Allegory and Political Economy

Allegory and Political Economy Liberal economics rediscovers Adam Smith By Daniel Klein This file accompanies the Mercatus Center presentation made 28 March 2012

My book Here I treat some of the central ideas.

Smith sketches an aspect of coordination: “It is the interest of the people that their daily, weekly, and monthly consumption should be proportioned as exactly as possible to the supply of the season.” In the pursuit of profit, the grain dealer adjusts price in ways that conduce to such coordination.

“Without intending the interest of the people, he is necessarily led, by a regard to his own interest, to treat them, even in years of scarcity,pretty much in the same manner as the prudent master of a vessel is sometimes obliged to treat his crew. When he foresees that provisions are likely to run short, he puts them upon short allowance. Though from excess of caution he should sometimes do this without any real necessity, yet all the inconveniences which his crew can thereby suffer are inconsiderable in comparison of the danger, misery, and ruin to which they might sometimes be exposed by a less provident conduct.”(WN, 525)

That is a miniature of this: “[The individual] generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. ... [A]nd by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” (WN, 456)

Metaphor and allegory • The prudent ship master is a simile. • The being whose hand is invisible is a metaphor. • By extending a metaphor, it may become allegory. • allegory: “an expressive style that uses fictional characters and events to describe some subject by suggestive resemblances; an extended metaphor.”

Edwin Cannan’s Inca “The reason why it pays to do the right thing – to do nearly what an omniscient and omnipotent benevolent Inca would order to be done – are to be looked for in the laws of value” (1902, 461).

The allegory of Joy Joy is • like a monotheistic God • universally benevolent • super knowledgeable • able to communicate personally with each individual • Individuals believe in Joy’s benevolence • Individuals trust Joy’s knowledge • Individuals value Joy’s love and approval

Joy communicates with Bridget the baker • Joy tells Bridget that perhaps she should buy new ovens, look out for better deals in flour, and advertise her confections. • Joy communicates these instructions to Bridget. • There is a meeting minds between Joy and Bridget.

The system is voluntary • Bridget is sensible to Joy’s benevolence and ethical wisdom. • Bridget feels entrusted to advance what Joy finds beautiful. • She generally follows Joy’s communications. • The signals from Joy are embraced voluntarily from what Smith would call her sense of duty. • Bridget “enters, if I may say so, into the sentiments of that divine Being” (1790/1982: 276) • —and those communications tell her to take actions rather like the actions that the market signals would lead her to take.

In the allegory we have • bonafide communication • beholding by Joy of the coordination of the vast coordination • cooperation writ large among the participants of the system • If Joy were to give bad instructions, she would be erring • She then might correct the error

Hayek’s “communication” talk “We must look at the price system as such a mechanism for communicating information if we want to understand its real function” (1948, 85-87).

Cowen and Tabarrok • “prices are signals” (84) • “The high price of ice … signals a profit opportunity for ice suppliers” (84) • “price signals … tell entrepreneurs what areas of the economy consumers want expanded and what areas they want contracted” (85)

Eggs $1.89 • What communication here? • There is communion in communication. • Simply, “Yours for $1.89.” • The economic explanation of profit seeking and prices entails communication only incidentally. • The communication is allegorical.

Hayek saw the allegorical nature of theory “[The spontaneous coordination of individual efforts] has never been given a title which would secure it an adequate and permanent place in our thinking. The limitations of language make it almost impossible to state it without using misleading metaphorical words. The only intelligible form of explanation for what I am trying to state would be to say—as we say in German—that there is sense [Sinn] in the phenomena; that they perform a necessary function.”

“But as soon as we take such phrases in a literal sense, they become untrue. It is an animistic, anthropomorphic interpretation of phenomena, the main characteristic of which is that they are not willed by any mind. And as soon as we recognize this, we tend to fall into an opposite error, which is, however, very similar in kind: we deny the existence of what these terms are intended to describe.” (1933, 27)

“The problem which we pretend to solve is how the spontaneous interaction of a number of people … brings about a state of affairs … which could be brought about by deliberate direction only by somebody who possessed the combined knowledge of all those individuals.” (1937, 50-51)

Insight gained by such allegory • What are the relevant signals? • How do they conduce to the general interest? • How do they adjust when practices go wrong? If the signals start “telling” people to go in the wrong direction, will the system correct itself? • Will the system tend to keep up with changes? • Will the system dig up new opportunity, new matters for “communication”?

Coordinationpin factory • Simon Newcomb: Coordination of the concatenation of activities within the firm. • Hayek, Coase and others took it beyond the firm. • Who beholds the vast concatenation? • We imagine a beholder, like Joy.

Hayek on coordination “[P]rices can act to co-ordinate the separate actions of different people in the same way as subjective values help the individual to co-ordinate the parts of his plan.”(1945, 85)

Cooperation • Bastiat celebrated the market system as “a marvelous association”. • Henry George: “[C]ompetition ... becomes the … most refined system of co-operation”. • Philip Wicksteed spoke of “a vast system of co-operation” and “one huge mutual benefit society”. • Milton and Rose Friedman: “Cooperation is worldwide, just as in the economic system”. • Cowen-Tabarrok: “[T]his immense cooperation is voluntary and undirected.”

Hayek on cooperation “Cooperation, like solidarity, presupposes a large measure of agreement on ends as well as on methods employed in their pursuit. It makes sense in a small group whose members share particular habits, knowledge and beliefs about possibilities” (1988, 19). • Bastiat and the others make sense only by allegory!

Market error and correction • Error entails a sense of regret –- actual, vicarious, or potential. • Loss-making firms have not necessarily erred. • You could have a story of market “error” and “correction” without any actual agent error. • Market error and correction should be understood as allegory: Joy would be erring in telling Borders to enter and expand.

Policy error and correction • You could have a story of policy “error” and “correction” without any actual agent error. • Economists often explain that the policy maker is not erring. • Policy error and correction should be understood as allegory. • When affairs are heavily governmentalized, correction mechanisms are particularly weak or even perverse. Liberal economists can make the point stronger by minding the allegory behind policy “error” and “correction.”

Other tropes that are allegorical • The economy • Cost-benefit analysis (social costs, social benefits).

Problems when liberal economists deny allegory: • They play into the role of one unattuned to the social. • They nonetheless speak of coordination, market communication, social error and correction, thus falling into inconsistency and self-contradiction. They subvert their own valuable teachings. • They relinquish the allegorical to those inclined to take it in illiberal directions.

Liberals need to fight illiberal allegory, not with denials of allegory, but with liberal allegory.

Other benefits from declaring allegory • Making the allegory explicit helps to make it innocuous. • You confess the looseness of aspects of your analysis.

Allegory can to some extent help to answer in a liberal way the yearning for larger meaning and connection. • Allegory can help people to see that they must subdue or rechannel the yearning for larger meaning and connection.

Yogi Berra • “If you don’t know where you’re going, you could end up somewhere else.”

The end • Thank you for your attention.

Allegory and Political Economy