Sunday, November 30, 2014
Zacks Equity Research (‘Our research. Your success”) posts (28 November), “OPEC Says No to Production Cut: Crude Dips Below $70” HERE
“The decision against production cut by the OPEC members has added to the market woes related to the oversupply of crude. Moreover, with weak global demand we do not foresee any immediate rise in oil price.
But we are sure that the market will not allow the commodity price to remain low for ever as it is the invisible hand that will determine the right price of the commodity in the long run.”
A cartel controlling its members’ outputs crude oil, amounting to 40 per cent of world sales, sets their outputs for the immediate future and reqiires them to maintain their common unit oil prices in a falling market’s demand.
Competing shale gas industry’s products require high prices to justify both expensive exploration and supply and non-cartel members require to maintain their volumes.
Believers in the “invisible-hand” religion assert that the mysterious “hand” “will determine the right price of the commodity in the long run”.
How long is the “long run”? Presumably for as long as it takes for the crude price to remain, depending on how long it takes the crude cartel to fall apart, and/or for expensive shale gas to reduce its costs.
The proviso at the root of this analysis is “the market will not allow the commodity price to remain low for ever”.
Amazing insight! What erudition! What ‘research’ capability resides in Zacks! What nonsense is spoken about the “invisible hand”! How does it work its magic?
Markets work by visible prices and cannot work without them.
Thursday, November 27, 2014
IN PRAISE OF SMITHIAN SELF-INTEREST
Martin Cohen is editor of The Philosopher and author of Political Philosophy from Plato to Mao (2001, 2008). He posts (27 October) a review article on Stewart Sutherland’s “Greed: From Gordon Gekko to David Hume, (Haus) in (Times Higher Education HERE “Greed From Gordon Gekko to David Hume”
“Martin Cohen on a brief but powerful look at the history of avarice in society and what can be done to temper its more extreme elements”
“Haus [the Publisher] is to be congratulated for its courage in dusting off the political pamphlet format and publishing a series of essays, short enough to be read in one sitting, in the internet age. Where other publishers have sought to make their products bigger, glossier and more colourful, Haus has headed determinedly the other way. … I gave the approach a tasting via Stewart Sutherland’s mini-book, a whistle-stop tour of David Hume’s ideas about greed and its role in society, with a nod at those of Hume’s great friend, Adam Smith. There is very little reason for Gordon Gekko, the villain of the film Wall Street, to be here, other than that it seems to offer some contemporary relevance.
Hume’s view … is that the excessive pursuit of self-interest is damaging to society and should be discouraged. “Hume’s insight”, says Sutherland, “is that greed minimises the claims of others, and absolute greed minimises absolutely the claims of others – depriving them of their shared humanity, no less”. …
[Sutherland’s solution?]  …”through socialisation within a family” [and] “education” …  ”re-think the place of the education of the emotions” and [3 and “a shared language” to “break down the barriers in society that greed can put up”.
“But enough theory – what does Sutherland’s pamphlet actually propose by way of action?”
“Lord Sutherland is, as the publishers put it, “one of Britain’s most distinguished philosophers”, … and a pillar of the educational establishment, so … we should not expect his advice on social policy to be anything too radical. … “it turns out to be simply that income tax declarations should be made public” and “we can trace its philosophical origins back not to Hume but to Adam Smith, who speaks of society as holding a mirror up to the individual, which restrains our worst impulses – such as greed.”
I concur with the reviewer to a limited extent, but I agree more with Adam Smith’s insights into the dynamics of self-interested inter-actions, as he explained them, in both his Theory of Moral Sentiments (1759) and his Wealth Of Nations (1776).
If Lord Sutherland’s overall conclusion is that “income tax declarations” are an important part of resolving the problems created by “avarice in society”, then I am perplexed by the naivety of his assertion. I am also surprised, as I attended a lecture he gave in Edinburgh some years ago where he seemed to me to be more “switched on” to policy-making than implied in that limp suggestion.
There is more than a “nod at those [ideas] of Hume’s great friend, Adam Smith”. I think Smith’s contributions were far more elevated than covered in Lord Sutherland’s reported expression of them.
Smith said a person’s moral code is moulded from an early age by contact with others in society - mother’s particularly from the earliest age and other adults thereafter, and school-age children. He uses the metaphor of society’s “mirror” by which individuals learn about acceptable and unacceptable behaviours. Of course the moral qualities of the behaviours - so to speak in the “mirror’ - impress a range of behaviours in the specific society in which a child/adult learns to accept them as 'moral'.
A society of “robbers and murderers” will exude behaviours different from a society of ‘saints’. The former would operate according to a common rule that they do not rob or murder each other and the latter operate with a high degree of personal politeness and self-sacrificing generosity no matter how poor they were. Both societies, however, could resort to murder to bring back into line anyone tempted to persistently endangered the others, or to protect that society’s cohesion or continuation with serious dissent.
Overall, members of a society learn to conform to the great school of self-command”, wrote Smith. Once dissent-behaviours take root, the cohesion of a group in a society weakens. However, once an ethos self-reinforces the cohesion of the group, it settles the group’s morality until events, including unacceptable behaviours, disrupt it.
On equating ‘self-interest” with “selfishness” and “greed” - a common enough error among such as “Gordon Geko” - erroneous ideas take root. For Adam Smith, such errors are nowhere asserted or implied in his discussions of “self-interest”. He specifically discussed how two individuals behave who want something from each other and he specifically identifies the means by which they address their self-interests to obtain what they want from each other. He called it bargaining in Wealth Of Nations (WN I.ii.2: 26-7) and outlined it in Moral Sentiments (in several places) how they reconciled differences in views or aspirations using conversation and persuasion, primarily free from compulsion.
