Visible, Invisible, Grabbing, Hidden and Palsied Hand Theories of Social Interaction Peter Boettke Econ 881/Spring April

Definitional Issues Visible  Individual design of organizational form Invisible  Social institutions that are the result of human action, but not of human design Grabbing  Predatory and rent-seeking activity Hidden  Conspiracy theories Palsied  Individual self-seeking behavior generates perversities

Matrix of Social Theories DESIRABLEUNDESIRABLE INTENTIONALVisible HandGrabbing Hand & Hidden Hand UNINTENDEDInvisible HandPalsied Hand

Invisible Hand Explanations Individual Choice  Rational choice Filter Mechanism  Incentives Disciplinary devices Unintended Result  Desirable  Undesirable

From Smith to Hayek ---- the bright side of rationality Individual behavior intended only to benefit your own ends Directed by the institutional context of private property, freedom of contract and consent Results which maximize the wealth of society  Examples outside of the context of property, contract and consent (path in the woods, science, law, morality)

The Dark Side of Rationality and Collective Action Tragedy of the Commons  Individual self-interest generates overuse of resources Segregation  Individual self-interest generates a situation nobody would want Business Cycles  Individuals pursuing their self-interest, though misled by false signals, will result in misallocations of resources

Politics as a Process MC D Q P Pm Pc QmQc H T

Implications for Political Economy of the Rent-seeking Model Costs of Rent-Seeking  T + H Transitional Gains Trap  Romance and Realism Status Quo and Compensation Principle

Implications of the Grabbing Hand Private Predation Public Predation Socialism Regulation Judicial System Self- Regulation Minimize Social Loss Due to Predation (a)Movement of the curve (b)Movements along the curve

Palsied Hand --- Stiglitzian Market Failure Theory Walrasian understanding of the invisible hand theorem  First and Second Welfare Theorem and the conditions under which they hold Stiglitz-Greenwald Theorem  Presumption is reversed Nirvania Fallacy from Arrow to Stiglitz  Unexamined alternative