The Invisible Hand in Economics: How Economists Explain Unintended Social Consequences (Routledge Inem Advances in Economic Methodology)
N. Emrah Aydinonat
Format: PDF / Kindle (mobi) / ePub
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 explanations concerning the 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.
explanation in comparison to these views. Accordingly, the first part of this chapter introduces Menger’s explanation and discusses it in comparison to its ‘rivals’. The second part of the chapter focuses on Menger’s methodological views and his justification of theoretical economics in contradistinction to ‘historical’ economics. This will help us reach an interpretation of Menger’s explanation and put forward some of the constituents of the framework presented in Chapter 7. There are two
R-World (t) may be transformed into R-World (t + n). Segregation 61 Sometimes, experimenting with different mechanisms (conjectures) may be a better starting point to understanding the nature of the phenomenon. Because of the complexity of the interactions among agents, conjecturing within the model world might be necessary to gain some knowledge, or at least insights about the real world. As with Menger’s case, we may use the analogy of explaining the origin of life to see the nature of
into account: the interaction of individuals who have limited knowledge and the process through which they coordinate their activities. These issues are not dealt with in traditional static equilibrium models of economics. In Chapter 8 we will see that some of the contemporary economists try to deal with these issues by using the tools of game theory. Another important idea that is common to Austrian economists and Smith is the explanatory strategy by which unintended social consequences are
variety in detail. Hence, this chapter only focuses on the emergence of coordination conventions and on the use of game theory in this literature. The rationale of this choice is that ‘coordination conventions’ more or less underlie what we have been talking about in this book. In particular, we have seen in Chapter 6 that emergence of money has been modelled as a coordination game among the market-dependent members of a direct exchange economy. In fact, it is generally argued that coordination
the difference of opinions regarding the study of conventions can be resolved by interpreting game-theoretic models of conventions as fulfilling diverse tasks in the process of explaining the emergence of conventions. While some of these models provide partial potential explanations, others examine the conditions under which a certain outcome is plausible. In fact, different models of convention fit each other in a way that allow us to see them as providing a good framework for understanding the