ANOTHER SMALL SIGN OF PROGRESS

Asad Zaman posts on WEA Pedagogy Blog HERE

“Failures of the Invisible Hand”

The introduction of an economics textbook by Manikiw quotes Adam Smith regarding the invisible hand and deduces the following claims:

1. Participants in market economies are motivated by self-interest. (SI)
2. Decentralized market economies work very well, and maximize the welfare of society as a whole. (FM: free markets)
3. The reason for excellent functioning of decentralized market economies is that all participants are motivated by self-interest. This self-interest works better than love and kindness in terms of promoting social welfare. (GG: greed is good)
4. The principles listed above were summarized in the concept of the “Invisible Hand” by Adam Smith. (AS)

Manikiw writes that these ideas remain central to modern economics. Our paper on “Failures of the Invisible Hand” shows that all four of these claims are wrong. Some years ago, I was naive enough to think that a refutation of key claims of a central text would at least arouse debate. But I have long since learned that challenges to the core ideologies are simply not to be discussed. THe paper is rejected by many journals with superficial comments not engaging with or disputing the claims.

Comment

Another small sign that the discussion about Adam Smith’s use of the “invisible-hand” metaphor is slowly attracting attention and Lost Legacy is not entirely alone in questioning the current widespread consensus in mainstream economics that it refers to, variously, markets, self-interested “greed” miraculously, or at least mysteriously, co-ordinating the billion/trillions of decisions by producers and consumers which mediates supply and demand to bring about the public good and etceteras.

While I do not agree with everything that the authors, Rafi Amir-ud-Din and Asad Zaman, say in support of their contentions in “Failures of the ‘Invisible Hand’” (15 July, 2013) , I do applaud their efforts and I am pleased they have posted it on the Social Science Research Network, which has a large pool of economists either subscribing their own papers (thus recording and dating their scholarly priorities; sometimes important to faculty recruitment boards) and is useful for reading the papers of others in their broad fields of work.

Hence my congratulations to Rafi Amir-ud-Din and Asad Zaman. I shall possibly comment on their paper later (though I am intensely busy just now).

LOONY TUNES NO. 107

1

‘The Offering’ by Grace McCleen in Laura Battle’s review posted in the Financial Times, (23 January) HERE http://www.ft.com/cms/s/2/6ac508e4-9fd5-11e4-aa89-00144feab7de.html#axzz3PjpCVaHT

“Every so often the treetops surged as if stroked by some invisible hand, the fields kept on rolling and surging; they jostled and shimmered and gave way to each other, hill after hill, rising and falling like swells in the sea, and in the endlessness of it all — in the grasses, in the dizzy activity of butterflies..”.

2

Michael Kearney (Dept of Anthropology, University of Calfornia, Riverside) writes in Annual Review of Anthropology Vol. 15, (1986), pp. 331-361

“From the Invisible Hand to Visible Feet: Anthropological Studies of Migration and Development”

3

ANON (January 29) in BEFORE ITS NEWS: HERE and HERE 

“Invisible Hand Anticipates Events – Australian Dollar Slide Has Purpose”

“Aussie Dollar. The Australian dollar’s slide, confirmed by copper, has been discounting not only a rising probability of lower commodity prices but also an unexpected rate cut months in advance. This all means trouble ahead. Let the die hard bulls and bears debate the merits of their static forecasts and follow the message of the market. The trend, leverage, and time/cycle define the message of…

[[ This is a content summary only. Visit my website for full links, other content, and more! ]]”

Comment

More nonsense from someone selling something from the 'come on':

Opening with the “invisible-hand” shows its like in a country fair and a three-card trick.

The Next item is proof that only the gullible would be interested:

“Preacher Has Visitation From God! Explains Why Most Christians Will Not Be Saved!”.

The is  like in the old ditty that a “man with money meets a man with experience; the man with experience ends up with the money and the man with the money ends up with exeperience”.  

If the “invisible hand anticipates events” it must be conscious in some sense … please, give us a break!

PRICES ARE VISIBLE

Helenic Shipping News (28 Jan) HERE 

 posts

“The Best Indicator That Oil Prices Will Rise — Quickly” 

“No matter what the “experts” say, no one really knows whether oil prices are going higher or lower over the next year. But the invisible hand of the market is definitely making a guess that looks very bullish for energy companies and investors.”

Comment

This typical commercial bulletin from “expert market watchers”, of which there are many making a living from dressing up their claims to their expensive expertise in modern jargon waffle that baffles their paying subscribers.

First the blindingly obvious: “no one really knows whether oil prices are going higher or lower over the next year.”  True! 

“But the invisible hand of the market is definitely making a guess that looks very bullish for energy companies and investors.” False!

Next the associated Jargon waffle: “contango”, in contrast to “backwardation”, supported by trends in “oil futures”. 

Confused?

Well you need expertise to help you and, fortunately, you can benefit from  “a brand-new investigative report on this significant investment topic and the company helping fuel its boom”…

But what about “the invisible hand of the market” that supposedly “is definitely making a guess”? Well nothing more is said about it!

Just as well because it doesn’t exist. Markets operate through visible prices, not “invisible hands”. If future contract prices appear to be a rising trend this has nothing to do with anything invisible - the rising prices of futures contracts reports that their rising visible prices are driven by market players apparent belief that prices will continue rise; if visible prices of futures contracts are falling then market players believe oil prices in future will fall. 

Current and would-be players are making guesses as to what will happen in the near and distant future. Their bets reflect their sentiments, not their specialised, insider’s special knowledge.

