Wednesday, December 27, 2006

A Stock Tipper Who Doesn't Understand Economics

From the Department of So Wrong; it’s not worthy of comment:

“While I agree with many of Stein's observations in the column, I think he may be missing one of the cardinal rules of economics: Adam Smith's invisible hand, which states that individuals create the greatest benefit for society through the selfish pursuit of personal gain.”

This was written in: ‘Ben Stein on hedge funds' by Zac Bissonnette in ‘AOL money & finance Bloggingstocks’, ( 26 December) clearly a stock tipper that must be avoided.

3 Comments:

Blogger TeenMoney said...

Hi,

Zac Bissonnette here, thanks for the comment on my post about Ben Stein...while you may disagree with the precise wording, I think that's a pretty good summary of the invisible hand. Here it is direct from the man himself:

"...every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

Can you explain your beef with what I was saying?

Thanks,

Zac

9:53 p.m.  
Blogger Gavin Kennedy said...

Thank you for your comments. I shall try to answer briefly.
Smith did not have a belief in ‘an invisible hand’ other than as a metaphor. The precise context of his single reference in Wealth of Nations to ‘an invisible hand’ is about human motivations having unintended consequences. It had nothing to do with his theory of markets (‘natural and market prices, supply and ‘effectual demand’, etc.,) fully discussed in Book I of Wealth of Nations.

His Book IV reference is to the risk aversion of some merchants to sending their capital abroad to import goods for sale in Britain or to invest in the ‘carrying trade’ (shipping, etc.,).

Because they did this (fear of piracy, fraud and theft), they invested locally and this meant that their individual annual revenues when aggregated together created larger annual revenues locally than it would otherwise if they had dispersed their scarce capitals abroad.

In short, the sum of their individual actions caused the whole to be larger than it would otherwise have been if their capitals had been dispersed, or, to express it another way (Smith was highly qualified in mathematics) he stated the simple arithmetical rule than the whole is the sum of its individual parts.

Hi is metaphor (used by many before and contemproary with him, e.g., Sakespeare in Macbeth, 3.2 and Defoe in Moll Falnders, has morphed into the myth of a ‘law’, ‘theory’, even ‘theorem’ of Adam Smith. It was and is none of these.

Neoclassical economics, emanating from Chicago is responsible for the mistaken elevation of a metaphor into a ‘cardinal rule of economics’.

Should you wish to proceed further with your enquiries, please read the three occasions only in which Smith refers to this metaphor, once in his History of Astronomy, referring to pagan superstition about the ‘invisible hand of Jupiter’ (the Roman god not the planet); once in his Theory of Moral Sentiments (TMS IV.I.10: p 184) and once in Wealth of Nations (WN IV.ii.9: p 456). On no occasion is he talking about markets or economics. His subject, his ‘principle’, is human motivation.

I have no ‘beef’ about this; I am only interested in stating Smith’s legacy as he intended it to be taken by posterity. Smith was a careful writer – he wrote and lectured about the use of metaphors (Lectures in Rhetoric and Belles Lettres, 1763) - and did not express himself carelessly.

If you scroll down the Blog you will find many instances in which I criticise those who, often unknowingly, ascribe to Smith views he did not hold or express, and who attribute to him ‘theories’ he did not advance.

The myth of ‘the’ invisible hand and its being ‘cardinal’ to his political economy is just that. If people wish to advance a notion that markets are ‘mysterious’ or ‘magical’ that is their prerogative; when they attribute such nonsense to Adam Smith they are vulnerable to correction.

I hold no animosity towards you whatsoever – we would probably get on just fine in a long conversation. If my tone caused you offence, then I apologise unreservedly – it was not intended.

9:38 p.m.  
Blogger TeenMoney said...

Hi,

Thanks for the response...Don't worry, you didn't offend me at all! I'm glad when our stuff can inspire passionate responses! While you are obviously far more of an Adam Smith expert than I am, I am certainly aware that he saw himself as a moral philosopher rather than as an economist as he is perceived now.

However, the invisible hand metaphor is very frequently used by proponents of free markets to explain why capitalism is good. That was the point I was trying to make. If people want to pay what appear to be outrageous fees to a hedge fund manager, why shouldn't they...I'm a big believer in the idea of "voluntary trade creates wealth."

And the quote from Smith that I showed you in my response- "By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good," I think absolutely speaks to the invisible hand metaphor, even though it is not stated explicitly there. It's the same idea. Voluntary trade creates wealth.

And I'm sure you intended no animosity but calling me a "stocktipper to be avoided" and that I "don't understand economics" is a little harsh. But it's cool. I'm glad you responded and you are very knowledgable. Thanks a lot for your time. Feel free to email me anytime at TeenMoney@gmail.com

Best always,

Zac

5:06 a.m.  

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