I will present here undermined Smith’s theory and the view of governmentthat rested on it. They have suggested that the reason that the hand may beinvisible is that it is simply not there – or at least that if is there, it is palsied.When I began the study of economics some forty one years ago, I was struck by the incongruity between the models that I was taught and the world that Ihad seen growing up, in Gary Indiana, a city whose rise and fall paralleled therise and fall of the industrial economy. Founded in 1906 by U.S. Steel, andnamed after its Chairman of the Board, by the end of the century it had de-clined to but a shadow of its former self. But even in its heyday, it was marredby poverty, periodic unemployment, and massive racial discrimination. Yetthe theories that we were taught paid little attention to poverty, said that allmarkets cleared – including the labor market, so unemployment must benothing more than a phantasm, and that the proﬁt motive ensured that therecould not be economic discrimination.
If the central theorems that arguedthat the economy was Pareto efﬁcient – that, in some sense, we were living inthe best of all possible worlds – were true, it seemed to me that we should bestriving to create a different world. As a graduate student, I set out to try tocreate models with assumptions – and conclusions – closer to those that ac-corded with the world I saw, with all of its imperfections.My ﬁrst visits to the developing world in 1967, and a more extensive stay inKenya in 1969, made an indelible impression on me. Models of perfect mar-kets, as badly ﬂawed as they might seem for Europe or America, seemed tru-ly inappropriate for these countries. But while many of the key assumptionsthat went into the competitive equilibrium model seemed not to ﬁt theseeconomies well, the ones that attracted my attention was the imperfection of information, the absence of markets, and the pervasiveness and persistenceof seeming dysfunctional institutions, like sharecropping. With workers hav-ing to surrender 50% or more of their income to landlords, surely (if con-ventional economics were correct), incentives were greatly attenuated.Traditional economics said not only that institutions (like sharecropping)
did not matter, but neither did the distribution of wealth. But if workersowned their own land, then they would not face what amounted to a 50% tax.Surely, the distribution of wealth did matter.I had seen cyclical unemployment – sometimes quite large – and the hard-ship it brought as I grew up, but I had not seen the massive unemploymentthat characterized African cities, unemployment that could not be explainedeither by unions or minimum wage laws (which, even when they existed, wereregularly circumvented). Again, there was a massive discrepancy between themodels we had been taught and what I saw.473
See, e.g. Becker  The insight was simple: that so long as there were sufﬁcient numbers of,for instance, unprejudiced employers, they would bid up the wage of the discriminated to theirmarginal productivity.
There was one brilliant, valiant attempt to show that sharecropping did not matter, a thesis bySteven Cheung completed at the University of Chicago, see Cheung . The unreasonableassumptions, especially concerning information, helped convince me of the need for an alterna-tive theory.