Tuesday, January 06, 2015

INTENDED AND UNINTENDED CONSEQUENCES

In The Nigerian Observer (‘that the people may know’) HERE somebody unnamed writes on economic conditions in The Phillippines

The Philippines Poor Of The Third World
“This is where CRC’s distinctive competence comes in,” Bernie said. “There are other institutions like CRC doing economic business research but I  think we stand out for the emphasis on the principles of subsidiarity solidarity and the common good. We are making it very clear to businessmen that there is no invisible hand, notwithstanding what Adam  Smith said, that automatically promotes the common good if you encourage individuals to be selfish.”
Comment
I am sometimes accsused of making a fuss about nothing important in the ‘real economy’, with mumbles about ‘so what’ or ‘Adam Smith’s dead’.
But what Adam Smith is alleged to have said is still argued about today and would be influencers and policy-makers continue to refer to his authority for whatever they are proposing or act upon using his name as either an endorsement or a criticism of policies in the real world.
I would strongly agree with part of the sentence I quoted above: “there is no invisible hand, notwithstanding what Adam Smith said, that automatically promotes the common good if you encourage individuals to be selfish” (follow the link to read the paper in The Nigerian Observer). Adam Smith never said that “SELFISHNESS” should be encouraged and the belief that he did was first circulated widely by Paul Samuelson on page 36 (in his first, 1948, edition and discussed variously in the 19 editions that followed to 2010) of his world-wide, best seller, with nearly 5 million sales of his “Economics: an analytical introduction” (McGraw-Hill).
Moreover, Adam Smith’s single use of the “invisible hand” metaphor in his ‘Wealth Of Nations’ did not assert that “it automatically promotes the common good”. Motivated actions could cause pollution, over-fishing, tragedies of the commons, radiation leakages, and such like).
Instead, Smith described a case of where some, but not all, merchants acting from their concerns for the security of their capital, avoided sending thier capital abroad and “out of their sight”. In refraining from doing so and instead, investing locally, they added their capital to “domestic revenue and employment”. The sequence is important. Their felt insecurity gave them a motive to act to assuage their felt insecurity with the intended consequence that a) their capital was safer when in their sight and control, and with the unintended consequence, that b), they added to “domestic revenue and employment”. The unintended consequence of their motivated actions in this case served the public good.
The sequence can be summarised as: 1: an individual’s hidden motives lead them to actions, and the resultant actions may satisfy their motives; and 2: actions once taken may have unintended consequences that affect the public good, either positively or negatively. Adding to “domestic revenue and employment” was regarded by Smith as a public good because “opulence” was regarded by him as a worthwhile goal by raising total domestic output which increases a society's real wealth.

It was not a question of gold, silver, diamonds, or whatever tokens pass for ‘weatlh’ in primitive societies, but of a people becoming productive by producing goods and services that people seek to exchange items that they value more than what they give for them through mutual, self-interested bargaining (“Give that which I want and you shall this that you want” -WN I.ii. p. 26-7).

2 Comments:

Blogger Alan said...

"I am sometimes accused of making a fuss about nothing important in the ‘real economy’, with mumbles about ‘so what’ or ‘Adam Smith’s dead’. But what Adam Smith is alleged to have said is still argued about today and would be influencers and policy-makers continue to refer to his authority for whatever they are proposing or act upon using his name as either an endorsement or a criticism of policies in the real world."

If there was any doubt about the truth of that, here is the great influencer himself discussing the invisible hand on the cusp of the revolution:

"Smith’s great importance for 1976, and his great achievement - as Hayek and others have so eloquently pointed out - is the doctrine of an “invisible hand,” his vision of the way in which the voluntary actions of millions of individuals can be coordinated through a price system without central direction....The market, with each individual going his own way, with no central authority setting social priorities, avoiding duplication, and coordinating activities, looks like chaos to the naked eye. Yet through Smith’s eyes we see that it is a finely ordered and delicately tuned system, one which arises out of man’s actions, yet is not deliberately created by man. It is a system which enables the dispersed knowledge and skill of millions of people to be coordinated for a common purpose. "

Friedman, Milton. “Adam Smith’s Relevance for 1976.” Annual Meeting of the Mont Pelerin Society, St. Andrews, Scotland, 1976. Reprinted at http://www.chicagobooth.edu/capideas/magazine/winter-2014/adam-smiths-relevance-for-1976.

1:18 am  
Blogger Gavin Kennedy said...

Alan
Market economies work through visible prices. That is an inescapable truth.
The "invisible hand metaphor" is superfluous to that truth.
Why would a metaphor referring to 'an invisible something have anything to do with visible prices, especially as markets cannot work with out prices.
Friedman is completely wrong with his thinking. It is a fabrication. An attempt to re-name something to do what?
Smith lectured on Rhetoric for 16 hers and knew about the role of metaphors. He never linked them to the prices, or markets, or to their co-ordination roles.
Gavin

9:22 pm  

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