IN DEFENSE OF THE INVISIBLE HANDNorman P. Barry

IntroductionDespite the current intellectual popularity of free market philos-

ophies and the increasing doubt cast on the idea that the politicalpower of the state can improve upon the spontaneous workings of adecentralized, private property exchange system in the productionof desirable social outcomes, criticism of the Invisible Hand hypoth-esis continues to flourish, Moreover, such criticism does not emanatesolely from the members of some socialist aneien régime anxious topreserve an intellectually spent economic dynasty hut from some ofthe most original and sophisticated economic and social theoristscurrently writing. Two outstanding contributions to this critique ofclassical economic liberalism are those of Frank Hahn and AmartyaK. Sen, whose Fred Hirsch Memorial Lectures have attracted muchattention.’ What is of interest to the Invisible Hand theory in thesearticles, especially that of Hahn, is not that its critics wish to amputatethe limb and replace itwith some allegedly superior steering device,but that they seekonly to expose infirmities in its joints and musclesand indicate souse unsureness of its grasp. Nevertheless, the hand offriendship proffered by these writers seems limp enough to provokesome defensive reflections on behalf of spontaneous market forces.

The criticisms of Invisible Hand processes cover a wide range ofeconomic and social issues. At the level of pure theory, there is thequestion of whether rational economic agents, driven only by self.interest, will produce an economic “equilibrium” and, further,whether

Cato Journal, Vol. 5, No. 1 (Spring/Summer 1985). Copyright © Cato Institute. Al!rights reserved.

The a,,thor is Professor of Politics at the University ofBuekingham.‘See Frank I-I. Hahn, “Reflections on the Invisible Hand,” Lloyds Bank Review, April1982, pp. 1—21; and Amartya K. Sen, “The Profit Motive,” Lloyds Bank Review, January1983, pp. 1—20. See also Frank Hahn, “General Equilibrium Theory,” in The Crisis inEconomic Theory, ed. I). Bell and I. Kristol (New York; Basic Books, 1981), pp. 123—38.

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“equilibrium” is a useful description ofeconomic reality, With regardto welfare economics, the critics argue that the optima described bythe theorems of market equilibrium have no necessary connectionwitheconomicjustice, since the optima are consistent with any givendistributions of property holdings~.Sen, especially, challenges theutility of the market in relation to employment and welfare policy inindustrialized countries and seriously questions its success in pro-moting prosperity in developing areas. Generally, both Hahn andSen express skepticism about the possibility that economic agentscan actually advance their personal interests by obeying the egoisticinjunction of the laissez-faire theory. Sen at least implies that such apostulate does not capture a desirable or adequate ethical goal. Thispaper examines these criticisms of the Invisible Hand theory in lightof Hayek’s insights concerning the market process, and in light ofthe recent developments in public choice theory and property rightstheory.

The Invisible Hand as a Competitive Market Process

The defense of the Invisible Hand process must begin at the the-oretical level with an accurate and coherent account of what is beingclaimed in the economic philosophies of those who utilize it, For itcan be argued, with ample justification, that much of the initial plau-sibility of the criticism of the Invisible Hand theorem derives froma systematic misrepresentation of the spontaneous market order thatit describes. In fact, the description of a competitive market systemgiven in the orthodox texts of neoclassical economics bares littleresemblance to the theory of competition advanced by Adam Smithand his successors. The differences center on the conceptions ofhuman action that underlie rival models of economic competition.

The difficulty of understanding the significance of the InvisibleHand theorem is that, in economics at least, it has become inextric-ably bound with the notion of equilibrium: the search for the pres-ence of an Invisible Hand process has been misdirected toward thesearch fir the existence of equilibrium in a decentralized marketeconomy. To anticipate what is to follow, the critics of the marketsystem claim that the absence of a stable equilibrium in real econo-mies entails the refutation ofthe Invisible Hand theorem. I maintainthat this is false.

The Shortcomings oftfahnian Equilibrium

Although Hahn is a distinguished exponent ofgeneral equilibriumeconomics, it is not always clear what exactly he means by the con-

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cept or how it is tobe used in economicanalysis. However, the policyimplications he draws from equilibrium theory are fairly clear.

