Friday, October 24, 2008

The Invisible Hand Gang

Richard Murphy writes on the Blog, Tax research UK, 24 October, ">HERE:

“Farewell Adam Smith: welcome the new economy"

As Greenspan said:

'I made a mistake in presuming that the self-interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders.'

So farewell to the mythical ‘invisible hand’ of Adam Smith.”

[I was just about to compose my rebuttal as a rebuttal in Lost Legacy when I noted somebody had placed a comment already and I paused to read it. Here it is, in full]:

And a reader of Tax Research UK comments on its Blog:

1. Alex Cobham wrote:

Not that you do this here, Richard, but Smith has so often been traduced that it’s worth dropping in a few original quotes to illustrate how distorted the a view of him the ‘invisible hand’ gang have promoted.

1. On unregulated business (referring to local rather than international, but clearly in conflict with the popular interpretation of the invisible hand line):

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices.”

2. the ‘invisible hand’…
… gets one mention only in The Wealth of Nations, and in a very specific circumstance around international trade - see e.g. Prof Gavin Kennedy on this here:

3. On banking regulation
“To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law, not to infringe, but to support.

“Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.”

4. On equity
“No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed and lodged.”

You could go on. I haven’t spent nearly as much time as I might like reading Smith, but even without doing that it’s clear that he was a varied and intelligent thinker and writer - not a narrow-minded ideologue.

He didn’t need to be right every time - who is? - to be a towering figure in founding economics. And he certainly doesn’t deserve the distortion of his work by the ‘invisible hand’ gang - or the abuse he sometimes gets from others who believe that distortion.

Well done, Alex Cobham. Worthy Winner of October’s Lost Legacy prize. I like the 'invisible hand gang'

Who said Lost Legacy is a wasted fight?

There are small signs that the fight for Adam Smith’s Lost Legacy has had some effect, judging from snippets in some Blogs.

I am so pleased, but the struggle continues…



Blogger michael webster said...

You might want to add John McMillan's otherwise excellent book, Re-inventing the Bazaar, on markets to your "hit" list.

On pages 153- 154 of the soft copy, he writes, I going to include the entire quote because it is important to the issue.

"Goods get produced and delivered to the people who want and can pay for them. Self interest is harnessed to the greater good. Intending only his own gain, a producer or buyer is led by an invisible hand, Smith famously concluded, to promote an end which was no part of his intention. The metaphor of the invisible hand Smith formulated in 1776 is the classic account of what drives a market economy.
It was nearly two centuries before Adam Smith's insight was taken beyond the metaphor of the invisible hand and given a rigorous theoretical foundation. Are competitive markets able to harmonize the actions of millions? Leon Walras took the first big step toward answering this question in the late nineteenth century, formulating a mathematical model of an economy in which, for each service and good, there was an equation representing the balance of supply and demand. Walras left unanswered the key question of whether it was possible for supply to equal demand simultaneously in every market. THis stayed unresold until 1954, when Kenneth Arrow and Gerald Debrue, in a densely mathematical article that was to earn them Nobel Prizes, confirmed the internal logical consistency of Smith's and Walras's model of the market economy. One of the supreme achievements of economics, the Arrow-Debreu theory identifies certain precise conditions in which the individual's separate decisions add up to a consistent overall outcome. Prices steer the economy, by rising and falling to restore balance whenever there is a shortage or a glut. The economy can be coherently directed by the market's invisible hand."

This long paragraph describes what I think most classical market economists think.

Whether or not Adam Smith had the insight about prices and an invisible hand is going to be largely irrelevant to them.

What would be relevant is if somehow a reexamination of Smith's concept of a market showed that it wasn't prices by themselves which restore balance.

Certainly, today the prices in the stock/credit market aren't doing much to balance the shortage of reputation.

3:50 pm  
Blogger Phil Neumiller said...

But wait. The Federal Reserve is an un-audited GOVERNMENT created entity, that is unconstitutional to begin with. Stop with the hand wringing. The real problem is STILL the government here...

11:41 am  
Blogger Gavin Kennedy said...


I have responded to your comment in the main section on Sunday's postings. Thanks for your comments which wqas of great interest.

10:37 am  

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