Self-interested agents can only achieve what they need or want by addressing the other’s needs and wants, not solely their own, and by showing them (and reminding themselves!) that both have to modify their own demands to serve sufficient of each other’s interests for them to agree on a mutually acceptable exchange of their “good offices”.
“Greed” is not a stable nor mutually cohesive strategy for serving one’s self-interests. Philosophical advocates of greed (such as Bernard Mandeville or Ayn Rand) sound smart to some readers and viewers only because cynical ‘sound bites’ appeal to certain juvenile audiences and to professional controversialists.
Tuesday, November 25, 2014
ALBERT O. HIRSCHMAN: A THINKING AND WORKING DEVELOPMENT ECONOMIST
AN EXCELLENT PAPER AND REVIEW OF ALBERT HIRSCHMAN 'S LIFE AND WORK HERE
"The Trespassing Thinker: Albert #Hirschman & #economic #development
Being a Consultant “Expert” in a Developing Country: the Legacy and Lessons of Albert Hirschman" Pier Giorgio Ardeni, Department of Economics, University of Bologna
After more than half a century, the reflections of Albert O. Hirschman on development assistance, the role of consultant “experts” in providing policy advice and the “visiting economist’s syndrome” are still very current. In as much as Hirschman argued against all-encompassing policy frameworks, overall development plans and universal models, “one-size-fits-all” models abstracting from the local, historical, geographic and institutional conditions have remained the prevailing modus operandi of international development agencies and governments in development assistance. In spite of Paul Krugman’s criticism of Hirschman’s lack of a mathematically-consistent approach in favour of an ad hoc pragmatism, Hirschman’s avoidance of assuming a toy model to deal with practical issues and the specificities of development problems in different countries – while still using rigorous and detailed analysis– appears to be a promising attitude of enormous relevance even today. If the rejection of large-scale models of the hey days of development theory was due to the neoliberal policy wave that led to the “Washington consensus” – more market and less State –, development assistance has remained firmly entrenched in the principles of balanced growth, all-encompassing liberalizing policy reforms and diffused marketization with an increasingly limited role for the State. Development assistance approaches have maintained a standard list of prescriptions, policy-reform recipes for all sectors, social, institutional and even political objectives, under the justification that “everything depends on everything”. In this paper, I briefly review the evidence regarding the active pursuit of a paradigm that, sidelining Hirschman’s unorthodox approach, has confirmed that we have “forgotten nothing and learned nothing”, as Hirschman once said. While Hirschmanian concepts like “linkages” and “leading sectors” and some of his famous parables – like the “tunnel effect” on inequality – have left an enduring mark on economists’ perspectives, his “unbalanced-growth” has been dismissed on ineffectual grounds, while his “empirical lantern” has been derided and abandoned. The lessons of Hirschman’s consultant experience in the tropics have left a legacy that goes beyond his prescriptions: it is a philosophy, a conception of the world, a guiding sets of principles that survives time. From that wilderness where Hirschman led his followers, it is only by re-igniting that lantern that we can wisely contribute to the “development” of others as savvy and informed “experts”.
[ Review by Beatriz Rodríguez-Satizábal is included in the NEP post - well worth reading - and subscribing]
• Adelman, J. (2013) Worldly Philosopher: The Odyssey of Albert O. Hirschman. Princeton, NJ: Princeton University Press.
• Hirschman, A. (1995) A Propensity to Self-subversion. Cambridge, MA: Harvard University Press.
• Hirschman, A. (1970) Exit, Voice, and Loyalty Responses to Decline in Firms, Organizations, and States. Cambridge, MA: Harvard University Press.
• Hirschman, A. (1958) The Strategy of Economic Development. New Haven, Yale University Press.
• Krugman, P. (1994) ‘The Fall and Rise of Development Economics’, pp. 39-58. In Rodwin, Ll. and Schon, D.L. (eds) Rethinking the Development Experience. Essays Provoked by the Work of Albert O. Hirschman. Washington, D.C.: The Brookings Institution.
THE ABOVE IS AN EXAMPLE OF THE HIGH QUALITY MATERIAL DISTRIBUTED ON NEP
BLOG (FOLLOW THE LINK HERE).
I WOULD RECOMMEND AND ADD TO THE ABOVE FURTHER READINGS,
HIRSCHMAN'S, 1977 EXCELLENT LONG (145 PAGES) ESSAY, "THE PASSIONS AND THE
INTERESTS: POLITICAL ARGUMENTS FOR CAPITALISM BEFORE ITS TRIUMPH",
PRINCETON UNIVERSITY PRESS.
[MEMO TO GRADUATE STUDENTS: If you can research and write as well as Hirschman does in
this essay, whatever your ideological stance on capitalism,you are assured publications, and more
important, more readers.]
A JESUIT ON THE CAUSES OF THE DESIGN OF ECONOMICS
James V. Schall SJ, posts (22 November) on aleteia (‘seekers of the truth’) HERE where he reviews John Mueller’s Redeeming Economics. He was a professor at Georgetown University for thirty-five years, and is one of the most prolific Catholic writers in America. . His most recent book is The Classical Moment: Selected Essays on Knowledge and Its Pleasures (St. Augustine Press, 2014).
“Economics—When the Truth Really Matters
“Not all theories cause wealth. Not all theories alleviate poverty”.
