The Invisible Hand in Economics: How Economists Explain Unintended Social Consequences (Routledge INEM Advances in Economic Methodology, 2008)
This is a book about one of the most controversial concepts in economics: the invisible hand. The author explores the unintended social consequences implied by the invisible hand and discusses the mechanisms that bring about these consequences.
The book questions, examines and explicates the strengths and weaknesses of invisible-hand type of explanations of emergence of institutions and macro-social structures, from a methodological and philosophical perspective. Aydinonat analyses paradigmatic examples of invisible-hand explanations such as Carl Menger’s ‘Origin of Money’ and Thomas Schelling’s famous checkerboard model of residential segregation in relation to contemporary models of emergence of money and segregation. Based on this analysis, he provides a fresh look at the philosophical literature on models and explanation and develops a philosophical framework for interpreting invisible-hand type of explanations in economics and elsewhere. Finally, the author applies this framework to recent game theoretic models of institutions and outlines the way in which they should be evaluated.
Covering areas such as History, Philosophy of Economics and Game Theory, this book will appeal to philosophers of social science and historians of economic thought as well as to practicing economists. (See the table of contents below.)
Praise for The Invisible Hand in Economics
‘This is a significant contribution to the philosophy of social science which will also engage the interest of reflective economic theorists.’ – Robert Sugden, University of East Anglia, UK
‘The book is a candidate to become compulsory reading for methodologists and philosophers of science, as well as for those economists who take seriously the issue of their models’ epistemological foundations.’ – Nicola Giocoli, University of Pisa, Italy
FOREWORD to The Invisible Hand in Economics by Maarten Janssen and Jack Vromen
Why do people abide to rules (think of traffic rules, for example)? Because they know that if they transgress the rules, there is a chance they are caught in the act and because they also know that if they are caught in the act, they will be punished. Why is there a system of punishing transgressors in the first place? Well, because some (particularly those with the requisite powers and authorities) thought it a good idea to install such a system. This way of explaining social, aggregate behavior in terms of the intentions and expectations of the people producing the behavior seems to make perfectly good sense. Nobody would deny that this is roughly how desirable social, aggregate behavior (in this case, people by and large abiding to the rules) often is secured. But it also has a trivial ring over it. If this type of explanation were the only type available to (and actually practiced by) social scientists, then this would make them vulnerable to the oft-cited charge that social science is not able to go beyond mere common sense (or ‘folk’) understandings.
But happily there is a venerable tradition in social theorizing in which another, non-trivial type of explanation of social, aggregate behavior is put forward: invisible-hand explanation. In a first rough approximation, invisible-hand explanations explain social patterns of behavior as unintended consequences of human actions and interactions. The challenge is to show that useful institutions such as money and, more generally, orderly patterns of aggregate behavior can emerge and persist even though no one intended to produce these outcomes. Invisible-hand explanations are far from trivial. There even is something deeply puzzling about such explanations. It is easy to see why. The unintended consequences that invisible-hand explanations refer to typically are useful or mutually beneficial. How do mutually beneficial consequences come about if there is no one intending to bring about the consequences? Moreover, what seems to explain certain patterns of aggregate behavior in invisible hand explanations is the fact that the patterns have mutually beneficial consequences. This seems to have things backwards: some situation is explained by its effects, rather than by its causes.
This book does a lot to resolve this and other puzzles surrounding the notions of invisible hand, unintended consequences and invisible-hand explanation. Indeed, the book goes well beyond the scope and depth of earlier work on these notions. N. Emrah Aydinonat covers a wide variety of topics and fields, ranging from the ways in which Adam Smith invoked the notion of the invisible hand over actual examples of invisible-hand explanations in social-scientific practice to recent work in philosophy of science on models. The combination of competences that Emrah brings to this is at once impressive and rare. Here is a scholar who does not rest content with an easy understanding of what he is talking about. Here is a scholar who goes to the bottom of things. This is done in a highly readable accessible prose and in a lucid style. To be sure, this is not going to be the definitive word on these issues. But subsequent work can ignore Emrah’s ground-breaking work only to its own peril.
It might seem that in praising Emrah’s achievement, we are indirectly congratulating ourselves. For the two of us supervised Emrah’s PhD project, from which the present book is an updated outgrowth. But we are well aware that our own contribution was not very large. Emrah had the basic ideas of the thesis in his mind right from the start of his PhD project. They just needed some more polishing, refining and more precise articulation. Let us assure you (in case you do not know him already) that like all talented students Emrah was much too unyielding to be steered in directions that he does not want to go. During the project we did see Emrah grow from an insecure freshman into the confident and mature scholar with strong preferences and firm ideas that he now is. But his initial insecurity did not prevent him from developing the rough and embryonic outlines of the ideas in this book quite quickly. It was a delight to work with Emrah, not only in our many encounters on the work floor, discussing his work and that of others, but also afterwards, in the bar. All those fine hours were definitely well spent.
Maarten Janssen (Professor, Erasmus University Rotterdam)
Jack Vromen (Professor, Erasmus University Rotterdam)
CONTENTS
ACKNOWLEDGMENTS
1 INTRODUCTION
- Unintended Consequences
- Plan and Summary of the Book
2 UNINTENDED CONSEQUENCES
- Introduction
- Types of Unintended Consequences
- Invisible-Hand Consequences
- Concluding Remarks
3 THE ORIGIN OF MONEY
- Introduction
- Menger’s Explanation
- Exact Understanding
- Explanatory Value
- Concluding Remarks
4 SEGREGATION
- Introduction
- Residential Segregation
- Explanatory Value
- Concluding Remarks
5 THE INVISIBLE HAND
- Introduction
- Smith’s Invisible Hand
- Modern Conceptions of the Invisible Hand
- Invisible-hand explanations
- Concluding Remarks
6 THE ORIGIN OF MONEY RECONSIDERED
- Introduction
- Existence of a Medium of Exchange
- Emergence of a medium of exchange
- Explanatory Progress?
- Concluding Remarks
7 MODELS AND REPRESENTATION
- Introduction
- Partial Potential Explanations
- Models and Explanation
- Models and Representation
- Models and Theories
- Models, Similarity and Tendencies
- Models and Exploration
- Models as Mediators
- Concluding Remarks
8 GAME THEORY AND CONVENTIONS
- Introduction
- Coordination Conventions
- Coordination in the World of Models
- Interpretation
- Concluding Remarks
CONCLUDING REMARKS
Appendix I Smith, Jevons and Mises on Money
Appendix II Models of Emergence of Money
Appendix III Explorations of The Checkerboard World
Appendix IV Focal Points, Risk Dominance etc.
REFERENCES
