Monday, July 16, 2012

Why It Matters

Leo W. Gerard, International President, United Steelworkers, writes in Huffington Post (16 July) HERE 
Casper the Friendly Ghost Can't Control Wall Street”
 “Bankers love to recount the fabled story of the invisible hand. In their version, the superhero Invisible Hand effectively controls the market, thoroughly trust-busting and fraud-forestalling. Everyone lives happily ever after.
Truth be told, however, the tale of the invisible hand is a horror story. The invisible hand fails miserably to constrain bankster racketeering. It didn't prevent the market crash in 2008. The ending to that sad saga is recession.
Expecting an invisible hand to control the market is believing in fantasy. It is depending on the ethereal digits of Casper the Friendly Ghost to stop bid-rigging, price-fixing, self-dealing banksters. Casper's airy little fist packed no wallop when it came to impeding high-risk betting on Wall Street, the LIBOR lending rate manipulation or the disappearance of client money at MFGlobal. There's a much better way than Casper to catch a bankster: pay them to turn each other in.”
I am often asked by fellow economists, in reaction to my insistence on the recognition that the modern invention of the myth of Adam Smith’s so-called” invisible hand of the market” is totally unfounded in his main Works, Moral Sentiments, 1759, and Wealth Of Nations, 1776: “why make a fuss about a harmless piece of rhetoric about the benefits of markets over state controls?”  “Who is interested” they ask, “in the obscure wording of history?” I have even been accused of spoiling the “romance” of a fantastic idea about “unintentional consequences”.
Well, the above extract from a trade union leader, Leo W. Gerard, illustrates one consequence of purveying the so-called romance of the notion of an invisible hand.  It provides ammunition to avowed opponents of markets and exponents of ever-greater state regulation by people who have a poor (to put it mildly) record of managing economies, expressed in the extreme by the dismal performances of state socialism, not to mention the certain tyranny which accompanies such attempts.
History matters.  So does historical accuracy.
There is no “invisible hand” operating as an entity in the economy.  It does not exist. It never has. Smith used “an invisible hand” as a metaphor. Once in each book, and neither referred to markets.
Modern economists have given the metaphor a status as an existing force.  Their allusions come back to haunt them in public debate.  Worse, they become weapons to imbalance the delicate relationship of ‘competitive markets where possible, the state where necessary’.


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