Abstract
We observed in Chapter 11 that the integration of general equilibrium theory with welfare economics provides neo-classical economics with the contemporary version of Adam Smith’s “invisible hand”. Within a perfectly competitive market economy, the different “parts” of the economic system — production, exchange and consumption — so adjust to each other that a general equilibrium state is secured that is to the mutual advantage of all agents within the overall system, even though such a collective optimum is not intended by the participating actors. Of course, in real empirical terms, such an “invisible hand” is not the instrument of some actual “deus ex machina” guiding the free-market. There is no omniscient, benevolent spectator who fully understands the nature and consequences of each individual economic activity such that he can steer the entire market system towards an end-state wherein there is a harmony of each with all. In the real-life competitive economy whatever mutually advantageous states do ensue for its participants will be the outcome of the uncertain choices of the fallible mortals who are actually engaged in production, exchange and consumption.
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References
Hayek’s writings on this topic are to be found especially in his classic articles “Economics and Knowledge” and “The Use of Knowledge in Society”, collected in F. A. Hayek Individualism and Economic Order (Chicago: University of Chicago Press, 1948), Chaps. II and V, respectively. For pertinent later writings see, for instance, “The Results of Human Action but not of Human Design” in F. A. Hayek, Studies in Philosophy, Politics and Economics,(London: Routledge and Kegan Paul, 1967), Chap. 6, or “The Errors of Constructivism” and “The Pretence of Knowledge” in F. A. Hayek, New Studies in Philosophy, Politics, Economics and the History of Ideas (Chicago: University of Chicago Press, 1978) Chaps. 1 and 2, respectively.
See, e.g., D. Lavoie, “The Knowledge Problem”, Chap. 3 of his National Economic Planning: What’s Left (Cambridge, Mass: Ballinger, 1985). And see J. Birner and R. van Zijp (eds.), Hayek, Co-ordination and Evolution: His legacy in philosophy, politics, economics and the history of ideas (London: Routlege, 1994) for a critical overview of Hayek’s work.
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We should point out here that in the last two decades there has been an increasing concentration by mainstream economists on the construction of theories under conditions of uncertainty or imperfect information. Of special concern in this work has been the analysis of situations of “asymmetric information”, wherein one agent to an economic transaction has knowledge which a participating agent lacks. Although the focus of such analysis is rather different than the one we are pursuing in this chapter, it is a significant finding for us that, under conditions of asymmetric information in a competitive economy, market distortions may result: either no equilibrium exists for a certain market, or, most importantly for our concerns, one that is not socially desirable. Consider, for instance, the pervasive phenomenon of signalling, where a signal is something an agent may acquire to make himself appear more valuable. For example, in the labour market, let us take the case where prospective employees know their real abilities, whereas employers do not. But let us assume that those of higher ability invest in advanced education to signal that ability and in this way secure an increased wage. However, on the further assumption that such education does not increase the marginal productivity of those who obtain it, it would follow that the equilibrium for this labour market is socially wasteful; here, the private gain from investment in educational signals is not socially desirable. (For an early review of problems of imperfect information in competitive markets see M. Rothschild, “Models of Market Organization with Imperfect Information: A Survey”, Journal of Political Economy,Vol. 81, 1973, pp. 1283–1308. For a later survey concentrating on problems of asymmetric information, including signalling, see H. Varian Microeconomic Analysis,3rd edn. (New York: W. W. Norton, 1992), Chap. 25.
J. Rothenberg, “Values and Value Theory in Economics”, pp. 240–41 (my italics). Variants of our principle of epistemic individualism have been a philosophical mainstay of the liberalist political tradition of classical and neo-classical economic thought. See, for instance, Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Bk. IV, Chap. II, p. 423; J. S. Mill, Principles of Political Economy, Bk. V, Chap. XI, sec. 2; J. A. Broome, “Choice and Value in Economics”, Oxford Economic Papers, Vol. 30, 1978, pp. 313–33.