In his Fred Hirsch Lecture, Hahn appears to be describing the“pure theory” of the Invisible Hand as equilibrium theory. An eco-nomic system is postulated in terms of a perfect coordination ofeconomic actions in which the price structure reveals no possibilityof further changes. According to Hahn: --

The economic environment of any one person is fully specifiedonce the prices of all tradeable objects are given. These prices arethe terms at which one good can he exchanged for another and it isa basic assumption that all individuals can trade to any extent theywish at these prices. One notices that the economic information isconveyed ves’y economically—the individual knows everything thathe needs to know once he knows prices.’

From this it follows that all individuals are price-takers (no oneperson can influence price), they are endowed with perfect knowl-edge ofall possible states of affairs, and markets are “complete,” thatis, there are terms of exchange that enable individuals to make anytrades they wish. Individuals then react in the mannerof automatonsto their environment, and their actions can be predicted by an exter-nal observer. These actions are, in Hahn’s own words, “machine-likeresponses of agents to prices.” The argument therefore for the oper-ation of the Invisible Hand is reduced to the abstract mathematicalproof of the proposition that in a world of decentralized trading theactions of transactors will “mesh”; there will be no discoordinationto be corrected by further trading,

A more adequate statement of Hahn’s position on equilibrium canbe found in his earlier essays,4 where two sorts of equilibrium aredifferentiated: the timeless static world described in the originalArrow-Debreu’ model and a more dynamic version in which thesequential movement of an economy is explored. Although no dif-ferent policy conclusions follow from the two representations, a fairtreatment of Hahn’s views requires that they be examined.

The latter is much more interesting and, as S. C, Littlechild haspointed out, has much in common with the Hayekian6 version of

‘Hahn, “Reflections on the Invisible Hand,” p. 2.3lbid., p. 6.41n particular, see Hahn, “The WinterofOur Discontent,” Economica 40 (August 1973);322—30; and his inaugural lecture at Cambridge University, On the Notion ofEquilib-rium in Economics (Cambridge; Cambridge University Press, 1973).‘K. J. Arrowand C. Debreu, “Existence ofan Eqnilibrium for a Competitive Economy,”Econometrico 22 (July 1954); 265—90.‘F. A. Hayek, “Economies and Knowledge,” in Indieidualism and Economic Order(London; Routledge and Kegan Paul, 1948).

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equilibrium, It represents a significant departure from the originalArrow-Debreu model, for instead of using equilibrium theory torepresent or “objectify” a static and unchanging picture of perfectcoordination, it addresses the question of how individuals, througha learning process, adjust their plans through time so as to bringabout that equilibrium state. This “subjectivist” view of economicssees the task of equilibrium theory as one of incorporating an expla-nation of individual action in a less rarefied world than that of com-parative statics. Hahn puts the matter accurately when he says thatthis “requires that information processes and costs, and also expec-tations and uncertainty be essentially included in the equilibriumnotion, This is what the Arrow-Debreu construction does not do.”7

In Hahnian equilibrium, which sees economic action as sequentialaction, each individual has a theory of how the economy will developover time, and his theory will be modified (through a learning pro-cess) in accordance with his perception of changes in the data thatcon&ont him. If every change is perfectly foreseen then each indi-vidual is in equilibrium: An economy is in equilibrium when all theindividual theories or plans are mutually compatible. Thus,, Hahn’snotion of equilibrium is similar to that used by Hayek in the PureTheory ofCapital. Hahnian equilibrium is undoubtedly an improve-ment on the Arrow-Debreu model, which, by objectifying a once-and-for-all state of affairs, is unable to accommodate change. But itis not at all clear that Hahn’s modified version improves our under-standing of how real markets work or contributes to an explication ofthe Invisible Hand theorem.

The crucial point is that Hayek sees the limitations ofequilibriumtheory, as Mises did before him (although the Misesian constructionof an “evenly rotating economy” is less useful since it does notaccommodate change). A theory of equilibrium is a deliberateabstraction from reality, a limiting case, which enables us to under-stand how and in what ways the behavior of real economies departsfrom the theoretical model. Thus, far from extending and refiningthe basic postulates of equilibrium theory so that they provide a truerpicture of reality, Hayek goes on to take account of other economicmechanisms.8 Notable here, of course, is entrepreneurship (com-pletely absent fi’om any equilibrium model), which explains how an

‘Hahn, On the Notion ofEquilibrium in Economics, p. 16. Sec also, S. C. Littlechild,“Equilil,riu,n and Market Proce,s,” in Method, Process, and Austrian Economics, cdIsrael Kirzner (Lexington, Mass.; D.C. Heath, 1982).‘Sec especially, “The Meaning of Competition, in Indieiduolism and Economic Order,The most sophisticated contemporarycompetitive theory is Israel Kirzner’s Competi-tion and Entrepreneurs/up (Chicago; University of Chicago Press, 1973).