“When the Canadian Jesuit philosopher, Bernard Lonergan, grew older, he decided to turn his attention to economics. After a lifetime devoted to metaphysics, theology, and such esoteric topics, especially with his interest in the nature of the sciences, he looked at the “social” science that is said to be nearest to the “hard” sciences, like physics. That science is said to be one that most relies on mathematics, method, and empirical verification, to wit, economics. John Mueller’s Redeeming Economics takes up this quest in a new and systematic way. This book is a remarkable one that purports, with considerable evidence, to complete the overall nature of what economics really is.
Modern economics has not been an “exact” science because its theoretic presuppositions, as Mueller points out, did not allow it to be complete. …
… One of the major contributions of this book is its analysis of the domestic, intermediate, and political economy. Mueller’s attention to the domestic economy is particularly fine. What does go on in the home? Most of the important things, in fact. Jennifer Roback Morse, in her not-to-be-missed book, Love and Economics, had previously asked the question: “Why do not economists understand the home?” Basically, she said, because the household does not operate on the same principles that are implicit in utilitarian or stoic based economic theories that seek to explain it. Determinism, utility, and pleasure, though factors, are not the principles that explain life and community in any normal home. While there are elements of order, pleasure, and utility, there is also sacrifice, generosity, and gift that depend on human intelligence, virtue, and freedom. These elements explain the ultimate distribution of goods in a way that has been lacking to economists.”
CommentThere is much more in James V. Schall’s review of John Mueller’s “Redeeming Economics” (follow the link) but I focus on a few paragraphs Broadly, everything comes down to the perspective one would expect from a Jesuit, with a self-certain, theological explanation of everything. En passant we are told that “Adam Smith was a stoic”, a debatable assertion, as far as I am concerned, because it ignores the fact that Adam Smith, as a Professor of Moral Philosophy, was required to teach his students, and indirectly his readers, the views of the usual galaxy of historical figures in moral philosophy, much as I used to explain Karl Marx on ‘capital’ to my economics students, which decidedly did not make me a marxist.
Mueller, according to Schall, “completes the overall nature of what economics really is”, which broadly boild down to the projection of relations in “the family” onto the failings in an economy. This assertion relies on a rather idealistic version of the family in the history of humanity, whereas the ‘family’ in pre-history was far from the images of a wholesome man and wife, well cared for kids and protective parental influence and personal safety. Nor did it appear to get wildy different throughout written history. John Meuller rests his ‘basic principles of economics’ on scholastic authors, notably “Augustine and Aquinas”, on household deterministic economics: "We have to know first what we want or need, next how to produce it, then how to obtain it, and finally what to do with it after we get it, and finally what to do with it after we get it”.
Any notion that and societies or individuals work methodically through that sequence to ‘design’ an economy leaves out much that is formed, not by pre-design, but by dispersed individuals creating solutions to low level problems, which over long periods of time may lead to others tweaking earlier solutions with new solutions, some of which could be disastrous. Plainly, dispersed small societies did not consciously design any step in the processes by which they developed, any more than the various proto-human species consciously developed from the common ancestor of the chimpanzees though the loss of bodily hair, up-rigtht walking and running, reversible thumbs and the brain's complexity. There are always multiple ‘solutions’ to all changes in species of everything up to maximum variations.The economies of all human societies operate and change in myriad ways spontaneously without design. Variation is a universal feature. It is neither planned nor designed. Neither Augustine nor Aquinas knew that; they imagined an original designing entity wrapped in mystery with intention. If that gives comfort to members of the SJ, fair enough. The problems begin when those convinced of their own certainties try to impose their views on others.
James V. Schall asserts that “Not all theories cause wealth. Not all theories alleviate poverty.” I for one would observe that “theories” create nothing. The actions that follow from a theory (or a motive) are the essential elements in creating anything, including the unintentional consequences that follow from original intended consequences that motivated the original action. Some outcomes are beneficial in their ultimate consequences, other not so, as nature demonstrates in the multiplicity of life-forms present in nature.
Monday, November 24, 2014
ABSURD CLAIM THAT ADAM SMITH WAS A "DISTINGUISHED CATHOLIC" THEOLOGIAN
“Pope Francis’ American honeymoon is over.”
“At first, some political conservatives complained Francis was showing insufficient respect for distinguished Catholic theologians such as Adam Smith and Milton Friedman. But now, more thoughtful Catholic writers wonder if the pope is laying the groundwork for more substantive changes on the sacrament of marriage and access to the Eucharist for the divorced and remarried.”
Er, “distinguished Catholic theologians such as Adam Smith and Milton Friedman”!
Surely not! Whatever else Adam Smith is “distinguished” for it certainly was never as a “Catholic theologian”.
Where did this absurd idea come from? Whatever happened to the renowned ‘fact checkers’ of old-style, US journalism?
Adam Smith was born into a Protestant household on 5th June 1723, and, as was common with a sickly child, he was baptised immediately by the local Church Minister from the Presbyterian Church of Scotland in Kirkcaldy (St Brides). His mother, Margaret Douglas Smith, a very religious member, regularly attended the same Church. Adam was brought up, according to the practice, by Confirmation as a member of the Church at around 11 years of age. At age 67, Adam was buried in July 1790 in the Canongate Kirk Yard, High Street/Royal Mile, Edinburgh.
He remained a church-going member of the Calvinist Protestant Church while his mother was alive and maintained good relations with several famous preachers and scholars all his life. In Wealth Of Nations he devoted a critical chapter on Church government and practices, with several acerbic remarks about Catholic teachings and church behaviours.
