THE SAID AND SEEN AND THE UNSAID AND UNSEEN

James Grant writes (2 Jan 2-15) in the Wall Street Journal HERE 

“The Depression That Was Fixed by Doing Nothing”

“The often forgotten 1920-21 economic crisis suggests that sometimes the best stimulus is none at all.

To combat the Great Recession and its long-lingering aftermath, leading central banks have pulled some $10 trillion out of thin air. Governments of the world’s principal economies have rung up almost $20 trillion in deficit spending. We often hear that the authorities have done too little. Perhaps they have done too much.

Not so long ago, the authorities did hardly anything. In response to the severe, little-known economic slump of the early 1920s, they virtually sat on their hands. It is an often forgotten episode that suggests the potential for constructive federal inaction—and underscores the healing power of Adam Smith ’s invisible hand.”

Comment

An interesting article by James Grant of interest to macro-economists (follow the link), though not to Keynesians, or whatever they are call themselves today, and probably not to politicians seeking re-election. Maybe its too early to expect results from France under Hollande’s experiment in borowing to spend the economy out of recession, thereby following the opposite track to Osborne’s UK reduce state spending to slowly cut the deficit in pursuit of growth, but early results don’t augur well.  Anyway with an election due in May in the UK (but not in France) arguments will persist on the policies that may change anyway between Tory “austerity” and Hollande/Labour “investment” using borrowed money.

My atttention was drawn to James Grant’s completely redundant last line: “and underscores the healing power of Adam Smith ’s invisible hand.” Neither the “invisible hand” nor its “healing power” exists in any meaningful sense, quite independent of whether government’s intervene or sit on their hands. 

Wealth Of Nations (Book IV) refers to some (not all) “merchants and manufacturers” whose hidden motives lead them to execute actions that intentionally lowered their perceived risks from foreign trade. To this sequence, Smith described this sequence “in a striking and interesting manner” using the metaphor of an “invisible hand”. By investing locally they avoided foreign trade. Such actions to achieve their intended consequences also may have unintended consequences, specifically by adding their capital to “domestic revenue and employment”, they added to the amount of domestic employment available and to national wealth creation. This unintended consequence was generally beneficial to the society. But this had nothing to do with the metaphor of an “invisible hand”. There is no directing “invisible hand”, guiding a comercial economy: the invisible hand is a metaphor for the hidden motives that drives people to take an action to achieve their intended consequence, in this case, avoid the risks of foreign trade  and, in doing so, the unintended consequences of their motivated actions may be benign, or not, socially as the case may be. That is why we describe the unintended consquence as a result of the actions, prompted by the initial motives for those actions.

As often, Smith noted, many privately motivated actions also unintentionally did not benefit the public good; they could and did dis-benefit the public good.  For example, ‘merchants and manufacturers’ who persuade supine governments to introduce tariffs and prohibitions unintentionally work against the public interest by restricting domestic competition and  raising domestic prices which is generally against the public interest (Smith called this “mercantile political economy” in Wealth Of Nations). 

Where this phenomenon fits into “the healing power of Adam Smith ’s invisible hand” is never made clear by those who misquote Smith’s use of a metaphor for their political ends.