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economy tends to move toward that state of perfect coordinationdescribed by abstract theory.

But Hahn believes, mistakenly, that further progress in economicscience can only come from the continual refinement of the generalequilibrium model. While accepting (emphatically) that this does notreflect reality, he claims that “The student of general equilibriumbelieves that he has a starting point from which it is possible toadvance towards a descriptive theory” (italics added).°Thus Hahn isnot interested in economic processes, genuine competition, entre-preneurship, or innovation, all ofwhich characterize real economies,but in routine, regularized, and repetitive behavior that canbe encap-sulated in equations. As Alan Coddington points out,’°this is entirelybecause Hahn is wedded to the formal deductive method in eco-nomic theory. But the real work of the Invisible Hand is done inthose coordinating market processes that cannot be captured by axi-omatic reasoning. Hahn shows some recognition of this when heconcedes that “general equilibrium is strong on equilibrium and veryweak on how it comes about,” but he never takes up the marketprocess theory that is hinted at here.

What is worse, as again Coddington points out, Hahn uses theoryin a systematically misleading manner,51 Although he occasionallyconcedes that general equilibrium is a self-contained (mathematical)exercise that does not picture reality, he uses it to “falsify” the majorclaim of the Invisible Hand theory: that an unhampered, decentral-ized market economy will tend to produce a Pareto-optimum. Hedoes this by showing that, in comparison to the perfect coordinationof plans described by pure theory, existing markets display many“inefficiencies” that could in theory be eliminated. The argument,however, is misleading because general equilibrium theory is not acausal explanation of how markets work but rather a self-containedlogical exercise that deliberately excludes coordinating processes.

Implicit also in Hahn’s analysis is a skillfully concealed piece ofnormative economics. What he wants to show is that in a variety ofareas the (alleged) &ilures of the market—in terms of the standardsset by abstract theory—can be corrected by government and admin-istrative action, presumably informed by the equations of generalequilibrium theory. What he does not consider is that although

‘Hahn, “Winter of Our Discontent,” p.32’!.‘°AlanCoddlngton, “TheRationale ofCeneralEquilibrium Theory,” Economic Inquiry13 (December 1975); 547.“Hahn, “Winter of Onr Discontent.”“Coddington, “Rationale of Ceneral Equilibrium Theory,” pp. 541—43.

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existingmarkets may notprovide “perfect” solutions to the problemsof, say, exhaustible resources, externalities, public goods, and so on,this still leaves “wide open the possibility that the imperfectly-func-tioning markets perform better than any of the available (administra-tive) alternatives.”13

Thus even though the full description of Hahnian equilibriumincludes some subjectivist elements, it no more captures the essenceof the Invisible Hand theorem than does the static model he is soanxious to refine. He has not produced an account of its movementat all but engineered a sophisticated sleight of hand. His sequentialequilibrium is still a description of the outcome of a market processand not an account ofthe process itself. An economic “end-state” hasbeen postulated after the Invisible Hand has done its work, but whatis not revealed is how this work is done.

The invisible Hand ProcessThe notion of the Invisible Hand must be seen as a metaphor that

illuminates a continuingprocess ofexchange and competition betweenindividuals which brings about a coordination ofplans and purposes.It must notbe seen as a picture of an end-state of perfect equilibriumin which all plans have already meshed, since that implies the ces-sationof human action. The Invisible Hand image refers to an unend-ing process of change and adjustment and not to a perfectly harmo-nious end-state in which incentives to change have been removed.It is because we cannot know in advance of a market process thedetails of the price structure of an economy in perfect equilibriumthat the description of a market economy in those terms is quitemisleading: It is merely a theoretical abstraction that has no neces-sary connection with real markets.

