Saturday, March 30, 2013

A Video on the Birth of Economics

Lawrence Reed (7 March) “Adam Smith and the Birth of Economics” (video lecture) at the Foundation of Economic Education. View it HERE: 
Invisible Hand” is a “term coined by Adam Smith that refers to the self-ordering process of the free market. As individuals work to fulfill their own goals, there appears order out of the multitude of individual plans. This is possible because, where property rights are secure and the rule of law prevails, individuals have incentives to trade and cooperate in a manner which benefits all parties involved.
Smith insisted on the importance of property rights under the laws of justice (which also potentially protected individuals from the miss-behaviour of those they live amongst).   Individuals who trade with each other by exchanging some of what they have for some other things that they prefer, with other individuals, positively benefit from such exchanges.  Both are made better off from exchanging; it is a non-zero sum game.  
Smith described this as bargaining by formulating proposed exchanges as: “give me this that I want and I shall give that which you want”, the universal (If-then) conditional proposal.  Agreed settlement exchange may emerge by the successive specification of stated offers and wants, which both parties may agree to after one or more mutual conditional proposals are made and considered, until one proposal is accepted by both of them, or they break off and find another trading partner.
Both parties benefit from the acceptance of the terms of the final proposed exchange because they would normally only agree to any specific exchange if it made them individually better off than before an exchange took place (though whether they are equally better off is not of relevance – they cannot read each other’s minds and individual perceptions cannot be measured).
Whether the outcome is a “self-ordering process” is not decisive, especially if by this is meant that there is only one, unique, exchange outcome that “benefits parties involved”.   Individuals may reject terms that are accepted by other pairs. There may be several possible outcomes among pairs of bargainers.  There is no single bargained outcome likely between all pairs of negotiators in the real world, though there may be one in an imagined General Equilibrium.  The real world does not conform to the imaginary conditions of mathematical equilibrium.  We know this because the assumptions of GE have never existed, yet.
The “invisible hand” was not “coined by Adam Smith to “refer to the self-ordering process of the free market”.  He didn’t ‘coin’ the IH metaphor. It was well known and regularly used in the 17th and 18th centuries, manly among theological preachers to refer to the “hand of God”, who was “invisible” and given to miraculous and mysterious powers. It was also used by poets, playwrights, novelists and politicians long before it was used only twice by Adam Smith and Smith never used the IH metaphor in any relationship to “free markets”, which were also fictional, even fabled, because they have not existed, anywhere, except as special theoretical cases in economic theories.
This does not detract from the excellent educational work of FEE. 
[Apologies: my original link to FEE was incorrect; the above new link worked today at 5.50pm BST, 31 March.]


Blogger Gavin Kennedy said...

A reader of Lost Legacy wrote to me reporting that on the original of this post, I had “confused the current leader of FEE, Lawrence Reed, with its founder, Leonard Read”, for which correction I was grateful.
Errors must always be acknowledged and corrected once an author becomes aware of them.
Hence, I deleted my references in the original post (late last night) to Lawrence Reed and Leonard Read, and for those who read the post earlier, I am acknowledging my error at the first opportunity this afternoon (having attended a family Easter lunch).
I am always grateful for readers pointing out errors of fact, and I always post corrections when I become aware of them.
Differences of opinion are also posted without censorship by me on Lost Legacy.
Moderation applies to posts purporting to be about subjects discussed, even those in praise of Lost Legacy, but I always exercise the deletion option whenever they contain subtle or open advertising of products or services unrelated to this Blog’s purpose, especially, but not only, those emanating from what is euphemistically known as the “sex industry”.

4:38 pm  

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