As we say in Scotland, the future price game is a "bogey", much like horse-racing (the latter of which industry also has its share of people selling their “insider” knowledge…).

THE NEWS GETS BETTER AND BETTER ON THE "INVISIBLE-HAND' DEBATE

A long-standing Asian correspondent sent to me the details of a new paper published on the Social Science Research Network (SSRN) that builds on recent scholarly criticism (besides my own) of the majority popular interpretation placed on Adam Smith’s use of the “Invisible-Hand” Metaphor”.  
This new paper is by Michael Emmet Brady, of California State University (Jan 24, 2015), aligns neatly with my own efforts since 2005, and takes an aspect of them to a new, higher, level: “Adam Smith, the Wealth of Nations, and the “invisible Hand: a metaphor for Ambiguity-Uncertainty Aversion of Decision Makers”.

The Abstract is reproduced below and the full paper may be found via SSRN below:

Adam Smith, the Wealth of Nations, and the 'Invisible Hand': A Metaphor for Ambiguity-Uncertainty Aversion by Decision Makers

Michael Emmett Brady 

California State University - Department of Operations Management

January 24, 2015

Abstract:      

Smith’s use of the “Invisible Hand,” as pointed out by Gavin Kennedy, is a metaphor provided for the great percentage of readers of the Wealth of Nations whom Smith realized would not be able to grasp the nature of his argument, which was about the ambiguity-uncertainty aversion of the majority of 18th century English business men. Gavin Kennedy has pointed out that the term,” Invisible Hand,” had nothing to do with Laissez Faire, free markets, free trade, Natural liberty, etc., for Adam Smith. Smith’s argument is an application of his very advanced decision theory that regarded the standard mathematical laws of the probability calculus as a special case that had only limited applicability in the real world. In general, applications of the mathematical laws of the probability calculus required a complete information set that was rarely satisfied. Smith realized that probability, nevertheless, had to be taken into account. Smith advocated an interval valued approach to the use of probability under conditions of uncertainty/ambiguity. 

Smith made great use of the concept of uncertainty. Uncertainty for Smith dealt with the quality of the information base upon which the probabilities were being calculated. Smith generally defined risk in the Wealth of Nations as an inexact and/or indeterminate estimate not based on the mathematical laws of the probability calculus. Risk could be calculated exactly only in conditions where there was a very high quality of evidence over which there were no conflicts and/or disputes of assessment regarding the relevancy of the data. 

Smith’s major conclusion in Part IV of the Wealth of Nations is that businessmen are ambiguity and/or uncertainty averse. The quality of the information, data, or knowledge upon which the probabilities, which would be interval estimates, is a second factor that is completely independent of the probability estimates themselves. Only in a limiting case, where the evidence is great, stable, and invariant over time, as in the case of deciding to become a shoemaker, would the probability estimates be point estimates. 

Smith completely rejects the ethics and decision theory of Jeremy Bentham, as well as all approaches built on it, such as the Subjectivist ( SEU-Subjective Expected Utility) approaches of Frank Ramsey, Bruno de Finetti, L J Savage , Milton Friedman .and modern Bayesians, such as Patrick Suppes.

Number of Pages in PDF File: 25

Keywords: ambiguity/uncertainty aversion, Ellsberg Paradox, weight of the evidence, J M Keynes, Adam Smith, Invisible hand

JEL Classification: B10, B12, B20, B22

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2554949

The full paper may be downloaded from SSRN via 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2554949

The Social Science Research Network is a wonderful (free) resource which all serious economics students and research practitioners should bookmark and make use of when papers in their areas of interest are posted.  They may also upload their own papers for others to read and to establish a record of their own original work for others to consult.

I shall comment on Michael Emmett Brady’s paper shortly and also publish my comments on SSRN.

WELCOME CONTRIBUTION TO THE "INVISIBLE-HAND" DEBATE ON THE WEB

A very welcome post on the "Thought du Jour" Blog (24 Jan), which I have reproduced below because of its importance and significance for Lost Legacy readers. Follow the link below and bookmark (as I have).
Its author, Larry Willmore, does not go so far as I have over the past 5 years (next month) but the issues he raises are well on the way towards my own. I am yet to hear the podcast but I shall later today. 
I know the contributors: Marianne Johnson, who collaborated with the late (and great) Warren Samuels in preparing his massive research project on the use of the "invisible hand" in modern economics: "Erasing the Invisible Hand: essays on an illusive and misused conception economics", 2011, Cambridge UP.  Also Eamonn Butler, Director of the Adam Smith Institute, London (of which I am a Fellow) and Polly Toynbee (Guardian columnist and leftish-of-centre social commentator).
Thought du jour (semi-daily posts, related largely to economics and government policy) HERE

Adam Smith’s ‘invisible hand’

What, exactly, is the “invisible hand”, a phrase attributed to Adam Smith? Is it a sound economic principle or a myth propagated by the misreading of Smith? All this continues to attract controversy. If you are interested, I recommend a lucid, 12-minute podcast on the topic. You can access it without charge, courtesy of  The Guardian newspaper, at the link below.

When we asked you to nominate some intellectual cliches for this series earlier this year, Adam Smith’s “invisible hand” cropped up repeatedly ….

In the third episode of The Big Ideas, Benjamen Walker discusses the meaning and uses of Smith’s concept with philosopher John Gray, academic Marianne Johnson, economist Eamonn Butler and Guardian columnist Polly Toynbee. ….

As we mention in the podcast, Smith himself only used the phrase “invisible hand” sparingly. ….

