Friday, July 31, 2009

An Idea Devoid of Content

Richard Kagan writes on ‘Human rights and the news’ in The Daily Journal (Fergus Falls Minnesota) 30 July, HERE

Article 19 of the Universal Declaration of Human Rights expands on this right. It includes the freedom “to seek, receive and impart information.” It is not enough to have the right of a free press. It is our responsibility to seek and receive information that is necessary to our well-being.

Two areas in the Journal are particularly responsive to this task: namely economic opportunity and environmental stewardship. The Nobel Prize Laureate in Economics, Joseph Stiglitz has criticized the Adam Smith assumption that there is an “invisible hand” that controls or determines our economy. Professor Stiglitz counterargument declares that information has economic value because it allows individuals to make choices more rationally. Without sufficient economically relevant information, individuals can be conned into make self-destructive decisions. When one person has more or better information than the other, there is an imbalance in the knowledge of reality. This negative relationship can lead to exploitation and ill feelings. The more the Journal can cover issues of economic growth and opportunity, the more we can make logical decisions about the local and national economy

Adam Smith did not assume “that there is an invisible hand’ that controls or determines our economy”, or, if he did believe that, he did not say that he believed it.

In fact, he said remarkably little about the role of ‘an invisible hand’ and even less about its possible role in ‘our economy’.

He only mentioned it once in Wealth Of Nations and then only as a metaphor for some merchants who, being risk averse, preferred not to send their cargoes out of their sight and instead preferred to invest their capital locally, even if they earned a lower rate of profit from doing so.

Other local merchants, willing to take greater risks, did send their cargoes abroad and they earned higher profits from doing so if their investments returned safely (the North Atlantic is a risky proposition for shipping; the Caribbean was infested with pirates; and India was over a year round-trip just for sea transportation.

By investing locally, these merchants unintentionally added to national output and employment. They were most interested in their own security.

It was in reference to this conundrum of the choice between foreign versus domestic trade that Smith wrote in Book IV, chapter 2, of Wealth of Nations his, now famous, but for most of the hundred years after his book appeared in 1776 largely ignored, use of the common 18th-century metaphor of ‘an invisible hand’, which he deployed to describe the consequential behaviours of those merchants who were risk averse.

The risk-neutral (and risk-seeking) merchants were not considered further – no ‘invisible hand’ guided them apparently.

So when Smith describes the behaviours of the risk-averse merchants being ‘led by an invisible hand’, he was considering them only.

His use of the words ‘every individual’ refers to this group only, though it is a common error to assert that the metaphor applied to everybody in the community and thereby leads most modern commentators to imagine that Smith said ‘all individuals’ do what they do, irrespective of what they do.

Few of these modern commentators have read Wealth Of Nations leading them to formulate a view of the economy attributed to, but never part, of Smith’s analysis of markets. Notably, in Books I and II of Wealth Of Nations, Smith analyses the working of markets in detail without mentioning ‘an invisible hand’ at all.

If the invisible hand guides some individuals to invest abroad and some others to invest at home it become a nonsensical metaphor and certainly an idea devoid content. It adds nothing Smith exposition in paragraphs 1 – 9 of Chapter 2, Book IV.

Professor Stiglitz should know all this, but apparently does not. If Stiglitz gets it wrong, what chance has Richard Kagan?



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