Tuesday, June 08, 2010

Circular Arguments are No Argument

Ravi Nagarajan, a private investor, writes for Gurufocus news HERE:

Lowenstein’s ‘The End Of Wall Street’ Examines The Financial Crisis

‘While the quant wizards who came up with various permutations of synthetic CDOs did in fact “create nothing” of economic value (other than generating fees), traditional investment banking helps match investors with real companies making real products and employing real individuals. Investors who allocate capital to businesses are, in aggregate, a vital part of Adam Smith’s invisible hand. This brings about an interesting observation regarding value investing as a contrast to Gordon Gecko’s famous quote. Value investors, by allocating capital intelligently with a long term orientation, are in fact contributing to the well being of our economy. They obviously do so with self interest in mind, but in the process, optimize economic outcomes.

Yes, but Ravi, what exactly does the so-called ‘invisible hand’ actually do?

You offer a circular argument: ‘intelligent’ investors, acting on their ‘self-interest’, defined as taking a ‘long-term orientation’, contribute to the ‘well being of our economy’. Fine.

But what of the rest? What or Who guides them? Don’t they also act in their self-interest as they see it?

If they play no part in “Adam Smith’s invisible hand”, because their actions are overcome by the other players, not playing a part in the invisible hand, what relevance is there to the so-called invisible hand?

Do we only know about the invisible hand working after the players have acted and those who act in a certain manner have their actions retrospectively credited to the invisible hand, how may we describe their actions as being ‘led by an invisible hand’ (WN IV.ii.9: 456)?



Blogger Maxine Udall (girl economist) said...

Or as Keynes observed in Ch 12 of General Theory: "Finally, it is the long-term investor, he who most promotes the public interest, who will in practice come in for the most criticism, wherever investment funds are managed by committees or boards or banks...and if in the short-run he is unsuccessful, which is very likely, he will not receive much mercy."

Unfortunately, it seems that the "invisible hand" (as a metaphor for something unobserved and seemingly guided by human wants and impulses to achieve something socially benign) will be more likely to shove the long-term value investor out the investment bank's door in order to make room for the short-term investor whose willing to make a killing while the killing's good.

I wonder if a metaphorical hand can also be described as myopic? :-)

8:25 p.m.  
Blogger Gavin Kennedy said...


Good point. Sadly, all too true.

The City pages are full of press releases and adverts for quick-results, suggesting that clients are as impatient as some employers.


8:28 a.m.  

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