Benjamin Walker, “The Big Ideas podcast: Adam Smith’s ‘invisible hand’“, The Guardian Comment is Free podcast, 6 October 2011.

Smith did use the term ‘invisible hand’ quite sparingly. It appears only once in each of three published works, for a grand total of three times.

In The History of Astronomy (written before 1758, but published in 1811), Smith writes that there is no need to resort to the supernatural, to “the invisible hand of Jupiter”, to explain natural phenomena:

Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters. [Emphasis added.]

The phrase appears a second time in The Theory of Moral Sentiments (1759), in paragraph 10 of the first and only chapter of part IV:

The rich … consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. [Emphasis added.]

His third and last use of the phrase is in book IV, chapter 2, paragraph 9 of The Wealth of Nations (1776):

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the 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. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. [Emphasis added.]

ONCE AGAIN ON MARKETS AND VISIBLE PRICES

Ronnie Elhaj n Perth Now (24 January) HERE 

‘Why Perth property market for units will ‘set its own pace’

“House sales are also experiencing mixed signals and property analysts are being cautious given the “volatility” of the market, with contradictory elements at play.

Nicheliving director of sales, marketing and acquisitions Ronnie Elhaj believes the “invisible
 hand” will direct the market.

“In other words, the market will manage itself and adjust accordingly,” he said.

“I like to listen to what the word on the street is because it provides me a decent insight into current consumer sentiment.”

Comment

The above is evidence that the metaphor “invisible-hand” is used as a mere space-filler in modern speech. It means nothing of substance other than to give speakers and listeners the pretence that they are knowledgeable about the mysteries of ecoomics.

The above quoted piece carries two contradictory ideas:

1 “the “invisible hand” will direct the market;

and

2 “In other words, the market will manage itself”.

Now which is it? Ronnie Elhaj does not elucidate.

Why? 

Because he can’t.  Neither can any other believer in the mythical invisible hand. 

Market are directed by VISIBLE prices, not INVISIBLE HANDS.

VISIBLE PRICES RUN MARKETS, NOT INVISIBLE HANDS!

Paul Steger posts on TwinCities.com Letters to the editor 23 Jan

HERE ‘THE MARKET'S 'INVISIBLE HAND'

“I hope all those who, when gasoline prices were rising to painful levels, blamed it on gouging by the big oil companies, are paying attention. To what do they attribute the steadily falling prices we've seen for months? Is it because the collective charitable actions of those same heartless corporations have combined to give us consumers a generous but temporary reprieve before turning up the screws again?

No, the truth is that neither corporations, nor nations, nor groups of suppliers, such as the increasingly irrelevant OPEC cartel, can prevail against the most important law in economics, that of supply and demand. Watching a free (or nearly free) market apply its "invisible hand" to find the proper price of goods can be an instructive and even fascinating process to watch. How sad that we forget this so quickly.”

Paul Steger, River Falls, Wis.

Comment

Given that all prices are VISIBLE what possible role is left for an invisible-hand? 

Is there an entity of some kind in existence that brings supply prices to equal demand prices? If so, how does it work across the billions (trillions?) of price decisions, dispersed across all the potential buy-sell decisions taking place each hour/minute of the day? 

Just who is Paul Steger who knows this but never once in recorded history has anybody showed how such an invisible entity operates, from whence it came from, what exactly it does or what energy sources operate it? Even in theories of general equilibrium there is no mathematical term for an ‘invisible-hand’.

 Paul, it doesn’t exist! Dispersed people observe visible prices and react or don’t react to them. These dispersed people have different views and different personal circumstances and motivations. 

THE DIAMOND-WATER PARADOX OF VALUE 8 YEARS LATER

‘Magpie” posts (22 Jan 2015) a comment on my Lost Legacy Blog entry for 16 January 2007, 8 years earlier! Here is the original post and my comment:

“Smith and Others Knew Their Water from their Diamonds”

“It’s always pleasurable to read Adam Smith’s contributions to the history of economics that are presented correctly. Last year I had occasion to correct statements to the effect that Smith ‘discovered’ or asserted ‘first’ the diamond water paradox between the use and exchange values of an economic good. He stated the paradox, of course, in Wealth of Nations but so had several earlier authors before him”. So ‘Hedgefund guy’ in the Mahalonobis Blog is spot on in his comment on a statement in the Wall Street Journal (WSJ), 16 January, 2007:

“Diamond-water paradox applied to synthetic diamonds. Doh!”

“From last weekend's WSJ: 

These lab-made diamonds have begun trickling into retailers at prices below those for natural diamonds of similar size and sparkle.

De Beers extols the permanence of natural diamonds and attempts to make them seem special. They're "billions of years in the making," it says on its diamond information Web site, adiamondisforever.com. "Adding to the mystery and aura of what make diamonds so sought-after" is the fact that "approximately 250 tons of ore must be mined and processed in order to produce a single, one-carat, polished, gem-quality diamond."

I think these diamond producers don't realize that higher cost doesn't imply higher value. In fact, the paradox of value is also known as the diamond-water paradox, because it notes that although water is on the whole more useful than diamonds, diamonds command a higher price in the market. Adam Smith famously propounded on the paradox in The Wealth of Nations, though heavyweights such as Copernicus, John Locke, John Law and others had previously tried to explain the disparity in value between water and diamonds. 

Marginalism brought about the birth of neoclassical economics and argues that it is not the cost or use-value of a good that determines its price but its marginal utility. Thus the marginal value of a synthetic diamond, like that of a cultured pearl, is unaffected by its provenance. I doubt anyone feels sorry for diamond makers grasping at straws.”

