Tuesday, March 04, 2008

Smith's Markets Were Not Led by Invisible Hands

John Shultz, Independent analyst and Contributing Editor, Logistics Management Magazine, writes in The Expert Network (here) Gerson Lehrman Group:

With Capacity Exiting Trucking Industry, Will Rates Inevitably Rise?
Analysis of: Current Transportation Capacity Glut is Forcing Many Independent Truckers Out of Business


Implications: The current slump in ground freight demand is taking its toll on some independent truckers, pinched between high fuel costs and slack demand. One truck repossession company reports it more than doubled the number of trucks it repossessed in 2007 compared with 2006. But at least one transportation consultant believes this is a good thing because "the invisible hand of Adam Smith" means that eventually this lessening of capacity will mean higher trucking rates for the survivors. Implications: The current slump in ground freight demand is taking its toll on some independent truckers, pinched between high fuel costs and slack demand. One truck repossession company reports it more than doubled the number of trucks it repossessed in 2007 compared with 2006. But at least one transportation consultant believes this is a good thing because "the invisible hand of Adam Smith" means that eventually this lessening of capacity will mean higher trucking rates for the survivors.”

Comment
The economics are sound: a fall in supply price following a fall in demand will reduce supply capacity eventually. But what has this got to do with Adam Smith’s sole use of the metaphor of the invisible hand in Book IV of Wealth Of Nations?

Adam Smith’s lengthy analysis of markets in Books I and II does not even mention the metaphor of the invisible hand. Including it in an exposition of the supply and demand relationship adds absolutely nothing to an understanding of the market changes.

Its only possible use is to imply some sort of authority to the analysis by using Adam Smith’s name and the famous metaphor, but what it does in fact is expose the analyst who makes the reference as knowing little about Adam Smith at all.

3 Comments:

Blogger Thomas said...

Oh, come now. It is obvious that there is a special consideration in WoN for truckers. This highly quotable Invisible Hand was so invisible ... you know the rest. If there was a corresponding invisible hand for the Police, would it be more difficult to stop traffic?

Tom
Austin, Texas

4:54 am  
Blogger Gavin Kennedy said...

Thomas
I like your approach to humour and economics.

Gavin

11:58 am  
Blogger Thomas said...

Zen Koan: What is the sound of one invisible hand clapping?

I discovered one profound answer to the koan in it's original form and find that deep thought on my version will lead to a renewed Smithian enlightenment. You, sir are supplying a demonstration of the answer nearly every time some fine individual abuses the meaning and context of AS's IH.

Captain Renault: What in heaven's name brought you to Casablanca?
Rick: My health. I came to Casablanca for the waters.
Captain Renault: The waters? What waters? We're in the desert.
Rick: I was misinformed.

Casablanca (1942)

2:48 pm  

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