Wednesday, December 23, 2009

Myths and Reality

A Mr Jacob R. Freudenthal of New York writes to the Financial Times HERE

“The iron fist forcing though healthcare reform”

“I am not an economist, but I had always thought that capitalism was supposed to be based oncompetition and freedom of consumer choice. When a politically influential interest group is able to harness the power of the state in order to expand its stranglehold over an industry that is so essential to the health and wellbeing of the entire population, Adam Smith’s invisible hand looks more like an iron fist.

Comment
A typical ‘popular’ take on the metaphor of the invisible hand used by Adam Smith and by scores of others from classical times, particularly in the 17th-18th centuries, but also right up to modern times (even in a “Tarzan” novel).

I have seen a variation of the “Iron Fist” version in the form of “a middle finger” (I understand this is an allusion to a vulgar “street” sign given out by some incompletely-educated people today).

In this case, it’s about a row over a Health bill going through the US Senate, of which I have no views (I only comment on political issues in the country where I vote – Scotland).

I can comment on the remark about “capitalism was supposed to be based on competition and freedom of consumer choice”. This is a remarkable statement from Mr Jacob R. Freudenthal. On one abstract level he is right, but not in the sense that this view corresponds to any (to my knowledge) modern state-capitalist societies in the 20th-21st centuries. It could even be argued that no such ‘capitalist’ society has ever existed.

Adam Smith wrote a devastating critique of mercantile political economy and it’s state-commercial integration almost from the 16th century onwards.

Think of 18th-century legislation to regulate society, making it less competitive in practice – Statute of Apprentices; Settlement Acts; Navigation Acts; Corporate and Guilds Acts; Protection and Prohibitions; Primogeniture and Entails laws; Chartered Monopolies and Tariff policies.

Smith’s critique was not against all state legislation or even in favour of minimal legislation (another myth dince the 19th century); it was against legislators and those who influenced them who passed laws that perverted the effects of competition.

The point is that much of what was eventually repealed was replaced by new forms of anti-competitive measures. The USA is hardly a bastion of free trade, as can be said of most others. The ultimate case is that of agriculture, a standing disgrace that rich countries discriminate against some poor countries potential exports.

In all of this, of course, the metaphor (and myth) of “an invisible hand” is a diversion. It has no relevance to the issue of health supply. That’s down to politics, finance, and the electoral system.

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3 Comments:

Blogger Ian B said...

Having just found your blog...

I'm a bit perplexed as to why you seem to think the Invisible Hand is a "myth". It's simply the (surely reasonable) observation that the economy is self ordering due to the selfish actions of its agents.

That is, a selfish butcher sells me meat that I selfishly want for the best quality/price ratio I can find in the marketplace. Competition between individual self-interests leads to spontaneous order, as if an "Invisible hand" is guiding the market, when no such hand actually exists. Once the state intervenes, it destroys the invisible hand, as with manipulation of the healthcare market.

It is certainly the case that there is no free market in existence, but we have numerous examples of more and less free markets, and thus plenty of evidence that confirms Smith's invisible hand- the less regulated the market, the more ordered it is. The recent example of the state-run credit/housing loans market, which collapsed into chaos, shows the mess the state makes of things.

So I'm not sure what part of Smith's invisible hand is mythical. It's a simple, and correct, observation of how free markets (even if a perfectly free market is no more real than a perfectly circular circle) self organise.

9:39 p.m.  
Blogger Ian B said...

Having just found your blog...

I'm a bit perplexed as to why you seem to think the Invisible Hand is a "myth". It's simply the (surely reasonable) observation that the economy is self ordering due to the selfish actions of its agents.

That is, a selfish butcher sells me meat that I selfishly want for the best quality/price ratio I can find in the marketplace. Competition between individual self-interests leads to spontaneous order, as if an "Invisible hand" is guiding the market, when no such hand actually exists. Once the state intervenes, it destroys the invisible hand, as with manipulation of the healthcare market.

It is certainly the case that there is no free market in existence, but we have numerous examples of more and less free markets, and thus plenty of evidence that confirms Smith's invisible hand- the less regulated the market, the more ordered it is. The recent example of the state-run credit/housing loans market, which collapsed into chaos, shows the mess the state makes of things.

So I'm not sure what part of Smith's invisible hand is mythical. It's a simple, and correct, observation of how free markets (even if a perfectly free market is no more real than a perfectly circular circle) self organise.

9:39 p.m.  
Blogger Gavin Kennedy said...

Ian B

Thank you for your welcome comment. I regard it as rasing some important questions and deserving og an answer/explanation for why I regard the invisible hand as attributed to Adam Smith as a myth.

Other readers may be interested also, but miss the comments pages.

Therefore, I have replied on the main Blog page today.

Regards

Gavin

3:59 p.m.  

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