Saturday, September 22, 2007

Greenspan is Not the Second Coming of Adam Smith

William Neikirk reviews Alan Greenspan's memior in the The Swamp (Tribune’s Washington Bureau)(21 September): 'Greenspan's memoir: Adam Smith rides again'.

Greenspan is the Adam Smith of our time. He believes in the "invisible hand" that guides free markets and leads to greater economic growth and wealth for those willing to take risks for the reward. The Marshall Plan after World War II was not nearly the stimulant to European recovery that were private, free market, he writes. Economies change through "creative destruction" of companies and industries that become obsolete.”

Comment
If Adam Smith believed that the invisible hand ‘guides free markets and leads to greater economic growth and wealth for those willing to take risks for reward’, it is remarkable that he never said so.

William Neikirk has bought the myth about the invisible hand being a central principle of Adam Smith’s. It wasn’t. It was a metaphor for something quite different in Book IV of Wealth Of Nations. His chapters on how markets function are confined to Book I and are remarkably clear without any mention of 'invisible hands' guiding anything.

Worse, his specific and only reference to ‘an invisible hand’ in Book IV, chapter 2, page 456, was about the reward to society of merchants who specifically were risk averse and unwilling to take ‘risks for reward’, in the case of them choosing to invest locally rather than abroad, where the risks were greater from long sea voyages, uncertain weathers, cheating inhabitants of distant countries and uncertain legal systems for seeking redress. (WN IV.ii.9: p 456)

Smith argued that because they were risk-averse (not risk seeking!) these merchants preferred to invest their scarce capitals locally and by doing so they increased the amount of capital locally, which in Smith’s growth model would increase local employment and add value to the use of raw materials, which in consequence would increase domestic capital and net growth.

This had nothing to do with markets nor anything remotely connected to ‘guiding them’, and if Alan Greenspan believed it was, then he had not read and understood Smith’s use of the metaphor of ‘an invisible hand’.

If, as William Neikirk alleges, Greenspan ‘believes’ that markets are ‘guided’ by an invisible hand, that is his privilege – he may also believe in fairies at the bottom of his garden for all it is relevant – but if he also believes that Adam Smith shared his fantasies, he is most decidedly mistaken.

Having clearly explained why governments do not need to impose import tariffs and why local merchants are prepared to invest locally from their risk aversion, he concludes that the sum of the parts (each merchant investing capital locally to make profits) will create a large ‘whole’, which follows a well-known arithmetical rule and not a mystical belief in disembodied body parts.

Greenspan most decidedly is not the ‘Adam Smith of our time’, nor is he Schumpeter’s ghost, whose quip about ‘the perennial gale of creative destruction’ is about all that most people remember Schumpeter for – and usually contract it, as demonstrated by William Neikirk in his review, to ‘creative destruction’.

2 Comments:

Blogger Adam Gurri said...

If Adam Smith believed that the invisible hand ‘guides free markets and leads to greater economic growth and wealth for those willing to take risks for reward’, it is remarkable that he never said so.

Your ability to turn this sort of phrase is part of what I love about this blog

10:31 am  
Blogger Gavin Kennedy said...

That is a very kind thing to say. Given the speed with which I write for Lost Legacy, I am embarrassed on occasion with my sentence constructions, typos, and other infelicities of style.

I try to do better, but sometimes it just does that come out that way ...

9:05 pm  

Post a Comment

<< Home