Monday, January 31, 2011

Being Mostly Right Is Better Than Being Mostly Wrong

In today’s “Article Cube” (HERE):

“Is free market capitalism actually practiced in the United States today still alive or is it now just a product of our imagination?

Let’s analyze the facts and see for ourselves.

Americans have traditionally believed that the "invisible hand of the market" means that capitalism will benefit us all without requiring any oversight. However, the man (i.e. Adam Smith) who came up with the idea of the invisible hand did not believe in a magically benevolent market which operates for the benefit of all without any checks and balances:

Smith railed against monopolies and the political influence that accompanies economic power...

Smith worried about the encroachment of government on economic activity, but his concerns were directed at least as much toward parish councils, church wardens, big corporations, guilds and religious institutions as to the national government; these institutions were part and parcel of 18th-century government...

Smith was sometimes tolerant of government intervention, 'especially when the object is to reduce poverty. Smith passionately argued, ''When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favor of the masters.'' He saw a tacit conspiracy on the part of employers ''always and everywhere'' to keep wages as low as possible.

Yes….Adam Smith may have been the father of free-market economics, but he argued that bank regulation was as necessary as fire codes on urban buildings, and called for a ban on high-risk, high-interest lending, the 18th-century version of subprime.

The article is mostly right about Smith – clearly its author has read Wealth Of Nations and is welcome for that and is worthy of congratulations for getting Adam Smith so right.

The muddle about the invisible hand is unfortunate, so I would add my remarks below.

It wasn't Smith who was wrong about his use (only once in Wealth of Nations) of the invisible hand metaphor; those modern economists were wrong who attributed to him an invisible hand that applied to markets. This is myth.

Smith did not hold that the invisible hand guided or operated in markets; he used in a different context.

Among the first to assert the popular modern view of the metaphor was Paul Samuelson in his text-book, Economics (1948), from which all the 'beneficial' affects flowed. But, even Samuelson had to modify his claims in later editions.

For Smith, some merchants, but not all, avoided foreign and colonial trade because of the higher risks involved, therefore, they invested domestically instead, thus adding to domestic 'annual revenue and employment'. This arithmetic consequence had nothing to do with general equilibrium or the welfare theorems. Rama Cont should identify the real cultprit, Samuelson - Adam Smith was right; his claims were much more modest in that the whole is the sum of its parts.

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Blogger Jacob T. Levy said...

While you seem to have dug much more deeply into this than I have, I have doubts about your late dating of the spread of "invisible hand" as a shorthand for Smith's economic thought, or of its use out of proportion to the importance the metaphor actually had for Smith. I have open in front of me F.W Maitland's A Historical Sktech of Liberty and Equality, 1875, pp. 130-31, which treats it as already the general received wisdom that "invisible hand" and "natural harmony of economic interests" are the same idea, and takes the trouble to show that Smith's belief in them was more limited than was (already, in 1875) widely believed.

7:04 p.m.  
Blogger Gavin Kennedy said...

I have replied with my observation on your interesting comment as a main post immediately above this one.

It was too long for the comments. I you wish to reply to it, send to it "gavinK9 AT" (Take as much space as you like).


3:22 p.m.  
Blogger Mark de Zabaleta said...

Excellent article.

8:22 a.m.  

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