1692. Reflexivity (Soros) and the invisible hand (Adam Smith)

Provocation #33 Soros reflexivity vs invisible hand

I have thought for a while that Soros’s ideas on reflexivity could help open up economics to a fuller use of all the thinking that bears on the way humans think.

The provocation is that Soros’s idea of reflexivity is a serious replacement for Adam Smith’s thought stopping invocation of the invisible hand that guides the market. Someone or many must have seen this replacement, but I can’t find it

The invisible hand idea is that the market is guided by more than the collective wisdom of all the participants, so that my desire to buy and the desire of all others to buy, and the desire to sell and the desire of all the sellers, act, over time, to balance out and each gets as close to what they want as possible. The process is unconscious. The participants don’t know they are making a market equilibrium. The coherence calls out for a cause: hence the invisible hand.

The problem with the invisible hand idea is that it shifts the focus from mind, which we can think further about, to the hand which is a dead end after the unanswerable question, “whose?”

The invisible hand idea comes from the Calvinistic belief that human behavior is guided by God and destiny. Using it as an explanation, as Smith and much of later economics acquiesced to, takes us away from the the mind, yours and mine and others, to a hand which belongs to neither of us, none of us, but to god.

Soros’ idea of reflexivity – that all the particpants are thinking and thinking about each other, and the result is a balance of those ideas. This shift from a force outside – the invisible hand – to the force that is located in the reflexive thinking of participants, is a huge advance that economics resists.

The idea of the invisible  hand leads to passivity: there is nothing to think about. But the idea that what I think about you as you think about me can be opened up and explored. Thus Reflexivity as an idea suggests an opening to the very rich history in philosophy and others,thinking about thought, the use literature, anthropology, history, daily observation of what people actually do.

Soros suggests that the reason reflexivity, or some equivalent, is not followed in economics is that the very idea of it makes prediction and the mathematical understanding of events impossible. But the desire to hold on to predicting models is so strong, better ideas, like reflexivity, gain no traction.

It remains a problem for modern economics.

‘The theories that I (and others) helped develop explained why unfettered markets often not only do not lead to social justice, but do not even produce efficient outcomes. Interestingly, there has been no intellectual challenge to the refutation of Adam Smith’s invisible hand: individuals and firms, in the pursuit of their self-interest, are not necessarily, or in general, led as if by an invisible hand, to economic efficiency.”
— Joseph E. Stiglitz

Soros says, rightly, that “reflexivity opens up a whole wide field for investigation: the relationship between thinking and reality. …..The only way they could imitate physics was by eliminating reflexivity from their subject.” From Soros on Soros.

A social process. Not a mechanical one.

From Rothschild’s Economic Sentiments: Adam Smith, Condorcet, and the Enlughtenment

Adam Smith’s ideas have had odd secular destinies, and the twentieth cen-
tury was the epoch of the invisible hand. “The profoundest observation
of Smith,” for Kenneth Arrow, is “that the system works behind the backs
of the participants; the directing ‘hand’ is ‘invisible.’” For Arrow and
Frank Hahn, the invisible hand is “surely the most important contribu-
tion [of] economic thought” to the understanding of social processes; for
James Tobin, it is “one of the great ideas of history and one of the most in-

The object of this chapter is to look at the intellectual history
of the invisible hand, and to put forward a view of what Adam Smith him-
self understood by it. What I will suggest is that Smith did not especially
esteem the invisible hand. The image of the invisible hand is best inter-
preted as a mildly ironic joke. The evidence for this interpretation, as will
be seen, raises interesting questions both about Smith and about the invis-
ible hands of the twentieth century.

Smith used the words “invisible hand” on three quite dissimilar occa-

The first use, in his “History of Astronomy” (which is thought to
have been written in the 1750s, but was preserved by Smith for posthu-
mous publication), is clearly sardonic. Smith is talking about the credulity
of people in polytheistic societies, who ascribe “the irregular events of na-
ture,” such as thunder and storms, to “intelligent, though invisible be-
ings—to gods, demons, witches, genii, fairies.” They do not ascribe divine
support to “the ordinary course of things”: “Fire burns, and water re-
freshes; heavy bodies descend, and lighter substances fly upwards, by the
necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended. To be employed in those matters.”

The second use is in the Theory of Moral Sentiments in a passage published in 1759, and retained unchanged throughout Smith’s subsequent
revisions of the work. It is here sardonic in a different way. Smith is de-
scribing some particularly unpleasant rich proprietors, who are uncon-
cerned with humanity or justice, but who, in “their natural selfishness and
rapacity,” pursue only “their own vain and insatiable desires.” They do,
however, employ thousands of poor workers to produce luxury commodi-
ties: “They are led by an invisible hand to without intending it, without knowing it, advance the interest of the society.”

Smith’s third use of the invisible hand is in the Wealth of Nations, in a
chapter concerned with international trade. He argues strongly against re-
strictions on imports, and against the merchants and manufacturers who
support such restrictions, forming “an overgrown standing army” who
“upon many occasions intimidate the legislature.” Domestic monopolies,
he says, are advantageous for specific industries, but not for the “general
industry of the society.” If there were no import restrictions, however, the
merchant would still prefer to support domestic industry, in the interest of
“his own security.” He will thereby promote the interest “of the society”:
“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.”

Pg 116-117


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