WHO IS PHISHING WHO? WHO ARE THE PHOOLS?

It is asserted:
"Adam’s Smith’s “invisible hand” of the marketplace is perhaps the single most captivating metaphor in all of economics. The idea that all of society can be made better off by the self-interested behavior of its constituents was revolutionary for its time, and it undergirds free-market philosophy to this day.

But a growing chorus of economists are taking issue with the degree to which we put our faith in free markets, and just how far the invisible hand can take us as a society." 
Nobel-prize winning economists, George Akerlof and Robert Shiller take up this mantle in their latest book, "Phishing for Phools: The Economics of Manipulation and Deception". The central argument of the book is that though free markets bring wonderful bounties to societies that embrace them, they also yield negative consequences that can be avoided with intelligent modifications. They write:

"We see the cornucopia that free markets have delivered. But just as every coin has two sides, so do free markets. The same human ingenuity that produces the cornucopia also goes into the art of the salesman. Free markets produce good-for-me/good-for-you’s; but they also produce good-for-me/bad-for-you’s. They do both, so long as profit can be made. The free market may be humans’ most powerful tool. But like all very powerful tools, it is also a two-edged sword.

The book offers powerful support for a skeptical view of free markets, but it’s also a helpful guide for consumers to avoid getting ripped off in the course of making important purchases." There are five dangerous scenarios Akerlof and Shiller present in their new book: “Phishing for Phools: The Economics of Manipulation and Deception”. Princeton University Press.

Comment

What a strange world we live in. First, the authors completely misrepresent what Adam Smith wrote about the “Invisible Hand” (it was not about how free markets work). His first use of the “captivating metaphor” was about the “pusilanimous superstition of Roman citizens” who believed that their stone image of “Jupiter” represented their credulous beliefs in their god firing thunder bolts from his "Invisible hand” at enemies of Rome, two thousand years ago (From Adam Smith’s posthumous “History of Astronomy”, published in 1795 — Smith died in 1790). 

Second, it referred to rich landlords in agricultural societies, feeding their slaves, serfs, and agricultural labourers from the produce that their landless servants were forced to produce by the landlords’ unsympathetic overseers, which had the unintended,overall consequence that such violent regimes promoted (unintentionally) the “propagation of the species”.

Thirdly, Smith referred to the unintentional consequences of some owners of capital investing said capital domestically rather than risk sending it abroad for overseas investnment. Said consequences included adding their capital to “domestic revenue and employment” (known today as domestic GDP).  Said unintentional consequences benefitted domestic revenue and employment, considered as public benefit.

It had nothing to do with “all of society can be made better off by the self-interested behavior of its constituents”, nor was it “revolutionary for its time”, even though it might “undergird free-market philosophy to this day”.  

Smith said nothing about its alleged contribution to “free-market philosophy”.  Indeed, it was a simple arithmetic consequence of the motivated actions of such owners of capital. It was not a general law of economics, free or otherwise.

Nobel-prize winning economists, George Akerlof and Robert Shiller’s latest book ”Phishing for Phools: The Economics of Manipulation and Deception” is based on a modern invented assertion that Smith claimed something that he didn’t.  Indeed, Smith in Books 1-4 of Wealth of Nations gives over 60 specific examples of owners of capital acting against “free markets”, the more famous being tariffs, prohibitions, and restrictions on imports, and even state-sponsored wars and the Navigation Acts, plus their conspiracies to restrict competitive markets.  He also warned that to believe that free trade would ever be established was to believe in “Utopia”, but urged steps towards them despite the machinations of selfish "merchants and manufacturers".

“Phishing for Fools” applies first to all those who preach that Smith had such a notion of a magical and miraculous “invisible hand”, as Akerlof and Shiller present it.   He didn’t.  He was very clear how "merchants and manufacturers" in his day manipulated the economy (now continued at all levels by many capitalists in our day). 

The “invisible hand” was not about the wonders of markets in a utopian sense. It was a metaphor for the motives of those who intentionally acted and how their actions could lead to  unintentional consequences, some beneficial and many that were not (see Book 4 of WN to get a taste for Smith’s realistic assessments of the range of negative unintended consequences common in markets. George Akerlof and Robert Shiller should know these truths.  Most of the profession apparently do not. 
Calling it "phishing" is imaginative and will sell their book, but Smith wrote about it in detail in the 18th century. Misinterpreting Smith's use of the metaphor of an "invisible hand" is the real "phishing".