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Published by EH.NET (June 2010)

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Steven G. Medema, The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas.? Princeton, NJ:? Princeton University Press, 2009. xiii + 230 pp.? $35 (hardcover), ISBN:? 978-0-691-12296-0.

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Reviewed for EH.NET by Steven Horwitz, Department of Economics, St. Lawrence University.

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With The Hesitant Hand_ Steve Medema, professor of economics at the University of Colorado at Denver, has given us what will likely be seen as the definitive history of the relationships among self-interest, markets, and government, particularly as they evolved in the twentieth century from Marshall to Pigou to Coase, Buchanan, and Posner. Medema takes the reader from Adam Smith?s invisible hand through the nineteenth century utilitarian pushback and on through the evolution of welfare economics, the Coase Theorem, public choice, and the law and economics movement in the twentieth century.? The focus along the way is how economists have tried to answer the question of whether, and under what circumstances, self-interest could be relied on to produce beneficial economic outcomes for all.?

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One of the most interesting themes of the book is that most of the major economists who tried to answer these questions were not as far apart as our modern caricature of them might suggest.? Where Medema is at his best in this book is suggesting that what we think of as Smithian laissez-faire, Pigovian welfare economics, and Coasean analysis do not have nearly as much to do with what Smith, Pigou, and Coase actually said as the adjectives might suggest.? All of them had at least some understanding of the advantages and disadvantages of both markets and government as allocation processes, and all of them recognized that whether or not self-interest ?worked? depended on the institutional environment in which it operated.?

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In the opening chapter on Smith and pre-Smithian thought, Medema is careful to note both the originality and importance of Smith?s argument for the invisible hand and the various exceptions that Smith discussed.? The following chapter focuses on J. S. Mill and Henry Sidgwick and the utilitarian reaction to Smith.? Medema notes that although they both rejected a strong rule of laissez-faire in favor of more pragmatic, utilitarian judgments of particular cases, Mill was still fairly skeptical of whether government could be relied upon to improve on the imperfections of markets, while Sidgwick had greater faith in the ability of government to do so.

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Out of that Sidgwickian tradition comes the focus of the third chapter, the early development of welfare economics in the hands of Marshall and Pigou.? Medema?s treatment of Pigou is particularly valuable as he makes clear Pigou?s view that market failures created a ?prima facie case? for government intervention, rather than an automatic rule favoring government intervention as is often associated with ?Pigovian? analyses.? Medema offers a careful reading of Pigou?s ?State Action and Laisser-Faire,? from 1935, in which Pigou analyzes the viability of interventionist solutions.? Pigou concludes, in Medema?s words, ?that there is no definitive answer that one can give, a priori, about the magnitude of the problems associated with state intervention? (p. 71).? This is not the Pigou of Pigovian welfare economics.

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Medema?s chapter on the Italian public finance theorists and Wicksell that follows is one of the better overviews of that literature that I?m aware of and nicely places it in the context of the larger story he?s telling, particularly given its influence on modern public choice economics, the subject of a later chapter.

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The chapter on Coase is in many ways the centerpiece of the book.? Medema brings together both the history of economic thought and the history of economics to tell the story of the evolution of the ideas in ?The Problem of Social Cost.?? Medema tries to get at what Coase was actually trying to do, which was to suggest that under the assumption of zero transaction costs and well-defined property rights, market participants will always be able to bargain away what at first appear to be externality problems requiring government intervention.? Medema is also clear that Coase did not think those assumptions were realistic descriptions of economic reality. The point of the paper was to show that the Pigovian system was ?empty? and to indicate that the really interesting questions about externalities and self-interest took place in a world where transactions costs were positive and where such rights were not well-defined.? As Medema notes later in the book, it is for this reason that Coase?s work is best understood as part of New Institutional Economics rather than the Chicago school more narrowly.

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With Coase having poked holes in the Pigovian framework and suggesting that examining how easily market participants could bargain was the real question, his University of Virginia colleague James Buchanan and his associates were working the other side of the fence, developing public choice economics.? Its lesson for this history, Medema argues, is that even if transactions costs meant that private bargaining would not produce optimality, self-interest in politics gave us reason to be skeptical that intervention could improve on those outcomes.? In this chapter as well, Medema combines close readings of texts with archival material to tell a rich story.

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The book ends with a look at the modern law and economics movement and its evolution to what is now ?the economic analysis of the law.?? The emphasis for Medema is the role played by the Coase Theorem, or at least the theorem attributed to Coase.? In the end, Medema concludes that Coase?s own understanding of his contribution takes us back to the more utilitarian calculations of the classical economists:? ?The task for legal-economic policy here becomes the assessment of the magnitude and influence of the relative costs of coordination across alternative institutional structures and the resulting implications for alternative institutional-policy arrangements? (p. 187).? The Coase of 1960 is best understood as an extension of the positive transaction costs world of 1937?s ?The Nature of the Firm.?

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Steve Medema?s book is a model of fair-minded scholarship and how to make use of both the history of ideas and the archives to weave together a somewhat grand narrative on the evolution of the role of self-interest in economic thought.? Already having won the 2010 ESHET Best Book Prize, scholars exploring these issues in the coming years ignore Medema?s contributions at their own grave peril.

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Steven Horwitz is Charles A. Dana Professor of Economics at St. Lawrence University in Canton, NY and his currently working on a book on classical liberalism and the family.

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