[My Original] Comment

I shall be happier when I see more of this sort of thoughtful comment. Smith’s contribution to economics is strong enough not to require false ascriptions of views that were also presented by others.

Now, I know that scholars know this, but graduate economists, and others who attended Economics 101 (or what I see is called Ec10 at Harvard), often shorten the list of other contributors simply to Smith, stating or implying that the paradox was original to him. Clearly, it wasn’t. In some cases this matters and in others it does not.

To the list of others offered by Hedge fund guy we could add: Plato, Samuel von Pufendorf, Grotius, Harris, Cantillon, and Mandeville, and his own tutor, Francis Hutcheson. Clearly, not a lot of modern commentators on Smith know that. But as clearly, Hedgefund guy does, and so do you now, if you didn’t before.

To which today’s correspondent (Magpie writes):

““Frankly, I am not convinced there ever was a "diamond-water paradox", at least in Smith's mind (I'd appreciate it if you could provide references to the other authors who expounded on it). This is the passage where people claim to see a paradox: "The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called 'value in use;' the other, 'value in exchange.' The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water; but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in on Smith and Others Knew Their Water from their Diamonds”.

My Comment today(2015):

I am not sure what ‘Magpie’ is complaining about because his complaint is clearly answered in the original 2007 post and in my original comment.

I could add that their relative value is also related to the timing and circumstances in which a comparison of their values is made. When dying of thirst in a desert, a person desperate for water would hand over a sack-full of diamonds for a drink of water, reversing the ‘paradox of value’.

In my previous day-job lecturing at Edinburgh Business School, I often posed the question to my classes on negotiation: 

“A man with six camels and desperate for water. approached an oasis  and found a man standing by a sign that read: “All the water you can drink, price one camel”. Who had the power?

This usually provoked a lively discussion, into which I tipped further complications, such as the man by the sign wanted a camel to be able to leave the oasis, and then I asked: which one of the men had a rifle? And so on ...

Moral: values are relative to situations.

NB:
'Magpie' responds to my 2007 comments which I also post HERE to save time searching back to 2007:
"Frankly, I am not convinced there ever was a "diamond-water paradox", at least in Smith's mind (I'd appreciate it if you could provide references to the other authors who expounded on it). This is the passage where people claim to see a paradox: "The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called 'value in use;' the other, 'value in exchange.' The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water; but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in on Smith and Others Knew Their Water from their Diamonds"

My Comments:
I think you are making an over-literal approach to Smith's use of a 'paradox of value'. I remember when I was taught on the 'paradox' in my first year economics A-level course at evening school, in 1961, it was treated as a 'paradox' to draw our attention.
In short, the use of the word 'paradox' is purely descriptive in presenting two apparent views that seem to contradict themselves in a purely literary sense, but which on examination are explainable by looking at them differently, such as value in use and exchange. Once explained the paradox removed.
The other authors I mentioned in 2007 I no longer have citations to hand and pressure of work precludes me taking time to identify them (use google).
Gavin

FLAWED KNOWLEDGE OF ADAM SMITH'S POLITICAL ECONOMY YIELDS POOR RESULTS

Hans-Werner Sinn, professor of economics and public finance at University of Munich, posts (20 January) in Global Times HERE 

“How classic concepts can lead to flawed decisions -

In some cases, rational behavior yields poor results”

“There is much to criticize in economics nowadays. For example, the profession focuses far too little on political issues and far too much on beating students to death with mathematics. But much current criticism of the profession is based on misunderstanding and ignorance.

Consider Adam Smith's concept of the "invisible hand," which implies that a market equilibrium is efficient if perfect competition prevails and well-defined property rights exist. Contrary to what many critics suppose, mainstream economists do not assume that these ideal conditions are always present. On the contrary, economists tend to use these conditions as a benchmark for analyzing market failures.”

Comment

Smith could not imply what is suggested as ‘market equilibrium’, ‘Perfect competition’, or ‘ideal condtiions’, because these were unknown concepts in economics while Smith was alive. 

“In this respect, economists are like doctors, who have to know what a healthy body looks like before they can diagnose disease and prescribe treatment.”

Dr Quesnay, a French man of medicine and a contemporary of Smith’s. They had several discussions when they met in France (1764-6) and whom Smith admired. He was sharply criticised by Smith in Wealth of Nations (Book V)  for linking an economy’s healthy state as a pre-condition of it moving a nation opulence.  If that was a necessary pre-condition, Smith observed, then no economy would ever achieve opulence.

Hans-Werner Sinn goes on in his article to describe markets in terms of the entirely modern notion of ‘market failure’, none of which is relevant to Adam Smith: 

“Environmental regulation addresses a particularly striking example of market failure. Markets are generally efficient if companies' revenues correctly reflect all the benefits that their output bestows on third parties, while their costs reflect all the harms. In this case, maximizing profit leads to maximizing social welfare.

But if production entails environmental damage for which companies do not pay, incentives are distorted; companies may turn a profit, but they function inefficiently in economic terms. So the state "corrects" firms' incentives by levying fines or issuing bans.”

Comment

Professor Hans-Werner Sinn displays a touching faith in the efficiency of modern States correcting the inefficiencies of modern firms.  Governments are often complicit in crony-capitalism when they are ‘captured’ by powerful corporate interests.

Overall a poor post.

