Since the beginning of the recession, distrust and repudiation of markets has become a prevalent meme. Dan Ariely, the James B. Duke Professor of Behavioral Economics at Duke University and a visiting professor at MIT’s Media Laboratory, suggests in the Technology Review, that Adam Smith had it wrong:
Irrationality is the real invisible hand
Adam Smith first coined the term “The Invisible Hand” in his important book “The Wealth of Nations.” With this term he was trying to capture the idea that the marketplace would be self-regulating. The basic principle of the invisible hand is that though we may be unaware of it, an unseen hand is constantly prodding us along to act in line with what’s best for the whole economy. This means that when this invisible hand exists, when we all pursue our own interest, we end up promoting the public good, and often more effectively than if we had actually and directly intended to do so. This is a beautiful idea, but the question of course is how closely it represents reality.
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We are now paying a terrible price for our unblinking faith in the power of the invisible hand.
In my mind this experience has taught us that Adam Smith ‘s version of invisible hand does not exist, but that a different version of the invisible hand that is very real, very active, and very dangerous if we don’t learn to recognize it. ...
In Adam Smith’s world the invisible hand was a wonderful force, and the fact it was invisible made no difference whatsoever. The irrational invisible hand is a different story altogether - here we must identify the ways in which irrationality plays tricks on us and make the invisible hand visible!
It is gratifying to see that economists are catching up to my blog. On a number of occasions I have commented that democracy works better than other systems because it allows us to sum our irrationalities:
To be human is to be able to believe impossible things, to believe unbelievable and contradictory things. Our intellectual capacities have endowed us with the ability to explain away apparent contradictions when convenient or necessary, and allow us to follow logic chains that lead to supremely illogical conclusions. Our unconscious minds are extraordinarily sophisticated in leading us to the desired conclusions in the absence of evidence. We are experts at convincing ourselves that what we imagine is what exists. Our democracy works primarily because when we sum our unconscious biases we tend to cancel out the most irrational; this is, unfortunately, not invariant and we have many times in our history paid a heavy price for irrationality.
It is always easier to see contradictions in others. In the political arena, it is easier to see the contradictions in the ideology and policies of our political opponents than in ourselves (which is why I always hope for decent and specific critiques from those who disagree with me; I am usually disappointed, unfortunately.) Sometimes, however, the contradictions become so egregious and overt that they become unavoidable. We may well be reaching a point where the left has no choice but to notice their own contradictions and, in the act of observation, their carefully constructed world view will collapse.
It is true that economists have traditionally depicted individuals as rational actors in their theories and only in the recent past have begun to incorporate the irrational into their models, but to use the current market failure as an excuse for introducing central control misunderstands and misapplies the lessons to be learned from this crisis. A classic evolving example of a failure of our democracy to sum our irrationalities is occurring in the realm of the theory of Anthropogenic Global Warming. I am not here interested in re-arguing the current state of the data. Even if the AGW alarmists are completely correct and the worst case scenarios are certain, the response to the problem pressed by the environmentalists is irrational in nearly every way (if their intent is to "save the planet" rather than to simply gain more power and money for themselves.)
If I have accepted their premise, that human derived CO2 presents an unacceptable danger to life on this planet, how can I argue that any amount of effort should be denied?
Sadly. it is all too easy to offer evidence of the dangerous irrationality of the environmentalists' position, even in the more mainstream iterations of Cap and Trade and various other efforts to decrease American and European Carbon emissions. Of course, to understand how misguided such efforts are requires some appreciation of engineering and markets. Peter W. Huber offers an excellent summary of the irrationalities that underline the Carbon mania of the radical environmentalists. [HT: Jennifer Rubin]
Cut to the chase. We rich people can’t stop the world’s 5 billion poor people from burning the couple of trillion tons of cheap carbon that they have within easy reach. We can’t even make any durable dent in global emissions—because emissions from the developing world are growing too fast, because the other 80 percent of humanity desperately needs cheap energy, and because we and they are now part of the same global economy. What we can do, if we’re foolish enough, is let carbon worries send our jobs and industries to their shores, making them grow even faster, and their carbon emissions faster still.
We don’t control the global supply of carbon.
The article is long and well worth your time. In effect, every attempt we make to increase the price of Carbon in America will simply move jobs and energy to the four fifths of the world's population who have no interest in, or concerns over, utilizing cheap energy (ie, coal, oil, and free wood from rain forests.) The engineering challenges that have made renewable energy competitive only with large government subsidies and that make breakthroughs for the production of cheap and clean energy distant possibilities lead to the conclusion that even a breakthrough tomorrow would not be scalable for many, many years. Further, Carbon taxes (any efforts that increase energy costs) will, of necessity, retard our economic recovery and make the investments needed to facilitate energy breakthroughs less available. As a bonus, the environmentalists and Carbonistas are the same people who have blocked the expansion of nuclear energy for the last 30 years, the one clean energy source competitive with Carbon emitters!
And, here is the clincher: in order to increase environmental consciousness and support a cleaner environment, there is one factor that has thus far been shown to be the only factor that actually works to clean up the environment:
By John Tierney
In my Findings column, I explain how researchers have discovered that, over the long term, being richer often translates into being greener. Many environmental problems get worse as a country first industrializes, but once it reaches a certain level of income, the trend often reverses, producing a curve shaped like an upside-down U. It’s called a Kuznets curve (in honor of the economist Simon Kuznets, who detected this pattern in trends of income inequality).
If the radical AGW alarmists have their way, their cure for the thus far unproven disease of Global Warming would impoverish (and further impoverish) billions. Their efforts remind me of David Bromberg's line that "wealth is the disease and I am the cure."
Summing our irrationalities would lead to a situation where the risks and benefits of AGW, if it truly exists, would have to be more completely weighed. We would need to balance the deleterious effects of AGW on Polar Bears and Pacific Islanders against the effects of lowering the standard of living for billions.
Most AGW enthusiasts do not volunteer to regress to subsistence farming for themselves although the most radical are perfectly willing to suggest voluntary euthanasia and demographic suicide for large percentages of the population of the planet.
The current enthusiasm for Carbon taxes and the pernicious use of legal obstructionism to accomplish the goal of increasing the cost of energy by more covert means, might well be understood as a failure of democracy to sum our irrationalities. The fewer people involved in decision making, the more likely it becomes that unbalanced irrationalities will triumph over more rational outcomes. The markets may have failed (and there are many who believe the failure was generated by political interference with our markets in some areas which led to unregulated speculation in other areas) but this is not a reason to conclude that a smaller group of elites who fail to recognize their own limitations will be better able to produce good outcomes.
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