IF THE PREMISS IN INVALID, SO ARE THE CONCLUSIONS
Mohamed A. El-Erian, chief economic adviser at Allianz SE, chairman of Barack Obama's Global Development Council, the author of best-seller "When Markets Collide," posts HERE
“Adam Smith vs. Keynes and Minsky”
“Once again, it is Adam Smith versus John Maynard Keynes and Hyman Minsky in the financial marketplace. Smith is winning so far, but his further prospects depend less on his theory of self-enlightened individual behavior in the private sector than on the efficacy of guardrails that governments and central banks put in place.
According to Smith, the collective good is best served by the atomized behavior of rational individuals driven by self-interest. In maximizing their own needs, individuals also maximize the collective objective – a process that has self-reinforcing dynamics.”…
… “Contrary to Smith, Keynes and Minsky suggest that, in certain circumstances, what appears rational and beneficial for the individual may not be so for society as a whole. At some point, financial stability becomes too much of a good thing, because it encourages excessive and ultimately irresponsible risk taking by individuals and institutions. In the process, the economic system and, therefore, collective interest are threatened.” …
… “The prospects for Adam Smith in this contest depend on the proper use of these two tools, rather than on timely course adjustments by the private sector. I doubt that his disciples -- who believe the invisible hand of the marketplace and self-interested behavior of individuals will always move the economy in a robust direction -- will find this reality reassuring.”
I found Mohamed A. El-Erian’s short piece unsatisfactory in linking current market problems and its uncertainties to the widespread misbelief of many market players and modern economists, who transact according to what is alleged to be Adam Smith’s so-called “theory of self-enlightened individual behavior in the private sector”, the potential consequences of such beliefs are reasonably demonstrated by what happened after 2008.
If the basic premiss is wrong - Smith’s alleged belief in ‘self-enlightened individual behavior in the private sector” always leading to “collective good”, then there are likely to be problems with the meaning of “self-enlightened individual behavior”, as well as certain to be dissappointments when people rely on the false premiss.
Clipping words from complex arguments, compromises the reliability of the alleged premiss. We do not need philosophical arguments from Smith’s ‘Theory of Moral Sentiments’ (1759) or about Smith’s meaning of “self-interest” in ‘Wealth Of Nations’ (1776) in contexts where self-interested actions by individuals in their market relationships are always mediated by persuasion, haggles, higgles, and bargaining (see Wealth Of Nations, Book 1, chapter 2).
Two egotistical, self-interested bargainers are not able to simultaneously ‘maximise’ their own self-interests. Experience shows that individuals who insist of maximising their own self-interest at the expense of the self-interests of other parties, usually fail to agree on a potential agreement for a mutually beneficial exchange. Moreover, those who exclusively pursue their own self-interests often try to do so at the direct expense of the self-interests of others.
After all, this was Smith’s point about mercantile behaviours, such as imposing tariffs on imports to reduce competition and to raise domestic prices. His long Book IV of Wealth Of Nations consists of his very strong polemics against merchants who clamour the government for tariffs and total bans on imports. Clearly, in “maximizing their own needs”, individuals do not “maximize the collective objective”!
We come full circle when Mohamed A. El-Erian concludes on the basis of his doubtful presentation of Smith’s views: “I doubt that [Adam Smith’s] disciples -- who believe the invisible hand of the marketplace and self-interested behavior of individuals will always move the economy in a robust direction -- will find this reality reassuring.” Neither Adam Smith, nor I, believe in the so-called “invisible hand of the marketplace and self-interested behavior of individuals”, which is a wholly false characterisation of Adam Smith’s use of the “invisible hand” metaphor (scroll down through scores of my posts on Lost Legacy for analytical details).
Nobody needs to go to Keynes or Minsky for comfort on the basis of the false presentation of Smith’s ideas and their anachonistic application in the current crisis. Adam Smith is innocent of the charges made in Mohamed A. El-Erian’s article in “Blombergview” which misrepresentations Smith’s views though they are widely believed by modern economists.