Of all the differences that mark off abstract equilibrium modelsfrom existing markets it is the omnipresence of ignorance and uncer-tainty that is most germane to real markets. Because market trans-actors are necessarily ignorant of most of the facts of the economicuniverse, all oftheir actions are speculative; they make guesses abouta necessarily unknowable future, Fromthis it follows thatthey cannotbe passive price-takers responding automatically to a given set ofdata, but are active makers of various futures. Economic activityconsists of continually exploiting price differences that exist in anecessarily imperfect world. It is this, of course, that constitutesprofit, a phenomenon which is absent from an equilibrium world.Yet if there were no possibility of profit there would be nothing to

“Ibid., p. 554.

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drive the system toward equilibrium. In Hayek’s instructive phrase,the market is a “discovery procedure” by which transactors adjust toever-changing ciTcumstances, rather than an “allocative device” bywhich means are somehow mechanistically directed to the produc-tion of given ends,

We can now see how genuine market competition differs from theersatz version described in “perfectly competitive equilibrium”models. As Frank Knight said, “in perfect competition there is nocompetition.” Ifthere are no mistaken prices to correct, as is the casewith perfect competition, there is no opportunity for the intenserivalry that characterizes economic action to manifest itself and noneed for entrepreneurship to play its coordinating role.’4

In economics the point of the Invisible Hand theorem is to showhow there can be order without a designingmind and without anyoneintending specifically to produce such an order. Hayek’s famousobservation that the social sciences should be concerned with theinvestigation of phenomena that are “the result of human action, butnot of human design”5 shows there are “natural” processes at workthat, if left undisturbed, will produce an order infinitely more com-plex than that which emanates from deliberate human will. This isbecause no one mind can have access to that dispersed knowledgewhich is a feature of a natural system: To think this is possible is,according to Hayek, to be a victim of the “synoptic delusion.” AsHayek has been at pains to point out, a self-correcting economicsystem is not the only example of a natural social process; legalsystems and languages, for example, display similar properties.

Sen’s Objection to Spontaneous Order

Sen thinks that this is rather an “unprofound” thought,’6 He sup-ports this contention by giving a trivial example ofan action—cross-ing the street—from which certain results occurred that were notspecifically designed; for example, crossing the street led toa passingcar being delayed. This is quite disingenuous, for the fascinatingthing about Invisible Hand theories is that they produce surprisingand untri vial results, The typical modern intellectual is a victim ofthe synoptic delusion: It is inconceivable to him that a market cancoordinate in the absence of a central human agency, or that judges,

‘4F. A. Hayek, “Competition as a Discovery Procedure,” in New Studies in Philosophy,

Politics, Economics and the History of Ideas (London; Routledge and Kegan Paul,1978), pp. 179—90.“See Hayek, Studies in Philosophy, Politics and Economics (London; Routledge andKeganPaul, 1967), pp. 96—105,

“Sen. “Profit Motive,” p. 3.

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in a case-by-case manner, accidentally generate a more predictablelegal order than that produced by a legislature. Yet it is these pro-cesses that are orderly and the human will that is capricious.

The most that Sen concedes to the market is that it is appropriateonly for those matters over which people’s interests converge, butthat it is quite irrelevant for those areas where there is a conflict ofinterests. In one sense, Sen is uttering a tautology: market relation-ships are convergent ones and, where there are irreconcilable con-flicts, trading is impossible. The interesting point about the familiarinstitutions of market society, however, is that they enable individ-uals to find out those areas where cooperation and gains from tradeare possible. We cannot know what coordination can take place untilwe allow people to exercise their “natural propensity to truck, barterand exchange.” The danger of overemphasizing the conflictual sideofhuman relationships is that it licenses “politics” todominate men’slives, and politics has an almost irreversible tendency to conceal theopportunities for agreement among people.

Normative Implications of ConventionalInvisible Hand Theory

We are now in a better position to scrutinize more critically thenormative implication, noted above, that lurks in the complexity ofthe conventional version of the Invisible Hand theory. The obviousimperfections, such as monopoly power, of real-world markets areheld up as departures from some imaginary social optimum cryingout for governmental correction. But if no social optimum existsindependently of the actions of economic transactors, how can therebe an infallible touchstone that measures so exquisitely all of oureconomic variables? The familiar market imperfections, since theyrepresent opportunities for speculative gain, are themselves beingconstantly corrected by enterprising individuals through the marketprocess. If there is nothing in economic behavior apart from theactions of individuals, from where do we derive an instrument forcallibrating those actions?

