Sunday, April 12, 2009

Myths of Free Markets

Erik Kirschbaum writes in Cota 1061 HERE:

German ‘cash for clunkers’ shows free market perils”

Scottish economist Adam Smith coined the term “the invisible hand” in the 18th century to describe the positive effects of the free market on individuals.
Yet the worst economic downturn since the Great Depression has led governments around the world to re-evaluate that belief in the “invisible hand” and to prop up sagging economies.

In an otherwise reasonably sensible piece, Erik Kirschbaum, writes this nonsense about Adam Smith and the metaphor of ‘an invisible hand’.

Adam Smith did not ‘coin the term “the invisible hand”. The metaphor was well-known in the 18th century and widely used in literature, and had been known since classical times (Greece and Rome). It was used by Shakespeare (in Macbeth: ‘thy bloody and invisible hand’), and Defoe used in twice (Moll Flanders and Colonel Jack). Even Voltaire, among others. used it.

Adam Smith most certainly did not use the metaphor ‘to describe the positive effects of the free market on individuals’, which he discussed in detail in Books I and II of Wealth Of Nations (he only used in once, and not in reference to markets; it was about risk and uncertainty, Book IV of Wealth Of Nations).

Modern economists who ‘believe’ in the myth of the invisible hand have been misled by leading US economists (in Chicago in the 1930s; Oscar Lange (146); Paul Samuelson, 1948); Milton Friedman (serially from the 1950s); and hundreds of thousands of graduates from academe influenced by the scores of graduates who ‘believed’ what their tutors told them (without them, or their tutors ever reading Wealth Of nations for themselves.

That governments came to believe the myth of ‘an invisible hand’ is the fault of prestigious modern economists (including Nobel Prize winners) advising them.

Moreover, that they apparently believe that their economies are ‘free markets’ is astonishing, given that even a casual look at modern markets in economies with Big Governments would show they were as un-free as commercial markets were in Smith’s day, not just internaly, but also externally through tariff protection.

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