Beyond the Invisible Hand

Kaushik Basu is professor of economics and the C. Marks Professor of International Studies at Cornell University. He is currently chief economic advisor to the Ministry of Finance of the Government of India. His books include Prelude to Political Economy: A Study of the Political and Social Foundations of Economics and Of People, of Places: Sketches from an Economist's Notebook.

"Alluring... [Basu's] latest book, subtitled Groundwork for a New Economics, aims to show that many economists have dogmatically accepted capitalist theories as fact and have failed, as a result, to scrutinize their own discipline... Basu devotes the bulk of the text to deconstructing some sacrosanct tenets of capitalism that have become entrenched in government policy over the past 60 years."--Timothy R. Homan, Bloomberg "A most interesting and ... a most significant book... Basu's book is the first serious study of the modern myth related to the 'Invisible Hand' I have seen anywhere."--Gavin Kennedy, Adam Smith's Lost Legacy "Basu has rethought and modernized socialism in this book. He has done so without cluttering it up with Marxist jargon or abstract mathematics; the worst the reader will encounter in this book is game theory, which, though it is not all fun and games, is pretty easy to follow. It is a book worth reading by the socialist types who run our country, as well as those who need to understand socialism to dissent from it."--Business World "[A] very rewarding read... This is Basu's most ambitious and rewarding book, and it works--there's no public policy debate in India it's not relevant to."--The Economic Times "This book should be read by anyone interested in economics for its in-depth thinking, although its targeted readership is more basically professional economists."--Wladimir Andreff, European Legacy "Beyond the Invisible Hand will be useful to political economists who want to see how game theory can shed light on the ways that groups and races of rational actors may assume surprising dynamics. It could also be useful to policymakers who must justify arguments about group policies in standard economic terms. [The] author's contributions to political economy deserves to be taken seriously."--Jonathan Schlefer, Perspectives on Politics

• Preface ix Chapter 1: In Praise of Dissent 1 Discontent and Discourse 1 Smith's Myth 9 The Lay of the Land 11 On Understanding 13 Chapter 2: The Theory of the Invisible Hand 16 Competition and Social Welfare 16 The Standard Critiques 20 Chapter 3: The Limits of Orthodoxy 24 The Dual Interpretation 24 Evolving Feasible Set 27 Evolving Preference 31 Social Norms and Culture 33 A Comment on Incentive Compatibility 41 On Methodological Individualism 43 On Knowledge 49 Chapter 4: The Economy according to Law 55 Kafka's Invisible Hand 55 Law's Economy: The Standard View 57 The Law as Focal Point 60 Implications of the Focal View of Law 66 A Game-Theoretic Illustration of Law as Focal Point 71 A Research Agenda 73 Chapter 5: Markets and Discrimination 77 Do Free Markets Reduce Discrimination? 77 The Literature 79 The Self-Reinforcement of Productivity 83 The Entrepreneur 85 Toward a New Theoretical Model 89 Appendix: Aptitude Test Administered to Slum Children at Anandan in Calcutta 95 Chapter 6: The Chemistry of Groups 97 Identity and Methodological Individualism 97 The Ingredients of Theory 101 Altruism, Trust, and Development 104 The Janus Face of In-group Altruism 110 The Malignancy of Identity 120 Chapter 7: Contract, Coercion, and Intervention 130 Principle of Free Contract 130 Coercion and Voluntariness 138 The Large Numbers Argument 141 Acts and Rules 148 Multiple Equilibria 153 Domains of Intervention 155 Chapter 8: Poverty, Inequality, and Globalization 157 Governance and the Globe 157 Inequality 158 Some Facts of Globalization 161 Some Analytics of Globalization 165 Inequality and Poverty: The Quintile Axiom 167 Poverty-Minimizing Inequality, with or without Globalization 171 Policy Implications 176 Chapter 9: Globalization and the Retreat of Democracy 180 Democracy in Deficit 180 Globalization and Influence 185 Dollarization and Democracy 187 Democratic Global Institutions 189 Chapter 10: What Is to Be Done? 193 Interpreting the World and Changing It 193 The'Environmental Case' against Inequality 199 Despair and Hope 208 Notes 213 References 235 Index 259