In private, he became sceptical of the teachings of Christian ‘Revealed Religion’. His essay, History of Astronomy (1744-58), first published posthumously in 1795, includes a history of pagan religions and their imaginary explanations of the natural world. His writing of this essay prompted him to change his mind about continuing on the Ordination course for a Priesthood in the Church of England (Episcoplaian Church in Scotland) and he switched to the Juris degree course at Oxford University in August 1744. He was disciplined by his tutors for private reading David Hume’s ‘Treatise’, and he left Oxford in 1746 without graduating. Smith’s subsequent writings on religion reveal a latent alienation from Christian theology and behaviours.
I have written in considerable detail on these subjects: Kennedy: The Hidden Adam Smith in his Theology’, JHET. Septembe, 2011 and Kennedy, 2011. ’Adam Smith on Religion’, Chapter 11, Oxford Handbook of Adam Smith, eds. Berry, Paganelli, Smith, Oxford University Press.
As for Milton Friedman’s absurdly alleged ‘Catholicism’, surely Michael Gerson is having a laugh?
Wednesday, November 19, 2014
BEARING FALSE WITNESS NEVER BENEFITS LIBERTARIAN INTERESTS
"Adam Smith and Milton Friedman on an Invisible Hand"
Jadranko Brkic posts 18 SEPTEMBER on ‘SIP TV Freedom and Prosperity ’(libertarian network of alternative media in Western Balkans') HERE
"People who intend only to seek their own benefit are led by invisible hand to serve public interest which was no part of their intention." - Adam Smith
"People who intend only to serve public interest are led by invisible hand to private interest which was no part of their intention." - Milton Friedman
The statement attributed to Adam Smith is phoney, i.e., made up.
The statement attributed to Milton Friedman is also invented.
Perhaps both were lost in translation?
Their nonsense is easily exposed.
Protectionists and advocates of tariffs on imports seek to gain from reducing domestic competition and raising prices. Adam Smith was adamant that both tariffs and protection legislation may have benefitted some domestic producers, but certainly did not “serve the public interest” - see his Wealth of Nations, Book IV.
Adam Smith understood that legislaters “seeking to serve” serving the “public interest” could be serving their own interests or the interests of specific groups at the expense of the interests of others (e.g., awarding lawyers monopolies in some specialised activities.
People making false statements do not serve the public interest.
Saturday, November 15, 2014
ADAM SMITH WAS MORAL IN BOTH POLITICAL ECONOMY AND MORAL SENTIMENTS
“How to Be Happy with Adam Smith: The Invisible Hand and the Lovely Man”
William Irwin, Ph.D., professor of philosophy at King’s College (Pennsylvania) reviews (14 Novenber) Russell Roberts on “How Adam Smith Can Change Your Life”. HERE
“One might expect that a book titled How Adam Smith Can Change Your Life would provide helpful hints for achieving economic success. In particular, if one had just a passing acquaintance with Smith’s concept of the invisible hand, one would expect that Smith would absolve us from all feelings of obligation to others. After all, he famously says in The Wealth of Nations that “Every individual 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 original intention. By pursuing his own interest he frequently promotes that of society more effectively than when he really intends to promote it.”
In other words, “it is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self-interest.” Outside the family, on the larger economic scale, things work out well when we pursue self-interest. Bill Gates and Steve Jobs have improved the lives of millions of people they never met by pursuing self-interest. So we might expect How Adam Smith Can Change Your Life to tell us how we can do likewise."
William Irwin, presumably a professor imbued with a moral obligation to treat others in the Academy with respect for their written views, he is rather casual in his use of them. He quotes Smith’s actual words but tears them out of context, though probably innocently, he uses quotations he has read written by third-party modern economists. Smith never lost sight of the candid qualifications in his Works. In the first quotation William Irwin implies that Smith’s “every individual” intends “only his own gain” in all things, when Smith actually refers to an individual who acts to protect his capital rather than take the risks he perceives from sending it abroad. This circumstance leads him to invest his capital locally. He is ‘risk averse’ as we would say today. From this perfectly understandable private motive, this individual acts to protect his capital, with the intention of avoiding the risks of personal loss. Smith uses the metaphor of “an invisible hand” to describe his actions in “a more striking and interesting manner” - as Smith described in his lesser known, but widely applied in his Works, from his “Lectures on Rhetoric and Belles Lettres” (1762-3) 1983, p. 29, Oxford University Press.One thing is also clear. The paragraph quoted goes on to make a general statement of Smith’s thinking on the consequence of actions that follow from people’s motives for initiating them. Their initial actions are ‘intended’, as are the ‘consequences’ of those actions. Smith used the ‘invisible hand’ to describe the effect of the motives for the agent’s actions. That is the limit of his use of the metaphor, and the intended outcome was the limit of intentions, because those intended actions also could have unintended consequences. This is where the sequence became muddled among modern economists (who do not always understand the use of metaphors) and readers who simply follow what professional economists assert publicly and unthinkingly imply that the metaphor of the invisible-hand actively intends the unintended consequences! If that was true of Smith’s use of the metaphor, it leaves unexplained how the ‘invisible-hand” metaphor knows about the unintended consequences.
Some theologically inclined economists and philosophers have a ready ‘explanation’ of sorts by asserting that the “invisisble hand” is the “hand of God”, which immediately raises difficult questions about its scientific basis and requires major shifts in human beliefs systems.
Moreover, William Irwin adds to his too slick misunderstanding of Smith’s argument by quoting another brief sentence from what was a fairly long argument; specifically: “it is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self-interest” (WN I.ii. 2: 26-27).
