ASPIRATIONS HAVE TO BE BARGAINED FOR

James Bartholomew posts (30 December) HERE 

“Chocolate that only melts in the mouth - a miracle of capitalism”

“Oh, Adam Smith, thou shouldst be living at this hour! Another breakthrough has been made by that "invisible hand" you wrote about.

Businessmen and women whose only thoughts have been profit and self-advancement have, without consciously intending it, bestowed a great blessing on humanity. Chocolate is going to become available to millions of people in hot countries around the world.”

Comment

Surely a new twist to the modern misuse of the metaphor of “an invisible hand”! If only making a “profit” and attaining ’self advancement” was possible by simply intending to achieve them, what a wonderful (if strange) world we could live in. 

It is much more complicated than that. The intended thought requires much more than mere aspiration. We have to consider how to achieve our goal, by which, apart from much else, we have to consider other people’s intentions, who may have similar ideas in which our unmeltable chocalate competes with their other desires. Hence we cannot simply think of our own “profit” and “self advancement”’ we have to think of and negotiate with their desire for “profit” and their goals of “self advancement”. In short, our thoughts are limited by the thoughts of others, causing us to think of more than our just own thoughts.

Adam Smith understood these relationships. James Bartholomew ignores them. Smith wrote about them in Wealth Of Nations (WN I.ii.pp.25-26).. See his reference to the “butcher, brewer and baker” where he sets out the mutual dependence of customers and sellers. In order to realise any of their aspirations they have to address the self interests of each other, and not just their own. That relationship requires bargaining and persuasion through conditional propositions: “IF you give me of what I want THEN I shall give you what you want”. For success the have to findout how much of what they have to give to get back how much of what each wants.

Business men and women must come to understand that ancient truth if they are to realise their aspirations. Exchange behaviour is one of humanity’s oldest forms of relationship. 

For more than thirty years I spent much time in Business Schools teaching managers about Smithian bargaining and writing about everyday examples of practices (see: Everything is Negotiable, 1982, Random House; Kennedy on Negotiation, 1998, Ashgate; The New Negotiating Edge, N. Brealey, Hachette, 1999).

There is no “invisible hand” miraculously guiding them to success and Smith never said there was such an entity. He used a metaphor to describe the unintentional consequences of their actions, which were sometimes beneficial for humanity and sometimes not.

JOHN KAY ACCURATELY DESCRIBES SMITH'S USE OF THE INVISIBLE HAND METAPHOR

John Kay posts (29 December) in the Financial Times HERE 

“An apt misquotation can reveal the greater truth

“Sometimes posterity forgets the context. Adam Smith did describe how a merchant might be “led by an invisible hand to promote an end which was no part of his intention”. But the remark was not the eulogy to untrammelled free markets attributed to him by modern libertarians.

In fact, Smith was explaining that protectionism was often unnecessary because consumers and traders so often preferred to buy goods made in their home country rather than importing them.”

Comment

I knew John Kay when we were students in the 1960s. He did Political Economy and Edinburgh University and I did Economics at Strathclyde University in Glasgow. A mutual friend, Robin Cook, later the Brithish Foreign Secretary in a Labour government, described John as the “Brightest man he knew” and his career as a senior consultant economist since at all levels has showed just how brilliant he was and is. Our paths seldom cross nowadays; more's the pity.

His statement quoted above is most encouraging for Lost Legacy. It is (almost) wholly correct. The mimor restriction in it is that Smith was talking about a merchant whose aversion to the risks of exporting his capital abroad, where he was less sure of the probity of their commercial morals and their legal systems, was motivated to his action to invest locally instead. This chosen action was intended to safeguard his capital but the motivated action had the unintended consequence of adding to domestic capital formation and benefitting  domestic revenue and local employment. In this case, the merchant was unintentionally “led by an invisible hand” to add to public benefits resulting from his action.

John’s summary that Smith’s metaphoric “remark was not the eulogy to untrammelled free markets attributed to him by modern libertarians” is typically masterly. It is also unique among modern economists and seldom expressed so clearly and typical of John Kay’s brilliance.

