Tuesday, November 08, 2005

Dr Vaknin's Muddle in Markets

Sam Vaknin, PhD, offers “Anarchy as an organizing principle” on http://globalpolitician.com, 6 November 2005. It contains a fair amount of hyperbole:

The recent spate of accounting fraud scandals signals the end of an era. Disillusionment and disenchantment with American capitalism may yet lead to a tectonic ideological shift from laissez faire and self regulation to state intervention and regulation. This would be the reversal of a trend dating back to Thatcher in Britain and Reagan in the USA. It would also cast some fundamental - and way more ancient - tenets of free-marketry in grave doubt”.

It develops the usual problematical assertions about Adam Smith:

“Markets are perceived as self-organizing, self-assembling, exchanges of information, goods, and services. Adam Smith's "invisible hand" is the sum of all the mechanisms whose interaction gives rise to the optimal allocation of economic resources. The market's great advantages over central planning are precisely its randomness and its lack of self-awareness.Market participants go about their egoistic business, trying to maximize their utility, oblivious of the interests and action of all, bar those they interact with directly. Somehow, out of the chaos and clamor, a structure emerges of order and efficiency unmatched. Man is incapable of intentionally producing better outcomes. Thus, any intervention and interference are deemed to be detrimental to the proper functioning of the economy.It is a minor step from this idealized worldview back to the Physiocrats, who preceded Adam Smith, and who propounded the doctrine of "laissez faire, laissez passer" - the hands-off battle cry. Theirs was a natural religion. The market, as an agglomeration of individuals, they thundered, was surely entitled to enjoy the rights and freedoms accorded to each and every person. John Stuart Mill weighed against the state's involvement in the economy in his influential and exquisitely-timed "Principles of Political Economy", published in 1848.”

Listing the errors, omissions and exaggerations is a duty, but not the happiest of tasks:

Adam Smith’s “invisible hand” is not “the sum of all the mechanisms” giving “rise to the optimal allocation of economic resources”. The invisible hand was a lonely metaphor, not a theory, not something that existed or exists. There are no invisible hands, except in pagan religion, and among sound-bite driven journalists. How markets work is not miraculous or mysterious; they are fully understood understood (as are rainbows).

Acts of “any intervention and interference” are not “deemed to be detrimental” by all economists, and certainly not by Adam Smith. Smithian markets operate within the rule of law and the necessary interferences of a vigilant legislature, eyeing attempts by ‘merchants and manufacturers’ to create monopolies and in many other ways to cheat consumers. If participants commit crimes they should be sent to a court of law; recent cases are good news for the rule of law.

Laissez faire, advocated by the Physiocrats (or rather some of them – not Turgot), was never advocated by Smith because he understood market failure (in public goods, education and health). That John Stuart Mill joined the clamour for laissez faire in 1848 is no responsibility of Adam Smith (who died in 1790).

Market participants go about their egoistic business, trying to maximize their utility, oblivious of the interests and action of all, bar those they interact with directly.”

Question: what is Sam Vaknin complaining about when market participants transacting with people direclty do not subject them to their ‘egoistic business’, or their passion for ‘maximising their utility’ even though they may be ‘oblivious’ to all the others they do not transact with? He is so close to presenting the authentic view of Smith, but he blows it.

If all market transactions are not in play to ‘egoistic’ ‘selfish’ maximisers, why is their ‘indifference’ to those they do not transact with a problem? If we enjoy our grandchildren growing up, but not to anything like the same extent those millions of other people's grandchildren whom we do not know, how are we deficient? Why would society collapse because that is how people behave, as Smith showed in "Moral Sentiments" (1759)?

It would be a serious problem if market participants did behave as egoistic maximisers towards those with whom they trade; it cannot be a problem at all in a Smithian market, or indeed in Vanin’s version of a market, if they do not so misbehave. If all participants deal with each other without expressing their ‘egoistic’ tendencies, if they mediate their differences and interests and aim for less than ‘maximising’ their ‘utility’, and if they are not ‘obliovious’ to each other, what exactly is Vaknin complaining about?

Everybody is in some market (though not in all), and nobody is excluded from all markets, it follows that Vaknin’s picture of markets can hardly be improved upon. This contradiction makes his assertions somewhat strange:

“This noble propensity seemed, alas, to have been tampered by avarice and narcissism and by the immature inability to postpone gratification.”

Markets never changed human behaviour – Smith and David Hume considered behaviour to be a constant across all ages and all forms of economic structures. If people were given to ‘narcissism’ and the ‘immature inability to postpone gratification’ in ancient Greece and Rome (as they were with a vengeance), there is no reason to believe they would not be in mid-18th century Scotland, or 21st century USA.


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