I ask William, whose self-interest was Smith referring to? Not just the person “expecting her dinner” (the buyer) but from the potential sellers too, and his advice was directed at the buyer. Now, both individuals had a personal interest in the potential transaction and Smith’s advice to potential bargainers in such transactions (explained in the paragraph, not quoted by William) was to persuade them both that that they could not expect such a transactions from their “benevolence only”. They had to do more if they were “to prevail” and they could achieve this by showing them (the “other party”) that it was in their (“other party’s”) self-interest to transact with the customer on the terms she offers for the “butcher’s, brewer’s and baker’s (the sellers’ products).
Smith sums up thus: “Whoever offers to another a bargain of any kind proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it ias in this manner that we obtain from one another the far greater part of the good offices which we stand in need of” (WN I.ii.2: p. 20).
I have taken much space to clarify Adam Smith’s meaning of self-interest that is lost in William’s misunderstanding of Smith’s (moral) political economy. It is not about rampant selfish self-interest contrasted with moral relationships. By using persuasion, adequately covered in Moral Sentiments, people mediate their self interest through compromise, persuasion, exchange and “good offices” towards each other.
There is no contradiction in Adam Smith’s two books; there is no Das Adam Smith Problem. Those philosophers who believe there is a problem, do not know Adam Smith’s Works and rely on clipped paragraphs and second-hand, often ideological, interpretations that do not stand up to scrutiny.
Wednesday, November 12, 2014
THE BUSINESS OF BUSINESS SCHOOLS
Pankaj Ghemawat is the Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Barcelona, and posts (6 November) on the Harvard Business Review blog HERE
“This small-numbers problem invalidates Adam Smith’s “invisible hand” mechanism in which good performance is supposed to be ensured by large numbers of competitors, none controlling more than a sliver of the market and none, therefore, with the power to jack up prices."
"What Economists Know That Managers Don’t (and Vice Versa)
Why did Jean Tirole win the Nobel Prize in Economics? Not for the highly-regarded work on
competition between small numbers of firms with which his career began more than thirty
years ago but for more recent work on how carefully structured regulation can improve
performance relative to unbridled market forces. This is a reminder that serious students of
market performance take market failures seriously.
But what many economists generally gloss over is a notion that I will argue is highly complementary to market failures: management failures. For policy-making purposes economists assume that all businesses act rationally in the pursuit of profits. The possibility that that might not be the case is generally ignored, or even when mentioned, quickly finessed."
Pankaj Ghemawat writes an interesting piece, in which he is interesting in some of his statements (not quoted above) about a new slant on what he distinguishes between ‘market failures’ and ‘management failures’ in modern economics.
Neoclassical economists - those that came after classical economics - who down-played the human role in economics and imagined universal rules of perfectly ‘rational behaviour’, ‘profit maximisation’ and ‘socially optimal performance’. The clue to the muddle of much of modern economics is in forgetting that “maximization is [only] a basic mathematical tool” and not a description of actual human behaviour in the real world, leading to exercises like “even if a firm doesn’t maximize profits, it can be treated, for the purposes of many of its interactions with the outside world, as if it does.”
Paul Samuelson got into similar muddle by enunciating almost as a quip of a general rule in the form of Adam Smith’s supposed use of the “invisible hand” metaphor in 1948 (“Economics: an analytical introduction”, McGraw-Hill), supposedly leading to a socially maximum output. He then spent over 50 years, across 19 editions of his best selling textbook, re-casting what the metaphor supposedly implied (see Kennedy, G. ‘Paul Samuelson and the Invention of the Modern Economics of the Invisible hand’, Journal of the History of Economic Ideas, no 3, 2010). This had disastrous results in the the teaching and practice of economics across the world.
Perfect competition does not and never has existed and was unknown to Smith. Humans behave variously in all manifestations of human behaviour in all situations in which they act purposely. Adam Smith did not say that humans behaved identically and with mathematical precision and by that behaviour, “good performance” in an economy was assured. The laws of gravity operate with mathematical precision, making gravitational precision predictable years, centuries even, ahead. How much a company will sell of its products this month is and remains unpredictable.
Whether such unpredictability is a ‘market’ or ‘management’ failure seems to me an uninteresting conclusion. More important, whether the ESE Business School in Barcelona can devise a programme that high paying managers will attend is a just and typical incident in the upper-echelons of the management team that runs the ESE Business School. I know the response well; I spent 20 years in the senior management team of Edinburgh Business School (Heriot-Watt University) and was a frequent guest lecturer at a dozen-plus others, here and abroad.
The so-called debate between ideologues of both Left and Right is a phoney war. One side calling for more markets and less government versus the other side which calls for fewer markets and more government. Adam Smith was a pragmatist, not an ideologue. He never used the words ‘laissez-faire’, nor ‘capitalism’. His support for ‘Natural Liberty’ was for everybody. His approach is best summarised as ‘markets where possible; the state where necessary’.
THE METAPHOR OF THE IMPARTIAL SPECTATOR
Edward D. Kleinbard posts (10 November) a 9-page essay in Commonweal HERE
This interesting, long essay fails on two grounds; first, it misinterprets Smith’s alleged religiosity by ignoring his biographical details in the context of the 18th-century inhibitions on acadmics expressing views that differed from the dominant Calvinistic theology of the times, and secondly, it ignores completley Smith’s teachings on the role of metaphors in the English language.
My focus today is not on Smith’s use of the ‘invisible hand’ metaphor, of which I usually comment several times a week. Instead, it is on the metaphoric meaning of Smith’s use of the ‘impartial spectator’.
