Friday, June 28, 2013

Credulity and the "Invisible Hand"

“James Grant on CNBC: 'Adam Smith's Invisible Hand' Will Prevail in the End  HERE
Adam Smith's Invisible Hand”
“Grant argued on CNBC that Adam Smith's "invisible hand," or natural market forces, will inevitably prevail in relation to asset prices despite the near constant intervention and price manipulation employed by the Federal Reserve ever since the financial crisis.
The risk is that Adam Smith's "invisible hand" will reassert itself, and central bank intervention and manipulation will eventually unleash devastating unintended consequences.”
Adam Smith said nothing about the Invisible-Hand metaphor being about  “natural market forces” – he never mentioned the two together. 
James Grant is copying what most modern economists say because earlier in the post-WWII, modern era (from 1948 to be precise) the connection between Adam Smith’s use of the IH metaphor and the (perfect) market was invented, primarily by Paul Samuelson.
Note how James Grant also extends Smith’s meaning, having repeated what he may have learned innocently: “Adam Smith's "invisible hand" will reassert itself” and “will eventually unleash devastating unintended consequences” as if the “invisible hand” is some sort of a mysterious conscious entity, or even the “hand of god” like many 18th-century preachers and theologians believed.
Moreover, note how James Grant reverses Adam Smith’s meaning that the individual risk-averse motives of some, but not all (the majority invest locally for a multitude of other reasons), merchants who acted in a specific way to protect themselves, that is Smith used the IH metaphor to "describe in a more striking and more interesting manner" (Smith, "Lectures in Rhetoric and Belles Lettres", 1762) the risk-averse cause of their actions of investing locally in “domestic industry”, rather than risking sending his capital abroad in “foreign trade.  The result of such actions had “unintended consequences”, specifically, by their actions they added to investment in “domestic industry”, which was a “public benefit” (in modern terms a larger GNP implies better outcomes for the domestic economy for more consumers). Note, Smith implies that those merchants who take the risks inherent in foreign trade reduce potential GDP domestic value-added by the amount they send abroad.  The IH metaphor refers to the causes of the risk-averse actions (using modern terminology), that is, it was not a metaphor for the consequences of their actions! The consequences came later - and they were unintended.
But what does James Grant misuse of the “Adam Smith's invisible-hand” do other than reverse the relationship between motives, actions and consequences?  He states that the “invisible hand” causes its consequences, in this case, namely it will “eventually unleash devastating unintended consequences”, because the IH will punishes transgressors! 
I see here more than a hint of 'a jealous God' in James Grant’s formulation.  He is more like an angry Old Testament prophet of doom, threatening future punishments by a mystic force, not a God, but an “invisible hand” of a mysterious invisible entity. 
Come to think of it, that is precisely what pagan Romans (and ancient Greeks before them) believed about the very visible stone statue of Jupiter on the Capitoline Hill of Rome.  It was supposed to remind all credulous citizens that the all pervasive Jupiter, King of the Invisible Gods, would strike down with his thunderbolts fired from his invisible finger on his invisible hand anyone threatening the Roman Emperor! What else did they believe about lightning strikes other than Jupiter punishing someone? Some Emperors produced coins with images of Jupiter's thunderbolts on them, especially to remind those citizens living in the distant reaches of the Empire far from the City of Rome and sight of the glowering face of the stone Jupiter.  
James Grant likewise produces images in the minds of credulous readers who ignore the risks of visible price price movements.  Prices, unlike motives, are visible, so why does anybody need an invisible entity?
Just how credulous is James Grant - and his readers?


Blogger airth10 said...

Grant is quite the evangelist.

10:19 am  
Blogger Gavin Kennedy said...

Thanks airth10
What do your know of Grant?

5:44 pm  
Blogger airth10 said...

All I know about Grant is what I have heard from him on CMBC and I think for the most part he is wrong about the Fed's intervention. He is a typical non-interventionist. And I agree with you that Smith's 'invisible hand' has nothing to do with how things turns out, as he supposes. (Ironically, Smith was for government intervention when necessary. Grant is being a cherry picker with Smith's ideas.)

However, I would not lump Paul Samuelson with this questionable Grant character, who is just a showman and who has contributed nothing significant to economic theory.

6:55 pm  
Blogger Gavin Kennedy said...

Thank you.
I took Grant solely by the contents of his piece, as I had nothing known about his background.
He appears to be shallow in his piece.
Still, in so far as his ideas are derivative, he may still have influence with his viewers, listeners, readers, which probably encourages him and his employers.
Opinions formers come in all guises.

5:08 am  

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