Loony Tunes no. 125

1

Connie Wang posts (17 December) HERE 

“How To Keep Your Skirt From Twisting Around /

Riding Up / Ruining Your Life”

“A skirt that does not stay in place is a skirt that is not worth wearing. You've seen that girl — you've been that girl — who has the world's cutest A-line mini on, and the row of center buttons is definitely not in the center. It's as if those skirts were haunted by a ghost that just doesn't want you to have a good time; the invisible hand spins them around as soon as you drop your guard.” 

2

Craig Lager posts in PC Gamer HERE 

“Dirt Rally Review

“With all assists off, an invisible hand will still gently help keep the rear end of your car in check. The in-car wheel is locked to 180°”. 

3

James Bartholemew posts (28 December) HERE 

"Oh, Adam Smith, thou shouldst be living at this hour! Another breakthrough has been made by that “invisible hand” you wrote about. Businessmen and women whose only thoughts have been profit and self-advancement have, without consciously intending it, bestowed a great blessing on humanity. Chocolate is going to become available to millions of people in hot countries around the world."

ECLECTICISM IS NO SUBSTITUTE FOR CLEAR THINKING

Atul Singh teaches Political Economy at the University of Berekely, California, graduated PPE (Oxford) amd MBA at Wharton (a distinguished education by any measure). He posts in Fair Observer (27 December) HERE

“The World This Week: Tornadoes, Flooding and Climate Change”

“The global economic system of today might be reaching an inflection point similar to that faced by the Soviet Union. At the root of the current system is a simple premise: People are better off if they can consume more. Many argue that this is a fundamental human trait, which enables us to grow crops, settle cities and build rockets. They claim that greater consumption makes people happier. They also assert that the price of progress is inequality. People want bigger homes, fancier cars, lusher lawns and so on and so forth. The only way this can be achieved is through a Darwinian system of competition where the miracle of markets through Adam Smith’s “invisible hand” leads to a bountiful world. The butcher, the brewer and the baker can produce more through specialization of labor and benefit more by trading with each other.

Smith’s world sounds excellent in theory but starts falling apart when there are slave owners and slaves, masters and serfs, and the superrich and slum dwellers. Trade is now no longer possible. The only thing that a purportedly free underclass can trade is its labor. The rich are far too few to require the services of all of the poor anyway. After all, there is a limit to the number of chauffeurs, butlers and nannies the rich can hire. Besides, endemic poverty dehumanizes the poor. African American neighborhoods in Detroit, favelas in São Paulo and shanty towns in South Africa are trapped in a vicious cycle of deprivation, poor education and gang violence. Smith’s blind devotees could do well to remember that he was a product of the Scottish Enlightenment in an egalitarian Presbyterian society. He also advocated public education, a fact conveniently ignored by American Republicans and Englishmen who study at Eton.

Smith’s world of butchers, brewers and bakers plying their trade no longer exists. Their work is now carried out by poorly paid workers for low wages. Giant supermarkets and big brand names now dominate. Concentration of capital has killed the independent trader and the small businessman, particularly in countries like the US and UK. Most American towns look the same with McDonald’s, Staples and Walmart beckoning those driving by. Capital chases ever higher returns and the name of the game is scaling up. People consume like gluttons, looking for ever cheaper deals. Hence, it is perfectly reasonable to cut down all trees for furniture and clever to pay people minimally to do so.

In this Darwinian system, the quest for ever-higher returns forces business to cut costs to the bone. To boost shareholder returns, it makes sense to discharge industrial effluents straight into the river instead of investing to make effluents less toxic. Strip mining for gold or drilling in the Arctic for oil is rational action regardless of the risks. Those who complain are woolly headed romantics, lacking the toughness and single-mindedness to succeed. Economists, the high priests of this global system, call everything that cannot be captured by the market “externalities.” This word supposedly captures collapse of public institutions, the death of rivers, the damage to people’s health and anything else. To use an oft-used phrase, we live in a world where we know the price of everything and the value of nothing.”

COMMENT

It is often said that a “little knowledge is dangerous” and the truth of those words is demonstrated by the above paragraphs by Atul Singh. He appears to have an eclectic grasp of many things but is short of an understanding of their contexts. To these defects he adds an almost total lack of historical perspective, as if somehow the human species recently left the innocence of an Eden Garden and entered a world flowing with bread and honey amidst a a truly humane paradise of mutual equlity and heavenly relationships between empathetic rulers and the ruled. 

