Wednesday, March 14, 2007

Standards Slip in the Financial Times

For the department of imagination and false ascription. An author writing for the prestigious Financial Times (13 March) ascribes an idea to Adam Smith, using the notorious metaphor of ‘the invisible hand’ to assert that Smith ‘said the invisible hand of competition would reduce excess profits in business to normal levels’. That he nowhere said anything like this at all, yet Philip Augar, the author of the article for which he presumably was paid money, is a minor point in the big world of media nonsense, and may not matter. But journalists used to concern themselves with the accuracy of their reports and, as a minor point of protocol – ‘don’t put words into the mouths of witnesses’, it ought to be considered important by editors.

Here is the report from the Financial Times, under ‘Comment and Analysis’:

“Adam Smith’s hidden hand is vanishing"
By Philip Augar

"It is ironic that, at the time when Adam Smith’s head is featuring on the Bank of England’s £20 notes, the financial services industry appears exempt from the market forces he described. Smith was the 18th century economist who said the invisible hand of competition would reduce excess profits in business to normal levels. Yet financial institutions seem to be defying conventional theory. Commercial banks are reporting record results, the $50m bonus has arrived for top investment bankers and hedge and buy-out fund managers are being paid off the scale.

It is tempting to write this off as just another cyclical peak. But there is a powerful underlying trend. Smoothing results through mini-cycles reveals rising levels of profitability for a quarter of a century. Profits and compensation levels have parted company with those in other industries. In contrast to what we might expect from Smith’s teaching, financial services industry returns have been remarkably resilient to pressure from customers and competitors.”

Smith did say that excess profits would be competed away. But he said nothing about ‘an invisible hand’ in this context. He called it competition. He did not need to embellish it at all with a metaphor (which he used in another context in Book IV of Wealth of Nations, p 456, IV.ii.9). It didn’t need one. Competition is competition. It isn’t invisible. It isn’t linked to a body part.

To assert it is – the author’s prerogative – is one thing; to ascribe it to another author when he didn’t say such a thing is wrong, called, I think, false reporting, sloppy journalism and plain wrong.

I think we deserve better from the Financial Times.


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