Turning to the “impartial spectator”, Smith in his ‘Theory of Moral Sentiments’ (1759; 6th edition, January 1790 - he died in July 1790) describes and discusses in detail of an inner-voice in all of us that acts as our judge of our conduct towards others. We learn from that ‘voice’ from a young age from parents, guardians, relatives, school pals and acquaintances, and others who observe us. Living in societies, rather than alone like an Hermit in the forest, other people in society act as a metaphoric ‘mirror’ of our conduct, and from them we learn which behaviours are acceptable or not in the ‘great school of self-command’. Much of our internal thinking about our behaviour is ‘hidden’ and is not articulated openly or truthfully to others. But our ‘impartial spectator’ sees all and we learn which behaviours and motives are acceptable and which are unacceptable and, should we forget the difference, our ‘impartial spectator’ reminds us, even if we try to repress, ignore or deny it. Our nagging inner voice never shuts up. Smith’s ‘impartial spectator’ was a metaphor for a complex phenomenon that all experience from participating in families in societies.
As a metaphor the ‘impartial spectator corresponded to Smith’s teachings on Rhetoric from 1748-51 in Edinburgh in private lectures at Edinburgh Philosopical Society rooms. He establishd his reputation among those who attended one or more (including professors from Glagsow University who informally visited). In 1751 he succcessfuly applied for the Chair of Logic at Glasgow and, a year later, he was appointed the Professor of Moral Philosophy. Throughout his professorship he delivered each year his 30-lecture series on Rhetoric until 1764. A set of student notes of these lectures were published in 1983 by Oxford: Smith, A. “Lectures on Rhetoric and Belles Lettres” (LRBL). The best biography of Adam Smith is by Ian S. Ross, “The Life of Adam Smith”, 1976, 2nd ed. 2010, Oxford University Press.
Smith’s biographical details are significant because they are not widely known. Many scholars have not read his ‘Theory of Moral Sentiments’, let alone heard of his ‘Lectures on ‘Rhetoric and Belles Lettres’, and consequently they insufficiently understand the significance of Smith’s teaching on metaphors, resulting in widespread errors in their assertions about them, especially in his famous use of the metaphors of the ‘invisible-hand” and, as crucially and less famous, the “impartial spectator”.
To write on Smith’s thinking without first studying his ‘Lectures on Rhetoric’ is too common among many of those who pontificate about his Works and meanings. It leads them to crass mistakes of interpretation, all too common even among some senior scholars.
Metaphors are common in everyday literature and speech. Smith writes:
“In every metaphor it is evident there must be an allusion betwixt one object and another”. … [No Metaphor] “can have any beauty unless [it] gives the due strength of expression to the object to be described and at the same time does this in a more striking and interesting manner” (LRBL, p. 29).
Applying Smith’s definition of the role of metaphors in the English language to the ‘impartial spectator’ there certainly is “an allusion between one object (our internal dialogue with ourselves) and another (our consciousness of our internal ‘voice’ self-assessing our conduct). And, like all brilliant metaphors, the ‘impartial spectator’, describes its object - our private internal judgements of our conduct - “in a more striking and interesting manner”.
I shall reinforce Smith’s assertion by quoting from Hugh Blair, Smith’s contemporary, who eventually took over Smith’s public Rhetoric lectures in Edinburgh, and subsequently moved his lecture series into Edinburgh University as its first Professor of Rhetoric (Ross, 1976, 2011). Hugh Blair’s exposition of the role of metaphors expands Smith’s spartan definition (and both correspond to modern uses of metaphors, see Oxford English Dictionary, 1983, 2nd ed. Vol. IX, p 676):
“When I say of some great minister ‘that he upholds the state, like a Pillar which supports the weight of a whole edifice’. I fairly make a comparison; but when I say of such a minister “that, he is the Pillar of the state,” it is now become a Metaphor. The comparison betwixt the Minister and a Pillar is made in the mind, but is expressed without any of the words that denote comparison. The comparison is only insinuated, not expressed: the one object is supposed to be so like the other, that, without formally drawing the comparison, the name of the one may be put in place of the other: “The minister is the Pillar of the state.” This therefore, is a more lively and animated manner of expressing the resemblances which imagination traces among objects. There is nothing which delights the fancy more, than this act of comparing things together, discovering resemblances between them, and describing them by their likeness. The mind, thus employed, is exercised without being fatigued; and is gratified with the consciousness of it own ingenuity. We need not be surprised, therefore, at finding all Language tinctured strongly with Metaphor.” (Blair, 1787, pp. 372-73, Lectures of Rhetoric and Belles Lettres. 3 vols. 3rd Ed. London and Edinburgh. Strahan, Caddel, and Creech).
Edward Kleinbard turns to the ‘impartial spectator’ after dismissing modern misinterpretations of the ‘invisible hand’ metaphor, with which I readily concur. For example, he writes: “Smith’s famous invisible hand has today become a dead hand, stifling meaningful debate over the roles of government and private markets. … Smith never intended his metaphor of the invisible hand to become synonymous with an omniscient and efficient Mr. Marketplace. Specialists have known this all along, but the caricature version of Smith continues to distort our policy discourse.”
However, Edward goes on to make theological interpretations of Smith’s “Moral Sentiments” free from the constraints that Smith wrote under. Edward doesn’t have such constraints (though, unhappily, if he lived in some other countries he would be disposed off for his views). This thought would get him closer to Smith’s world. The three Glasgow Professors (Professors Simson, Hutcheson and Leechman - all orthodox Christians - two were also ordained) immediately before Smith’s tenure were brought before the Glasgow Presbytery on charges of teaching ideas unpalatable to the Christian Calvinist zealots who dominated university teaching.
