taken as end, rather than a 182 means goal here, it makes the system of values existing here and now absolute instead of relative. Its survival, the prevention of its succession by another, alternative system becomes a good in its own right, an end which we should pursue regardless of its utility for us. Secondly, instead of seeking to pursue our own goals, instead of seeking to maximise our own welfare, we are enjoined to pursue, and to subordinate our own interests to, the interest of some nonhuman entity. This is precisely the establishm vis-à-vis 130 cited in Sen 1970: 1 n 1). -individualist outlook emerges in his criticism of (unnamed) rationali functioning of the social process and that it should be our aim, through conscious assessment of the concrete facts of the situation, to produce a foreseeable result which they ly involves a demand that individual intelligence, rather than rules evolved by society, should guide individual action that men should dispense with the use of what could truly be ss of society) and contempt for what really is a social phenomenon and of a belief in the superior powers of COL: 65) What is remarkable, in the present context, about this passage, is that it criticises a social, but because it is really an appeal to the individual. He is criticising these expressing a very anti-individualist view. Individuals are not to be trusted to work things out for themselves, but have to submit to traditional rules whose rationale is unknown. This is very similar to the anti-Protestant view of the Catholic Church, as can be seen by re-casting the passage in terms of the Catholic critique of Protestantism: Protestantism involved a demand that individual religious conscience, rather than the doctrines of the Church, should guide individual action that men should dispense with 130 The reference is to Karl Marx (1844/1959) Economic and Philosophical Manuscripts of 1844 p104; reprinted in Marx (1975: 350). 183 of God, rather than of humans) and should rely on their individual judgement of the particular case. The therefore ultimately the result of a contempt for genuine religion and a belief in the superior powers of individual human reason. -individualist, is also highly misleading. Although the thinking involved in review, revision and reform of the rules under which we are to live, must take place in the brains of individual people, they are by no means acting as individuals, as isolated atoms, but rather as members of the community, debating with others in ways supervised by the public and according to rules invigilated by the public, many individuals contributing factual and analytical material to the discussion so that the whole thing is far more complex and profound than any one individual could have managed in isolation. Reform is a truly social enterprise. It is the superior powers of social, not individual, human reason which are being relied upon. ... is primarily a theory of society, an attempt to understand the forces which determine the social life of man, and only in the second instance a set of political maxims derived from this view of society. This fact by itself should be sufficient to refute the silliest of the common misunderstandings: the belief that individualism postulates (or bases its arguments on the assumption of) the existence of isolated or self-contained individuals, instead of starting from men whose whole nature and character is determined IEO: 6) Just about everything Hayek says here is false. Contrary to what he says, individualism is indeed primarily a political doctrine, and only secondarily a theoretical underpinning for it. And whatever its status in general, it certainly is primarily political rather than the whole nature and character of people is determined by their social being, their being in society, is of the essence of the holist standpoint: it is very far indeed from the individualism of neoclassical economics, which starts from isolated individuals c statement in CRS quoted by Toynbee, that individuals are but foci in the network of relationships constituting society. 184 Smith and Hayek are essentially conservatives 131 , and from this all else flows. In both cases nostalgia for stability plays a key rôle in their psychologies. Smith wanted to preserve the fixed orders and ranks of society; Hayek feels the same about traditions: been no successful attempt to operate a free society, without a genuine reverence for grown institutions, for customs and habits ... [A] successful free society will always in a large measure be a traditionCOL: 61). to undesigned rules and conventions whose significance and importance we largely do not understand ... [and] reverence for the traditional COL: 63). uncomprehending of the world they inhabit as children, voluntarily submit themselves to the greater wisdom embodied in tradition, or, failing such voluntary submission, one in which submission is brought about by compulsion. The individualist order requires often appear unintelligible and irrational .... The willingness to submit to such rules ... is IEO: the processes by which mankind has achieved things which have not been designed or IEO: 32) of the spontaneous. sphere of policy, he is indeed an individualist, regarding individual freedom as a paramount value. Just as Smith regarded social order as more important than justice, as 131 k is a conservative most obviously in his veneration of tradition, and in his belief that most of the forms of social organisation that exist in capitalist economies are the product of a long process of evolution. Thus private property is not something to be defended purely on intellectual or rational grounds, but also as tends to conservatism in social affairs, notable in his attitude to religion 1990: viii-ix). 185 face the fact that the preservation of individual freedom is incompatible with a full IEO: 22). On the other hand, there is nothing specifically individualist about the methodology which Hayek employs to investigate the world. On the contrary, and again like Smith, and despite equivocation and inconsistency, he does recognise the fundamental necessity of a holistic scientific methodology to understand the world. Finally we have seen that the two writers, Smith and Hayek, also share a set of authoritarian conservative 132 social attitudes which are extremely thin on respect for the rationality, the autonomy, and the fate of individuals. 5.6 Conclusion Just as Smith faced, and refused to face up to, the problem of how, given that human nature is natural, anything that humans do especially state activity could be unnatural, so Hayek faces a problem of how any human behaviour, including state intervention, can fail to be the result of an evolutionary process. And this is fatal for his policy prescription, j view that everything natural was God-given and hence good, while everything artificial was human-made and hence fallible. Hence his opposition to the visible hand of state intervention and his belief in the optimality of the outcomes supplied us by the invisible hand of a benign deity. But if all human strengths and weaknesses alike are themselves natural and God-given, then state intervention, too, must play its necessary part in the scheme evolution of institutions automatically generates optimal outcomes while rationalistic intervention is both unnecessary and perverse in its effects. But the institutions by means of which the society as a whole acts to coordinate agent actions, and to improve on the inefficiencies of spontaneous outcomes, are themselves the outcome of a spontaneous process of evolution and thus, in a consistent Hayekian view, optimal. To intervene on principle to prevent them from doing their job, without regard to the actual content of 132 no intention ... of making a fetish of democracy. It may well be true that our generation talks and thinks t often been much more cultural and spiritual freedom under an autocratic rule than under some RTS: 52). 186 what they were doing, would be a clear instance of the rationalism which he has spent his life combating. Appendix: Bibliographical note everal editions and papers are reprinted in various collections. Navigating his works can be confusing. This appendix will set out a bibliography of not a comprehensi ambitious task, but an indication of what has been consulted for this chapter, an explanation of the abbreviations used in the text, and an explanation of which version page numbers of works by Hayek cited here refer to. For fuller bibliographical information, refer to: a Machlup (1977: 51-59). Although only going up to 1977, this gives details of 173 publications by Hayek; b e: 1986) Hayek on Liberty Oxford: Blackwell; c a more brief but up to date listing contained in the bibliography to Hodgson (1993: 325-326). Only items referenced in the text are included. Each of the following items is preceded by the abbreviation used for it in the text, where relevant. Only the books are included in the bibliography at the end of the thesis. Books by Hayek RTS 1944 The Road to Serfdom London: George Routledge & Sons IEO 1948 Individualism and Economic Order Chicago: University of Chicago Press; (reprinted, 1949, London: Routledge). References are to the 1949 reprint. TSO 1952 The Sensory Order. An Inquiry into the Foundations of Theoretical Psychology London: Routledge & Kegan Paul. Originally drafted in approx 1920. 187 CRS 1e: 1952 The Counter-Revolution of Science. Studies on the Abuse of Reason Glencoe, Illinois (second edition, 1979, Indianapolis: LibertyPress). Reprinted articles. References are to the second edition of 1979, which contains additional prefatory material. COL 1960 The Constitution of Liberty London: Routledge & Kegan Paul SIP 1967a Studies in Philosophy, Politics and Economics London: Routledge & Kegan Paul. Reprinted articles. NSP 1978a New Studies in Philosophy, Politics, Economics and the History of Ideas London: Routledge & Kegan Paul. Reprinted articles. TBT 2e: 1978b (ed SR Shenoy) A Tiger by the Tail London: Institute for Economic Affairs. An edited collection of extracts from other works. LLL (1982) Law, Legislation and Liberty. A new statement of the liberal principles of justice and political economy s comments. One-volume version with corrections and revised preface of: Law Legislation and Liberty (1973-1979) in three volumes: Vol 1 (1973) Rules and Order Vol 2 (1976) The Mirage of Social Justice Vol 3 (1979) The Political Order of a Free People KES 1983 Knowledge, Evolution and Society London: Adam Smith Institute. Four lectures given in the United States in the late 1970s, plus prefatory essays by Eamonn Butler and Arthur Shenfield. Journal articles and lectures 188 Collectivist Economic Planning Calculation I: The Nature and History of the Problem IEO: 119-147. References are to the 1949 reprint of IEO. 1 Economica. Reprinted as Part II of CRS: 183-363. References are to the 1979 edition of CRS. 1942Economica. Reprinted as Part I of CRS: 17-182. References are to the 1979 edition of CRS. published, 1946, Dublin: Hodges, Fidges & Co, and Oxford: Blackwell; reprinted as Ch 1 of IEO: 1-32. References are to the 1949 reprint of IEO. Measure June. Reprinted as Part III of CRS: 365-400. References are to the 1979 edition of CRS. Mandeville Proceedings of the British Academy Volume LII: 125read 23 March 1966) London: Oxford University Press. Reprinted as Ch 15 of NSP: 249-266. References are to the Proceedings version.. Imprimis Vol 7 No 7 (Hillsdale College, Michigan). Reprinted in KES: 17-27. References are to the KES version. Reprinted in KES: 28-37. References are to the KES version. tanford University. Reprinted in KES: 38-44. References are to the KES version. KES: 45-57. References are to the KES version. 