Thursday, October 16, 2008

A Correspondent Writes

A correspondent writes to tell me:


You’re correct, but alas, such is the world! As much as I am tempted to launch myself into a discussion of Adam Smith, whose ideas have passed into legend, and that’s not meant positively; it wasn’t Smith’s fault that his work has been turned into propaganda and prostituted; poor old Marx has suffered a far worse fate, even in his own lifetime, leading him to exclaim in frustration – I am not a Marxist!

Still, isn’t that an academic debate, far removed from the rude world we live in? Such debates begin to resemble theology and arcane disputes about the lives of the saints and their ‘holy’ words.

Below I select three of today’s many articles from around the world, linking Adam Smith, via the metaphor of the ‘invisible hand’ in a form which Smith did not use it and with conclusions that he did not remotely state, from three continents and three different authors:


Economic regulation, which is quite different from price controls in theory and practice, is a sine qua non of the market economy. The unfettered “invisible hand”, which Adam Smith told us would allocate resources efficiently in the market place, surely needed some guidance in order to make butchers, who were prominent merchants in Smith’s time, not cheat sellers with faulty weighing machines, or sell meat that’s stale on prices for a fresh cut.”

Business Daily, 16 October, “Crisis a case of abused self-regulation" by M. J. Gitau, Niarobi, Kenya (HERE)

In the 1980s, the proponents of the "free market" dogma and "neoliberal globalization" as a policy framework dug up and bannered the argument of laissez faire capitalism that greed ought not be considered a negative attribute since it is a necessary and powerful force for driving social progress. Greed was presented as the crucial motor of the capitalist system.

Of course, it wasn’t called greed then; it was decked out as individuals simply motivated by self-interest. Adam Smith’s theory of the "invisible hand" of the market provided the rationale that the individual drive for self-gain magically self-regulates and transforms itself into the common good

Business World, Manila, Philippines, 16 October, “Greed at the heart of capitalism”, by Carol Pagaduan-Araullo

Another big problem is the almost blind faith that Friedman's followers and most other present-day economists have in Adam Smith's "invisible hand." They believe that the free market, unimpeded by government, will almost inevitably produce good outcomes. This kind of thinking substitutes theology for economics. And many times, it just isn't true.

Smith (1723-1790), a Scottish philosopher and college professor, was, of course, the founder of modern capitalist economic theory. In context, it is clear that when he writes about "the invisible hand" in his first great work, "The Theory of Moral Sentiments," and again in his more famous book, "The Wealth of Nations," he is referring to the hand of God or some equally inexorable force of Nature. In "Moral Sentiments," published in 1759, he ties the invisible hand directly to God. In "Wealth," 17 years later, he is less specific. But here too, Smith portrays "the invisible hand" as a powerful, superhuman force that makes things turn out right, in spite of human selfishness and rapaciousness. Either way, Smith's premise is based on faith, rather than on observation.

If, however, one looks at human experience rather than invoking faith or religion, one must observe that all too often things do not turn out right. All kinds of economic calamaties, not to mention genocides, natural disasters, disease pandemics, and other catastrophes have afflicted humankind since its beginnings, punishing good people as well as evil ones. The invisible hand that makes things turn out right is often nowhere in evidence. The market often works, but sometimes it doesn't.

Actually, Smith himself acknowledges this by his use of the word "frequently," rather than "always," when he writes that men unintentionally promote the common good. Even the founder of capitalist theory was not nearly as optimistic about "the invisible hand" inevitably creating "the magic of the marketplace" as are many of today's conservatives. Despite this, they continue to insist on citing him as the authority for their nonsensical claims about the infallibility of laissez faire capitalism

The Huffington Post, New York,16 October, “Whatever Happened To 'The Magic Of The Marketplace' And 'The Invisible Hand?'”, by Sandy Goodman, (HERE)

Lost Legacy is about carefully putting the case of economists and philosophers to read Adam Smith’s Works and Correspondence and discovering exactly what he wrote about.

This means spending some time each day providing regular reminders that the source for the three correspondents above, and many scores of others each day, mistaken claims about the link between the metaphor of ‘an invisible hand’ and the mystical, magical, god-like force to which it is attributed, had absolutely nothing to do with markets, theories of prices or competition, supply and demand, or the consequences of individual’s choices, in anything that Adam Smith wrote.

The myth of the invisible hand and its attribution to Adam Smith was invented (not too strong a word) by neoclassical and post-neoclassical economists in the United States from the Second World War onwards, who associated his name to their general equilibrium theories and their admonitions on how to run the American economy. This, they thought gave their empty mathematics some historical ballast and legitimacy.

Sadly, many economists who took an interest in the history of economic thought, as well as modern economic theory, and knew better than endorse what they knew to be an intellectual fraud, shrugged their shoulders and said (and say!): ‘So, what; it’s a harmless white lie. Smith’s dead, most economists have never read Wealth Of Nations, and attributed 'facts' are immune to anybody seriously contesting them.’

Probably true. My correspondent above displays not just a degree of cynicism; it’s also an invitation to complicity in purveying dangerous nonsense in place of intellectual honesty.

The epigones oversold Adam Smith, and like the fools who oversold the toxic debts they created – egged on by legislators who urged swapping prudent banking for social engineering and social inclusion – have unleashed potent propaganda, as in the three examples above, that may in consequence deepen a financial crisis into a large-scale assault on free markets, open economies, and global trade.



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