It follows then that there are two problems for the general equilib-rium versions of the Invisible Hand theorem. First, there is theepistemological argument that the nature of free economic activity,which is essentially unpredictable, precludes any observer havingthe knowledge needed to make any statement about a social optimummeaningful. Second, even if the idea of such an optimum could bemade operational, how would we guarantee that government actionwould produce it more effectively than private agents? Why should

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political officials be more informed about profitable opportunitiesthan market traders who risk their own resources? Furthermore, asthe public choice school of political economy has shown, we cannotbe at all confident that political officials will maximize such socialoptima in the absence of strict constitutional rules. In fact, the reverseis likely to be the case, that is, officials will maximize their privateinterests.

The market is a process that operates through time; it is not char-acterized by the instantaneous adjustment of carefully programmedautomatons. If the Invisible Hand’s operation were that described inthe general equilibrium theory, there would be no need for money,the firm, entrepreneurship, and all the other economic categoriesthat exist only because ofthe ineradicable uncertainty that pervadeseconomic life in the real world. The interesting question concernsnot the existence of perfect coordination in abstract equilibrium, hutthe nature of the coordinating process that the Invisible Handgenerates.

Here there would appear to be some disagreement between thevarious anti-equilibrium schools of political economy. The Austriantradition, as exemplified by Mises and Hayek, holds that there is atendency to equilibrium: This does not consist of an instantaneousprice and quantity adjustment, hut of a learning process in whichindividual plans are coordinated, However, a more extreme subjec-tivist position, associated mainly with the work of C. L. 5. Shackle,’7

holds that because economic life consists entirely of thoughts andexpectations about the future, which may turn out to be wrong, onecannot even posit a tendency to equilibrium. The world is “kaleidic”rather than smoothly coordinating, and the entrepreneur is a creativeinnovator rather than an agent that merely brings about an alignmentof dispersed information.

The failure of the Invisible Hand derives not from considerationsadvanced by Hahn and Sen, but fi’om a subtle interpretation of thevery process that their models conceal. We cannot here go into theintricacies of Shackle’s position, but experience strongly indicatesthat the disruptions to the coordinating process that do occur comefrom government intervention rather than from some endogenousfeatures of the exchange system. Throughout the 20th century, gov-ernment mismanagement of money has had catastrophic discoordi-nating effects, and the plethora of welfare and trade union legislationhas systematically rendered large parts of the labor force virtually

‘7See his Epistemics and Economics (London; Cambridge University Press, 1972).

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immobile. In other words, the Invisible Hand is notnaturally arthritic:It has artificially imposed impediments that confine its movements.

Critics of the Invisible Hand theorem sometimes concede thatunder specified conditions, a decentralized exchange process willgenerate a Pareto-optimum, a state of affairs inwhich no reallocationof resources is possible without making (at least) one person worseoff’

8 But they are quick to point out the limitations ofthis notoriouslyweak principle of welfare economics. It is, of course, nice to knowthat unplanned markets can generate Pareto-improvements, but thepotential beneficence of this principle is severely qualified by thefact that it is silent on the morality, or otherwise, of the distributionof property rights from which trading is to start. Of course, there areas many Pareto-optimal outcomes as there are possible property dis-tributions. As Sen rightly points out: “A state in which some peopleare suffering from acute deprivation while others are tasting the goodlife can still be Pareto-optimal if the poor cannot be made better offwithout cutting into the pleasures of the rich.”~

This is a much labored objection to free market economics, but itssignificance is vastly overstated. All it says is that if the InvisibleHand mechanism is to function as something more than a scientificexplanation of economic order, it must produce separate principlesthat establish the legitimacy of the original property holdings ofmarket traders. As a matter of logic, an exchange process must beginwith objects’that were acquired by means other than exchange. This,however, is not a special problem of the Invisible Hand explanationbut a general problem ofjustification in politics and ethics.

Invisible Hand theorists become political liberals when they pro-duce logically independent arguments for the justification of indi-vidual acquisition of previously unowned resources, of inheritance,gifts, and other forms of entitlement. Some of these arguments maynot be persuasive, but can it really be maintained that socialist argu-ments forjust acquisition are morally superior? Most ofthese, in fact,maintain the moral fiction that the “community” can somehow ownvalued things, a proposition that, in practice, has subverted not onlythe morality of individual freedom but also those individualisticmechanisms that power the exchange system.