189 190 Chapter 6 icy prescription 6.1 Introduction In the previous chapters of this thesis I have tried to show two things: Firstly, that in a world of partially overlapping and partially conflicting interests there is good reason to doubt that self-seeking behaviour at the micro-level will spontaneously lead to desirable social outcomes at the macro-level. And, secondly, that some sophisticated economic writers who would like us to rely on the spontaneous interaction of self-seeking agents, writers advocating a laissez-faire Smith, I scope to the unfolding the expression not of divine order but of fallible human reason. Hayek, adopting a similar policy stance, based it in an evolutionary process in which those institutional forms best adapted to reconciling individual interests would, he believed, spontaneously be selected for in the inter-group struggle for survival. The purpose of the present chapter is to cast a light on this issue from another direction by displaying an example of the policy consequences of adopting an alternative methodological stance. The argument of the chapter is that (a) staying within the holistic framework of Smith and Hayek, but (b) rejecting their invisible hand mechanisms, leads (c) to the rejection of their reductionist laissez-faire policy stance as well. historical role of capitalism and his analysis of its pathology, rooted in what we would 191 significance of his methodological standpoint. This lays the basis for a consideration of his policy prescription in the following two sections. Section 6.3 looks at two very exactly what he meant by this. Before doing so however and this is the other key aspect to the question the section class standpoint, showing the bourgeoisie policy prescription, drawing out the distinction , but also the intimate connection, between, on the one hand, microthe other, the macro6.5 concludes by considering Keynes in relation to the themes of the thesis Smith and Hayek, holism, reductionism and the invisible hand. 6.2 Whereas, for Smith and Hayek capitalist individualism is the terminus of an ontogenetic process, for Keynes it is something transitional, something with a historical and phylogenetic evolutionary stance. Laissez-faire historical role, carrying us from an Era of Scarcity to an Era of Abundance. It was precisely because it had substantially fulfilled that role that it had become countercapitalist 5, and n1). The purpose of this section is to show that Robinson was right, and Pilling wrong 133 , on 133 It has been argued (Geoffrey Kay, personal communication) that both Robinson and Pilling were talking about the ie the assertion that Keynes viewed capitalism as a phase in historical development (Pilling, 1986: 57). On this latter point Pilling was clearly wrong and Robinson right. However, one might wish to go further and argue that there was a sense in which Pilling was right about Keynes being unhistorical because he, Keynes, had a notion of capital which was 192 though not, I should emphasis, necessarily to defend it. In order to laissez-faire, we must say something about his conception of the historical context, that is, about his periodisation of history. I I of the General Theory GT: 313-384). EP: 304) production is overwhelmingly production for the sake le for subsistence, always has been hitherto the primary, most pressing problem of the human race not only of the human race, but of the whole of the biological kingdom from the EP: 326-7). During the Era of Scarcity, there is an overwhelming obstacle to the accumulation of capital in the form of uncertainty driving the marginal efficiency of capital (MEC) below the rate of interest (i): y-preference was the outstanding evil, the prime impediment to the growth of wealth, in the ancient and medieval worlds. And naturally so, since certain of the risks and hazards of economic life diminish the marginal efficiency of capital while others serve to increase the preference for liquidity. In a world, therefore, which no one reckoned to be safe, it was almost inevitable GT: 351) At so to speak the other end of history from the era of scarcity, in the near future, lies EP EP EP within sight of solution, within a hundred years ... the economic problem ... is not the EP: 326). The essence of the era of abundance is that needs are satisfied in the sense that we prefer to devote our further energies to nonEP: 326). Thus, we may note in passing, production here, too, in some sense timeless. But this goes beyond the question of whether Keynes had a historical view of capitalism, and slides over into another question, namely whether he had what one believes to have been the correct historical view of capitalism. That is not an issue I am addressing here. 193 man will be faced with his real, his permanent problem how to use his freedom from EP: 328). The following year, in the Preface (dated 1931) to Essays in Persuasion (EP), a collection of essays spanning a dozen years, this approaching liberation from economic economic problem will take the back seat where it belongs, and that the arena of the heart and head will be occupied ... by our real problems the problems of life and human EP: xviii). This messianic strand, though expressed in more sober language, still plays a central, and, indeed, even more urgent, role in the General Theory quasiGT: GT: GT: 324). EP: 304) in self-sufficient character of the other two epochs, but is simply the period of transition from the one to the other. As such it is not an end in itself but a means to an end lying capitalism must refer, not to how pleasant or otherwise it may be, but to its efficacy in achieving that end: objecting to capitalism as a way of life, argue as though they part I think that capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in EP: 294) and, for Keynes, the rate of capital accumulation is the measure of the rate of our approach to the economic paradise. To denote the motives to this accumulation of EP EP: 329). money-making as an end in itself, saving, ostensibly for future consumption, but actually for the sake of 194 accumulating claims on future production; saving not in order to enjoy the deferred consumption later, but in order to secure a stream of unearned income. Keynes analyses actions into an indefinite future by means of an infinite regress: the remote future results of our actions than with their own quality ... the purposive man is always trying to secure a spurious and delusive immortality for his acts by pushing his interest in them forward in EP: 330) Just as Marx, in the Communist Manifesto, for example, was outspoken in his praise for the achievements of capitalism (Marx and Engels, 1976: 489), Keynes, too, paid tribute victories of laissez-faire EP: 304) The accumulation of capital depended upon the freedoms of laissez-faire in particular, private properly in the means of production and unrestricted scope for the operation of market forces: , throughout Europe, with an extraordinary success and facilitated the growth of wealth on an unprecedented scale. To save and invest became at once the duty and the delight of a class. The savings were seldom drawn on, and, accumulating at compound interest, made possible the material triumphs which we now all take for granted. The morals, the politics, the literature, and the religion of the age joined in a (EP: 62) In one of his essays on Liberalism, whe EP -fashioned individualism and laissez-faire ... contributed to the success of the nineteenth-century ... I should have belonged to this party [sc the Liberal Party] if I EP: 300-301). While recognising the historical necessity and legitimacy of the laissez-faire system, and subversion of moral EP: 329) Keynes is here protesting against the fact that capitalism requires, and laissez-faire permits, the transformation of the economy from production for the sake of consumption to production for the sake of profit, for the sake of the accumulation of wealth. Saving for the sake of future consumption Keynes GT: 376) is morally reprehensible. 