Wednesday, July 23, 2008

Adam Smith on the Falling Price of SUVs

In fits of enthusiasm to get a message across, writers (for hire) can always use the old dodge (forgive the pun) of invoking Adam Smith to sell their message.

Rex Roy of The Detroit News HERE: does it in racy style.

Rex Roy is selling the idea of buying an SUV of gargantuan proportions and invokes the name of Adam Smith and his invisible body part:

Rex Roy: Car culture: Doing the math: SUVs may add up to big value

So the family and I have just returned from a fantastic week of beaching up north.
“Good news: Up north is still there and wanted me to tell you as much. Bad news: For people driving fuel-sucking SUVs, the drive up north gives cause for some rational thought.

As I sailed home along I-75 behind the wheel of a borrowed 2009 Armada LE 4x4 (a Nissan of Chevy Suburban proportions but with worse fuel economy), I pondered the following ...

Remember Adam Smith's invisible hand of supply and demand? Well, Smith's hand is pushing prices on new and used leviathans down. According to some sources, current SUVs and full-size trucks are so heavily discounted that their price equals that of vehicles two years old

This exposes the phoney use of Adam Smith and the totally unnecessary invocation of the misused metaphor of ‘an invisible hand’. It’s unnecessary because the reason why SUVs at the top end are falling in price is nothing other than the higher cost of fuel to drive them.

Students learn that in preparatory classes for Economics 101. Having learned about how markets work (covered by Adam Smith in Books II and II of Wealth Of Nations) their tutors introduce them to a mystical, even magical notion to confuse them forever, which is redundant, adds nothing but confusion, the metaphysical properties of something invisible and a hand to boot, that is believed by their tutors (they learned it from their tutors) and passed on to them in the certainty of the ancient trade of witch doctors, whom are ancestors listened to in trembling fear way back when all humans on the planet across the whole world lived as hunter-gatherers.

Of what does this invisible hand add to the SUV fall in price when fuel costs rise dramatically and the entire media tells owners of them that fuel will hit $300 a barrel sometime soon, the earth is going to experience significant climate change in a decade or two, and life as we know it is going to be a memory for those still alive and an historic myth for our grandchildren’s grandchildren?

And that’s the problem with the misuse of the metaphor, mentioned only once in Wealth Of Nations, and then not even about markets. It is sloppy economics; worse, it takes modern economists back to the status of ‘witch doctors’ who, at least, had the excuse of their ignorance of how the world works. Modern economists, and journalists, today have no excuse for misapplying Smith’s use of common enough metaphor in his time.

Here’s how Adam Smith explained their world as they knew it, in his ‘intended juvenile essay, began while a student at Oxford (1740-46) and completed c.1749, but not published until 1795, after his death in 1790. For details see my: Adam Smith: a moral philosopher and his political economy’, Palgrave MacMillan, 2008:

a savage, whose notions are guided altogether by wild nature and passion, waits for no other proof that a thing is the proper object of any sentiment, than that it excites it. The reverence and gratitude, with which some of the appearances of nature inspire him, convince him that they are the proper objects of reverence and gratitude, and therefore proceed from some intelligent beings, who take pleasure in the expression of those sentiments. With him, therefore, every object of nature, which by its beauty or greatness, its utility or hurtfulness, is considerable enough to attract his attention, and whose operations are not perfectly regular, is supposed to act by the direction of some invisible and designing power. The sea is spread out into a calm, or heaved into a storm, according to the good pleasure of Neptune. Does the earth pour forth an exuberant harvest? It is owing to the indulgence of Ceres. Does the vine yield a plentiful vintage? It flows from the bounty of Bacchus. Do either refuse their presents? It is ascribed to the displeasure of those offended deities. The tree, which now flourishes, and now decays, is inhabited by a Dryad, upon whose health or sickness its various appearances depend. The fountain, which sometimes flow in a copious, and sometimes in a scanty stream, which appears sometimes clear and limpid, and at other times muddy and disturbed, is affected in all its changes by the Naiad who dwells within it. Hence the origin of Polytheism, and of that vulgar superstition which ascribes all the regular events of nature to the favour or displeasure of intelligent, those invisible beings, to gods, daemons, witches, genii, fairies. For it may be observed, that in all Polytheistic religions, among savages, as well as in the early age of Heathen antiquity, it is the irregular events of nature only that are ascribed to the agency and power of their gods. Fire burns, and water refreshes; heavenly bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters… And thus, in the first ages of the world, the lowest and most pusillanimous superstition supplied the place of philosophy. (Adam Smith, 1744-49. ‘History of Astronomy’, III.22: pp 49-50)

Modern economists who teach a 'theory', 'concept', or 'paradigm' of the invisible hand a lot to answer for.


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