Irrespective of these more substantive liberal considerations, oneimportant indirect political implication ofthe classical liberal versionof the Invisible Hand theorem is scarcely considered at all. This isthe view that we cannot simply choose any distribution of property

“Hahn, “Reflections on thc Invisihic Hand,’ p. 4,“Sen “Profit Motive,” p. 6.

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rights, since the choice is likely to have unintended consequencesthat are impossible to foresee.20 This argument derives from theantirationalist version ofthe Invisible Hand theory and presses homethe case that thereare self-correcting mechanisms at work—not merelyin the market economy but in the legal and social system generally—that produce outcomes which an unaided reason is powerless toimprove upon. A good example is the evolving common law system,which has historically coordinated an individual’s actions much bet-ter than the imposed statutes of rationalist planners. It is because ofour ignorance that we cannot plan the future and, therefore, in autilitarian sense, it is advisable to accept inherited institutions.Thiswould dispose us then toward accepting a received system of prop-erty rights, which in most cases has developed accidentally, ratherthan planning them anew according to some arbitrarily imposedabstract principle.

Although the extension of the Invisible Hand theory appears toinvolve a descent into an uncritical traditionalism, which is too con-servative for radical laissez-faire economists, its importance in thedebate about the institutional framework within which marketexchanges takeplace is frequently overlooked. Even those who favorfree exchange and production for the satisfaction ofindividual wants(such as the “market socialist” thinkers of the l930s) blithely pre-suppose that property rights can be shuffled and reshuffled endlesslyso as to produce some socialist Pareto-optimal end-state withoutthere being any adverse effects on the institutional framework ofeconomic society.

Alleged Deficiencies of the Invisible HandMuch of the contemporary criticism of the Invisible Hand theory

is directed less to theoretical concerns and more to the alleged real-world deficiencies—economic, political, and ethical—of a systembased on the spontaneous interaction of basically selfish economicagents. The argument here concerns the need for state action tocorrect an unhampered market that would otherwise periodicallyproduce mass unemployment, pockets of poverty amid affluence,“externalities” in the form of pollution and damage to the environ-ment, and fail to generate economicgrowth in Third World countries.In all this there is scarcely any recognition of the obvious fact thatno other economic system has remotely approached capitalism in itsproductivity and ability to satisfy consumer wants. Centrally planned

nSee Hayek, The Constitution ofLiberty (London; Routledgeand Kegan Pans, 1960),

pp. 124—30,

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systems notonly depend on capitalist systems for vital technologicalknow-how but also, and more important, for the whole range ofpricing signals provided by the international market system. In theabsence of the latter, the productive process in a planned systemwould lack any kind of rationale.

In light of this, it is incredible for Sen to claim that, in the marketeconomies of the West, people do not go begging for food becauseofthe “social security that the state has offered.”2’ It is surely obviousthat the high welfare payments in capitalist economies are paid outof a surplus created by an economic system driven by the profitmotive. Indeed, the social security payments in capitalist economiesin many cases exceed the incomes ofemployed workers in plannnedeconomies. Again, it is neither naive nor callous to suggest that muchofthe unemployment that characterizes market economies is a resultof those very same welfare payments that cramp the movements ofthe Invisible Hand. People who choose subsidized leisure overpaidemployment are responding rationally to the signals of a distortedmarket. It is intellectual duplicity to argue that economic inefficien-cies caused by interventionist inhibitions in the working of the Invis-ible Hand constitute evidence of its failings.

Sen22 pays some attention to the version of market theory thatstresses the inviolability of the property rights of the participants tothe exclusion of any consequentialist considerations that would nor-mally be thought relevant to an evaluation of the outcome of theexercise of those rights. Thus he concludes that actual instances ofmass starvation in developing countries can be attributed to theproperty rights structure of market society. Here, the Invisible Handis said to fail in a welfare sense because it does not distribute food,in conditions of no overall deficit in food availability, to those whoclearly need it.

No doubt such cases have occurred, although their frequency inthe terms so described may be disputed. However, this is not acriticism of the Invisible Hand as such, but of the property rightsstructure within which it operates; as I suggested earlier, a varietyof moral considerations may be brought to bear on the question ofproperty entitlements, The apparent failure of a spontaneous marketto distribute food to the needy may be the result of some previousviolent acquisition of land and resources by a minority.