ONE STEP TAKEN, ANOTHER STEP NEEDED

LL Thursday 15 Jan

Dr Kamal Monnoo posts HERE

“Economics – Bad Ideas”

“So what are some of these global bad ideas, which in fact also come across as being quite relevant in the context of continuous wrong policy directions that our economic managers in Pakistan have been steering in recent years? In particular, bad idea No. 1 – “The Invisible Hand” – is pretty hard to distinguish from bad idea No. 3, “Milton Friedman’s case against government intervention”, and it segues fairly seamlessly into bad idea No. 7, “globalization that is always good.” 

As an aside, this sometimes makes Mr. Madrick’s argument more disjointed with key propositions spread across nonconsecutive chapters; however, he is actually trying to make an important point here: Adam Smith used the phrase “invisible hand” only once in “The Wealth of Nations,” and he probably didn’t mean to say what most people now think he said. Today the phrase is almost always used to mean the proposition that market economies can be trusted to get everything, or almost everything, right without more than marginal government intervention. Is this belief well grounded in theory and evidence? No. As Mr. Madrick makes clear, many economists have, consciously or unconsciously, engaged in a game of bait and switch. 

On one side, we have elegant mathematical models showing that under certain conditions, an unregulated free-market economy will produce an efficient “general equilibrium,” in the sense that nobody could be made better off without making anyone worse off. Yet, as he says, these assumed conditions – including the assumption that people “are rational decision makers, and that they have all the price and product information they need” – are manifestly not met in practice. Further, he contends that in the real world and especially in the ‘developing’ world where economic governance structures tend to weak the reliance on the sheer competence of the economic leadership of the day tends to be even more critical than otherwise – Pakistan certainly falls in this category”.

Comment

Dr Kamal Monnoo’s post struck me as unusual for most modern day economics commentators, as suggested in the paragraphs quote above (follow the link to read his full paper).

The views of which he complains are political and those attributed to Adam Smith are ideological, and not historically accurate. 

A scroll down the list of attributions made by many modern economists to the writings of Adam Smith would show they are quite misleading, though they are made regularly by those who preach them, including leading scholars in the otherwise very best universities in the world.  However, their claims are not supported by Smith’s texts. But as their readers have seldom read Smith's Works, beyond some clipped quotations, they get away with it, filed under "everybody knows" what Adam Smith meant ...

The consequence is that when turned into policies by governments, whose personnel take what they are told about Adam Smith by their teachers on trust, the outcomes are invariably disappointing, and occasionally disastrous.  Moreover, competing ideologies tend to assert error-riddled Statist ideas - that political governments are more efficient than theories from modern economics and reliance on imperfect markets - and they are often as disappointing, if not more so, because of failures like widespread top-down corruption and failing institutions, riddled with tribal or regional ideological and neighbourly tensions.

Dr Kamal Monnoo should write a companion piece to his “Economics — Bad Ideas”, entitled: “Politics — Bad Ideas”. We can re-start from there!

NEW COLLECTION OF PAPERS ON PHILOSOPHY OF ADAM SMITH JUST PUBLISHED

:

PROPRIETY AND PROSPERITY: new studies on the Philosophy of Adam Smith, edited by David F. Hardwick and Leslie Marsh, Forward by Vernon Smith, Palgrave Macmillan, 2014.

Included in the 14 chapters by the contributors is mine: Chapter 11: ‘The Invisible Hand Phenomenon in Economics’, pp. 198- 222, one of 4 chapters on the ‘invisible hand’.

Readers may not be surprised to note that my four colleagues writing on the invisible-hand take different approaches to the one I take on Lost Legacy. I may comment on their approaches on the Blog.

There is also chapter 14 by my friend and colleague, Craig Smith, Glasgow University: ‘Smith, Justice, and the Scope of the Political’.

CALL FOR PAPERS NO 3

3

European Society for the History of Economic Thought

XIX Annual Conference

Great Controversies in Economics

Roma Tre University, Rome, 14-16 May 2015

The 19th Annual Conference of the European Society for the History of Economic Thought (ESHET) will be held at Roma Tre University 

To participate in the conference, please register with this website as a new website user.

In solidarity with our French colleagues and friends, the deadline for the submission of abstracts has been postponed to January 19th

For questions and problems contact the local organizing committee: eshet2015@uniroma3.it

4 LSE SEMINARS 2015

The HPPE seminar (Historical and Philosophical Perspectives on Economics) at LSE's Economic History Department programme for Lent Term 2015 (see below). 

The bi-weekly seminar takes place on Wednesdays from 1-2.30pm in room CLM.2.04. For updates to the programme please visit: http://www.lse.ac.uk/economicHistory/seminars/HPPE/home.aspx. The convenors of HPPE are Maxine Montaigne (m.c.Montaigne@lse.ac.uk) and Tobias Vogelgsang (t.vogelgsang@lse.ac.uk).

About HPPE: 

HPPE - Historical and Philosophical Perspectives on Economics: The seminar runs since 2012 and is organised by PhD students at the Economic History Department. It brings together scholars from different disciplines to discuss the evolution of economic thinking and embraces topics from Ancient Greece to contemporary Africa.

The seminar inquires how the theory and practice of economics changes with the historical and philosophical context. The seminar aims to provide scholars at any stage of their career with an opportunity to discuss their work with a critical audience. For further information, please contact the convenors.

------

21 January 2015

• Maxime Désmarais-Tremblay

• On the definition of public goods. Assessing Richard A. Musgrave’s contribution

4 February 2015

• Olivia Muñoz Rojas

• From Rebuilding to Branding: the role of politico-economic ideology in modern city-making

18 February 2015

• Tim Hochstrasser

• Lost or found in translation? How political economy travels in the Enlightenment.

