Monday, December 26, 2005

Invisible Hands and Other Nonsense

Paul Anderson writes in ASPEN TIMES, Colorado, USA an article, “Bumps in a Flat world”, (26 December) (visit: http://www.aspentimes.com/article/20051226/COLUMN/112260005).
Anderson writes:

“In his book "The World is Flat," New York Times columnist Thomas Friedman describes forces that are levelling the global playing field. Friedman fails, however, to mention how the world is supposed become flat without the levelling of global wealth.

If Friedman's flat world is to promote the most good for the most people, then a new economic model is needed. To end world poverty, according to Nobel Prize-winning economist Joseph Stiglitz, governments should adopt the Scandinavian model for a social democratic vision instead of relying on Adam Smith's free market.The Scandinavian model describes a welfare state with an emphasis on education, which is proven to promote fast, equitable growth. Smith's "invisible hand" implies that man's innate selfish nature best asserts itself in business through libertarian-anarchist, laissez-faire freedom.”

I know nothing of Paul Anderson or his background, (nor much about Thomas Friedman), but I do know Anderson does not know what he is talking about in respect of economics.

Incidentally, the ‘Noble Prize’ he talks about is actually something different from the ‘Noble Prize’ of longer pedigree: it is the “The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”, awarded since 1969. The winners of this prize are no less distinguished than the traditional Nobel Prize winners (awarded since 1901), but accomplished journalists are usually fussy about checking their facts.

I am always suspicious about suggestions that countries with very large populations adopt radical policies already adopted by countries with very small more easily managed populations. Given that their adoption is unlikely politically and probably unworkable politically, Anderson’s solution falls at the first hurdle of overcoming the minor problem of electoral success in the West and overcoming dictatorial impediments in the East. There is no point advocating change based on unrealizable goals, or of ignoring them and merely blaming rich western countries.

China is not going to adopt the ‘new economic model’ of Scandinavia just because Joseph Stiglitz recommends it (nor is India or anywhere else). I would guess further that not even New York City, home to his Columbia University, will adopt Joseph’s ‘new economic model’. I suspect Joseph knows this, which makes his ‘solution’ a non-starter even in his own country, let alone in the non-Scandinavia world of 6 billion other people. We can add Paul Anderson, Thomas Friedman and Joseph Stiglttz to the rest of what Smith called the world’s ‘men of system’ – fanatics who know what’s good for everybody else, but dangerous to boot if they somehow get power anywhere.

Anderson’s next paragraph is so full of non-sense (I am being polite because calling it ‘crap’ would be unscholarly):

Smith's "invisible hand" implies that man's innate selfish nature best asserts itself in business through libertarian-anarchist, laissez-faire freedom.”

Smith’s invisible hand was a metaphor, not a theory (he got it from Shakespeare’s Macbeth 3:2). It did not imply anything about “man's innate selfish nature” (Smith rejected such nonsense in his Theory of Moral Sentiments, 1759). It is about the unintended consequences, sometimes positive, often negative, from human motivations. That is all. These were not necessarily ‘best’ asserted in business. Quite the reverse, they could be highly negative in business: pollution, monopolies, dangerous working practices, fraud, gangster-ism and political corruption.

Smith did not believe in leaving ‘merchants and manufacturers’ free to do whatever they wanted. That way led to the dreadful and appalling practices such as in the East India Company, a chartered private monopoly of execrable reputation. The adjective “libertarian-anarchist” would have meant nothing to Adam Smith (what does it mean to you: left wing or right wing libertarian-anarchists?).

As for ‘laissez-faire freedom’ that was never a view of Adam Smith’s. Paul has bought into an attribution imposed on his name by people in the 19th and 20th centuries with agendas I think you would not approve.

Paul Anderson writes another sentence, showing alarming naiveté, mixed, of course, with comforting concern for people in the developing world:

Friedman's flat world and the expansion of technology and information he cheers are tarnished by the exploitation of cheap world labor.”

I take it he does not believe that ‘cheap labour’ can have their real living standards increased merely by paying them up to the ‘expensive’ labour of developed countries? They would sell next to nothing at such wages. If poverty could be reduced by money income transfers on the scale required politicans would print more money. Because wages are cheap it does not mean that they are ‘exploited’, though their wages may lag behind the value of their productivity. Economic growth will raise their real wages and combined with technology will enable them to sell their goods and services in the richer countires.

Millions of Chinese and Indian peasants on really low incomes are switching from the land to the cities because they can raise their poverty incomes by employment in low pay jobs from doing so. This massive population shift is bringing more people out of abject poverty into relative poverty compared with columnists paid for writing for Aspen Times, but making the absolutely better off, better educated and more healthy. They have still a long way to go to raise their wages even to the levels of those on poverty wages in the US. Affording to educate their children out of their wages is their next task (impossible before in the mud hut villages of rural China and India).

Man creates wealth (real output of marketable goods and services) and poverty is the absence of wealth creation opportunities, not its cause. Paul Anderson does not understand that yet. Stiglitz apparently does understand it because we assume he has read Smith’s “Wealth of Nations”.

Stiglitz wants to persuade (presumably) the whole world, including New York City, to adopt the Scandinavian economic model, and Paul Anderson, who apparently warns achieving even this utopia is going to be too slow, believes that Marx’s prediction that the workers will “rise up to end” their “exploitation” by “a violent tectonic drama that could level the social topography” will come to pass.

If it does, it will result in absolutely no improvement in living standards or amelioration from poverty. Markets have many faults and one precious benefit: they tend to work. As Adam Smith commented to a correspondent, who wrote in haste that the war in America was not going well for the British Crown and that further reverses would ‘ruin the nation”, he told him there is a ‘lot of ruin’ in a nation. There is also a lot of ‘ruin in markets’, but once ruined they take a long time to function again. In the meantime – it lasted 1,000 years after the fall of Rome – everybody ‘enjoys’ barbarism politically and poverty economically, until nascent markets spring up again.

Paul Anderson should contemplate these lessons of the past millennia while skiing in the exclusively rich resorts of Aspen.

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