His image of a “Darwinian competition” and Adam Smith’s markets driven by the so-called “invisible-hand” is a rhetorical absurdity that is wrong on many levels, not least that the myth of “an invisible hand” is a modern invention only tenuously linked to anything written by Adam Smith (see my regular posts on Lost Legacy since 2005).

Atul Singh appears to think that people would be better-off is they consumed less - incidently a fine way to define poverty (of which humanity has countless millennia of experience). From that premiss to argue that “inequality” today is a growing problem driven by “capitalism” is ahistorical. 

Smith’s so-called “world of butchers, brewers and bakers” that “no longer exists” is to miss the point he was making, specifically that people received the goods and services they required by exchanging some of what they had available for some of the things they did not have, in this case, meat, alcoholic drink and bread. In previous generations each had to hunt for their meat (protein), drew their water from streams, and simply did without bread. That economic regime lasted for tens of millennia and human lives were short, uncertain, hard and people were ignorant.

But with exchange human societies began to change. The exchange phenomenon began long before markets emerged. Populations grew and migrated from where they had speciated from their origins. The metaphoric long road to “butchers, brewers, and bakers” began. It was not a road resplendent in democracy, equality, and abundance for all. Politically it was decidedly unequal; violent rulers ruled and the ruled laboured. Capitalism did not invent the misery that was widespread. Rulers did not build the pyramids, the gardens of Babylon, the canals of India or China, or the glories of the Classical world. That labour was carried out by the oppressed majority and who kept in line by violent overseers. For millennia these were everyday occurrences for the vast majority.

Adam Smith discussed these and other issues in his Wealth of Nations, Lectures on Jurisprudence, Moral Sentiments, the History of Astronomy and his Lectures on Rhetoric and Belles Lettres. He was no apologist for the mighty who cornered what were the better products of growing economies. He viewed their behaviour within the production-consumption relations of his times and human exchange behaviours that were rooted in human history.

Atul Singh might benefit from reading Smith’s Works in full rather that the extracts given out in Oxford’s PPE. Our consumption has moved on from mere “butchers, brewers and bakers” - tap water is now safer to drink than it was in 18th-century Scotland where beer from brewers was preferred because beer was safer than city water. The same is not yet true for the experiences of much of the world’s still poverty-striken communities.

I am not a "woolly headed romantic” at all, nor am I a “high priest” of the global system”. I take Smith’s historical perspective seriously. It is a place to start our analysis, not a place to end it.

A SMALL STEP TOWARDS SANITY ON THE INVISIBLE HAND

Susmita Dasgupta, Joint Chief Economist, Joint Plant Committee, Ministry of Steel, posts (9 Jan 2016) HERE 

The Great ‘Invisible Hand’

“Nehru believed in mixed economy where the public sector co-existed with the private sector”

“In the absence of Adam Smith’s “invisible hand”(a term used to describe unintended social benefits through individual action) to guide the adjustments of production and the adjustments of production and consumption and given the scarcity and high cost of capital in the country, it was important that industrial licences did the job of making the demand and supply adjustments in lieu of market signals.”

Comment

The first part of the quoted sentence is close to the correct (Smithian) interpretation of Adam Smith’s intended meaning of his use of he metaphor of “an invisible hand”. 

The use to which Susmita Dadgupta puts it, however, is partly questionable. But sticking with the positives, she is right partially in that the IH was used by Smith to “describe unintended social benefits through individual action”. 

In the case Smith describes in Wealth Of Nations he refers to a merchant who is so concerned with the safety of his capital if he sent it abroad that he decided to only invest his capital locally in the country and the economy he lives in and under a legal system he knows well. Such are his motives for intentionally acting so and they  guide his investment actions.

The unintentional consequence of his motivated action result from his intentional actions; obviously he did not intentionally act to secure the unintentional consequences of his actions! Among the unintentional consequences of his motivated actions were, Smith notes, the arithmetical addition of the merchant’s capital to his country’s “domestic revenue and employment”, which, Smith notes, are a “public benefit”.

Smith’s metaphor for the process is the merchant is led by an “invisible hand”, clearly meaning his motives for investing locally (decribed today as his risk aversion). Moreover, the unintended consequences in this case are an arithmetically larger amount of local economic activity (today, a larger GDP) regarded as a public benefit.

