Not Quite Right

I am often asked why I spend so much time on this Blog bashing away at the so-called idea of Adam Smith’s that “an invisible hand” of  “markets”, “supply and demand”, the “economy”, or whatever, so arranges the economy (“miraculously”) that people left free to arrange their capital in the way they choose in their “self-interest’ (even their “selfishness” claimed Paul Samuelson), will inevitably advance the “best interests” of the community.   No such entity exists.  The politics and moral conventions of society decide  how a society’s people behave.

Read this extract from the piece below by IMTIYAZ UL HAQ Sr. Assistant Professor in the Department of Economics, University of Kashmir, who writes in Greater Kashmir HERE  and note out why the Western myth of Adam Smith’s invisible hand is so pernicious, not just for disappointed Western voters said to be suffering from “austerity”, but for deeply impoverished poor people in much of the developing world, who really know what real austerity feels like.

“What ails J&K Economy: Do We Lack Resources, Big Investments or Sound Policies?”

“This write up is the outcome of recently held interactive session at the University of Kashmir between the big Indian business tycoons and the students of Kashmir University. The event was organised with the expectation that these industrialists can provide employment opportunities by way of placement of our students in various Indian companies and to explore investment opportunities in different sectors of the J&K economy to kick start the process of development and employment generation. However, what emerged out of this interaction was the reluctance of these industrialists to invest in an atmosphere of instability and unrest within the region. The condition that peace and stability is the prerequisite for producing a conducive environment for investments and economic development apparently seems to be a rational argument from the private sector viewpoint, but a preposterous preposition from the social standpoint. One cannot expect stability and peace to emerge unconditionally from a situation of social unrest, assuming the underlying cause being economic backwardness and mass unemployment. This implies getting trapped in a vicious circle. Now even if we make another assumption that the region somehow becomes stable and expect big investments to fillip up the process of growth and development; to what extent is this true? It all depends whether we are the believers of “trickle down” theory and expect Adam Smith’s “invisible hand” to play its role in promoting the social welfare. I can’t dare to challenge this idea; after all this principle is the underlying factor of all the advanced countries of the world. But surely in our circumstances one can observe that the so called invisible hand has either developed arthritis or has turned into ‘invisible handshake’. Business tycoons are always in search of profits. They are more concerned about their own gains than social welfare. And secondly, amidst inappropriate policies and weak institutional framework, the impact of private sector big investments would be to invite exclusive growth- nothing less than a social disaster. Under such a situation it primarily becomes the responsibility of the local government to frame appropriate development policies, keeping in view the regional specificities. As far as possible the development policies should be designed to provide a solution within the system itself before asking for any external help. This should not be viewed as a conservative approach in the era of globalisation. After all, preserving and strengthening the fundamentals of any economic region, before opening it up, is a sure recipe for achieving self- reliance and sustainable development...

IMTIYAZ UL HAQ goes on suggest that  “a comprehensive programme, by setting up separate and full-fledged institutions and departments producing professional and qualified personnel capable to handle all the potential sectors of our economy. After availing professional degrees in all these areas, [GK: that is expand Kashmir’s universities!] one should genuinely expect the business activities to get started with entrepreneurial spirit, manageable amounts of capital, and a minimum government concern.”   

Comment

IMTIYAZ UL HAQ is close to being on the right track, but also shows signs of straying from it.  He writes: “It all depends whether we are the believers of “trickle down” theory and expect Adam Smith’s “invisible hand” to play its role in promoting the social welfare. I can’t dare to challenge this idea; after all this principle is the underlying factor of all the advanced countries of the world.”

I suggest he acquires the academic courage to dare to “challenge” the “invisible hand” so-called “principle” which is a purely invented property of markets.  Quite rightly, governments are part of the problem, but so are invented notions like the “invisible hand”, imported into modern economics for quite another purpose than the use by Adam Smith of a 17-18^th century mainly theological metaphor.

I agree with him that social stability, the rule of law, and the widespread adherence to the precepts necessary for markets to function and even to achieve modest growth.  Governments and their departments are not very good at economics, especially when they try to run businesses through their agencies and over-burden them with regulations.  Governments can set the rues, enforce compliance through clear rules, but generally should get out of the way.  Entrepreneurs can play their roles of marshalling resources and people to produce competitively what people are willing to pay for.

However,  while I suspect that a university academic’s solution to growth problems is put forward with the best intentions, the expenditures required must come from taxation or government borrowing, or aid.   The “entrepreneurial spirit” gets going from a genuine freedom to do so.  There is no “invisible hand” awaiting release. And it didn’t come from Adam Smith in the form it is widely known as today. 

Even in the most desperate of circumstances, where state corruption, criminal gangs, and petty laws plague big and small entrepreneurs and their workers, as is common in the city slums of Asia, and in gangster corrupted capitalism, much entrepreneurial energy is found at work, if often “underground”, to keep ahead of government inspectors, gangsters, and the money-lenders.   Unleash that entrepreneurial force and apply the advice of “markets where possible, the state where necessary”, and stand back and stay back.    

For evidence just look at 20^th-century Hong Kong … and how the West really started in the 19^th-century. Sure, we had widespread slums to contend with, but without entrepreneurial-led markets, we would still be there in those slums in the 21^st century.