Smith’s students were all at least formally confirmed as Christians and the majority of his readers were also likely, in the main, also to be similarly inclined. To read TMS as if it was a candid expression of Smith’s own beliefs is as unwise as it is inaccurate. Space precludes me elaborating on these statements here and they will be discussed in a new book that I am writing currently. I mention, for instance, that Smith gave a detailed lecture on how humans developed their lives compared to animals and their increasing differences without mentioning at all the events in the Eden Garden (Smith, Lectures on Jurisprudence, 1763, pp. 330-9).
However, I have published my contrary theses and interpretations in two publications: see Kennedy, 2010.’The hidden Adam Smith in his theology’, Journal of the History of Economic Thought, vol. 33, no 3, and Kennedy, 2013. ‘Adam Smith on Religion’, pp. 464-84. in The Oxford Handbook of Adam Smith, ed. Berry, Paganelli, and Smith, Oxford University Press. Meanwhile, readers may note that in his last, 6th edition of TMS Smith made major and significant changes of tone and on his use theological language throughout, including the removal of overtly Christian terminology. He was declining as he finished it in January1790 and anticipated his early death. If he remained a Christian believer it is unlikely that he would have made so many changes in his language if he believed he was soon to meet his maker and face the final judgement.
Tuesday, November 04, 2014
THE PSEUDO-SCIENCE OF THE INVISIBLE HAND
I found this piece on my desktop in an unused, open file, dated, 27 October, but I have no idea from where it came or by whom it was written (I refer to him/her as the Author - if you recognise who wrote it or where its from, please let me know in the comments).
It happens to combine two threads I have recently been discussing: first, gravity as a metaphor in Adam Smith’s ‘Wealth Of Nations’ (to appear, hopefully in ‘Economic Theory’, an online journal, edited and refereed by economists as: “Adam Smith’s Use of the “Gravitation Metaphor”, in a couple of months; second, my regular comments on Smith’s use of “an invisible hand” as a metaphor for motivated actions of agents, which may have unintended consequences that may add or detract from human welfare.
The Author’s notions that “gravity” and “invisible hands” as related similies/ metaphors stretches credulity by giving a scientific gloss to his/her notions about Smith’s use of the ‘invisible hand’ as a metaphor with a somewhat tortured resemblance, “more comparable to natural selection, where complexity and design arise in nature from spontaneous order without the assistance of an outside agent.”
From there the Author claims that “market forces allow individuals within the market place to seek their own rational self-interests through voluntary trade and labor”. There is no explanation of the assertion that people “seek their own rational self-interests”, when even casual observation sees individuals expressing their many different “self-interests” in market relationships that can be wildly different in content and scope from a common sense of “rationality”.
For the Author to argue that either gravity or magnetism equate to “invisible hands” does not imply “that they are “magical” is precisely what is implied. The Physics of gravity is pretty well understood in science. As a force it can be measured and movements associated with gravity can be precisely predicted well in advance, to a thousandth of a second. Now do that with ‘invisible hands’! Market forces, in the guise of the “Invisible Hand of the Free Market”, says the Author, can be “empirically observed, tested, and researched”. Oh Yes? Is the Author sure? Even in the higher maths of General Equilibrium no mathematical term appears for “the Invisible hand”!
Moreover, there is nothing invisible in market forces! They operate soley by VISIBLE prices! Market cannot work without visible prices, so what role is left for an invisible hand?
So when we look back to how far we have come from the economics of the Forest life of the hunters and gatherers 40,000 years ago (in Europe and Africa) to where we are in the developed market economies today it is plain silly for the Author to suggest we thank the ‘invisible hand”. It played no role in the Forest, or in Agriculture or in the emergence of markets from classical times.
It was a metaphor for the motives of individuals who acted in pursuit of their intended consequences, and some, but not all, of those intended consequences also could have unintended consequences that could in turn have benefitted society, sometimes generations of people, even centuries and millennia later.
We call this history and pre-history and modern sciences - archeology, anthropology, natural and social sciences, and so on - can identify a great deal about particular causes of events, without turning to mythical “invisible hands” or God explanations, that explain nothing.
ADAM SMITH WAS NOT A CHRISTIAN
Paul B. Farrell posts (31 October) on Market Watch HERE
“1. Adam Smith’s moral capitalism guided by the Invisible Hand of God
“ … Capitalism is guided by an Invisible Hand that Adam Smith refers to in his classics as the “Deity,” “Providence,” the “Author of Nature,” and “God” roughly a hundred times using references common in the 18th century, language clearly confirming that Smith was referencing the “Invisible Hand” of God as the power driving the new capitalism.” …
…2. Ayn Rand, free-market capitalist, atheist, narcissist
“… Candidate No. 2 is Ayn Rand, atheist and also patron saint of what Jack Bogle calls “mutant capitalism” in his “Battle for the Soul Of Capitalism.” Today, Rand’s mutant capitalism is the core belief system guiding the psychological behavior of Republicans, the Big Oil sector, social conservatives, energy billionaires like Koch Bros, Wall Street bank CEOs, and climate-science deniers. …
“…The only one real election is the one between the only two real candidates that count. They will determine the balance of power, Adam Smith vs Ayn Rand with two totally opposite versions of capitalism, one moral, the other godless. This is the only election that matters this century. These are the only two candidates. They control the fate of America.”
I referred to Paul B. Farrell’s 31 October post a few days ago when discussing Halloween, but l leapt over his ideas about Adam Smith and religion.
Adam Smith had won a Snell Exhibition (scholarship) to Oxford University in 1740 and on graduation promised to join the established Calvinist Church of England as a priest, and serve in Scotland within the Episcopalian (Church of England) confession.
In the event, Smith changed his mind and withdrew from the academic route to ordination in 1744, by switching his studies to Jurisprudence. In 1746 he left Oxford and travelled home to his mother’s house in Kirkcaldy to seek employment as a tutor.
