Université de Strasbourg

USIAS Fellows seminar - The Great Illusion: there is no Invisible Hand

May 14, 2019
From 15:30 until 17:00
Salle Afrique (MISHA)

By Alan Kirman (2017 Fellow)

What has systematically been asserted since the enlightenment and has been reinforced by the political and social underpinnings of liberal democracy, is that there is an “Invisible Hand” which leads a socio economic system to a satisfactory state or equilibrium. This mechanism achieves its best results when individuals are left, insofar as possible, to their own devices.

Although this view has come to dominate economics over more than two centuries we have never been able to make the Invisible hand mechanism explicit, nor to show that there is any natural equilibrating tendency in economies. We are told that “markets do the job” yet markets play almost no role in economic theory. The sort of markets studied by students are, at best, metaphors.  

The view that we have been on the way to the “end of history” when liberal democracies prevail everywhere was predominant until 2008. However, the crisis which began in 2008 was put down to failures of the financial sector and it was widely claimed that this would be put straight by appropriate policy and legislation. Thus, the crisis was essentially due to perturbations which did not come from within.

There is a choice between two very different views, one of the socio-economic system sailing on a steady and socially satisfactory course from which it is occasionally pushed away by some external event. The other, for which I will argue, is that our system is complex and is constantly changing and evolving and the rather frequent upheavals that occur come from within as the system continually self organizes into new states.

Complexity theory argues that the interdependence between the individuals who make up the socio economic system and their interaction means that the system does not necessarily converge to any sort of equilibrium and is in a constant state of flux. Aggregate behavior emerges from the interaction between simple individuals and leads the system to self-organise in ways which cannot be predicted from our knowledge of how individuals act in isolation. This is not just true for the economy but also for the political and social systems within which it is embedded.

The laws of aggregate motion which emerge, replace the Invisible Hand, and lead us onto a path with periodic sudden major shifts which can have catastrophic results. We should abandon the comfortable illusion that the system in which we live is on a reassuring path from which it deviates occasionally as the result of exogenous shocks. Crises are an integral feature of the system and we should be less concerned with the efficiency of the system and more concerned with improving its resilience.

France 2030