There is no mention of economic (general) equilibrium, Pareto Optima, or any of the other modern readings claimed for it, nor for some mystical or magical (even theological) force in the economy that leads to such outcomes. The object of the IH metaphor, to which it describes in a “more striking and interesting manner” (Smith, ‘Lectures on Rhetoric and Belles Lettres”, p. 29, 1762-3), are the private, not expressed, and actually invisible motives, of the risk-averse merchant!

For something so clear, even obvious, modern economists have created a great muddle, a great fantasy, eminently avoidable, out of something Smith wrote so clearly that it represents a Category 1 embarrassment to the profession who continue to defend, which so many of them have become caught up in.  They continue to deny their error (sadly)  through thick and thin.

SOMETIMES YES AND SOMETIMES NO, BUT NOT "NATURALLY OR RATHER NECESSARILY"!

John Pemble rieviews (7 January 2016 , pp 25-26) in London Review of Books HERE 

“Phantom Gold”:

Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of  

Modern Finance by Ian Klaus Yale, 287 pp, £18.99. 

“In 1776 Adam Smith had argued in The Wealth of Nations that free-market capitalism was a force for material and moral progress. Capitalism left to itself, he insisted, must produce the best of all possible worlds, since a capitalist pursuing self-interest makes life better for everyone. ‘The study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society.’ He is ‘led by an invisible hand to promote an end which was no part of his intention.”

Comment

Ian Klaus writes about an interesting phenomena: the proclivity for some humans to resort to behaviours that can seek personal advantage at the expense of others. Visit any magistrates court on any day and witness the parade of hapless individuals charged with breaches of any of the host of regulations aimed at protecting others fom their petty depredations. Cross over to the higher Courts where bigger offences are tried at risk of more serious consequences. Such instituions are built on the premiss that society in general requires protection from individuals “pursiing [their] self-interest” which patently does not “naturally, or rather necessarily, lead [them] to prefer that employment which is most advantageous to society.”

Klaus’s proposition is unsound. It’s even similarly unsafe to insist that “a capitalist pursuing self-interest makes life better for everyone.”

It is certainly true on some occasions. However, Smith did not write such a sentence. As always it depends, which Smith was discriminating enough to be clear upon. In Wealth of Nations, Smith was careful enough to discriminte between the actions of “merchants and manufacturers” - he never referred to them as “capitalists” - that were socially beneficial and those actions which were detrimental to those of the “society”. Klaus, clearly has not read Wealth of Nations well enough to recognise Smith’s regular suspicion - even condemnation - of “merchants and manufactuers” their nefarious behaviours.

Upon such shaky foundations, Klaus argues that Smith wrote that “The study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society.’ He is ‘led by an invisible hand to promote an end which was no part of his intention” is an unsafe generalisation and a misreading of Smith's use of the metaphor of “an invisible hand”. 

The unqualified sentence: “The study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society”  is unsafe as a generalisation. It is safer only if it is qualified. A dishonest “merchant” in pursuit of his own “advantage” could be led to “collude” with other merchants to lobby their government to impose tariffs on competitive imports in order to narrow the market and enable them to raise prices to boost their profits. 

If Klaus is unaware to the folllowing passage in Wealth of Nations where Smith categorically states: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices” he should be embarrassed to make such unjustified assertions about capitalists acting intentionally or unintentionally to do what was “most advantageous to society”. Some do and some don’t; some do so sometimes and other times they don’t. Smith was never naive about how humans behave. He was clear about what they ought to, hence he wrote his first classic: The Theory of Moral Sentiiments (1759) and his second classic, An Inquiry Into the Nature and Causes of the Wealth of Nations”  (1776). While we are at it, perhaps, Ian Klaus could also have a look at Smith’s “Lectures on Rhetoic and Belles Lettres” (1762-3) and take special note of his advice about the use of metaphors.

ADAM SMITH ON THE INVISIBLE HAND: THE FACTS NOT THE MYTHS

Dr. Marwan Iskandar opines (11 January 2016) HERE

“The Invisible Hand and Consequences of Invisible Neglect”

“The pioneers of modern economic thinking like Adam Smith and John Stuart Mill considered that an invisible hand, which guarantees the best result, guides the order of free markets. Successive crises as of 1907 culminating in the international financial and economic crisis of 2007/2008 disprove that theory.”