Clues to his loss of faith are revealed in an essay he composed from 1744 on ‘The History of Astronomy’ (published posthumously on his instructions in 1795). This cannot be conceived as a theological treatise. Its account of the long process of theological fantasies under pagan influence and superstition to the realisation through science of the Earth’s place in the Universe, suggests its personal sugnificance in his decision to switch careers at Oxford. It also contains his first refrence to the “invisible-hand” metaphor, specifically identified as the “invisible hand of Jupiter”, the main pagan god, who was believed by the credulous to fire thunderbolts (visible lightning!) at dissaffected citizens in the Roman Empire. How Paul B. Farrell fits this allusion into Christianity could be revealing.
The 6th and final edition of Adam Smith’s ‘Theory of Moral Sentiments’ published in January 1790, just months before he died in July 1790, is certainly revealing because if he was a Christian believer it was a strange testiment for someone who believed, acccording to Paul B. Farrell, that he was about to meet his maker. Consider the manner in which Smith edited out many of the last edition's removal or modified its thelogical phraseology in the first 5 editions of Moral Sentiments.
I have discussed these changes and their implications in my paper: “The Hidden Adam Smith in his Alleged Theology”, ‘Journal of the History of Economic Thought’, 2011. Vol. 33, No. 3, pp. 1-18. This was my reply to Lisa Hill’s, “Hill, L. 2002. ‘‘The Hidden Theology of Adam Smith.’’ European Journal of the History of Economic Thought 8 (1):1–29.)
A longer version of my ideas was published in Chris Berry, Maria Paganelli, and Chris Smith, eds. 2013. ‘The Oxford Handbook of Adam Smith’, Oxford University Press: ‘Adam Smith on Religion’. Part VI, pp. 464-84.
Paul B. Farrell, safely esconsed in the 21st century democratic USA seems not to appreciate the extent to which competing religions dominated all discourse in the late-18th century and the extent to which critics of these prevailing orthodoxes had to compose their books to avoid reprisals for challenging them. Smith was no exception when writing his books.
Even on its own merits, Farrell’s assertions do not confirm his premiss. Smith did not link the ‘invisible hand’ to “God as the power driving the new capitalism”. Smith never mentioned ‘capitalism’, a word that was first used in English in Thackery’s novel, ‘The Newcomes’ in 1854. Smith discussed ‘markets’ that had been operating in classical Greece and Rome and Europe (5th century BCE). He did not even mention what we know today as the ‘industrial revolution’. He discussed the pros and cons of the conduct of ‘merchants and manufacturers’ (overall he did not think much of their behaviour).
Moreover, his use of the ‘invisible hand’ metaphor was covered in purely secular terms, and never as the ‘hand of God’. In his use the ‘invisible hand’ was a metaphor for the motives of ‘proud’ landlords who exchanged food from their fields for their labourers (serfs, slaves, or whatever) who laboured to produce it. The landlords greatness and power rested upon the labourers who were compelled to work his fields. The labourers worked the fields in exchange for food resources and shelter.
However, beyond the intended consequence of their exchange (food for labour/labour for food) there was also an unintended long-term consequence of agriculture in the form of the ‘propagation of the species’. Population in agriculture continued to grow with increasing production that promoted wider exchanges and economic (unequal) benefits. Hence, Smith’s comments on the higher standards of living for all participants in agriculture compared to those confined to hunting and gathering in the forest.
On Ayn Rand there is no comparison with Adam Smith with her lack of belief in religion and her beliefs in selfishness as a virtue in ‘capitalism’. Smith was associated with the philosophy of Natural Liberty - for all, not just employers and politicans - and he was not religious in so far as ‘revealed’ religion was concerned.
Whatever Paul B. Farrell’s complaints about “mutant capitalism [as] the core belief system guiding the psychological behavior of Republicans, the Big Oil sector, social conservatives, energy billionaires like Koch Bros, Wall Street bank CEOs, and climate-science deniers” it sounds very much like ideological ‘politics’ of which Adam Smith did not express views. Given Smith’s critique of Bernard Mandeville, I am pretty certain he would have had nothing positive to say about Ayn Rand’s ideology.
Monday, November 03, 2014
ADAM SMITH'S MORAL PHILOSOPHY AND ROBERT BURNS POETRY
I sent this letter to The Scotsman (Edinburgh) yesterday that may be of interest to Lost Legacy readers.
Robert Burns, of course, is a classic Scottish lierary icon, weel known to readers of poetry. What is less well known is Burns shared an admiration for the moral philosophy of Adam Smith. Robert Burn’s father gave to his son a copy of Adam Smith’s ‘Theory of Model Sentiments’, of which he read and was also sympthetic.
“To the editor:
Michael Fry’s [a contemporary Scottish historian] reference to Robert Burns and Adam Smith in the Scottish Enlightenment. It brought to mind their compatibity in moral philosophy.
Smith wrote: “This self deceit, this fatal weakness of mankind, is the souce of half the disorders of human life. If we saw ourselves in the light in which others see us, in which they would if they knew all, a reformation would generally be unavoidable. We could not otherwise endure the sight.” (Smith, “Theory of Moral Sentiments” (1759).
Compare this with Burns famous lines (1785):
To see oursels as ithers see us!
It wad frae mony a blunder free us,
An' foolish notion.”
We know Burns had read Smith’s “Moral Sentiments” and may have drawn poetic inspiration from it.
An important element that made the Scottish Enlightenment distinctive was the close overlapping, linked contacts among its contributing members in and around Edinburgh during those heady decades.
Emeritus Prof. Gavin Kennedy.”