Tuesday, July 14, 2009

Too Clever By Half on Smith and Darwin

Nitish Grover (FCA, AICPA Intl Associate) writes (13 July) in the Blog of the Gersham, Lehrman Group (‘Intelligently connecting institutions and expertise’) HERE, a piece on “The Invisible Hand, Trumped by Darwin” in the New York Times (discussed on Lost Legacy yesterday):

Nitish Grover writes a witty (speaking loosely) piece to the theme: “Charles Darwin, Adam Smith, Accounting and Financial Rules”. He gives an 8-step analysis, which is more than tendentious in my view.

1.The invisible hand has always been there in accounting and in the development of financial products.”

Nitish does not explain how ‘an invisible hand’ manifests itself in accountancy (but then Adam Smith only mentioned it once in Wealth Of Nations where it is clearly a metaphor not an actual entity.]

“2. Natural selection (Darwin) speaks of adaptability and change. The invisible hand refers to a population of businessmen doing the right thing for a selfish motive.”

[Hold it! Where does Adam Smith speak of ‘selfish motives’ having anything to do with The Metaphor of ‘an invisible hand’? He does no such thing, which leads me to ask if Nitish has read Wealth Of Nations or has relied merely on a summary of modern interpretations, plus a couple of Hollywood films (‘Wall Street’, ‘Beautiful Mind’, and perhaps those scriptwriters influenced by Ayn Rand).

The traders mentioned in connection with The Metaphor were those who were risk averse to sending their capital across to the British colonies in North America (the Atlantic was dangerous to small ships, the people they dealt with in the colonies were not known to them, the local courts were an unknown element, though based on British Law, and their goods were out of their sight). Consequently, they preferred to invest locally, which on the arithmetic of the whole is the sum of its parts, each risk averse trade increased local investment larger than it would be if these traders joined the non-risk averse traders who did business in the colonies. How is risk-averse behaviour ‘selfish’?]

3. While the invisible hand and the selfish motive are driven by greed the process of natural selection is slower and driven by the environment.”

[It gets worse! Now they are driven by ‘greed’. Nitish confuses Adam Smith with Bernard Mandeville (1724) and the ‘Fable of the Bees’, a common enough misattribution to Smith who regarded Mandeville as ‘licentious) (see his Moral Sentiments, 1759). Nobody who reads Wealth Of Nations would make that elementary mistake.]

4. While the invisible hand has a short term perspective the natural selection is more strategy driven.”

[The Metaphor has no perspective at all – it's imaginary, not real. Darwin did not instill ‘strategy’ into natural selection; individual adaptations can develop to a series of short-term events – a regular food declines, alternatives are tried by some individuals, some new habits become more regular, which may solve one problem – survival – but may induce others that become terminal. Natural selection works on the individual and does not have foresight, nor does it always and inevitably ‘progress’ (former sea creatures can evolve into land creatures, and much later return to the sea).

Hominids that failed to adapt to the growing nutrition needs of a growing brain, remained with smaller brains, lived for a million years or more as a species and then died out as the environment changed or bigger brained hominids out competed them. Has Nitish actually read Darwin? Does he understand Darwin’s theory of natural selection? He hasn’t read Smith and I suspect he hasn’t read Darwin either.]

5. Accounting standards have evolved more over a period of natural selection and due process (Darwin).

[Economic behaviour has also evolved over long periods. Exchange behaviours did not suddenly turn into bargaining behaviour. They went through a series of changes from ‘gift behaviour’, through voluntary reciprocation (the ‘quasi-bargain’), reciprocation enforced by sanctions, to bargaining proper (‘If you give me X then I will give you ‘Y’ – or the simultaneous exchange). This process is no different than that of ‘accounting standards’, except that the evolution of bargaining took much longer, measured in millions of years, not just millennia – has Nitish ever read any anthropology?]

Nitish's items 6 thru 7 and 8 are meaningless. I said his article was ‘witty’ but perhaps it was more ‘clever’ than witty, but its cleverness was more entertaining than instructive.

[Disclaimer: the Gersham, Lehrman Group disclaim any responsibility for the contents of its authors' articles]

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