195 That mankind has had to depend on this sort of egoistic materialism in order to raise itself from scarcity to abundance had, according to Keynes, had widespread deleterious capitalism is absolutely irreligious, without internal union, without much public spirit, EP I think that Capitalism ... in itself is in many ways extremely object EP: 294). appeal to the money motive in nine-tenths of the activities of life, with the universal striving after individual economic security as the prime object of endeavour, with the social approbation of money as the measure of constructive success, and with the social appeal to the hoarding instinct as the foundation of the necessary provision for the family EP: 268-9) The ultimate problem with Capitalism, however, was when it became ineffective as a Capitalism ... is not intelligent, it is not just, it is not virtuous CWXXI: 239). Nevertheless, despite these criticisms of capitalism, Keynes was anxious not to throw out the baby with the bathwater: I believe this is a wildly mistaken interpretation of what is happening to us. We are suffering, not from the rheumatics of old age, but from the growing pains of over-rapid changes, from the painfulness of (EP: 321) The fundamental, underlying problem in this period is that production is not directly production for the sake of consumption, as it is in the two great eras of scarcity and abundance, instead we have production for the sake of profit, of accumulation, for the sake, tha GT shows it in two diametrically opposed rôles. Consumption today is consumption for production: it does not matter what it is consumption of so long as it contributes to aggregate demand and hence keeps the accumulation of capital going. In the future, in co EP: 328), 196 (EP: xviii). The critical importance of this view of consumption, and its methodological implications, will be taken up in the next section. arising from its transitional nature. The MEC is falling precisely because it has fulfilled its purpose. Its purpose was to promote the accumulation of capital and, in general, the wealth of society: the falling MEC (and marginal propensity to consume, MPC) are the inevitable result of that accumulation. Indeed, for Keynes, the definition of the MEC has fallen to zero. There is nothing pathological about this on the contrary, it is to be expected and desired. The trouble arises from the institutional context within which the transition was taking place, namely that of laissez-faire. Under laissez-faire, Keynes believed, and believed he had demonstrated, the MEC falls faster, and further, than the rate of interest (i). This is due to a peculiarity of money that it can act as a store of value for the individual but not for the community what is true for each individual taken separately is not true for all GT: 155). If the community tries to convert part of its aggregate income into a hoard of money, total income simply declines to the point where the community no longer tries to do so. MEC to decline with increasing abundance of capital and MPC to decline with increasing income. i should therefore decline pari passu: the opportunity cost of investment that is, the foregone or postponed consumption should fall to zero, since that portion of income is saved anyway. Given an adequate institutional framework this is what will happen. The MEC can then decline to zero without falling below i and hence without investment being brought to a standstill. Once the MEC has fallen to zero, capital goods are essentially free and we have entered the economic paradise. However, the institutional framework is not adequate: the laissez-faire system introduces an intolerable level of uncertainty. If every agent were in some way linked up to every other so that they could act in concert, each would realise that it is in the interest of all to make sure that their saving and investment correspond. No-one could have any interest 197 in a beggar-thy-neighbour policy of hoarding money. But laissez-faire means, precisely, that this coordination is lacking. Every agent must now be in ignorance as to what his fellows are going to do. Instead of assessing real economic conditions each agent must now devote himself to guessing what all the other agents think of those conditions, or, rather, to guessing what each other agent guesses every other agent guesses... A rational saver may know that it would be best for all if he (and everyone else) were to restrain himself from hoarding money; he may even assume that everyone else knows this in theory, but he cannot be certain that everyone will have the necessary restraint not to increase the liquidity of his assets a little. But if he, as a rational agent, finds that necessary, then so presumably do other agents. Every increase in the demand for money (or liquidity preference, as Keynes calls it) is a reduction in aggregate demand (AD). A reduction in AD means a fall in the MEC. The agent must now believe, correctly, that a severe economic recession is on the way, and would be foolish not to build up as large a pool of liquid wealth as possible, thereby driving up i yet further. Even if the agent is fully conscious that he is contributing to the crisis, exacerbating it, there is absolutely nothing that he, as an isolated individual, can do about it 134 . ignorance ... these ... factors are ... the cause of un-employment ... Yet the cure lies outside the operations of individuals; it may even be to the interest of individuals to aggravate the disease. I believe that the cure for these things ... would involve Society in exercising EP: 291-292; my emphasis) partially overlapping and partially conflicting interests rationally but without collaboration. It shows how rationality at the individual (micro) level necessarily leads to irrationality at the collective (macro) level under these conditions. The essence of Keynesian opposition to laissez-faire is that by artificially dividing economic agents from each other it compels them, in individual self defence, to act in a manner detrimental to 134 amazing and disturbing slide from certain restraint ... It is a cascade, a stampede, in which the tiniest flicker of doubt has become amplified into the gravest avalanche of doubt. That is what I mean by qu (Hofstadter, 1985: 753). 198 themselves as a group. Keynesian agents thus find themselves in what we in retrospect -shot game, but an indefinitely repeated one. As we have seen, players in an indefinitely repeated game may under certain circumstances a sufficiently large probability of further rounds of the game together with a sufficiently low rate of discount of future payoffs find their way to a cooperative outcome. However, as we have also seen, while this is the case for twoplayer games, the achievement of such desirable outcomes rapidly becomes extremely difficult as the number of players rises above two. With any significant number of players, it becomes impossible to discriminate between cooperators and defectors, leading to the collapse of reciprocity: defection is once more the dominant strategy. And in the Keynesian case we have a multi-player game with the number of players being the number of wealth owners who need to determine the proportions of money and other assets to hold in their portfolios. (GT: Ch 22: 313- ents, which would in fact yield 2 per cent in conditions of full employment, are expected to yield less than nothing; and the resulting collapse of new investment then leads to a state of unemployment in which the investments, which would have yielded 2 pe (GT: 322) individual investors: they expected yields to fall by more than two percentage points and that is exactly what happened; their as a whole: it was sheer insanity for them to be pessimistic as it was precisely that pessimism which led to the collapse in new investments, the consequent unemployment and hence the collapse in yields. The institutional framework of laissez-faire dictates individual decision-making on an issue which is fundamentally not an individual matter. Laissez-faire divides economic agents from each other and leads to uncertainty; uncertainty leads to increased liquidity preference; raised liquidity preference leads to one in which changing views about the future are capable of influencing the quantity of (GT: (GT: 235). Because of this irreducible uncertainty associated with the laissez-faire 199 system, Keynes believed that capitalism would settle down to a normal condition of underexcitement is associated and in my opinion, inevitably associated with present day GT sition GT: 254). This outcome has two particularly deleterious consequences, other than the obvious one that unemployment and a fall in aggregate income is in noregular fall in the MEC towards zero, and what that is an index of, namely, the accumulation of capital up to the desired level of intensity, is broken off. For as long as MEC is below i ) puts it, is postponed for as long as we remain in this rut of under-employment. Secondly, and this is critical for Keynes, unemployment may lead to damaging, that GT If [income deflation] occurs, our present regime of capitalistic individualism will assuredly be replaced by a far- (TM: 346). On another occasion, he took comfort from a general willingness to drop the philosophy of laissez-faire for similar reasons to his own fear that the existing institutions would otherwise be jeopardised. a general conviction that the stability of our institutions absolutely requires a resolute attempt to apply what perhaps we know to preventing the Times: 65). Keynes thus wants reform in order to forestall revolution. Things must change so that things may remain the sam methodological holism which laid the basis for his policy prescription, and subsequent sections examine what Keynes believed had to change, what he wanted to retain, and how it should be done. 6.3 Keynes and holism 200 In the previous section, I argued that, for Keynes, the underlying problem with capitalism was that production was not for the sake of consumption, but for the sake of production itself. To elucidate the relation between production and consumption in Keynes, we need to consider a number of passages from the General Theory and early drafts. In a draft chapter of the General Theory (Sup commodity circulation and capitalist circulation, C M C' and M C M'. The first says that a commodity, C, is exchanged for money, M, and the latter used to purchase another commodity, C'. The difference between C and C' is qualitative: they are different commodities. The second says that a quantity of money, M is invested in commodities, C, and the latter sold for a quantity of money, M', greater than the original quantity (M' = M + M, M > 0) 135 . The mistake of the classical economists, Keynes says, was to assume that money has the role only of means of exchange, as it does in simple commodity circulation, rather than store of value, as in the circulation of capital. In simple commodity production, production is still for consumption: the original commodity is produced in order to sell it and with the proceeds purchase the commodity desired for consumption. In capitalist production, the purpose of production is to this end. In the one case, money is a convenience allowing the commodity owner to translate his commodity, produced only for the market, into the one he wants to consume. In the other, money is money capital, money is the goal and criterion of production. ion in the actual world is not, as economists seem often to suppose, a case of C M C', ie of exchanging commodity for money in order to obtain another commodity. That may be the standpoint of the private consumer. But it is not the attitude of business, which is a case of M C M', ie of Sup: 81) and the structure of incentives under capitalism, contradictions: although we might behave as though production were carried out for its 135 In Marx, the second formula is true of merchant capital, which buys cheap in one market and sells the same commodities dear in another market; in capitalist production proper the original money capital is invested in means of production constant and variable capital (c, v) which are then consumed in the process of production, generating new commodities which are subsequently sold for more than the value of the means of production: M C: MP (c, v M' (Marx, 1974: 25). 