4 March 2015

• Jim Thomas

• Ronald Coase and the London School of Economics 1920s-1940s

18 March 2015

• Martin Giraudeau

• If a business plan is good then it is a good project! Georges F. Doriot and the administration of venture capital (1946-1973)     

5

Call for papers 

(Deadline: Monday 12 January 2015) (oops!)

Economic History and History of Economic Thought Session 2015 Scottish Economic Society Conference, 13-16 April 2015,  Mercure Perth Hotel, Perth, Scotland

We invite paper proposals relating to any aspect of Economic History and / or History of Economic Thought, to form part of a dedicated session at the 2015 Scottish Economic Society conference. For your paper to be considered for the session, please send a draft (or extended abstract) to Jenny Eades <j.a.eades@dundee.ac.uk> by the stated deadline.

Please do feel free to contact any one of us direct to discuss potential paper proposals further.

Tim Barmby, University of Aberdeen (tim.barmby@abdn.ac.uk)
Ioannis Theodossiou, University of Aberdeen (theod@abdn.ac.uk)
Matthias Klaes, University of Dundee (m.klaes@dundee.ac.uk)

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On behalf of the Trustees of The History of Economic Thought Society (THETS) (http://thets.org.uk) I am pleased to announce that there will be a Special Session at the 2015 Royal Economic Society Conference to mark the foundation of THETS. The Conference will take place at the University of Manchester, 30 March to 1 April, and the Special Session will be held on 30 March, 11.00am-12.30pm, details as follows.

Session title: Historical Perspectives on Modern Economics.

Session Chair: Terry Peach, University of Manchester.

Paper I: Roger Backhouse, University of Birmingham: “Paul Samuelson and the Myth of the Keynesian Revolution in the United States”.

Paper II: James Forder, Balliol College, Oxford University: “Why did Milton Friedman change his mind about the Phillips curve?”

Paper III: Matthias Klaes, University of Dundee: “Revisiting the origins of the theory of the firm: Coase, Transaction Costs and Marginal Analysis”.

Further details about the Conference may be found at http://www.res.org.uk/view/0/2015conference_home.html.

The foundation of THETS comes 47 years after the first UK conference on History of Economic Thought. For several decades there was no appetite for going beyond the relative informality of an annual conference and publication of a Newsletter, and it was with some reluctance that the decision was taken to embrace modernity through the constitution of an official society. It is our hope that the new platform may assist in the preservation and propagation of history of economic thought as a serious intellectual pursuit within the UK, and that it should do so with the minimum of ostentatious formality.

Terry Peach, University of Manchester

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CALL FOR PAPERS

International Academic Conference
Economics of Vices and Virtues
May 15–16, 2015
While accepting the assumption about the rationality of economic agents as a starting point of analysis, economists still cannot afford to ignore that rational choice in any case is made within a framework of specific beliefs, values and behavioral patterns. Some of these behavioral patterns are traditionally considered to represent virtues, and some — passions and vices, and in different cultures and subcultures the interpretation may vary. Is this kind of assessment relevant for economic science and economic policy? In order to understand this, we propose to discuss (from the point of view of economics and culture) such phenomena as addictions and habits in consumption of certain products, the specifics of policy — making in such cases, problems of interpretation of consumer addictions and habits in culture and social science, as well as the problem of prohibitions. This topic is supposed to come back to the discussion of the provocative thesis of Bernard de Mandeville in his “The Fable of the Bees” (1714) that the private vices tend to form the public benefit.
The Conference topics will include:
• Virtues and Vices: criteria and interpretations;
• Economy and culture of production and consumption of alcohol (beer, wine and strong spirits);
• Economics on Virtues and Vices;
• Formation of attachments and addictions, as a business strategy;
• Overcoming attachments and addictions, as a state policy target;
• Economics of prohibitions, Temperance movements and Public Policy;
• Economy and culture of smoking/ of gambling/ of Internet addiction;
• “Green lifestyle” — the Virtues or Vices?
The specific issues to be discussed will be the examination of the different aspects of the economics, historical facts and culture of alcohol production, consumption and regulation. We invite economists, sociologists, anthropologists, historians and the scholars from other spheres in the social sciences and humanities for the dialogue.
Conference languages: English and Russian
Center for the Study of Economic Culture
St. Petersburg State University, RussiaThe deadline for the submission of an abstract of about 500 words is January 10, 2015.
The conference organizers welcome proposals of sessions with a description. Please send abstracts and proposals to maidachenko09@gmail.com
Authors will be informed about acceptance or rejection of the paper for presentation by February 2.
Organizing Committee:
Aleksei Kudrin, St. Petersburg State University
Danila Raskov, St. Petersburg State University
Eline Poelmans, Leuven University and Beeronomics
Deirdre McCloskey, University of Illinois at Chicago
Denis Kadochnikov, St. Petersburg State University
Alexander Pogrebnyak, St. Petersburg State University
Viktor Rjazanov, St. Petersburg State University
Alexander Nemtzov, Moscow Research Institute of Psychiatry
Vladimir Ignatiev, Novosibirsk State Technical University
Alexander Skorobogatov, Higher School of Economics

Our last conference on Economics and Religion took place on June 6–7 2014.                    

ADAM SMITH ON RELIGIOUS HEGEMONY

Emre Deliveli posts in the Hurriyet Daily News (Turkey) HERE

“The economics of radical religious terrorism”

“The provision of basic social services would make Adam Smith’s invisible hand slap terrorists. Berman [author of “Radical, Religious and Violent: The New Economics of Terrorism” 2009] notes that in his “Wealth of Nations,” the Scottish economist suggested religious pluralism and tolerance, as well as strongly non-discriminatory government, to counter violence based on religion. I hope France and the rest of the West can continue on that route.”

