Monday, May 10, 2010

Once More With Feeling

‘niftynei’ writes the Scribblings Blog (HERE):

“Book Review: Predictably Irrational”

‘Definitely a must read for anyone interested in buying a house, starting a bank, creating a pricing scheme for a product set, or just understanding the idiocy of our current economic dogma. Dan Ariely explains in everyday (if not too everyday sometimes) language how and why we as consumers are NOT in fact rational consumers that obey Adam Smith's invisible hand, but rather irrational beings that merely like to think that we are logical. The rational model of economics is, really, nothing more than an optimists view of reality: the actual rules of reality, Ariely shows, are a far cry from what we would have ourselves believe them to be.

Typical comment from those who buy the modern myth of Adam Smith’s invisible hand.

It does not even correspond to what Adam Smith wrote about the invisible hand in Wealth Of Nations, which ‘niftynei’ would realize if he read the single reference to the metaphor (Book IV, chapter 2, paragraphs 1-9).

Smith made no statements about ‘rational’ consumers ‘obeying the invisible hand’. In fact, his point about the metaphor of the invisible hand had nothing to do with consumers, or markets, or so-called rational consumers.

He referred to some – BUT NOT ALL – merchant traders who preferred to invest locally in their own country rather than engage in foreign trade because of the additional risks of sending their capital abroad. He used the metaphor of an invisible hand to reinforce what he had explained in the 8 paragraphs before he mentioned ‘an invisible hand’ as a metaphor fin paragraph 9.

Those merchants who invested locally were ‘led by an invisible hand’ metaphorically to express in a ‘more striking and interesting manner’ what they insecurity led them to do. That is the role of a metaphor, according to Adam Smith’s Lectures on Rhetoric and Belles Lettres (given at Glasgow University 1762-3, p 29). He delivered his lectures on rhetoric regularly between 1748-1763 and showed that metaphors describe their ‘object’ in a ‘more striking and interesting manner’. The invisible hand was a metaphor, not a noun – there was no invisible hand compelling anybody.

The other merchants, who were less risk-averse, clearly were not ‘led by an invisible hand’, because they invested abroad instead. Both sets of merchants behaved according to their tolerance for risks.

The consequence of the risk-averse merchants from their investing locally was a larger local annual output than would otherwise occur if they overcome their ‘insecurity. The arithmetic rule of ‘the whole is the sum of its parts’ fully explains this consequence.

The notion that Smith wrote what is claimed for him about the invisible hand is a wholly invented myth from the 1950s. He was not a believe in Homo economics, rational consumer or slave to the metaphor.

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