201 -subsistent entity existing apart GT ation of consumption is the only GT to repeat the obvious is the sole end and GT: 104). The point Keynes is insisting on here is that production has to be validated by consumption to count as production: output must be sold to convert it back into money, and, indeed, more money than was started with. The subordination of consumption to production implicit in classical laissez-faire capitalism sets up a continually re-emerging barrier to accumulation in the form of underconsumption and failures of aggregate demand. classical economists, from Ricardo to Pigou. For the individual hous C M C': consumption is the immediate goal of economic activity. So does this mean that C M C' is valid for society as a reductionist: it is M C M': economic activity is directed towards the accumulation of claims on future production. General Theory, cited in the Introduction to this thesis, and in the Conclusion to the present chapter, Keynes (GT: xxxii). The same line of criticism is apparent in Chapter 2 of the General Theory. Here Keynes criticises Ricardo for focusing on microeconomic problems concerning relative prices and the allocation of resources between different uses, and his denial of the desirability, indeed possibility, of macroeconomic analysis of the level of economic activity as a I think it should be called an enquiry into the laws which determine the division of the produce of industry amongst the classes who concur in its formation. No law can be laid down 202 respecting quantity, but a tolerably correct one can be laid down respecting proportions. Every day I am more satisfied that the former enquiry is vain and delusive, and the latter GT: 4) Later in the same chapter he criticises the classical school for its reductionist approach to ostulates of classical economics: wage when a given volume of labour is employed is equal to the marginal disutility of t firms are optimising in the labour market, the second that households are. Keynes conceded the first but denied that the second held as a rule. Classical economists who assumed it to be true forgot, he claimed, firstly, that the relationship between real and money wages was different for the individual industry and the whole economy: real wages to be in the same direction as the change in money wages. But in the case of GT: 10) Keynes is clearly reiterating the point that the whole cannot be understood as the sum of its parts: the relationship between real and money wages is transformed as we change levels. Secondly, according to Keynes and this is really the same point made another way the classical economists forgot that the principle, that unemployed workers can always underbid the employed and so bring supply and demand into equilibrium in the labour that a single individual can get employment by accepting a cut in money-wages which his GT to accept a cut in wages, this would be relative to a given price level, which would remain unchanged by his actions and so his, or her, real wage would decline in the same proportion as the money wage. The actions of a single worker, in an economy of any significant size, have a vanishingly small impact on the general price level. For the actions of the workers as a whole this is no longer true: an attempt to reduce the general in the general price level of about the same magnitude, leaving real wages where they were (GT: 12). Again, it is clear that Keynes is making a point about the relationship 203 between phenomena at the system and substrate levels, and criticising the classical economists for failing to see it. At the substrate level, the general price level is a parameter, at the system level it is a variable. Numerous further examples from Keynes could be cited. At the risk of labouring the point, just two more instances will be considered here, both from the General Theory. In impermissibly transferring unexceptionable micro statements to the macro context: ustry relating transferred without substantial modification to industry as a whole; and it is supposed by a parity of reasoning, that we have a demand schedule for labour in industry as a whole [S]urely [this] is fallacious. For the demand schedules for particular industries can only be constructed on some fixed assumption as to the nature of the demand and supply schedules of other industries and as to the amount of the aggregate effective demand. It is invalid, therefore, to extend by analogy its conclusions in respect of a particular industry to industry as a whole, it is wholly unable to answer the question what effect on employment a reduction in GT: 258-260) Finally, and for exactly the same reasons, we may note that in the chapter of the General Theory GT: Chapter 21, 292-309), Keynes rejects the GT: 293). ggest, between the theory of the individual industry or firm and of the rewards and the distribution between different uses of a given quantity of resources on the one hand, and the theory of output and employment as a whole on the GT: 293) Keynes is again clearly articulating a holist conception here. The classical dichotomy distinguishes between a real supply side and a purely nominal demand side a standpoint upply must have GT: 292). This classical standpoint tacitly and illicitly given namely the quantity of resources which is employed in the economy as a whole, must also be given at the macro-level, the level to which monetary theory applies. This leaves money with no real effects (the real and monetary sectors are dichotomous): from our 204 standpoint as observers it is a mere veil over the real workings of the economy. In opposition to this classical dichotomy, Keynes proposes his own micro-macro GT: xxxii), and a macro sphere to be analysed as a whole, as a system, and in which money attains critical importance for real outcomes. 6.4 the pathologies of capitalism, and of his clear sighted articulation of the micro and macro levels in economics, lays the basis for an understanding of his policy prescription. Only Haye we live in a world endowed with providential, pro-human qualities. His standpoint is entirely consistent with that of A.E. Dawkins, 1995:155). If good is to be found in the world, it must be the results of our own activity. In such a world, a policy of laissez-faire is a non-starter. and, moreover, who was to execute it? A careful reading of Keynes makes it quite clear what he was prepared to sacrifice, and what he was determined at all costs to retain GT: 247) which he thought worth keeping. What Keynes was concerned to defend was the liberties, the privileges, the prestige, the security, the standard of living, and in short the whole mode of life of the I am going to pursue sectional interests at all, I shall pursue my own. When it comes to the class struggle as such ... the Class war will find me on the side of the educated bourgeoisie (EP: 297). Far from expressing any narrow, sectarian point of view, however, Keynes was able to take this stance because of the universality universal class in the sense that, by following its own interests, it would lead the whole own activities made him part of business management and public administration, and 205 the worlds of academia and the arts. It excluded the actual owners of the means of production, EP: 328). Keynes invented a rather grotesque raison for this stratum, which runs as follows. The big problem with the approach of the ordinary people will not know what to do with themselves: I think with dread of the adjustment of the habits and instincts of the ordinary man, bred into him for countless generations, which he may be asked to discard within a few decades EP and no people, I think, who can look forward to the age of leisure and abundance without a dread ... It is a fearful problem for the ordinary person, with no special talents, to occupy EP: 328). e, who can keep alive, and cultivate into fuller perfection, the art of life itself, and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes ... the wealthy classes in any quarter of the world ... are, so to speak, our advance guard those who are spying out the promised land for the rest of us and pitching their tent there ... those who have an independent income but no associations EP: 328). Keynes immediately takes the opportunity of castigating the idle (EP: 328). Keynes is attacking them for failing to live up to the role he ascribes to the rich the development of a good life of culture and consumption, rather than and thereby undermining the of the class their money, take it off them. He regarded the inheritance of fortunes as a specially pernicious, feudal institution, and favoured high death duties to counter its effect on the MPC (EP: 299; GT: 95, 372-3; Times: 72). Meanwhile, to the rest of us he addresses I feel sure that with a little more experience we shall use the new-found bounty of nature quite differently from the way in which the rich use it EP: 328). in the importance of class distinctions comes out clearly when he states his differences from communism : 206 I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeois and the intelligentsia who, with whatever faults, are the quality in life and surely carry the seeds of all human advancement ... It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here ... It exalts the (EP: 258-259) We should be quite clear, here, what Keynes means by the bourgeoisie. Just as he in a completely different almost opposite sense 136 , his use of the term bourgeois has the means of production, the capitalists per se (whether holders of debt or equity). When he explicitly sides with the bourgeoisie, by no means is Keynes erecting an apology for the rentier. The latter he regards as a parasitic excrescence on the productive apparatus of society, and one which is in the course of quiet liquidation by the spontaneous development of the economy itself: done its work ... the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in GT: 376) society (GT: Ch 24 passim), he is not referring to private property in the means of production. Indeed, the question of private or public ownership of the means of production was a non-issue as far as Keynes was concerned. (GT: 378) -called important political question so really 136 ie economics which, he felt, tried to explain, rather than to explain away, the nature of capitalistic production from Petty in the late 17th century on, and culminating in Smith and Ricardo. Subsequent mainstream economists Marx examples (GT -classic (GT: 213). 