History of Economic Thought

Description

Foreword to the Third Edition

It is an honor to write the foreword for this new edition of History of Economic
Thought: A Critical Perspective. On rare occasions we read something that
grabs us by the shoulders, shakes us, and changes the way we see the world
around us. Early in my career as a young economist, an article by someone I
only came to know personally years later forever changed the way I think about
markets. In hopes that a passage E.K. Hunt wrote which changed my world
view may affect others in the same way, I quote from the passage at length.
The Achilles heel of welfare economics is its treatment of externalities …. In a
market economy any action of one individual or enterprise which induces pleasure
or pain to any other individual or enterprise and is under or over priced by a market
constitutes an externality. Since the vast majority of productive and consumptive
acts are social, i.e., to some degree they involve more than one person, it follows
that they will involve externalities …. . If we assume the maximizing economic

man of bourgeois economics, and if we assume the government establishes prop-
erty rights and markets for these rights whenever an external diseconomy is dis-
covered [the preferred «solution» of the conservative and increasingly dominant

trend within the field of public finance], then each man will soon discover that
through contrivance he can impose external diseconomies on other men, knowing
that the bargaining within the new market that will be established will surely make
him better off. The more significant the social cost imposed upon his neighbor, the
greater will be his reward in the bargaining process. It follows from the orthodox
assumption of maximizing man that each man will create a maximum of social costs
which he can impose on others. Ralph d’ Arge and I have labeled this process «the
invisible foot» of the laissez faire … market place. The «invisible foot» ensures us
that in a free-market … economy each person pursuing only his own good will
automatically, and most efficiently, do his part in maximizing the general public
misery …. To paraphrase a well-known precursor of this theory: Every individual
necessarily labors to render the annual external costs of the society as great as he
can. He generally, indeed, neither intends to promote the public misery nor knows
how much he is promoting it. He intends only his own gain, and he is in this, as in
many other cases, led by an invisible foot to promote an end which was no part of
his intention. Nor is it any better for society that it was no part of it. By pursuing
his own interest he frequently promotes social misery more effectually than when
he really intends to promote it. 1