FISHING AMONG PFOOLS

Peter Foster posts (17 November) on Financial Post HERE 

“Nobel Phools George Akerlof and Robert Shiller”

“Akerlof and Shiller claim to have cast-iron proof for their thesis. It’s all Adam Smith’s fault. His concept of the Invisible Hand has led to a “standard economics” that celebrates greed and ignores market manipulation; that preaches that markets are perfect and economic actors purely rational. “If business people behave in the purely selfish and self-serving way that economic theory assumes,” they write, “our free-market system tends to spawn manipulation and deception.

But which business person derives his practices from economic theory?

What Akerlof and Shiller are actually condemning is human nature. Moreover, once we abandon caveat emptor for “Let the government beware for us” we are on a slippery slope towards losing not just choice but freedom. Such concerns are dismissed by claiming that those who warn against the moral hazards involved in government “would also tell us to do away with fire departments, because there would then be no fires since people would be more careful.”

Adam Smith in fact never suggested that markets were, or could be, perfect. He wrote of “the higgling and bargaining of the market, according to that sort of rough equality which, though not exact, is sufficient for carrying on the business of common life.” He was also an avid student of human irrationality which, he noted, was infinitely more dangerous when it came to politics and religion than to shenanigans by tradesmen, of which he was well aware. He pointed out that the market controls such shenanigans, not least by rewarding a reputation for honesty, although the law is needed to protect us from fraudsters. Akerlof and Shiller’s answer to the value of reputation is to claim that it is accumulated so that it can be “mined” to cheat people.”

Comment

Peter Foster is the author of “Why We Bite the Invisible Hand” (Pleasance Press, Toronto, 2014), on which I had occasion to comment on Lost Legacy last year, partly favourably - he is an excellent writer - and partly unfavourably - he believes the usual modern nonsense about the “invisible hand”).

Here he Is lambasting George Akerlof and Robert Shiller for taking seriously modern myths of Adam Smith’s use of the metaphor of “an invisible hand”. I have criticised Akerlof and Schiller’s thesis on Lost Legacy and would so again for their portrayial of Smith’s simple metaphor as if it has anything to do with modern (post Pail Samuelson’s 1948-2010) treatment of it as “the invisible hand” of the market.

That error is the kernal of the confusion of modern economics. Peter Foster’s quarrel with the Akerlof and Schiller “phishing" thesis is spot on but Foster shares the same core fallacy of the so-callaed invisible hand supposedly at work in market economies ensuring the common good.

There is no such invisible hand and Smith never claimed that there was. Smith simply observed that if a merchant prefers to avoid foreign trade and intentionally invest locally, he will unintentionally and arithmetically add to “domestic revenue and employment”, i.e., in modern terms, add to GDP, which can be a public benefit. Hardly a startling conclusion! Yet so much is read into such an obvious outcome even by Nobel Prize winners from top universities. 

Moreover almost the entire economics profession has bought into Paul Samuelson’s misreading of Adam Smith. The invisible hand is a metaphor for the motivated actions of  people may be having unintended outcomes. It was not about a mystical, even miraculous, controlling force at work in market economies.

I would hope that Peter Foster would come to see what Smith meant and where Akerlof and Schiller got it completely wrong.