Comment

Emre Delivelli taps into Adam Smith’s long exposition on the role of state- sponsored religious conformity, of which Smith had considerable experience, living in Kirkcaldy, Scotland as a child in the (Calvinist) Church of Scotland and later as a student in Glasgow, followed by six years at Oxford (Calvinist) under the Established State, Church of England. Religious strife between Protestant and Catholic adherents had been bitter and violent in the 16-17th centuries, with numerous massacres and martyrs within and between both sides, in bloody incidents of assassinations, extra-judical executions, full-scale wars, tortures, and such-like passions, similar to those Emre Deliveli discusses in the 20th and 21st centuries.

In short, Islamist terrorism is not unique historically (follow the link to see his perspective). Mass, instant electroninc media today shows terrorist incidents within minutes of them happening anywhere in the world, conveying an immediacy of the extremeist threat right into our homes. No doubt some viewers look nervously at their neighours.

In Wealth Of Nations (WN V.i.g: 778-816: ‘Of the Expence of the Instituions for the Instruction of People of All Ages’) Smith writes at length on the then current state of affairs in regard to religious organisation in the UK and its influences, which the main were not conducive to a free society.

Unfortunately, like much else in Smith’s Works, this (long) chapter is not widely read today (I am not sure it was widely taken notice of when he was alive). I wrote about it briefly in my paper: “The Hidden Adam Smith in his Alleged Theology”, Journal of the History of Economic Theory, 2011, vol. 33.no 3, pp. 383-422) and in my chapter 22, ‘Adam Smith On Religion’, in Oxford Handbook of Adam Smith, pp.465-484), edited by C.Berry, M. Paganelli, and Craig Smith. For a somewhat harrowing account of the conduct of the Church of Scotland in Smith’s life-time, see H. G. Graham (1899) 1937. The Social Life of Scotland in the Eighteenth Century, London, A & C Black.

As regular readers would expect, my quotation from Emre’s short article refers to “Adam Smith’s invisible hand slap[ing] terrorists”, an over-used, and in this case, an over-stretched, somewhat “violent” (in Smith’s words), metaphoric expression. Just as Christianity multi-divided into scores of factions and degrees of fervour, so has Islam.  Smith’s cure for zealotry was education for the poor as well as the provision of productive employment, and crucially, freedom of religious practice without state-protected favour of one religion, or variation of one particular faith, over all others.

It was almost Mao-like, in one of his quickly forgotten episodes when Smith suggested that in place of one officially approved religion in preference to all others, he favoured a ‘hundred sects’ of equal standing, much like Mao announced letting a “thousand flowers bloom and thoughts contend”, without, of course, Mao’s immediate and violent suppression of all visible contenders other than the Maoist Communists!

LOONY TUNES NO. 106

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Minimalist (‘Go Blow Jesus Out Your Ass’) posts on ‘Atheists Forum’ HERE http://atheistforums.org/user-410.html

“The Invisible Hand of the Market Has You By The Balls”

[Reminds me of a punishment I received from a Master who overheard me swearing at school - I was ordered to write 200 lines with the words: “When ignorance predominates, vulgarity asserts it self”. As an atheist I have never forgotten the Master’s assertion.]

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Eric de Groot posts on Investing.com:

HERE http://www.investing.com/analysis/review-of-crude-oil-238013

“Oil's Close Below $50 Maintains Sharp Decline To Lower Targets”

“The professional investors must profit by anticipating future trends and events rather than chasing old news. This is done by following the invisible hand or message of the market.”

Comment 

Eric - we’ve engaged on Lost Legacy before - but you really are talking in the dark again.

Your headline reports that oil is close to $50. 

That is a VISIBLE price.  

So what more information do you or they want? 

All markets everywhere, and throughout all history, work through VISIBLE prices and cannot work without them, as I am sure you have noticed in your carreer as a PROFESSIONAL oil price expert.

Where and how does the so-called INVISIBLE hand contribute to your knowledge? How do you or ANYBODY follow it if it is INVISIBLE? Your guess is as good or bad as anybody else’s.

Why look for something INVISIBLE when you can see the VISIBLE prices? What more do you need to see when the VISIBLE prices tell you all you need to know, including where they were yesterday, and, if you keep looking, where they will be tomorrow when tomorrow comes?

Of course, your paying clients may realise that they only need to pay you if they also believe that there is a mysterious INVISIBLE hand that only you can “see”!

Nice one Eric! 

But its still a load of old cobblers …

CARGO CULTISM AND THE INVISIBLE HAND

 Bob Ashley (Editor) reflects, (10 January) in the Herald-Sun HERE 

“Reflecting on changing area paper has called home”

“I hope someone will make moves in that direction, if the invisible hand of the market doesn’t change the area’s trajectory naturally as the economy continues its resurgence.  Less than five miles from downtown Durham and about seven miles from downtown Chapel Hill, on a busy gateway corridor to Durham, it could be a vibrant gem.   

I’ll be watching, professionally and personally. Familiar dining haunts will bring me back to this area, I’m sure – and my commute between home and our new offices will take me through it daily. I expect to keep using the same familiar cleaners, barber shop, shoe-repair shop, pharmacy and so on.”

Comment

Bob will wait a longtime for “an invisible hand” initiating a move in the market. There is no such entity.  It doesn’t exist. Its a metaphor not a reality. Markets work through visible prices and the motivations of real living human actors.

