Tuesday, October 20, 2009

From a Multitude of Epigones

Tom Slater writes (19 October) in GreenBeat (HERE)

Cap and Trade 101: For those who haven’t been following for the last 30 years

“This approach to regulation applies ye olde economist Adam Smith’s theory of the “invisible hand” (the power of the free market, essentially) to curtail pollution with less human intervention and at a lower cost. As is, California spends close to $500 billion annually regulating businesses’ emissions. The U.S. is trying to avoid this on a national level. But the idea of cap-and-trade can’t be traced all the way back to Smith. Instead, it began with a 1960s-era supercomputer.”

“Adam Smith’s theory of the “invisible hand” (the power of the free market, essentially)” compromises the rest of Tom Slater’s interesting article.

I am less concerned with the errors in Tom’s attribution to Adam Smith of the myths about the metaphor of the “invisible hand” than I am with the effect of the continual repetition of the attributed myth in all sorts of contexts.

The real culprits for the myth are those modern economists (from the 1950s onwards) who grabbed it from “ye olde economist” and applied it to their theories of general equilibrium in solving a problem – is a market equilibrium theoretically possible? – or who adopted it to give an unnecessary mystical credence to the manifest superiority of markets, under liberty and the rule of law, over the then competing claims of Soviet planned economies and the visibly repressive political structures associated with their operation.

The intentions were perfectly honourable and, I believe acceptable, but markets are well understood and do not need ‘miracles’ of mystical “invisible hands”, which nobody has ever explained how these “invisible hands” work, and often attribute different meanings to them – some say variously that the invisible hand is (a small selection from a larger list):

“supply and demand”,
“the power of free markets”,
“coordination out of autonomous decisions”,
a “theorem at the root of economic liberalism”,
“market competition”,
“the market process at work”,
“market forces”,
“consumer satisfaction”,
“maximised profit”,
“free competition”,
“foundation of modern welfare economics”,
“the price system”
“great idea of intellectual history”,
“the purchases or sales of goods or services for money”
“ a force inherent to the market”
“inevitably pilots the economy”

There are honourable doubters too, who assert that the metaphor has been misused by economists, though they are fewer in number than those who have bought into the myth.

Recently, of course, several new voices of dissent emerged in response to the current financial crisis, allegedly caused by adhering to the myth of the invisible hand as a perfectly natural corrector of market variations.

Already, as financial institutions steady their balance sheets, some of these recent “converts” are retracing their steps back to the myth, under the familiar truth that “the markets are self-correcting”.

Markets are strong enough to ‘self-correct’ but that has always been true, without any recourse to “invisible” body parts. It’s not the undoubted resilience of markets that is in dispute; it’s whether the invisible appendage ought to be invoked and attributed to the wholly innocent Adam Smith by a profession that claims to be a harder science than theology.



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