The Hesitant Hand

The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas

Steven G. Medema
Copyright Date: 2009
Pages: 248
https://www.jstor.org/stable/j.ctt7skfx
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  • Book Info
    The Hesitant Hand
    Book Description:

    Adam Smith turned economic theory on its head in 1776 when he declared that the pursuit of self-interest mediated by the market itself--not by government--led, via an invisible hand, to the greatest possible welfare for society as a whole.The Hesitant Handexamines how subsequent economic thinkers have challenged or reaffirmed Smith's doctrine, some contending that society needs government to intervene on its behalf when the marketplace falters, others arguing that government interference ultimately benefits neither the market nor society.

    Steven Medema explores what has been perhaps the central controversy in modern economics from Smith to today. He traces the theory of market failure from the 1840s through the 1950s and subsequent attacks on this view by the Chicago and Virginia schools. Medema follows the debate from John Stuart Mill through the Cambridge welfare tradition of Henry Sidgwick, Alfred Marshall, and A. C. Pigou, and looks at Ronald Coase's challenge to the Cambridge approach and the rise of critiques affirming Smith's doctrine anew. He shows how, following the marginal revolution, neoclassical economists, like the preclassical theorists before Smith, believed government can mitigate the adverse consequences of self-interested behavior, yet how the backlash against this view, led by the Chicago and Virginia schools, demonstrated that self-interest can also impact government, leaving society with a choice among imperfect alternatives.

    The Hesitant Handdemonstrates how government's economic role continues to be bound up in questions about the effects of self-interest on the greater good.

    eISBN: 978-1-4008-3077-0
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-viii)
  2. Table of Contents
    (pp. ix-x)
  3. Acknowledgments
    (pp. xi-xvi)
  4. PROLOGUE
    (pp. 1-4)

    When Adam Smith wrote about an “invisible hand” translating the pursuit of self-interest to the larger interests of society as a whole, he launched a debate over the impact of self-interested behavior that continues to this day in academic, political, and popular realms—most recently in the context of the current economic crisis, which is widely seen as the consequence of self-interest (and, in the limit, greed) run amok. Smith was not the first to assert that the pursuit of self-interest could have beneficial effects or that government policies closer to the laissez-faire end of the spectrum would be in...

  5. CHAPTER ONE Adam Smith and His Ancestors
    (pp. 5-25)

    When Adam Smith suggested that “an invisible hand” would tend to harmonize individual and social interests, and that attempts by the state to interfere with this would run counter to the national interest, he was living in the midst of a society dominated by a morass of regulations on trade. There were taxes and protective tariffs, of course, but there were also countless regulations and monopolies, many of which would seem incredible today: apprenticeship laws, regulations on the quality of goods, primogeniture mandates, laws of settlement, corporation laws, and sundry guild controls. These measures established a web of monopoly privileges...

  6. CHAPTER TWO Harnessing Self-Interest: MILL, SIDGWICK, AND THE EVOLUTION OF THE THEORY OF MARKET FAILURE
    (pp. 26-53)

    On May 31, 1876, the Political Economy Club of London held a dinner to mark the centenary of the publication of theWealth of Nations. Those present included prominent politicians, academics, businessmen, civil servants, and aristocrats. Mr. Robert Lowe, an able exponent of Benthamite utilitarianism and the Chancellor of the Exchequer (1868–73) under Prime Minister William Gladstone, opened the discussion by singing the praises of Adam Smith and theWealth of Nations, holding forth the opinion that “[t]he test of science is . . . prediction, and Adam Smith appears to me in the main to satisfy that condition.”¹...

  7. CHAPTER THREE Marginalizing the Market: MARSHALL, PIGOU, AND THE PIGOVIAN TRADITION
    (pp. 54-76)

    Sidgwick’s analysis marked the beginning of what came to be known as the Cambridge tradition of welfare economics, which worked its way through Alfred Marshall on the way to its far more elaborate, and yet more narrow or pointed, development at the hands of A. C. Pigou. Marshall, who occupied the chair in political economy at Cambridge from 1885 to 1908 was the driving force behind the professionalization of economics in Great Britain around the turn of the century.¹ HisPrinciples of Economics, first published in 1890, was perhaps the most influential text of the marginal revolution.² Though Marshall considered...

  8. CHAPTER FOUR Marginalizing Government I: FROM LA SCIENZA DELLE FINANZE TO WICKSELL
    (pp. 77-100)

    While the Cambridge school was expressing both hesitation and optimism about the ability of government to improve on market failures, continental scholars were developing models of the political process as an integral component of the enterprise of public finance. It is not our purpose here to explore the history of public finance, but these continental models of the political process mark an important moment in the history of economic ideas. The Cambridge tradition did not neglect the influence of the political process on economic policy, as we saw in chapter 3, but this relationship was not woven into the theory...

  9. CHAPTER FIVE Coase’s Challenge
    (pp. 101-124)

    We have seen that Smith and the nineteenth-century classical economists posited a much greater degree of harmony between individual self-interest and the larger social interest than did commentators of previous eras, and how, under the influence of John Stuart Mill and Henry Sidgwick, this view gradually began to erode. Both Mill and Sidgwick pointed to a number of factors, including what we now call externalities, that can cause individually optimal behavior to diverge from the social optimum, and argued that these divergences potentially call for the imposition of governmental corrective measures. It was through A. C. Pigou’s analysis, though, that...

  10. CHAPTER SIX Marginalizing Government II: THE RISE OF PUBLIC CHOICE ANALYSIS
    (pp. 125-159)

    While Coase was hinting at problems with the governmental machine in “The Problem of Social Cost,” a small group of scholars was beginning to train the tools of economic analysis—in particular, the assumption of the rational, self-interested agent—on the political process. This economic analysis of political behavior, which eventually came to be known as “public choice analysis,” was generating results that provided theoretical support for many of the qualms about the influence of the political process on economic policy-making that we have encountered in previous chapters. The development of public choice analysis, however, was not an isolated circumstance;...

  11. CHAPTER SEVEN Legal Fiction: THE COASE THEOREM AND THE EVOLUTION OF LAW AND ECONOMICS
    (pp. 160-196)

    Public choice theory was by no means the only manifestation of the backlash against the Pigovian approach to the analysis of market failures. Coase’s analysis in “The Problem of Social Cost” contributed to the development of another significant movement, the Chicago approach to law and economics. Like public choice, law and economics employed the model of self-interested behavior—in this case, to analyze behavior in the legal arena. In doing so, it purported to show how the legal system can, and often does, cause self-interested behavior to generate outcomes consistent with efficiency, suggesting that observed, ostensibly inefficient behavior may in...

  12. EPILOGUE. Everywhere, Self-Interest?
    (pp. 197-200)

    The analysis of the economic role of government has been bound up almost continuously in questions about the effects of the exercise of individual self-interest on society as a whole. The preclassical commentators looked for a means to coordinate or restrain the base effects of self-interested behavior and saw no means other than government regulation. Adam Smith and the nineteenth-century classical economists saw the system of natural liberty harmonizing, to a greater or lesser extent, self-interest and social interest, allowing the market to function with less direct control by the state. The marginal revolution and the subsequent development of neoclassical...

  13. References
    (pp. 201-224)
  14. Index
    (pp. 225-230)