207 unimportant, so irrelevant to the reorganisation of the economic life of Great Britain, as (EP: 290) Nationalisation was a nons in fact taking, or had already taken, control of the bulk of industrial and, indeed, nonindustrial institutions. This theme in Keynes the separation of ownership and control, leading to the hegemony of the managers in industry and state has since become a major tradition in its own right. The theme originally had two aspects, distinguishing Investment System, in these terms: loped during the nineteenth century, arrangements were devised for separating the management of property from its ownership ... Contracts to receive fixed sums of money at future dates must have existed as long as money has been lent and borrowed ... But during the nineteenth century they developed a new and increased importance, and had, by the beginning of the twentieth, divided the propertied classes into two groups with partly divergent interests ... business men might be investors also, and investors might hold ordinary (EP: 61-62) shares, too, and leave the managers without any ownership stake in the enterprise. the shareholders, are almost entirely dissociated from the management, with the result that the direct personal interest of the latter in the making of great profit becomes quite EP: 289) (EP: 289), and privat EP: 290). A significant example cited by Keynes in this context, and significantly prior to its nationalisation, is that of the there is no class of persons in the kingdom of whom the Governor of the Bank of England thinks. less when he decides on his policy than of his shareholders. Their rights, in excess of their conventional dividend have already sunk to the EP: 290). This conception of what has since been se policy framework for 208 deliberately aims at controlling and dir EP: 305). He GT (Times CWXXVII: 387). He was enthusiastic about the proposals for a national plan contained in the Mosley Manifesto The central debate in politics, he [sc Keynes] wrote, was between planning and laissez- (Skidelsky, 1975: 241). But what sort of planning does Keynes want? Planning by whom? For whom? We have . He is even less sympathetic towards those at the opposite pole of the social spectrum. Keynes clearly believed that Jews were over-represented, to put it no more strongly than that, among the rentier capitalists (Keynes, Russia ... is the fruit of some EP: 270), and in the same article remarks that the Russian Revolution has failed to make the Jews any less avaricious (EP: 259). In a highly sinister passage, Keynes daydreams about the fate of Jewish financiers in the economic paradise to come: disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease ... Perhaps it is not an accident that the race which did most to bring the promise of immortality into the heart and essence of our religions has also done most for the principle of compound interest and EP: 329-330)137 Jewish) rentiers on the other. While expressing no particular desire to dispense with parliamentary democracy, he clearly regards it as simply irrelevant: Government will have to take on many duties which it has avoided in the past. For these (EP: 301-302). 137 no endorsement of their stance, but so that there should be no possibility of misinterpreting my motives here, I completely dissociate myself from his racist remarks and standpoint 209 initiati GT: 380), I have argued that Keynes is their dual GT determine what in particular is produced, in what proportions the factors of production are combined to GT: individual owner of wealth, the individual as vehicle for capital, and in every other truly efficacious, who enjoys freedom, opportunity bourgeois It seems semiquangos and quagos linked together and to the national bank by a board of public investment: -autonomous bodies within the state ... bodies which in the ordinary course of events are mainly autonomous within their prescribed limitations, but are subject in the last resort to the sovereignty of the democracy (EP: 288-289) Now, even the private enterprise firms of the laissez-faire say very little. In practice, what we have is a new laissez-faire, differing from the old in being collective rather than individualistic. The managerial class, which has quietly triumphed in both the formally private and the formally public sectors, is to be allowed to get on with it, free in the ordinary course of events of effective parliamentary supervision, regulation or restraint. 210 The Times in January and March, 1937, provide perhaps the most explici - - plans are prepared. The railway companies, the port and river authorities, the water, gas and electricity undertakings, the building contractors, the local authorities, above all, perhaps, the London County Council and the other great corporations with congested population, should be asked to investigate what projects could be usefully undertaken if capital were available at certain rates of interest 31⁄2%, 3%, 21⁄2%, 2%. The question of the general advisability of the schemes and their order of preference should be examined next. What is required at once are acts of constructive imagination by our administrators, engineers, and architects, to be followed by financial criticism, sifting and more detailed Times: 72) This is one half of the strategy. The other half is to ascertain from the mass of information obtained in this, and every other conceivable way, what rate of interest would be compatible with a flow of new projects just sufficient to absorb what the nation chooses to save: the figure that the new projects can afford. In special cases subsidies may be justified. But in general it is the long-term rate of interest which should come down to the figure which the marginal project can earn ... We have the power to achieve this. If we know what rate of interest is required to make profitable a flow of new projects at the proper pace, we have the power to make this rate prevail in the (Times: 73) There are three points worth noting here, as to why Keynes is so confident about the rate of the success of a merely monetary policy directed towards influencing the rate of GT: 164). The first point is that the Bank of England had already been cited by Keynes as a entirely of administrators and economists. The two institutions could therefore be depended upon, once Keynesian ideas had made themselves felt, to take the side of the electorate via parliament, on the other. The second point is that due to the institutionally powerful position in the market of the -term rate of 211 (Times: 73). The channelling of savings through the national bank, too, would give the state additional leverage against the rentier class and undermine the ability of the latter to dictate absolutely the rate of interest on borrowed capital (Times: 73, GT: 376). Thirdly, the plan has been drawn up by the business community themselves, and in a collective rather than individualistic way. Everyone knows what the rest of the economy is doing and no-one has any incentive to increase his liquid reserves. Consequently, there is nothing to force i up above MEC at full-employment. Uncertainty has been eliminated at the outset by removing the artificial isolation of economic agents imposed by the anachronistic laissez-faire approach to policy. The payoffs to holding money and bonds 6.5 Did Keynes reject laissez-faire? In conclusion, it is worth addressing the vexed question as to whether Keynes rejected laissez-faire. In the past three answers have been given yes, no, and yes and no all of them false. The first has tended to be associated with more left-wing interpreters of Keynes. such as Joan Robinson, and the second both with more conservative interpreters, and with left-wing anti-Keynesians, such as Geoffrey Pilling. The third alternative, that Keynes was inconsistent in his attitude to laissez-faire, has been a very common one, and in the 1930s cartoons used to appear in the press of Keynes as a double-jointed man supporting, for example, both free-trade and protection. These approaches fail to do Keynes justice. It is true that Keynes did not make the final break with classical economic theory, until around 1933, and he himself aptly GT: xxiii). In spite of this, his general social and political philosophy was consistent throughout his productive life and, I would argue, the changes in his economic theory were designed specifically to The field of social philosophy is the field in which Keynes remained consistent throughout (Lambert, 1963: 344). 212 General Theory earlier views. In fact the General Theory can be viewed as giving an economic theoretic (Minsky, 1975: 145) While they can thus agree that Keynes was consistent, commentators are anything but agreed on what it was that Keynes was (s Keynes [is] essentially an economic liberal arguing for specific non-liberal measures solely in periods savings are not run to waste in agenda [of government], it seem as if there is precious little non-agenda The reason why these views are mistaken is that they take the supposed Keynesian rejection of laissez-faire (whether they assert or deny that rejection) to be a rejection a limine. It is not. An implication of the present chapter is that it is a critique a concrete laissez-faire is not absolute but conditional and historical. His call for state intervention to equilibrate saving and investment is, in his own view by no means timelessly or universally valid. The difference between himself on the one hand, and, on the other, the old-fashioned Liberals as well as the classical neoclassical schools whose theories underlay the laissezfaire attributed to the unchanging and universal character of natural law, in terms of positive and therefore changeable laws and of the particular conditions obtaining at a given time Indian Currency and Finance (1913), written when Keynes was still, in terms of economic theory, entirely within the neoclassical school. The point is that even where, as in his work prior to World War I, Keynes obtained results formally consonant with the neoclassical and liberal traditions, such as the correctness of the laissez-faire approach to the economic policy framework in the nineteenth century, these results were obtained on the basis of a different more concrete and more historical methodology. It was this methodology which enabled him to develop a vision of what was wrong with laissez-faire, when