Beyond the Invisible Hand
Rs 399 pp 273
How social is the science that derives from Adam Smith’s invisible hand? Not particularly to begin with, and made worse by mis-reading, argues Kaushik Basu in Beyond The Invisible Hand: Groundwork For A New Economics. Basu has devoted a lifetime to examining the central tenet of capitalism — individual self-interest leads to social good — and the results of his study lead him to the inescapable conclusion that markets are rarely efficient and hardly every fair.
The author traces the making of the free market mantra from Smith’s observation that in making economic decisions, each person “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 not part of his intention”. Basu goes through the assumptions that went into converting this into a neat mathematical construct, some of which are indeed heroic.
A large body of economic research has gone into proving that Smith, or at least his formulaic representation, was wrong. Repeated assaults on classical economics have given the science a better understanding of how economic agents behave. But Basu’s brand of normative economics casts its net wider to other social sciences for a more holistic approach to policymaking.
In this, he draws richly from the work of the economic iconoclasts, be they game theorists, choice theorists or behavioralists. The author’s academic bent is on display in the survey of literature ranging from George Akerlof to Leon Walras and his exposition of the changes that have been incorporated into mainstream economics is masterly. But Basu comes into his own in describing the real world and how little conventional economics can explain it.
Particularly insightful is his vision of how one-sided contracts can dispossess large swathes of mankind from the gains of capitalism. He draws parallels between intellectual property rights that the West is so keen to implement on the rest of the planet and the land laws that helped colonise the United States. In both cases, the persons drafting the law had a far better idea of the value of the resource than those that were, or are being dispossessed.
In this, the role of the State is vital. It can act as a crony to those out to corner particular chunks of the common wealth, but it also has the capacity of acting as an honest broker. Basu’s wide store of historical anecdote is, however, fairly pessimistic about the role the State can be expected to play in future unless a competitive paradigm emerges to laissez faire.
Basu is being modest when he says that is the job for another. His work is restricted to questioning the lay of the land. In this limited ambition, the author excels. Basu’s dissent is meant more for the common man, who has an instinctive feel of his social milieu, than the economist trained to perceive reality through the rigour of theorems.