Wednesday, November 25, 2015


Jag Bhalla posts (November, 2015) on “big think” HERE
“Does The Story That Most Shapes Our Times Have Plot Holes?”
“Are there key plot holes in a tale that shapes our times?
1. Economics illustrates “the pitfalls of a good story,” says science writer Philip Ball.
2. It is built on a simple story that can discount or hide complicating logic.
3. Here’s Adam Smith’s plot summary: “He who intends only his own gain ... is ... led by an invisible hand ... [and] frequently promotes [the interest] of ... society.”
4. The key “characters” are self-seeking individuals and competitive markets, where prices automatically coordinate good collective outcomes (benign efficient “spontaneous order” = unintended consequence). 
5. But what Smith’s invisible hand “frequently promotes,” it can’t guarantee. The other logical possibility is that self-seeking can cause collective harm, intended or not.
6. Plus the “simple story” mischaracterizes competition and prices.
7. Competition can be efficient, or wasteful — see Markets Dumb As Trees.
8. Prices often aren’t “right.” Both sellers and buyers gain (short-term) by ignoring “externalities,” like pollution costs. That complicates voluntary fixes.
9. Two “invisible hand” types exist. Sometimes local incentives combine to generate good group outcomes. Sometimes they undermine group goals. As Charles Darwin saw, these bad invisible hands create spontaneous disorder, which local incentives can’t cure.
10. Parts relate to wholes in two distinct ways. Sometimes we can predict how wholes behave from the properties of their parts. Other times not; it’s more complicated.
11. The field of “complex systems” studies these trickier beasts. That’s an unfortunate name — jet engines are complex but predictable, and two simple parts can generate unpredictable complexity (Wolfram Rule 30).
12. Markets are the most powerful social forces on earth, they shape how billions of people live. Let’s get their whole story straight. We can’t afford to continue ignoring their complicating logic.
For less one-sided stories, and more on efforts to deploy tools and ideas from complex systems, evolution and business, see Evonomics.”
Jag Bhalla is a prolific blogger and I have commented on his (always well written) work on Lost Legacy before.
Here he writes an intelligent sceptcism about Smith’s so called claim for the powers of “an invisible hand”.
Unfortunately Jag’s claim is a false one; Smith did not make a general claim at all. That is a myth created by Paul Samuelson in his 1948 textbook: “Economics: and introductory analysis”, page 36 (McGraw-Hill) where Samuelson created a myth that claimed for Smith the assertion that “selfish” behaviours led to “public benefits”, which by ideological osmosis became a general proposition of what Smith meant by using the now famous metaphor.
In fact, Smith’s statement was somewhat more modest. First he made no mention of “selfishness”; second he gave an example with much more modest pretensions.
Smith discussed a “merchant” who believed that foreigners in international trade were less reliable than domestic merchants and therefore such merchants avoided foreign trade and kept their capital invested domestically where they could keep a closer eye on it and, should they be deceived they, could seek redress in local courts whose probity was more reliable than foreign courts. They also avoided shipping costs and the costs of loading and unloading their cargoes and also the additional worry of what happened to their cargo once it was out of their sight.
Such merchants invested their capital domestically, which Smith noted added to the total domestic investment of all domestic merchants, but crucially their decision to invest locally was made because of their fears of investing abroad.
In short their motivation was what we would call “risk avoidance”.  However, their intentional action was to protect their capital, but, as he also noted, the unintentional consequence of their motivated action was that it also added to “domestic revenue and employment”. 
Now it was the unintentional consequence which was a “public benefit”.
They did so because their motivation led them intentionally to the action of investing locally. Metaphorically they were led by “an invisible hand” to an action that unintentionally led to a public benefit - specifically in this case of adding to local “GDP” in modern terms.
Now not all motivated actions lead to “public benefits”.  There is no rule in Smithian economics that they did so. In fact, anybody actually reading “Wealth of Nations”, with its many examples of “merchants and manufacturers” acting from selfish motives that decidely were not public benefits in Smith’s opinion,could possibly come to the popular modern myths of the “invisible hand” metaphor.
I can only conclude that far fewer than the small number of economists, let alone numerous political idealogues, who believe in Samuelson’s myth that Smith said that “selfish” actions led to public benefits, have actually read Wealth of Nations, or even properly read, Book IV of WN, in which Smith used the “invisible hand”. 
As Smith did not assert the ideas Jag Bhalla claims for him, I think Jag should withdraw the charges he makes against Smith in his use of the “invisible hand” metaphor. The errors Jag points out are solely in the imaginations of those many modern economists who simply copied what Samuelson claimed in his best selling introductory textbook.
Remedy: read Adam Smith on Metaphors in Smith, A: "Lectures on Rhetoric and Belles Lettres", (1761-2) 1983. Oxford University Press; and read Wealth Of Nations, (1776), 1976, Vol. 1, Book IV, chapter 2, pp 452-6, OUP).


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