his contemporaries could 213 only see that something was wrong (Pigou, for example, in the 1930s), and hence enabled him to develop a theoretical account of the economic problems of his time. * * * of the functions of government involved in the task of adjusting to one another the propensity to consume and the inducement to invest, would seem to a nineteenthcentury publicist or to a contemporary American financier to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety GT: 380) This passage, from the final chapter of the General Theory, is a concise statement of laissez-faire. Yet taken out of context, it could be extremely expansion in the role of the existing state. This is concerned principally with the adjustment of the propensity to consume by manipulation of the rates of income tax and death duty, and by deciding how sharply progressive should be the former, channelling savings through a national savings bank, and a programme of emergency public works in severe recessions. nature of the state. What he wants is an extraor nonparliamentary state consisting of a central bank and a national planning board linking together the enterprises (in the broadest sense) of the country into a single organisation. This organisation would, through discussion, draw out a consensus of the whole of the by the principles of laissez-faire, would eliminate the uncertainty which gives rise both to damaging fluctuations in economic activity and to the under-employment equilibrium around which the economy oscillates. d GT: 377) in its implications. The (revolutionary) introduction of central controls and planning to achieve full employment at the macro level is to provide the necessary environment in which the (conservative) micro-level GT: 378-379). Keynes wants to combine 214 micro-level individualism with the macro-level planning required to preserve it. To put it another way, individual self-seeking behaviour at the micro level will generate desirable social outcomes at the macro level when the institutional framework ensures that the payoffs to individual actions are such as to avoid prisoners dilemmas. The transition from the Era of Scarcity to the capitalist epoch required central controls on production and distribution to reduce uncertainty and the rate of interest, and raise the marginal efficiency of capital. This was the age of mercantilism and absolutism. problems call for similar solutions: a latter-day mercantilist policy (GT: Chapter 23), (GT: 203). Appendix: Bibliographical note The works of Keynes consulted are as follows. Books all in the Collected Writings series are listed first, then articles and letters. Each is preceded by the abbreviation used in this thesis, where appropriate. Since all the shorter items are contained in the Collected Writings, only the books are included in the bibliography at the end of this The Times, where the versions reprinted in Hutchison (1977) are used here. a Books by Keynes John Maynard Keynes The Collected Writings of John Maynard Keynes (eds: Austin Robinson, Elizabeth Johnson and Donald Moggridge), London: Macmillan, for the Royal Economic Society: TM Vol VI (1971) [1e: 1930] A Treatise on Money Vol II GT Vol VII (1973a) [1e: 1936] The General Theory of Employment, Interest and Money EP Vol IX (1972a) [1e: 1931] Essays in Persuasion 215 CWXIII Vol XIII (ed Donald Moggridge) (1973b) The General Theory and After. Part I. Preparation CWXX Vol XX (ed Donald Moggridge) (1981) Activities 1929-31. Rethinking Employment and Unemployment Policies CWXXI Vol XXI (ed Donald Moggridge) (1982) Activities 1931-1939. World Crises and Policies in Britain and America CWXXVII Vol XXVII (ed Donald Moggridge) (1980) Activities 1940-1946. Shaping the Post-War World. Employment and Commodities Sup Vol XXIX (ed Donald Moggridge) (1979) The General Theory And After: A Supplement b Shorter works by Keynes articles, letters, reviews EP: 59-75 Laissez-faire nted in EP: 272-294 EP: 253-271 I EP: 295-306 Nation and Athenaeum, 13 December; reprinted in CWXX: 473-476 EP: 321-332 Yale Review, and New Statesman and Nation, 8 and 15 July. Reprinted in CWXXI: 233-246 216 1935 letter to GB Shaw. Reprinted in CWXIII: 492-493 Times The Times, January; reprinted in Hutchison (1977) Times The Times, March; reprinted in Hutchison (1977) Road to Serfdom. Reprinted in CWXXVII: 385-388 217 Chapter 7 Conclusion 1 Retrospective: Keynes and providentialism In a holist view of the world, the individual agents composing an economic system are, and are primarily, components of a social totality: their life process is determined by their mutual relations, the totality of which is the economic system. Under capitalism, however, the individual agents are divorced from each other and their relations are refracted through their sole link with society: the money nexus. This gives them the appearance of independent, asocial, biological totalities, and hence gives the real social totality the appearance of a mere congeries. It is in a sense immaterial where the economist commences his study of society, whether efrom the nature of the whole, or vice versa. (Friedman, 1976: 316). That makes no difference but where you end up: do you understand the economy as a totality with Keynes, Marx, Hayek, and Smith or as a congeries with Friedman, Lucas, and the neoclassical school. the methodology of those neoclassical writers, such as Friedman, who re-assert the claims of pre-Keynesian economics post-Keynes. The agent is a rational, utilitymaximising being; since society is merely a mass of like individuals, the results of the analysis of his behaviour can be applied directly to society as a whole. Thereby the latter is shown to be a rational, welfare-maximising aggregate of many individuals. Protracted, general, involuntary unemployment is not possible: no rational individual would under-utilise scarce resources, so humanity in the aggregate must necessarily be just as rational. On the other hand, the appearance of unemployment can be explained away as false appearance concealing the intrinsic rationality of the system: irrationality on the level of the system cannot be the fault of the system but only of the individuals 218 comprising it so apparent unemployment must in fact be voluntary, caused, for example, by wage rigidity or other micro-irrationality. Keynes, summarising his whole approach in a passage to which I have already drawn attention, goes straight to the heart of this question: general theory. I mean by this that I am chiefly concerned with by extending to the system as a whole conclusions which have been correctly arrived at in GT: xxxii) Keynes is saying that the principal differentia are not isolated from each o for instance, has consequences for other individuals who are not party to the relevant transaction and hence unable to affect its outcome. In this clash between the private form and public consequences of the decisions to consume, and to save, to hold money and to invest, we see again the combination of independence in form and interdependence in content of those decisions, which lies at the heart of the prisoners dilemma. Keynes sees this clash between private action and public consequence as remediable only by the removal of the anachronistic private form of decisionlaissez-faire and his demands for social control of the propensit GT: 378, 376). agency representing it, to control saving and investment, there would need never be any discrepancy between the two. The desirability of the marginal unit of investment would be equal to the sacrifice involved in the marginal unit of saving, and with the accumulation of wealth, both would decline to zero. The problem is the presence of an anachronistic institutional framework laissez-faire which fragments the decision-making process without mitigating the social consequences of the decisions made. The community can only do two things with its income: consume 219 it or invest it. The individual acting on the basis of self-interest, however, has third alternative: he can hoard part of his income as money. Indeed, if he foresees any slackening of aggregate demand, he would be unwise not to, even if he realises the inevitable transfer of wealth to him who saves, though he in his turn may suffer from the GT: 212) Hence hoarding, which is the cause of the economic EP: 318). Though in practice the matter might be highly complex, the solution is in principle simple: that individuals should act no longer as individuals but as a collectivity, in so far as quantitative investment decisions are concerned. * * * The assumption standing behind preand post-Keynesian mainstream economics is that the unintended consequences of individual actions are essentially benign. This providential assumption pervades the writings of Smith and Hayek, Friedman and Lucas. Keynes devoted his theoretical life to the demonstration that unintended consequences, just because they are unintended, are uncontrolled and liable to be thoroughly malign: not so governed from above that private and social interests always coincide not a correct deduction form the principles of economics that enlightened selfEP: 287CWXX: 474) full circle. The episodes in the history of economic thought considered in this thesis have shown that the combination in decision-making of independence in form and interdependence in content is an issue which continually re-emerges in political economy. At every stage there is a clash between the scientific and the vulgar, the desire to understand and explain, on the one hand, and fear of the consequences of doing so, on the other. Providentialism plays a key role here. A relatively unsophisticated strategy of simply ignoring the disparity between levels has been noted but given little explicit attention: it has been assumed that for present 220 purposes the reductionist methodology of the monetarist and new classical schools can be dismissed a limine. The bulk of the thesis has focused on two sophisticated attempts to underpin a reductionist laissez-faire policy prescription with a holistic methodology. Smith and Hayek, though separated by two centuries, have proposed very similar invisible hand mechanisms to mediate between the holistic nature of the world and the reductionist character of their desired policy framework. Consideration of Keynes has shone a light on their attempts: his account gives us an outstanding example of the fate of laissez-faire political economy if a holistic approach is not supplemented with the deus ex machina of an invisible hand. The precise content of the two invisible hand mechanisms considered the will of