Comment

Adam Smith never made such a sweeping and absolutely false statement that Dr. Marwan Iskandar attributes to him. Dr Iskander is extremey well qualified and has had a distinguished career. He holds a B.A. and an M.A. from A.U.B., a law degree from the Lebanese University and a Ph.D. from Oxford, and he is a prolific author. 

Yet he will never find anything in that Adam Smith wrote that asserts “an invisible hand, which guarantees the best result, guides the order of free markets”.

That was an assertion made by economists long after Adam Smith died in 1790 and confuses modern interpretations of a singular case in Wealth Of Nations where he shows that a merchant who was pessimistic about the conduct of foreigners in respect of trade with them and in the quality of foreign judicial remedies for deceit and thereby would prefer to invest domestically instead, which motivated action would arithmetically add to “domestic revenue and employment” (WN IV.II.9. pp. 455-6).

There is absolutely no generalisation in Smith from this singular case to such an invisible hand “which guarantees the best result, [and thereby] guides the order of free markets”. 

That sort of claim is a modern one, such as by Paul Samuelson, in his “Economics: and introductory analysis” McGraw Hill, 1948, which subsequently spread into the popular textbooks and was added to by the general media where they were encouraged to do so by many prominent academic economists, including, to their shame, the authority of many Nobel Prize winners. The 5 million readers of Samuelson’s 19 editions (to 2010) who passed through Econ 101 since 1948 also remembered the false assertion that Smith allegedly enunciated the myth that his reference to “an invisible hand” was about even “selfish” motivations were all worked through the “price system” to serve the “public good”. By repetition that was all they remembered of their classes and they passed it on to the general media.

Dr. Marwan Iskandar now passes on the myth to his readers, while attacking it for being wrong! Of course it is wrong and Adam Smith is innocent of the claim that he asserted it in the first case. 

In Wealth of Nations Smith exposes such notions (more than once) throughout by showing that “merchants and manufacturers” often intentionally act to manipulate markets to limit competition in order to raise prices, often in collusion with legislators, by pressing for tariffs and prohibitions, let alone colluding with their competitors privately whenever they meet, even on social occasions (Smith in WN: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”)

So, as Smith never made such an absurd claim as attributed to him by Dr. Marwan Iskandar and often points out the contrary, is it not time his critics took note of the facts and all those who believe that he did make such claims, for both groups to read Smith for themselves, starting with Smith's clear exposition of the role of metaphors in his Lectures on Rhetoric and Belles Lettres (1762) and his Wealth of Nations (1776). They could also benefit from reading my essay, “Adam Smith and the Invisible Hand: from Metaphor to Myth” Gavin Kennedy (2008) Enquiries to: gavinK9@gmail.com

HISTORICAL CONTEXT MUST BE GRASPED BEFORE TRANSLATING SMITH INTO MODERN POLICES

David Hardman,  posts 17 December HERE 

“Soft strengths”

“In The Wealth of Nations, the Tories’ favourite philosopher, Adam Smith, espoused a view of education that is distinctly at odds with modern Tory policy. For Smith, the education of ordinary people was more important than that of “people of some rank and fortune”. Education was a protection against the dulling effect of division of labour, and against the “delusions of enthusiasm and superstition” that led to disorder in more “ignorant” nations. In short, it made people better citizens.

It is with some concern, therefore, that I note the results of the Higher Education Academy’s UK Engagement Survey, in which “being an informed and active citizen” is listed as one of the weakest outcomes of higher education (“UK Engagement Survey: universities have limited impact on students’ ‘soft’ skill development”, News, 10 December). Noam Chomsky has written of how charging students for their education dulls their willingness to question the system that has co-opted them. Smith himself wrote that, because of education’s public benefits, the expense “may, therefore, without injustice, be defrayed by the general contribution of the whole society”.

Perhaps it is time to pay heed to the educational philosophy of the real Adam Smith, not the fictional one whom the Tories would have us believe in.

David Hardman, Secretary, University and College Union, London Region”

Comment

Most people, let alone Tories, haven’t a clue about Adam Smith’s education policy, as well as most of what else he wrote.

