Saturday, April 11, 2009

A Humourist and the Invisible Hand

Geoff Elliott, Washington correspondent of The Australian (‘on-line newspaper of the year’) HERE:

A mishap on freedom highway’

‘In that 2007 interview O'Rourke had just finished a book on Adam Smith. Smith's famous The Wealth of Nations, with its theory about the invisible hand of markets, is the bedrock for libertarian economic thought and on what O'Rourke has pinned decades of witty observations, starting in Rolling Stone and proceeding to 12 books such as Holidays in Hell, Eat the Rich and Give War a Chance.

One has to feel sorry for PJ, though. This is the man who calls all politicians dingbats and wished the hell government just got out of the way. Now he's like someone walking through the ruins of their house asking, "What the hell just happened?"

Smith, though, remains as relevant as ever, he says. The market is now doing its job, despite the best efforts of government to stop it. In O'Rourke's view, channelling Smith, throwing trillions in taxpayers' money at the problem is folly.
"How, then, would Adam Smith fix the present mess?" O'Rourke wrote in the Financial Times recently. "Sorry, but it is fixed already. The answer to a decline in the value of speculative assets is to pay less for them. Job done."

"You know Adam Smith was much better on the whole speculative bubble thing," O'Rourke tells me. "He had that nailed. Smith has a recognition, unlike others with greater technical expertise, that you are mainly talking about psychology here. Simply, Smith saw bubbles as more to do with the human desire to fool itself."

Bubbles and mania are nothing knew. But clearly there was nothing in Smith's writings that allowed the likes of O'Rourke to predict the mother of all economic meltdowns, and O'Rourke sounds slightly chastened when he speaks of the events of the last 12 months.

"What we just saw was a terrific overvaluation in every asset class. It is pretty remarkable, really. We just had huge runaway inflation - Weimar Germany standards - but it was in credit and money supply."

P.J. O'Rourke will lecture in Sydney on April 21 and in Perth on April 28 on "Invisible hand v visible fist: securing the future wealth of nations" for the Centre for Independent Studies. The Australian is co-sponsoring the visit. For details and bookings, call (02) 9438 4377, email, or visit:

P. J. O’Rourke is famous for his writing style and his book on Adam Smith’s Wealth Of Nations, deservedly is a best seller, though I have reservations about some of his interpretations, notably on his swallowing and then regurgitating the unreliable, and incorrect, Chicago/Samuelson/ Friedman invention about Smith’s so-called theory of an ‘invisible hand of markets’.

My essay, ‘Adam Smith and the Invisible Hand: from metaphor to myth’ discusses what Adam Smith actually wrote when using (once only) The Metaphor in Wealth Of Nations and rebuts claims, popularised in the 1950s in academe, about The Metaphor being a theory of markets. Readers can download an early draft (2008) HERE

That some economists, and their readers, have gone from worshipping mythical invisible beings and hands (‘pusillanimous superstition’ according to Smith) when discussing how markets work to confusion and dismay when the myth turns to shadows, is instructive.

The real damage to Adam Smith’s legacy occasioned by the invention of the myth of the invisible hand, in lieu of understanding how markets actually worked (fully explained by Adam Smith without mentioning disembodied body parts at all in Books I and II of Wealth Of Nations), has been enormous. Some economists turned Smith’s single use of the popular 18th-century metaphor into a religious experience – it became in effect the ‘Hand of God’ – and added a perfectly redundant and misleading mysticism to the very real, earthly experience of humans in societies.

That markets, and the exchange behaviours associated with them, have a long history in the long march of our species from brutish ignorance to modern science is not a ‘miracle’, nor evidence of ‘providence’, nor the consequence of a gentle guiding force of invisible beings, with or without hands. Humankind achieved it all by itself, for good or ill.

We do know that when human societies, for whatever reasons, curtailed, suppressed, or abandoned institutions dominated by voluntary exchange, they languished in the poverty of the alternatives to markets.

P. J. O’Rourke favours markets, but does not (yet) understand them. His popularisation of Wealth Of Nations, while a noble quest, perpetuates the modern myths of those ideologues who faced up to the collectivist challenges of the Cold War decades.

He now turns his wit to the bust part of the cycle after its boom, making his highly-readable presentations in Australia likely sell-outs without too much marketing effort. He does not show signs that he understands his own contribution to the boom in his romance with the myths of modern economists.

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