a deity in Smith and a group-evolutionary process in Hayek was perhaps of less interest than the sheer fact of their existence. We were obliged to explore these propositions in detail to check their scientific status. Though from a systems perspective a default injunction, always to do nothing, is inherently implausible, there would be no justification for an a limine rejection. It might well have turned out that one or other of these proposed mechanisms grasped some unexpected aspect of the world. On the basis of that examination we may now see that that was not the case. Both turned out to be essentially ideological constructs, providential assertions which assumed what was to be demonstrated, namely the desirability of spontaneous outcomes. reductionism, on the one hand, and holism plus an invisible hand, on the other, is perhaps of less interest than its existence. Keynes had a particular view of the class of which he was part he saw it as a universal class in a Hegelian sense, leading humanity from darkness into light. He was also, in my reading, a virulent racist with very strong, deeply ambiguous feelings about Jews. 138 I believe that all of this shaped and coloured his reading of writers such as Ricardo and Marx, his positive analysis, and his policy prescription. So from the perspective of this thesis, the details are less important than the fact that he showed that there was an escape route: the economy is to be studied as a system and not as a congeries, and our default is to act, not to do nothing. Against the 138 This was mixed up in his mind with sexual questions passages in his essays on Einstein and Dr Melchior being particularly remarkable expressions of this potent mixture of racial and sexual issues. It would be inappropriate, however, to develop this theme further here. 221 against the providentialism of the invisible hand theorists he simply and clear-sightedly denies that any such providential mechanism exists, and shows in detail the implications, positive and normative, of that denial. So for Keynes, the invisible hand ensuring that desirable social consequences flow from self-seeking individual behaviour is a myth: but the job it was supposed to do, the reconciliation of partially conflicting and partially overlapping interests, still needs to be done. This reconciliation is to be achieved in Ke educated bourgeoisie, and, in particular, by the extra-parliamentary state which it will build, based around a board of national planning linking all the enterprises of the country to the central bank. For Keynes it is precisely the educated bourgeoisie which will take the place of the invisible hand. 2 Results and prospects This thesis has thus used a review of some episodes in the history of economic thought to illuminate the ways writers have viewed the relationship between micro and macro ase made for planning by John Maynard Keynes. A number of themes have emerged. Firstly, we saw that in a world of agents with lead optimising agents spontaneously to suboptimal social outcomes. The appropriate policy prescription, the case for state action or otherwise in the economy, depends on the importance we attach to such suboptimalities. We have seen that the extent to which writers adopt a holistic or reductionistic approach is of great importance in appraising their overall standpoint and the policy prescription they promote. Nevertheless, we have also learnt that there is no strict relationship such that reductionists and only reductionists will support laissez-faire, and holists intervention. On the contrary, we have seen two towering examples of holists advocating laissez-faire: Smith and Hayek. The argument has been made that laissez-faire is essentially a reductionist policy 222 prescription; that those advocating it face severe difficulties in what is in fact a holistic world; and that invisible hand mechanisms constitute an attempt to reconcile the two. We examined two examples: the invisible hand of an omnipotent, omniscient and beneficent deity in Adam Smith, and the group selection theory of the evolution of institutions in Friedrich Hayek. By contrast, in the case of John Maynard Keynes, we saw that when an explicitly holist standpoint is adopted, along with the explicit rejection of invisible hand mechanisms, then the logical result is a call for far-reaching reform and state activity in the economy. The research begun here has opened many doors to further investigation. One example is the struggle with providentialism to be observed in the various editions of works by Thomas Malthus and his disciple, Charles Darwin (Poovey, 1998: 283; Darwin, 1928: 19-20, 462shown in the evolution and hypostatisation of the auctioneer through the first four editions of his Elements (Mirowski, 1989: 252). Lastly, there is the current resurgence of evolutionary ideas in political economy shown by Hodgson (1988, 1993) and Vromen (1995), to give just three examples of a burgeoning literature. These will constitute the starting points of future research in this area. Perhaps the most important underlying theme not so far explicitly addressed, but highly relevant for these proposed future studies as well as this thesis, is the continuing and fundamental importance of the Darwinian evolutionary theory of Richard Dawkins for an understanding of the key issues in political economy. 223 Glossary Agent. An agent is an entity which carries out some action of interest, such as surviving, transmitting an impulse, buying a good, processing information or allocating resources between its functions. An agent can in principle exist at any level, micro or macro. A macro-level agent, then, is the aggregate or complex of all the micro-level agents composing it. Aggregate. See under Micro and macro. Apologetic. Of the nature of a formal defence or vindication. In the chapter on Smith, I identify an apologetic aspect to his work. Essentially, Smith is trying to defend two potentially incompatible things: the existing system of ranks and orders of society in Borda counts. A system of ascribing numbers to preferences such that in addition to the ranking of alternatives, some information on the intensity of preferences is impounded. third choice. Then, instead of majority voting, one would arrive at a social choice by adding up the points scored by each alternative. Such a procedure defeats both the paradox of voting (qv with a purely ordinal ranking of individual preferences. Cardinal one, two, three but note that cardinals can take any value, positive, negative, fractional, etc, while ordinals can only have positive integer values. The older, cardinal approach to utility assumed not only that the consumer ranked consumption bundles, but that it was meaningful to speak of the magnitude of the utility yielded by these bundles, in terms of the (cardinal) number ordinal. Classical of much confusion; it is much used in economics and, in particular, in the history of economic thought, and indeed in highly inconsistent senses. It seems to me that there are at least three meanings of the term in 224 general use. Marx originally divided p classes, with Smith and Ricardo representing the pinnacle of the scientific or classical group and, roughly, everyone after Ricardo being consigned to the apologetic, or vulgar trend (Marx, 1972: 501). Keynes then from Marx and proceeded to use it in a completely different almost opposite sense. that is, economics which, he felt, tried to explain, rather than to explain away, the nature of capitalistic production from Petty in the late 17th century on, and culminating in Smith considered to be only interested in explaining away the undesirable features of capitalism. Edgeworth and Pigou as examples (GT: 3). Hence, for Keynes, the labour theory of GT: 213), though logically Ricardo and Marx, incidentally, while designating Ricardo a classical economist, identified the contribution (Marx, 1968: 468, 502). Finally, in standard History of Economic Thought nerally taken to refer to the principal economists principally Smith, Ricardo, Malthus, the Mills, and Marx up to the marginal revolution of the Compatibilism. The view that causal determinism and moral responsibility are not mutually exclusive. Connation. Sharing the same route into a subsequent generation. All a biological they thus share an interest in cooperating to ensure the success of those gametes. Parasite genes do not share a route to subsequent generations and thus are at liberty to damage host interests if it aids their own survival and reproduction. Memes and meme complexes do not share a route into the next generation with their human hosts and hence may have interests quite antagonistic to those hosts. Congeries. A collection of things merely heaped together. 225 Consequentialism. The view that what gives our actions their moral character is their consequences. The claim that the deliberate killing of one innocent person in order to save the lives of more than one other person is a morally justified act would be a consequentialist claim. The end can justify the means. The opposite of deontology (qv). Coordination. In an ensemble of interacting purposive elements coordination arises when the actions of the individual elements are consistent rather than chaotic and mutually defeating. Cyclical preferences. Suppose three individuals, A, B, and C, and three possible policies or states of the world, x, y and z. Suppose also that the pattern of preferences is A: x > y > z B: z > x > y C: y > z > x. Simple majority voting on each pair of alternatives will elicit the social preference that x is preferred to y, y to z, and z to x: we are left going round in circles and each policy is preferred to both of the others by a 2-to-1 majority: S: x > y > z > x See also, transitivity and transitive closure. Decisiveness. In social choice theory, the preference of a decisive individual or group on some specific alternative about states of the world that we can bring about, is Decisiveness refers only to one alternative while dictatorship (qv) refers to all alternatives on which the society must choose. Deontology. The view that some actions are right and others wrong by virtue of their intrinsic nature, regardless of the consequences of those actions. The end cannot justify 226 deontological standpoint. The opposite of consequentialism (qv). Dictatorship. An individual, or a group of individuals with identical preferences, is a dictator if its preferences over every possible state of the world that the society can bring members of the society. Dominant strategy strategy (qv) in which the rationally