Saturday, February 06, 2010

A Wee Thought While For My Journey to Oz

It occurs to me in my new paper on the invisible hand, as it became in mid-20th century economics, that it is worth considering what happens after those merchants who are risk-averse to foreign trade and, in consequence, invest locally rather than take the greater risks (as perceived by them, but not all merchants - many do invest abroad, of course), which Adam Smith observed, benefitted the national economy (the whole is the sum of its parts), that the tale ought not to end there.

Modern economists generalise from the narrow case which Smith discusses in Wealth Of Nations (WN IV.ii.1-9) to make the bold - near heroic! - assertion that self-interested people end-up benefitting the public by acting on their self-interest. Milton Friedman (among many others) celebrated this assertion, supposedly attributed to Adam Smith.

However, consider the real consequences of a national policy of investing as much as possible domestically. True (absolutely true), the more merchants who invested in profitable projects domestically, the larger would be national output (and employment) on grounds of the 'whole is the sum of its parts'.

'Tis but a short step from such a conclusions for the same domestic merchants delivering their outputs locally for some of them (it only takes a few, even one) to realise that they can raise their profits yet more by curbing rival suppliers from competing in the same domestic markets.

One obvious target is foreign traders sending foreign outputs to doemstic markets - including those domstic marchants who exported abroad and returned with foreign goods to sell domesticlaly. Of domestic merchants, confined to the domestic market, having been 'led by an invisible hand', the temptation to go for retrictive tariffs and outright protection by prohibition must become real.

So, being led by an invisible hand to forego profitable trade with foreigners (Smith's narrow example), they are likely to promote protectionism, to narrow the competition for local consumers by widening the market for domestic merchants.

The question occurs to me: are they led by an invisible hand to take this step?

We can ask ourselves: which group of merchants usually prefer tariffs and prohibitions against foreign traders? Which lobbies their legislators and those who influence them to this end? Is it the domestic merchants primarily, or is it those merchants who invest in foreign trade?

I conclude (for short), that the merchants engaged in domestic trade only (driven by their risk aversion from foreign trade) are the most likely proponents of tariffs and prohibitions on imports, and not the less risk averse domestic merchants who do engage in foreign trade.

As there is unlikely to be an invisible hand at work leading domestic merchants to prefer tariffs and prohibitions (the latter also brought about by narrow national interests - 'jealousy of trade'), which must make the general interpretation of the doctrine of invisible hands, as a special, limited, and partial phenomena. Smith, of course, knew this, and he also knew he was not making a general recommendation against foreign trade. Modern economists, 200 years on, ought to know this too.

What went wrong?

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5 Comments:

Blogger Tom Hickey said...

Brilliant. Have a great trip and happy seventieth. I celebrated mine last June.

3:50 pm  
Blogger Lammert said...

The Economic Fractal's Second Modest Proposal: The IRDC US Political Party

The IRDC Super Party: The Independent Republican Democrat Centrist Super Party

The global monetary-banking-financial system that forms the basis for possibilities of reasonably fair and socially beneficial economic growth is .... simply ... broken.

The self designated defacto fixers of that broken system are in fact both the principal causal elements of the broken system and the members and beneficiaries of the current broken system.
With the old system's failed and bad rules enforced by its current principal beneficiaries, the broken system will never be fixed.

There will only be more disproportional rewards for the owner of the broken system: the self acknowledged too big to fail financial industry.

Kindly consider this. The rewards and benefits of the members of the financial cartel are in reality much greater than the often quoted nominal 2009 over 2007 gains. That 2009 purchasing power of the cartel's members' earnings is denominated in surviving dollars in an environment of a 20 percent reduction in US citizen net household wealth over the last 30 months and a 5-6 percent increase in unemployment that reduces the demand side cost of wages. Real estate can now be purchased for both 15 percent less and with lower interest rates.

(The leveraged damage done to US citizens are relatively greater than other world citizens and their fiat currencies... any questions regarding a rising dollar relative to other fiat currencies?)

Those 2009 dollars earned, but for congressional intervention and tax-payer re bankrolling, by a bankrupted financial industry, can now buy 20 percent more than in 2007 more and likely 30-40 percent more later in 2010.

The Financial Industry members have made out like the bandits they are.

Cicero two millennium later speaks: Res ipse loquitor....

What would be a sine qua non metric target for a successful stable fair real economy? One possibility would be a working citizen benefited monetary financial system where, for example, graduates going into an engineering careers or teaching careers earn more than graduates going into the financial industry.

With the owners of the monetary system firmly in control of congress, is there any possible hope for remedy?

Perhaps.

Perhaps it is time for the establishment of a coalition super party - the IRDC party.

The IRDC party, the Independent Republican Democrat Centrist party (the C could also represent Constitutionalists) likely already includes the philosophical, if not the I want to be re-elected - majority of US congress people.

The Centrist IRDC platform is simple. Create a fair economic system that values hard work and economic creation of useful real goods and services and conversely implements effective new rules which restricts private citizen or corporate wealth creation from manipulation of the monetary system.

Politicians could run either as an IRDC candidate, an independent, a republican, or a democrat supporting the centrist principal platform of restoring real fairness and worth to the economic system. After successful election republicans, democrats and independents who ran on their respective republican, democrat, and independent tickets and who supported the IRDC platform could then join a majority IRDC caucus and be a member of a majority party entitled to chairmanship of key committees.

Think about it. The IRDC Super Party - a great reckoning for Wall Street and the Wall Street run world.

The establishment of a Super Party Constitutional and Centrist majority offers the chance to begin anew with new rules and underlying new principles to engender fairness and a rationale allocation of wealth for the 21st century. (A drop in the bucket of time but so good for the world's grand children.)

10:53 pm  
Blogger Gavin Kennedy said...

Thanks Tom

I have no idea why Lammert thinks he can re-organise the whole world by design - a very unSmithian idea.

Gavin

12:17 am  
Blogger Jonathan said...

Since the Invisible Hand functions as consequence of human nature, it follows, indeed, that it pushes domestic merchants towards protectionism. This is yet another example of how neo-classical economics reified the analogy of the invisible hand into a fundamental principle. Smith, as an empiricist, was far too thoughtful to be a modern market fundamentalist.

6:35 pm  
Blogger Gavin Kennedy said...

Jonathan
I am glad that you agree - now if only others would too.

This is why my new paper fr the June HET conference at Richmond is taking the contest to the modern economists to clear up the mess that have made of Adam Smith's political economy, which we can live with, but it is really expensive socially when they create a set of policies, apply them to today, and we have to live with the consequences.

Gavin

11:31 pm  

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