Unfortunately, other human actors trying to theorise about how markets work, misread one paragraph in Adam Smith’s Theory of Moral Sentiments (1759, TMS) and one paragraph in his Wealth Of Nations (WN, 1776) and confused his use of a metaphor with a real entity and declared that he meant a real, tangible entity rather than a metaphor.  Now the people who started this myth off were not always clear on the role of metaphors. 

Educated graduate journalists, like Bob, are expected to be proficient in the English language and its rules (grammar). They also used to be legendary sticklers for fact-checking. Bob instread has gone with the crowd who believe that which they have heard most economists who speak of the invisible-hand” stand in awe. This awe is not informed from their reading of Adam Smith; like most economsts, they simply repeat what they were taught, and moreover they have not read Adam Smith on Rhetoric in which he defined metaphors as “describing in a more striking and interesting manner” that to which they refer.

In Smith’s case his use of the inviisble hand’ metaphor referred to the hidden motives of individuals that leads them to undertake actions for an intentional consequence. Moreover, their intended consequence could also have unintended consequences.  This is explained in Smith’s “Lectures in Rhetoric and Belles Lettres” (LRBL, 1762) and he demonstrated this in his three only uses of the “invisible-hand”. Smith delivered his Rhetoric lectures continuously throughout his teaching career (1748-1764).

Only if an individual entrepreneur decides to a course of action to realise an intended consequence of a profitable opportunity in or near the run-down area will that consequence potentially materialise. Using Smith’s metaphor, it describes him or her motivated actions.  Smith did not say or imply an actual third-party invisible hand materially intervened as today’s epigones claim; he used the IH metaphorically to describe a motive-action-sequence.  That’s all.  But since Paul Samuelson’s misreading (1948), the process has been fossilised into “selfishness” being transmuted into generating a “public good”, and later, into an active  and actual ‘invisible hand’ guiding market economies! What this version of the IH metaphor means varies from a ‘mystical’ (or miralculous) force or entity right through to the invisible ’Hand of God’!

Evidence of human behaviour since the distant past, as well as abundantly confirmed today and also detailed in Smith’s written Works, show innumerable examples of human actions that do not serve any definition of causing “public good”.  A few examples from Wealth Of Nations reveal evidence of the ‘public bads’ associated with mercantile political economy, traiffs, prohibitions, ‘jealiousy of trade’ (and resultant wars). More recent examples of pollution, enviromental destruction, over-fishing, ‘tragedy of the commons’ cases, exhaustion of the land and decline of water resources, and many more.

So Bob Ashley intends well and hopes positively but like the old ‘Cargo Cults’ of New Guinea in the past he likely will be disappointed while waiting for a metaphor to do something. 

DON'T BELIEVE A BOOK'S BLURB THAT IS HISTORICALLY WRONG

The blurb for a downloadable version of Mark Scousen’s 2007 book, “The Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes” is available HERE

“History comes alive in this fascinating story of opposing views that continue to play a fundamental role in today's politics and economics. "The Big Three in Economics" traces the turbulent lives and battle of ideas of the three most influential economists in world history: Adam Smith, representing laissez faire Karl Marx, reflecting the radical socialist model and John Maynard Keynes, symbolizing big government and the welfare state. Each view has had a significant influence on shaping the modern world, and the book traces the development of each philosophy through the eyes of its creator. In the twenty-first century, Adam Smith's "invisible hand" model has gained the upper hand, and capitalism appears to have won the battle of ideas over socialism and interventionism. But author Mark Skousen shows that, even in the era of globalization and privatization, Keynesian and Marxian ideas continue to play a significant role in economic policy.”

Comments 

Blurbs notouriously are unreliable, but authors normally get to read them pre-publication and may correct errors in good time.  So I assume Mark Scousen considers the above blurb reasonably representative of his views.

I am not sure that Adam Smith led a “turbulent life” in Scotland, or for that matter Keynes, a gifted member of the comfortable, upper-English upper middle-class inteligentsia, never short of a penny or two or in danger of going hungry during his adult life.   As for Karl Marx, he brought much turbulence and poverty on himself and his extended family, from his political activity of trying to promote aimless revolution in mainland Europe (he had no idea on how or what would be done to manage post-capitalist society before the proletariat and their families suffered in the chaos created after they succeeded in storming the barricades.

Linking Adam Smith to “laissez-faire” is historically inaccurate - he favoured Natural Liberty for all, not laissez-faire for employer’s only. If Mark Scousen's “book traces the development of each philosophy through the eyes of its creator” I would be interested in his trace of “laissez-faire” to the “eyes” of Adam Smith.  He never used the words and Scousen has no authority to link them to anything Smith wrote. He had low opinions of the self-interested actions of “merchants and manufacturers” throught-out Wealth Of Nations.  

If Smith had lived into the 19th century, he would have seen how employers and their political allies took-up the clarion call of “laissez-faire” in defence of their claimed right to employ children in mills and mines for 12-hour days, and pay them pittances as they metaphorically shrugged their shoulders if a child’s limb was wrenched off by fast moving machinery. Linking ‘laissez-faire’ to Adam Smith’s name to give it political credibility, is a category one error in historical attribution.

Scousen's assertion tthat Adam Smith's "invisible hand" model has gained the upper hand”, depressingly, is true, only in the sense that what passes for the “invisible hand” theory today is widely and mistakenly believed among modern economists, but the ‘IH theory’  of the 20th and 21st centuries bears little resemblance to Smith’s use of the IH metaphor in the 18th century.

Sadly, I shall not be rushing out to buy Mark’s book.