Monday, August 11, 2014

MORE ON INTENDED AND UNINTENDED CONSEQUENCES

LORRIE GOLDSTEIN writes (10 August) for Sun News (Canada) HERE
This is from a longer article detailing the financial policies of a government in Canada and quite devastating it is as a critique of general government debt waste (a common enough feature of many countries, including all post-war governments in the UK).  However, follow the link to read it and judge for yourself.
My interest is from a section of it quoting from Peter Foster, a very talented journalist’s, new book, Why We Bite the Invisible Hand - the Psychology of Anti-Capitalism”.  I read Peter Foster’s book some weeks ago and found much to commend it and I intend to comment on it soon, both favourably in respect of those parts I agree with, and less favourably on those I disagree with.
First read this extract from the Sun News by Lorrie Goldstein, quoting from Peter Foster’s “Why We Bite the Invisible Hand - The Psychology of Anti-Capitalism”:
“The "invisible hand" is a reference to Adam Smith's famous description of the merits of capitalism in The Wealth of Nations.
As Smith wrote: "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest ... By directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. …”… Foster provides the perfect quotation to illustrate this attitude, which comes from a 1959 book, The Failure of the ‘New Economics' by journalist Henry Hazlitt:"The people who have earned money are too shortsighted, hysterical, rapacious and idiotic to be trusted to invest it themselves. The money must be seized from them by politicians, who will invest it with almost perfect foresight and complete disinterestedness (as illustrated, for example, by the economic planners of Soviet Russia). For people who are risking their own money will of course risk it foolishly and recklessly, whereas politicians and bureaucrats who are risking other people's money will do so only with the greatest care and after long and profound study. Naturally, the businessmen who have earned the money have shown that they have no foresight; but the politicians who haven't earned the money will exhibit almost perfect foresight. The businessmen ... whose success depends upon the degree to which they satisfy consumers, will of course have no concern for ‘the general social advantage'; but the politicians who keep themselves in power by conciliating pressure groups will of course have only concern for ‘the general social advantage.”
Comment
[Disclaimer: Lost Legacy does not express views on the politics of any country other than the one I Vote in, which is Scotland.]
Smith’s “butcher, the brewer, or the baker” parable in WN Book 1: pp 26-7) says nothing about his single use, 430 pages later, of the now famous metaphor of an invisible hand (Book IV: p 456) and is on a different subject.
The “butcher, brewer and baker” reference is about how people in markets bargain with each other to seek what they want to buy or sell and advises readers to address the other parties’ self-interests by persuading them that by selling/buying the ingredients of their dinner is of benefit the other party.  Smith cautions buyers/sellers not to talk of their own necessities but to address of the self-interests of the orther party.
The metaphor of an “invisible-hand’ is about the unseen, hidden motives of a merchant, who is concerned about the security of his capital if it is sent abroad, and thereby out of his sight and control and exposed to losses with fewer chances of redress from those involved in the jurisdiction of a distant foreign country (mentioned by Smith four times).  Therefore, said merchant is likely to be motivated to prefer to invest his capital domestically.  He is guided by his motive of avoiding the risks of foreign trade to take the action to invest locally.  His motives leads him to an action that has an intended consequence (the security of his capital). That outcome also may have unintended consequences: his investment arithmetically adds to domestic “revenue and employment”, judged by Smith, “frequently” to be a “public good”. This consequential outcome was “no part of his intention”.
The use of the metaphor of “an invisible hand” is an and example of what metaphors do in English as Smith understood and taught about them in the 18th century, specifically: “to describe in a more striking and interesting manner” their “object” (see Adam Smith, 1762-3: “Lectures on Rhetoric and Belles Lettres” p. 29).  By their “object” Smith meant what the metaphor describes, in this case, clearly, he referx to the motives of the merchant that lead him to his intended consequence of protecting his invested capital from the risks of handing it over to foreign traders beyond the merchant’s security of ensuring redress if they misuse it.  The merchant has more faith in getting redress locally than in a foreign country.
The invisible hand is not about the unintended consequences of the merchant’s intended actions, though that is how the metaphor has been corrupted by modern economists to mean. It is about the intended consequence of the action which has unintended consequences. Sometimes this becomes a general ‘mystical” even “miraculous” (theological?) force operating in a market economy (yet Smith’s other use of the IH metaphor in his ‘Theory of Moral Sentiments’ refers to an agricultural economy).  

Neither paragraph quoted singly or together say what is claimed for them and Lorrie Goldstein is quite wrong to imply that they do.  I do not blame Lorrie for this error; I have seen the same claimed linking made by leading economists and by journalists who rely upon them.  There are  also references to extentions of the initial error by claiming there is a sub-category of  “invisible-hand explanations” - nothing to do with Adam Smith.  

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