2’Sen, “Profit Motive,” p. 12. Bastiat’s famous description of the state as “that great

Bction by whidi everybody trios to live at the expcnse of ovcryhody else” is appositohere.22lhid., pp. 10—11.

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But even if it were the case that perfectly just acquisitions ofresource holdings led to mass starvation in circumstances of aggre-gate adequate food supply, this does not refute the case for theInvisible Hand or establish the case for a dirigiste production anddistribution system. Just because there have been occasional exam-ples of such suffering under capitalist systems, it does not follownecessarily that collectivism itselfwould have prevented them. Surely,the more frequent cases of mass starvation under communism, as inthe Soviet Union, are sufficient to tip the balance in favor of laissez-faire even in the least propitious cases.

This points to a more general problem with the approach of thecritics ofthe Invisible Hand. Their obsessive concern with the allegedfailures of the market process leads them tooverlook the deficienciesof politics. All too often, the choice of methods is presented as if itwere between the commands of a benevolent and omniscient legis-lator on the one hand and a messy and imperfect market on the other.However, the real comparison ought to be between political andeconomic means to generally agreed ends.23

Such a comparison is particularly instructive when we look at theresults of competition for votes in a democracy. Under conditions ofunlimited government, as in the United Kingdom, we find that thestate, far from being the infallible purveyor of the public good, becomesthe plaything ofinterest groups who use legal and political privilegesto secure their members incomes they could not earn in the market.The tragedy here is that such action is ultimately destructive of theinterests of all in the political community. Whereas the correctivemechanisms of spontaneous markets act to harmonize the self-inter-ested actions of individuals with the common interest, this cannotbe said ofthe political system. Thus, when Sen talks ofthe prevalenceof prisoners’ dilemmas in economic society,24 that is, where self-interested action is ultimately self.defeating, he neglects to observethat their most obvious manifestations lie in the public world ofpolitical actors rather than in the private world of economic maxi-mizers. Indeed, the increase in government activity during the lastfour decades has come about not through the need for collectiveaction to produce public goods, as Sen claims, but through the dem-ocratic process itself.

23SamueI Brittan’s work, especially The Economic Consequences of Democracy (Lou-

doo: Temple Smith, 1977), is most important in this respect.alson “Profit Motive,” p. 18.

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The Self-Interest PostulateThis brings us face-to-face with the problem of self-interest and

the validity of the now well-known thesis of the late Fred Hirschthat the classic motivational postulate of the Invisible Hand theoremis an inadequate mechanism for satisfyingeveryone’s interests. Hirschmade much of the phenomenon of “positional goods,” by which hemeant those goods, such as rare works of art or uncrowded beaches,whose supply cannot increase with increase in demand. He implies,in other words, that a market economy produces a mass of unsatisfi-able desires, Perhaps the novelty of the concept has been exagger-ated. Positional goods have always been with us and, presumably,always will; their existence does not point to the failure of the Invis-ible Hand but to unalterable facts of the world. It seems to me thatHahn25 has it about rightwhen he suggests that the marketwill alwaysprovide an adequate supply (and immense variety) of augmentablegoods, which makes the positional goods problem less pressing thanis often supposed. Certainly, Hirsch’s implicit claim that the onlysolution is toalter somehow individual wants has an unduly depress-ing (and faintly sinister) ring to it.

There is, however, in Hirsch’s work a more direct argument thatthe pursuit of self-interest is counterproductive, that rational indi-viduals cannot achieve their undeniably selfish ends by the pursuitof self-interest alone. It is claimed that certain kinds of nonselfishbehavioral motivations, such as “team spirit” or “loyalty,” both ofwhich may require individuals to sacrifice immediately beneficialopportunities, are required in order to generate the efficient out-comes that are supposed to be a product ofunalloyed egoism. Sen2°cites the Japanese commercial success as partly due to a peculiarethos that has little todo with the individualistic spirit of Adam Smith.

The attack on self-interest, however, neither blemishes the Invis-ible Hand theory nor affects drastically the self-interest assumptionfrequently used by expositors ofthat theory, A universal self-interestis not a logically necessary featureofthattheory, which merely claimsthat a social order will emerge from the spontaneous actions of indi-viduals without the necessity for an all-powetful central institution.The importance of the self-interest proposition is to show how thepublic interest is an accidental and unintended outcome of privateactions so that the appeal to a deliberate altruism is either redundantor positively harmful. As Adam Smith remarked, “I havenever knownmuch good done by those who affected to trade for the public good.”

