Beyond The Invisible Hand , livre ebook

Kaushik Basu

Beyond the Invisible Hand
Ground Work for New Economics
Contents
About the Author
Advance Praise for Beyond the Invisible Hand
Dedication
Preface
Chapter 1 In Praise of Dissent
Discontent and Discourse
Smith s Myth
The Lay of the Land
On Understanding
Chapter 2 The Theory of the Invisible Hand
Competition and Social Welfare
The Standard Critiques
Chapter 3 The Limits of Orthodoxy
The Dual Interpretation
Evolving Feasible Set
Evolving Preference
Social Norms and Culture
A Comment on Incentive Compatibility
On Methodological Individualism
On Knowledge
Chapter 4 The Economy according to Law
Kafka s Invisible Hand
Law s Economy: The Standard View
The Law as Focal Point
Implications of the Focal View of Law
A Game-Theoretic Illustration of Law as Focal Point
A Research Agenda
Chapter 5 Markets and Discrimination
Do Free Markets Reduce Discrimination?
The Literature
The Self-Reinforcement of Productivity
The Entrepreneur
Toward a New Theoretical Model
Appendix: Aptitude Test Administered to Slum Children at Anandan in Calcutta
Chapter 6 The Chemistry of Groups
Identity and Methodological Individualism
The Ingredients of Theory
Altruism, Trust, and Development
The Janus Face of In-group Altruism
The Malignancy of Identity
Chapter 7 Contract, Coercion, and Intervention
Principle of Free Contract
Coercion and Voluntariness
The Large Numbers Argument
Acts and Rules
Multiple Equilibria
Domains of Intervention
Chapter 8 Poverty, Inequality, and Globalization
Governance and the Globe
Inequality
Some Facts of Globalization
Some Analytics of Globalization
Inequality and Poverty: The Quintile Axiom
Poverty-Minimizing Inequality, with or without Globalization
Policy Implications
Chapter 9 Globalization and the Retreat of Democracy
Democracy in Deficit
Globalization and Influence
Dollarization and Democracy
Democratic Global Institutions
Chapter 10 What Is to Be Done?
Interpreting the World and Changing It
The Environmental Case against Inequality
Despair and Hope
Notes
References
Follow Penguin
Copyright
PENGUIN BOOKS
Beyond the Invisible Hand
Kaushik Basu is professor of economics and the C. Marks Professor of International Studies at Cornell University. He was awarded the Padma Bhushan, in 2008. He is currently chief economic advisor to the Ministry of Finance of the Government of India. His books include Prelude to Political Economy: A Study of the Political and Social Foundations of Economics and Of People, of Places: Sketches from an Economist s Notebook .
Advance Praise for Beyond the Invisible Hand
Deftly, with the carefully chosen anecdote, and the sparing but subtle thought experiment, Kaushik Basu again and again dispels the myth that the invisible hand of free markets leads to the best of all possible worlds-indeed, often far from it. With great wisdom, Beyond the Invisible Hand describes the frequently shocking consequences of the free markets of modern economic theory; it also sets the agenda for where that theory needs to go next -George A. Akerlof, Nobel Laureate in Economics and co-author of Animal Spirits and Identity Economics
In this remarkable tour de force, Kaushik Basu scrutinizes the foundational assumptions of economics and asks new and important questions. In his quest for a better and more equitable society, Basu leaves no room for complacency. This thought-provoking book will generate debate in the economics profession and beyond -Justin Yifu Lin, chief economist, World Bank
Beyond the Invisible Hand poses a fundamental challenge to the way that economists think about many of the most important issues of economic theory and policy. Written for both economists and educated laymen, the book lays out a new vision for economics, one that will stimulate the reader to rethink current practice and give deeper consideration to issues often slighted in contemporary economic analysis. While the reader may not always agree with Basu s prescriptions, the importance of his contribution to the debate over the future of economics cannot be ignored -Steven G. Medema, University of Colorado, Denver
With standard economic perspectives under question, the need for alternative perspectives is great. Eminently readable and timely, this book is appropriate for general readers and professional economists -Arjo Klamer, Erasmus University
To the memory of my father,
Keshab Chandra Basu (1905-86)
Preface
In economics, there is a substantial literature that demonstrates how a free market has several attractive qualities. As an if-then proposition this is certainly valid. Free markets can serve socially useful functions, even though those social ends may not have been contemplated by the individuals who constitute society. Or as economists would put it, a free market equilibrium can be socially efficient even though it is a product of individuals each pursuing their narrow self-interest. There are theorems that establish this with precision and all the artillery of modern economic theory.