See T. Scitovsky, The Joyless Economy: An Inquiry into Human Satisfaction and Consumer Dissatisfaction (Oxford: Oxford University Press, 1976), Chaps. 1213.
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See, e.g., J. K. Galbraith, The Affluent Society,ch. XI, pp. 126–33, and “A Review of a Review” (Reply to Solow), The Public Interest,No. 12, 1967, pp. 109–18 and T. Koopmans, Three Essays on the State of Economic Science,pp. 165–66.
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For a recent discussion of the moral and political significance of such a “private zone”, see J. S. Fishkin, The Limits of Obligation,(New Haven: Yale University Press, 1982), Chap. 4, pp. 20–24.
Perceptive examinations of self-deception can be found in D. Davidson, “Deception and Division”; D. Pears, “The Goals and Strategies of Self-Deception”; both in J. Elster (ed.), The Multiple Self (Cambridge: Cambridge University Press, 1985), pp. 59–77, and pp. 79–92, respectively; and J. Elster, Sour Grapes: Studies in the Subversion of Rationality (Cambridge: Cambridge University Press, 1983), Chap. 4, sec. 3, pp. 148–57.
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See D. M. Winch, Analytical Welfare Economics (Middlesex: Penguin, 1971), pp. 34ff; pp. 95ff; R. Boadway and N. Bruce, Welfare Economics (Oxford: Basil Blackwell, 1984), Chaps. 1 and 6.
D. Davidson, “How is Weakness of the Will Possible?” in D. Davidson, Essays on Actions and Events ( Oxford: Oxford University Press, 1980 ), p. 42.
Instructive elucidations of this problem can be found in J. Harsanyi, “Morality and the theory of rational behaviour”, sec. 7; B. Williams, Ethics and the Limits of Philosophy (London: Williams and Collins, 1985), pp. 40ff; R. E. Goodin, “Laundering Preferences” and A. Gibbard, “Interpersonal comparisons. preference, good, and the intrinsic reward of a life”, both in J. Elster and A. Hylland (eds.), Foundations of Social Choice Theory (Cambridge: Cambridge University Press, 1986), pp. 75–101, and pp. 165–93, respectively; R. B. Brandt, “Two Concepts of Utility” in H. B. Miller and W. H. Williams (eds.), The Limits of Utilitarianism (Minneapolis: University of Minnesota Press, 1982), pp. 169–85; R. C. Jeffrey, “Preference among Preferences”, Journal of Philosophy, Vol. 71, 1974, pp. 377–91.
For a useful review of the issues involved see the articles in M. Hollis and S. Lukes (eds.), Rationality and Relativism ( Oxford: Basil Blackwell, 1982 ).
See I. Berlin, Two Concepts of Liberty (Oxford: Oxford University Press, 1958). a’ Cited •in Berlin, Two Concepts of Liberty,p. 36.
For this restriction and its rationale see I. M. Copi, Symbolic Logic, 5th edn., ( New York: Macmillan, 1979 ), p. 72.
Of course the social choice procedures recommended in this paragraph would still have to come to terms with Arrow’s “impossibility” theorem — that under certain apparently desirable conditions, it is logically impossible to devise a choice method that provides a social ordering or consistent preference ranking for a group by aggregating the consistent preference rankings of the individuals constituting the group. (See K. Arrow, Social Choice and Individual Values, 2nd edn. (New York: Wiley, 1963); and his “Values and Collective Decision Making” in F. Hahn and M. Hollis (eds.), Philosophy and Economic Theory, pp. 110–26.)
Our comments in this paragraph have an affinity with the notion of an “ideal speech situation” specified by J. Habermas. See, for instance, his “Towards a Theory of Communicative Competence”, Inquiry, vol. 13, 1970, pp. 360–75.
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Hodgson, B. (2001). Economic Uncertainty and Consumer Autonomy. In: Economics as Moral Science. Studies in Economic Ethics and Philosophy. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-04476-6_13
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