GOVERNOR OF THE BANK OF JAPAN MISUNDERSTANDS MARKETS AND BLAMES THE INNOCENT ADAM SMITH
Jacob M. Schlesinger writinging (26 July) in ‘Real Time Economics’ in The Wall Street Journal HERE
“Kuroda Urges ‘Visible Hand’ to Raise Japan Wages”
“During Japan’s long, debilitating bout with deflation, basic market mechanisms broke down.
Fixing the machinery requires more than the traditional stimulus policies deployed to pump up growth, says Haruhiko Kuroda.
“A ‘visible hand,’ is necessary” in particular to prod companies to lift worker pay, a crucial element for sustainable growth, the Bank of Japan governor declared in a weekend speech at the Federal Reserve’s annual Jackson Hole, Wyo. symposium.
Mr. Kuroda certainly isn’t the first central banker to discuss alternatives to Adam Smith’s “invisible hand” of the free market. During the emergency response to the 2008 financial crisis, the Fed and others smashed any number of taboos. …
In conventional “invisible hand” logic, prices are dictated by supply and demand. In the labor market, that means falling unemployment should force companies to raise wages to secure workers as they become more scarce. In the U.S., Ms. Yellen is focused on maintaining an easy monetary policy to reduce the persistent “slack” in the job market, on the assumption that once the slack disappears, wages will then naturally rise. …
And he suggests the Bank of Japan’s 2% inflation target become that “visible hand,” the benchmark framing labor negotiations. Management and unions should set wages around the assumption that the BOJ meets its target, which, of course, would in turn make it easier for the BOJ to hit that target in a sustainable manner.”
When senior international bankers regularly chase a phantom illusion about “Adam Smith’s invisible hands”, we don’t have to look far for the causes of problems in the economies they think they are, or ought to be, managing.
Even the notion that “conventional invisible hand logic” (whatever that means), behind supply and demand, which together dictate prices is a weird way to describe the role of prices in markets.
No market can function without VISIBLE prices. No EXHANGE of GIFTS, reciprocated FAVOURS OR SOCIAL OBLIGATIONS, can function without mutually understood (often cumbersome) social conventions of RECIPROCITY, no human society has ever functioned without the human disposition to EXCHANGE.
Modern commercial markets using VISIBLE PRICES are the most EFFICIENT manifestation of THE HUMAN PROCLIVITY for EXCHANGE, compared to all their social predecessors (see anthropology, archeology, sociology, and other social sciences).
So where does Smith’s use the metaphor of an “invisible hand” fit into Haruhiko Kuroda’s, a governor of the Bank of Japan no less, thinking about markets? What does this mysterious entity do? Where did it come from? What is it describing?
As Adam Smith NEVER said anything about “an invisible hand” of markets (in fact his first reference to the metaphor of “an invisible hand” was applied to a non-market economy (Adam Smith: Theory of Moral Sentiments, 1759).
His second use of the “invisible hand” metaphor described “in a striking and more interesting manner” (Adam Smith: Lectures on Rhetoric and Belles Lettres, 1762) the risk-averse motivations of a merchant deciding to invest his capital locally rather than risk his capital abroad (Adam Smith: Wealth Of Nations, 1776).
Moreover, in a pothumously published essay he used the “invisible hand” to describe the pagan, pusilanimous superstitions of Roman citizens about their imagined, stone-god Jupiter, whom they believed fired thunderbolts from his finger at enemies of Rome during wild storms - hence they were motivated to stay indoors during such storms (Adam Smith, History of Astronomy, 1795, posthumous).
I respectfully suggest that Haruhiko Kuroda re-visits both basic economics ON THE ROLE OF PRICES and the history of economic thought ON THE MYTH OF AN "INVISIBLE".