ANOTHER CANDIDATE FOR NONSENSE ON STILTS?

Dr Jones is a certified Osteopathic family physician.  He is interested in what works and has had plenty of experience with things that don’t. - See more at: HERE   posts on “Common Sence Medicine (key to resilient adaptation)” and HERE

“Economy and the ‘Invisible Hand’”

“A major part of all cultures is the economy—the work that people do and how they interact and trade. Our model, capitalism, has been very successful over the last four hundred years, but in order to succeed it too has evolved.

When Adam Smith first described capitalism he already saw that it changed and he proposed an “invisible hand” that guided it. Part of this guidance was provided by the “properly understood” clause that seemed always to be associated with “self interest”. Smith seemed to think that the invisible hand was provided by the morals of those participating.

In today’s marketplace, self-interest seems to have lost its constraining clause—greed is pronounced good. We have no problem using others for our own profit without their understanding or permission. Joe Stieglitz argues that the invisible hand has been killed by asymmetric information: where one side of an agreement has information not had by the other, which they use for their own gain. This puts a different spin on the invisible hand idea. We argue here that the choices of the informed consumer are the invisible hand that guides the marketplace.

This view is the basis of how we see capitalism evolving; if the invisible hand is going to guide us in the beneficial way that Smith saw, then we need to focus on increasing transparency wherever we can.

Comment

Almost a candidate for Lost Legacy’s ‘Nonsense on Stilts’ series.  Dr Jones clearly knows next to nothing about Adam Smith (but then I know nothing about Osteopathic medicine - and therefore I would not presume to offer advice about it).

T’is a pity he does not apply the same self-denying ordinance to his ideas on Adam Smith, who for one thing never “first described capitalism” - word definitely not invented in English until 1854 to describe a phenomenon of financial capital (Thackeray’s “Newcomes” novel). Nor did Adam Smith see that capitialsm “had changed and he proposed an “invisible hand” that guided it”.  This last is nearly a candidate for the award of a ‘Gold Leaved Cluster and Bar’.

Smith use of the metaphor of “an invisible hand” had nothing to do with “guiding” capitalism. Neither was it true that “Smith seemed to think that the invisible hand was provided by the morals of those participating”.

Dr. Jones says “We argue here that the choices of the informed consumer are the invisible hand that guides the marketplace.”  There is absolutely nothing invisible in what guides a market place.  Markets are guided by ALWAYS VISIBLE PRICES!  Moreover, they cannot work without VISIBLE prices.

The invisible hand metaphor refers to the hidden motivations of consumers and producers who operate in markets.  We cannot see into the minds of other people.  We can guess, assume, interpolate and deduce, but we can never be sure of the motivations of other people that cause them to to act.  

Now Adam Smith described metaphors as “describing in a more striking and interesting manner” their motivations (Lectures on Rhetoric and Belles Lettres, 1763).  They may be guided by what the regard as their self-interested actions by which they aim to achieve INTENDED consequences. But our intentions are not always realised and even if they are, our actions may also have UNINTENDED consequences.

Whether our intended consequences and /or their unintended consequences are beneficial to ourselves or to the wider populations affected by them can only be assessed on a case by case basis.  They cannot be assumed a priori to benefit the wider public, or even ourselves.

Neither did Smith “think that the invisible hand was provided by the morals of those participating”. Whatever this means, it is unrelated to anything Smith wrote, and he had a lot to say about the moral sentiments of people.

Dr Jones concludes that “We argue here that the choices of the informed consumer are the invisible hand that guides the marketplace.”

People’s choices in markets in the form of their hidden motivated actions react to price signals and are what markets are about.  There is no guiding principle beyond that.  Neither does it require a metaphoric “invisible hand” to describe what are disparate actions from disparately motivated individuals.  

Stiglitz recanted from his earlier belief in the “invisible hand” when he concluded that there is no “invisible hand” on 10 July 2010 (see him doing so on ‘You Tube”).