optimal moves are independent of the moves made by the other player(s). Emergence. Emergence is the idea that features of an entity at a particular level may ubstrate of the entity. Emergence is therefore a characteristic of holist modes of thought. See also holism and reductionism. Evolutionarily stable strategy (ESS). An ESS is a strategy such that, if all members of a population adopt it, then it is immune from invasion by any mutant strategy (Smith, 1982: 10). ESS is a close biological analogue of the concept of Nash equilibrium (qv). Fallacy of composition. The fallacy of composition asserts that what is true of the parts taken in isolation is true of the whole. Thus Plott claims that the concept of social involves an illegitimate transfer of the properties of an individual to the properties of a collection Genotype 1989b: 287). See also phenotype. Idealism. A philosophical standpoint in which the phenomenological world which we observe is seen as the product of a reality standing behind it, and the substance of that ory of Forms is held to be a species of idealism: we see a variety of forms of appearance, but they are all 227 products of and reducible to a few abstract geometrical forms. A materialist would say the forms are obtained in our minds by abstraction from the things we see, an idealist that the things we see are obtained by an obscure process of materialisation of the preexisting forms or ideas. See also materialism. Holism. The view that phenomena at one level can be understood as emergent at that level, that a higher level entity can be understood as a product of the interrelationships between its component parts. The opposite of reductionism (qv). See also micro and macro, and micro-macro dichotomy. Materialism. The philosophical standpoint in which the fundamental nature of the world we see is taken to be matter in motion. Thoughts, ideas, forms, are all held to be reflections of the material world, by a material, physiological process of abstraction, in brains which are themselves just one particular part of that physical world. See also idealism. Meme. The units of selection in biological evolution are genes, the corresponding units of selection in cultural evolution are cultural traits or features with the capacity to be adopted, consciously or unconsciously, by human beings (Dawkins, 1989a: 192, 1989b: 290). Micro and macro. Micro and macro just mean small or lower-level and big or higherlevel. They are relative concepts. An atom is a macro level phenomenon as far as electrons, protons, quarks, neutrinos and so on are concerned; it is a micro concept as far as molecules, cells, organisms, etc, are concerned. Similarly, in economics, a market is a macro level concept when discussing the behaviour of agents within it, and a micro concept when looking at the whole economy. I also use the terms substrate and aggregate to refer to micro and macro level phenomena, respectively. Micro-macro dichotomy. The putative failure of rationality at the micro level, the level of the individual agent, to guarantee rationality at the macro level, the level of the whole society. 228 Monism. The view that ultimate reality consists of only one kind of stuff. Consistent idealism (qv) and materialism (qv) are monist, since they hold that reality consists exclusively of ideas, or matter, respectively. The opposite of pluralism, which holds that there are many kinds of stuff in the world. Cartesian dualism, in which there are material bodies but also souls, is a species of pluralism. Nash equilibrium. An equilibrium in which each agent is doing the best it can, given what all the other agents are doing. Closely related to the concept of an evolutionarily stable strategy (qv). Natural law. The conception that there are certain divinely appointed principles of human conduct, awaiting discovery by human reason, with which human law must conform if it is to be valid (Hart, 1961: 182, 152). Neoclassical. Mainstream economists since the marginal revolution of the 1870s. Ontogeny. The process of development of the individual organism from foetus to sexually mature adult. See also phylogeny. Ordinal first, second, third 1973: 1460). Opposite of cardinal (qv). In the ordinal approach to utility, we only assume information on whether a bundle of commodities yields more, less, or the same utility to the consumer than (as) an alternative bundle. Paradox. A statement or condition that in some sense seems self-defeating. In the strong or logical sense, a paradox is the bringing together of two (not necessarily version of the Epimenides or Liar Paradox, used in the Gödel indecidability theorem. In the weak sense, a paradox is a statement merely contrary to orthodox belief. The parable of the Good Samaritan is paradoxical, not because it was logically incoherent for Jesus to posit such an entity, but because he knew his audience would have strong negative paradox of thrift is in this latter category, as is the paradox of voting. In the latter, individuals with cyclical preferences (qv) between a number of alternative actions are unable to reach a coherent decision by 229 simple majority voting on each pair of alternatives. This result is unexpected, rather than logically self-contradictory. Pareto efficiency. An outcome is Pareto-efficient if it is impossible to make an agent better-off without making any other agent worse-off. A change in behaviour causing a change in outcome which improves the welfare of at least one agent without worsening that of any other agent is a Pareto improvement. Pareto efficiency is a minimal requirement of social welfare that most observers can agree on although a normative rather than a positive statement about the world, it is a relatively robust one. It might not be possible to agree what would constitute maximising social welfare, but still be possible to agree that Pareto-inefficient outcomes show that social welfare is not maximised. Peripatetic. Aristotelian. Phenotype 1989b: 292). See also genotype. Phylogeny 1989b: 292) the sequence of forms taken by the species over long periods of time. See also ontogeny. Providentialism icent care and government of Quago. Quasi-autonomous governmental organisation. See also quango. Quango. Quasi-autonomous non-governmental organisation. See also quago. Rationality. Given an objective function to maximise, rational behaviour comprises just those actions which do in fact systematically maximise that function, within the constraints the agent is subject to. For example, an agent who fails to derive the maximum satisfaction from consumption because of systematic errors in forecasting the satisfaction to be gained from a particular class of commodities is acting irrationally. One mode of procedure would be to regard the problem t of 230 underestimating the enjoyability of a product, for example as a constraint. The agent can then be defined to be acting rationally, given the constraint. This would be to define the problem away, and hence is a fundamentally uninteresting approach. Reciprocity. The ability of players in a game to influence the behaviour of other players by the moves they themselves make. Reductionism. The view that an entity at one level can be understood as an aggregate of entities at a lower, substrate level, that the properties and behaviour of higher level entities can be understood in terms of the properties and behaviour of its constituent lower level parts, taken in isolation, taken, that is, as a congeries (qv). The opposite of holism (qv). See also micro and macro, and micro-macro dichotomy. the revenues to the factors participating in production, hence we can only have offsetting overand under-production in different sectors, but not generalised over-production. Suppose national income is Y. Now new output of Y is produced. All the factors combining to produce Y receive some compensation for their contribution. With this new revenue they demand additional products perhaps some of the new product, perhaps some of the previously produced output. Now it may be that the demand for Y is greater than or less than this value, but that is an allocative matter: it just means that resources should be redirected towards this product and away from others, or vice versa. It has no meaning in this view to say that total demand is too high or too low. Social welfare function (SWF). A measure of social happiness; a putative algorithm for reconciling and aggregating the preferences of members of society so that states of the world that we can bring about by our actions may be unambiguously ranked in terms of better and worse. Solipsism. The view that only oneself exists. Strategy. List of (or algorithm generating) all the moves that a player will make in all the different circumstances that can arise in the course of a game. 231 Substrate. See under micro and macro. Teleology l explanations attempt to account for things and features by appeal to their contribution to optimal states, or the normal functioning, or the attainment of goals, of wholes or Theodicy. A existence of evil. The Theodicy of 1710 was the only book on philosophy Leibniz published in his lifetime. He argued that we necessarily live in the best of all possible worlds, since it was the one world, of all logically possible ones, which a necessarily morally perfect god had chosen to actualise. Hence any apparent imperfections in the world must be logically necessary ones. Transitive closure. Cyclical preferences (qv) generate the preference ranking S: x > y > z > x This violates transitivity (qv): x is preferred to y and y to z, but z is preferred to x. Hence preference ranking with the statement that S: x = y = z = x Which retains the salient fact that society is indifferent between the three alternatives, but restores transitivity. Transitivity tive: that Jane is older than Anne, and Anne is older than Jill, implies that Jane is older than mother of Jill, does not imply (indeed, in this case it precludes), that Jane is the mother of Gill. 232 Utilitarianism. A family of consequentialist views in which it is held that aggregate social welfare is an operational concept, a measurable entity which it is our duty and interest to maximise. The utilities of individual members of society feed into that aggregate, but it may be possible to trade off the utility of one member against that of another. A view fiercely opposed by the deontological standpoint, which argues that utilitarianism is an ideological cover for unjustified and immoral incursions into the freedom of members of society. 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