Thursday, November 29, 2012

A Claim from the 1980s in Mainstream Economics

“The Invisible Hand, 1980”
Dr. William Peterson, the Scott L. Probasco, Jr., Professor of Free Enterprise and director of the Center for Economic Education at the University of Tennessee at Chattanooga, posted in 1980 in the Foundation for Economic Education’s "The Freeman”, a stout defence of profit, much of which I would agree needs to be stated.  But look what he tags on to it – a gratuitous and unnecessary quotation on an entirely different subject from Adam Smith on how some, but not all merchants, concerned with the security of their capital if they sent it abroad in foreign trade and shipping were inclined to invest it in “domestic industry” instead, and how this addition to domestic capital added to the total of annual domestic “revenue and employment”. 
Dr Peterson writes:
“To be sure, repressing and decontrolling prices and then taxing “windfall” gains are done under the name of the public interest. But self-interest in a market system usually advances the public interest more than those who profess to serve the public interest (apart from their own inevitable personal interest). As Adam Smith observed, the individual “neither intends to promote the public interest nor knows how much he is promoting it . . . . By . . . directing (his) industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
Now, mindful that not all merchants invested locally from their concerns about the risks of foreign trade (and therefore not included in Smith’s singular example of “an invisible hand” in Wealth Of Nations) and most decidedly do not always “promote the public interest” as far as consumers – or other domestic merchants - are concerned.
Smith also questioned whether all domestic investment from merchants in their self-interests was necessarily “advantageous” to society, compared to some alternative configurations that different conceptions of their self-interests would have led them to invest in.  The answer depended on a whole host of factors and therefore it seems to me a stretch to make this an argument for all domestic investment being equally beneficial.   This strikes me as a bland assumption if no more than an unexplained single extract from a single paragraph is proclaimed as a general rule.  Adam Smith noted all over Wealth Of Nations,  for example, that self-interested merchants often persuaded the legislature to enhance their domestic profits by restricting competition through tariffs and prohibitions of foreign imports.  This was one of the major themes of Adam Smith’s “violent attack on the entire commercial system” then operating in Britain, as it had done for two or more centuries, in his critique of “mercantile political economy.”
This post was originally made in 1980 in the midst of the post-Samuelson explosion of multiple references to the invisible hand, supposedly “miraculously” at work in the market economy, though nobody can show this was Adam Smith’s “concept” nor, for that matter, how it worked.  Markets work through visible price signals, not theological superstitions of “Providence”,  “Divine” orders and “invisible” beings.  Markets reflect costs and profits. Mostly they are realized in markets, which have a singular advantage over state-managed command economies, which do not know of “market prices” or know the real economic cost of anything (there truly is 'No such thing as a free lunch',), and consequently they miss out on entrepreneurial discovery and the resultant benefits of a price-driven complex market economy.  


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