Sunday, July 03, 2005

Nonsense from a Texan Banker

Are the Desert Kingdom's foundations built on sand? Arabia runs dry by Heather Stewart Sunday July 3, 2005 in The Observer

Texan oil banker, Matt Simmons, says he wrote “Twilight in the Desert”, which will be published in the UK later this week, scare everybody to death”. Among his scares he writes:

'I grew up in a banking family. I am a firm believer that the market is a 500lb wrecking ball. If you leave it to the invisible hand of Adam Smith, that could actually end up creating a gigantic noose that strangles us.' He points to the fights that broke out in the US in queues for petrol during the Seventies oil embargo as evidence that the market does not produce fair solutions to problems of scarcity.”

We can stop there I think. The “invisible hand” of Adam Smith had nothing to do with markets (note the plural please; “The Market” has crept into economics discourse as if there is only one – there are myriads of markets, but none alas with an invisible hand, Smithian or otherwise). The Invisible Hand is Shakespeare’s invention (from MacBeth: “thy bloody and invisible hand”) and not Smith’s.

And Smith used it three times but not in connection with markets; once in an essay on Astronomy, published three years after he died and hardly ready by anybody now, which was about pagan superstition related to the Roman God, Jupiter; next in “Moral Sentiments” (1759) about Feudal Lords who supplied their retainers, soldiers and serfs with grain, etc., equivalent, Smith estimated, to what they would have received had they owned plots of land (which, of course, they didn’t); and third in “Wealth of Nations” (1776) about “merchants and manufacturers” preferring to keep their capital close within sight and not send it abroad, which unintentionally made the local economy grow faster. In all cases, Smith was trying to explain how human ideas and their consequences lead to unanticipated and unintentional outcomes. He was NOT explaining anything about markets.

Matt Simmons “firm beliefs” about “wrecking balls” and “invisible hands” are fantasies and nothing to do with Adam Smith (what are they teaching bankers in Texas?). The rest of his attempts at purveying “scary” nonsense should be treated as such. For example:
'The bottom line is that I still think that $60-a-barrel oil is a remarkable bargain,' he says. 'We need a pricing committee to start taking a "cold shower" look at what the real value is. My guess is that will be somewhere between $250 and $400.”

A “pricing committee”! Ye Gods. What next?

Why not try markets? They provide the most accurate anonymous “pricing committee” ever created and require absolutely no legislation, no impertinent pretenders claiming to know better than the anonymous millions in their markets, no compromises in dark corners and no policing by “price controllers”, backed by judges, lawyers and juries.

Let the price of oil and its downstream products rise gently. Consumers will be more careful how they use the more expensive products – perhaps switching from guzzlers to efficient vehicles; some producers will attempt to improve supplies, others will get into substitute products, and yet others will get out of the oil business altogether. Bankers will shift their investments likewise (at least those outside Texas).

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