25Hahn, “Ilofiections on the Invisible Hand,” p. 9.

use,, “Profit Motive,” pp. 14—15.

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General reliance on the postulate of self-interest to explain eco-nomic behavior, however, does not exclude the possibility that moreefficient orders may be produced by arrangements that rely on othermotivations. A natural process will select out in an evolutionarymanner the successful industrial forms, and these may well includesome that are characterized by nonegoistic motivations. The orga-nization of the firm is a response to the uncertainty of economic life,and we cannot know in advance of experience which is the mostefficient mode ofits operation. Certainly, wecannot use the examplesof enterprises that depend less on self-interest and are still successfulas a license to inculcate deliberately a nonegoistic spirit. Where thishas been tried the results havebeen disastrous. The point overlookedwhen examples of successful “team spirit” enterprises are cited isthat the institutional arrangements and psychological attitudes thatare said to be the causal factors in these success stories have devel-oped spontaneously. Where they have not so developed the tradi-tional concept of man as a maximizer is still the only serviceableeconomic notion that we can have.

In fact, few of the Invisible Hand theorists ever supposed that asociety could function entirely by selfish impulses. The prevalentview has been that although the coherence ofthe market order couldbe explained by this postulate, the social and legal context in whichtrading takes place depends on a measure of self-restraint and moralprobity that appears to be excluded by the psychological assumptionsof traditional theory. But, of course, such behavioral traits are notexcluded. All that is excluded is the construction ofrationalistic moralcodes that presuppose that man can be other than he is or declarethat a new altruistic man, unfettered by the ethics of greed, willemerge if only capitalist institutions can be overturned in a revolu-tionary manner.

There is no externality problem here—the market has not failed toproduce the public good of morality and self-restraint. Laissez-faireeconomic arrangements are quite consistent with the traditionalWestern ethical values of honesty, fair-dealing, justice, and individ-ual autonomy. The nonobligatory virtues of benevolence and charityflourish under capitalist systems. There is evidence of much greaterselfishness and brutality in socialist regimes precisely because themarket—the one area where egoism can beneficially materializeitself—has been suppressed,

Flaws in the Negative Externality Argument

In comparison with these rather grand themes, the other areas ofalleged market failure, where the Invisible Hand has failed to steer

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society in a smooth manner, seem almost routine and mundane.These cover the whole range of negative externalities, where privatetransactors impose costs on the community as a whole. This is nowsuch a well-worn theme that a detailed summary would notbe rele-vant here. It is sufficient to point out that the original argument (fromPigou) that an observed divergence between private and social costsautomatically negated the case for the Invisible Hand and justifiedgovernment intervention is no longer as plausible as it once was.This is so on at least two grounds. First, as mentioned earlier, itmustnot be assumed that government is an omniscient and benevolentinstitution that automatically maximizes the public interest. In fact,political failure is likely to be more common than market failurebecause political actors operate (normally) under fewer constraintsthan economic transactors.The public choice theoristshave strength-ened the case for the Invisible Hand with their systematic demon-strations of the failure of government, although this was probably nottheir deliberate intention.

Second, the rapidly expanding property rights literature has shownthat many of the alleged externality problems could be internalizedif the ownership of resources could be specified. In an appropriatelegal framework, there would be many possibilities for tradebetweentransactors in the face of apparent externalities. In many cases, thereare already appropriate institutional arrangements so that the needforgovernment to conjoin private and social costs by coercive taxationor prohibition is otiose. The common law itself contains remediesfor people adversely affected by the economic actions of others.27

ConclusionEven these brief considerations suggest that economists should be

more concerned with showing how institutional re-arrangementsmight assist in the working of the Invisible Hand rather than dem-onstrating gleefully how far some existing market allocation departsfrom an alleged optimum. Ifthere is no Invisible Hand process thenthere are no economic regularities, and if there are no such regular-ities there is no economic science. In the absence of the InvisibleHand, the economic world becomes the plaything of, first (and verybriefly), the delicate and elegant but headily unrealistic abstracttheorist, and then the defenseless target of the clenched fist of thepolitical commissar.

‘7Thc classic work here is Ronald H. Coase, “The Problem of Social Cost,” journal ofLaw and Economics 3 (October 1960): 1—44.

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