Friday, January 23, 2009

Perpetrators of Myths Mislead Generations of Students, Some of Whom Grow Up to (mis)Advise Legislators

Craig Emerson, a federal Minister for Small Business, Independent Contractors and the Service Economy, reveals the source of those spreading the myth of the invisible hand in The Australian, HERE:

Education essential to reform’

‘The Hawke government was acutely conscious of the imperative of good economic policy in delivering socially progressive policies. Whether all members of the Hawke and Keating cabinets recognised it, the intellectual basis for public policymaking by these Labor governments had its genesis in Adam Smith's work on the benefits of open, competitive markets guided by an "invisible hand".

Though Smith advocated interventions such as state-owned public schools for children of the poor, anti-monopoly legislation and progressive taxation, he is often misrepresented as a champion of business against the interests of working people.
In truth, he was a champion of the people, especially the underprivileged. The deregulatory, pro-competitive policies of the Hawke and Keating governments laid the foundations for an unbroken period of unsurpassed prosperity, starting in 1991.

Not many Hawke and Keating cabinet ministers would have waded through Smith's Wealth of Nations or his Theory of Moral Sentiments, but Smith's intellectual legacy was carried forward and expanded in public policy formulation during the Hawke-Keating era by leading economic thinkers such as Ross Garnaut (Bob Hawke's office), Barry Hughes (Paul Keating's office), senior economists in the Prime Minister's Department, Treasury and Finance, and the Productivity Commission.

The invisible hand cited by Smith can be detected in the deregulation policies of the Rudd Government. But beyond the worthy ambition of fashioning the Australian market into a seamless national economy by getting rid of unnecessary, overlapping federal and state regulation, how much more pro-competitive policy work remains to be done?


Comment
Sadly for Craig Emerson’s assertions, ‘the intellectual basis for public policymaking by these Labor governments [DID NOT HAVE] its genesis in Adam Smith's work on the benefits of open, competitive markets guided by an "invisible hand", because Adam Smith did not have any theory of an invisible hand.

It was used once in Wealth Of Nations, as a simple metaphor for what he took several pages to explain how risk aversion impelled some merchants to refrain from the risks of overseas trade (with the British colonies in North America), which in consequence motivated them to invest their capital locally in Britain and, thereby, to increase domestic capital investment (the whole is the sum of the parts, etc.,) and this meant British domestic output and employment was larger than it would have been if these particular merchants were not so risk-averse.

Those other British merchants who did conduct trade with and investments in the British colonies and elsewhere abroad, somehow did so despite a supposed invisible hand tryin to lead them elsewhere - they sought the higher profits available from their choice, under the protection of Cromwell's Navigation Acts and the presence of the Royal Navy (courtesy of British taxpayers).

The notion that Smith had a ‘theory’ of ‘an invisible hand’ leading all players in markets to act in pursuit of their self-interests and raise annual output and annual employment is a myth, invented (‘made up’ would not be too strong a charge) by advocates of pro-corporate capitalism, then becoming rampant in the USA in the 1950s.

Adam Smith’s works did not require invisible body parts to illustrate how competitive markets worked.

I agree that “Not many Hawke and Keating cabinet ministers would have waded through Smith's Wealth of Nations or his Theory of Moral Sentiments” – they had to take the authoritative assurances of “leading economic thinkers such as Ross Garnaut (Bob Hawke's office), Barry Hughes (Paul Keating's office), senior economists in the Prime Minister's Department, Treasury and Finance, and the Productivity Commission” that the myth was true.

There is a high chance that these doyens of the Australian economic profession had not read Smith’s books either (they probably took it that Wealth Of Nations said something quite different to what they believed having taken it on trust from their tutors - students tend only to read what is examinable!).

Adam Smith was certainly not “a champion of business against the interests of working people” and Craig is absolutely right to make this clear.

Smith’s intellectual arguments, and personal warmth for the growth of commercial society, were driven by the conviction that growth across agriculture, industry and specific, targeted public expenditure, such as defence, justice, and public works and public institutions, would assist the spread of opulence, especially to the labouring poor and their families, albeit slowly and gradually, but steadily too, if legislators and those who influenced them were careful not to approve monopoly schemes to narrow markets and restrict competition, not to indulge in spasms of ‘jealousy of trade’, protectionism, forming loss-making colonies and conducting wars for trivial ends (i.e., not for defensive purposes only).

Introducing, a mystical or miraculous force at work in markets detracts from the real and detailed policy measures that may required from time to time to ensure steady growth, competition, and liberty for all, and not just for the amoral ends of privileged monopolists and their cronies.

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