Where a large body of professionals-lobbyists, lawyers, politicians, and influential economic journalists-that draws on the old-fashioned economics literature errs is in its failure to recognize that while the textbook conceptualization of the free market may have all those qualities, such a free market does not and probably cannot exist in reality. Furthermore, one cannot make even the limiting claim that approaching the extreme case of a fully free market will take us toward some kind of social ideal. The free market proposition is a powerful intellectual achievement and one of great aesthetic appeal, but its rampant misuse has had huge implications for the world-in particular, in the way we craft policy, think about globalization, and dismiss dissent.
This book is an attempt to give form to the dissenting voice. It is founded in the belief that while the dissent against globalization and corporatization that we hear on the streets and from unruly protesters may be inarticulate and even inconsistent, it is an expression of a genuine and plausible critique of contemporary economics along with its disproportionate influence on the world of policymaking.
I have written this book without the usual trappings and garden implements of contemporary economics-algebra, calculus, geometry, and in particularly unrepentant cases, topology. In so doing, my hope is to reach out to the uninitiated. At the same time, this is a monograph meant for professional economists, with the aim being to cause them some discomfiture. But being acquainted with the crust of unquestioning opinion that most experts tend to create around themselves, I am reconciled that my main hope of winning over people must rest largely in the camp of the uninitiated. This is not to deny that among contemporary economists, especially those on the front line, there are individuals who have taken up positions and methodologies similar to the ones advocated in the pages that follow, but they constitute a minority.
The book is primarily a critique of mainstream economics, and it promotes a particular perspective for the positive analysis of society and economics. It comments on normative economics, but such remarks are few and far between.
A large part of modern economic theory is driven by the research of mathematical economists. This has meant that ideas that might have been important, but were not mathematically hard enough, got left by the wayside. This is understandable (not to be confused with commendable); scientific journals do not want to publish papers that are not analytically challenging, and the lure of complexity is an enduring force. This quest for complication has hurt the discipline of economics. Simple truths escaped our attention in the stampede to discover complicated truths or, worse, complicate truths.
There is a tale, though the author is unknown, of Sherlock Homes and Dr. Watson on a sleuthing trip in rural England feeling tired and deciding to pitch a tent in an open field. In the middle of the night Holmes nudged Watson: Look at the sky, and tell me what you can deduce? Watson rubbed his eyes, and staring at the wondrous heavens, said, Living in London one does not realize that there are so many stars in the sky. Well, since there are so many stars, we can deduce that there are many planetary systems. If there are many planetary systems, we can safely conclude that there are several planets which are like the earth. And if there are several such planets, there must be a few with intelligent life on them. So I deduce that there is intelligent life out there in the universe. Holmes looked at him with exasperation and replied, Someone stole our tent.
Watson s mistake is rampant in economics. My decision to eschew formalism is not merely to reach a larger audience but also to avoid the pitfall of unnecessary complication. It is a self-disciplining device and stems from the belief that some of the most important ideas in the social sciences are also simple. My profession s predisposition to Watson s mistake has kept these ideas away from us.
Beyond the Invisible Hand is in some ways a sequel to my earlier Prelude to Political Economy: A Study of the Political and Social Foundations of Economics . But I have written it so that it can be read on its own. In fact, one needs nothing but a rudimentary knowledge of economics and a little proclivity for deductive reasoning to be able to read this book. I have recounted some basic concepts of economics from scratch. These occur in chapter 2, and the trained economist is advised to speed-read through this chapter. I also summarize a few ideas that occur in my Prelude to Political Economy so as to make this book readable on its own. One central precept that this book shares with Prelude is the idea that the economy must be viewed as embedded in society and po