Moreover, when Smith was alive he was actively working in an education system widely different from modern societies. 

Scotland had a more modern education system than existed in its larger neighbour, England. Since the 17th century, Scotland had local schools in almost every parish, to which all male children from 6 years old attended a local school, if only for a couple of years. Poverty was rife and local circumstances dictated how well the schools were managed and supplied with teachers. All male children were expected to be paid for by their parents (girls were left out of the arrangements) supplemented in some cases by local charties or charitable persons. In many areas some children attended until they went on to university. Smith was one such. He left Kirkcaldy Grammar School, aged 14, and enrolled at Glasgow University. Most children of poorer labouring families received a minimal education in reading, writing and arithmetic.

Smith recommended extending the Scottish system across England, though girls then were hardly provided for, in all but the middle and upper class familes, through to much later in the 19th century. His ambition was for there to be a school in every parish but this did not happen until the UK parliament legislated in the later 1860s. Meanwhile in Scotland talented boys could go into University at a young age, funded by charitable donations, one result of which was Scottish educated male children proved suitable for enlistment into the newer skilled jobs in engineering and science-based industries.

Clearly this suited the growing industialisation of the growing economy.

Smith also recommended that education was beneficial as an anti-dote to the mindless occasional riots and destructive disturbances caused by uneducated mobs bent on destructive outbursts. In WN he was writing for the attention of educated readers to see the need to support education of labouring-class boys to act as a barrier to the reception of ideas deterimental to long-term economic growth.

His readers’ self-interests should support some public provision for “little schools” on every parish, if only because raising the money from all the poorest parents would be insufficient to set up a comprehensive system (and because he judged without some even limited constribution, even if measured only in pennies, the middle-class and the upper-class would never support the scheme on such a vast scale. Noam Chomsky’s expressed views ignore the social realities of 18th century UK and his reference to “charging students for their education dulls their willingness to question the system that has co-opted them” is more relevant, perhaps, to modern times with its higher per capita incomes. Chomsky would benefit for a bit of history of the realities of pre-industrialised 18th century UK, which Smith addressed before the educational provision for all children, rich and poor. 

To assess the merits or otherwise of Smith’s limited aims, by modern standards, it is necessary to read some history of Smith’s times and tempers to understand what he was “banging on about”. Hence, Smith returned to education later on in his Wealth of Nations using argument that would persuade the rich to pay for most of it. His reference to the detrimental affects of labouring gave the rich an incentive to pay for his ambitious plans. Notably  with the rich paying for educating the poorest children, the dulling affects of manufacturing labour did not cease for the poor. That consequence continued (and continues) but the rich paid for it. Notably, out of the factory system (and mining), the educated workmen and women formed the core of what became the organised labour movement throughout the 19th century and beyond.

WHY ADAM SMITH MATTERS WHEN REPORTED ACCURATELY

L. Randall Wray in Business Standard HERE 

"WHY MINSKY MATTERS

An Introduction to the Work of a Maverick Economist by L. Randall Wray

At the core of Minsky's alternate view is the belief that "stability is destabilising". Neo-classical economists believe that even in the event of shocks to the system, market forces will operate to move the economy back to equilibrium. But Minsky disagreed with conventional economic wisdom that market forces are fundamentally stabilising. He discarded Adam Smith's notion of the invisible hand guiding the market economy. In his view, "the internal dynamics of the modern economy are not equilibrium seeking". That's radical stuff, by any standard.

Minsky argued that during periods of tranquillity, market participants change their behaviour. They believe that the good times will last and, thus, begin to take on even riskier bets. Moreover, "a stable economy makes it more difficult to find profitable business opportunities." This encourages risk-taking. Economic stability also promotes financial deregulation on the grounds that the system is more stable. These policies encourage even more risk-taking. In doing so, the seeds of the next crisis are sown. A case in point: Alan Greenspan's "Great Moderation", during which market participants took on more risks and discounted the likelihood of Nassim Taleb's Black Swan events. In some sense, Minsky's analysis, rooted in the behaviour of market participants, draws on psychology rather than economics."

COMMENT

The crux of this paper is based on the error that associates Adam Smith, inevitably, given modern lack of attention to detail, including the wrash error of not reading Smith’s Wealth of Nations and his Moral Sentiments closely, added to which most believers in the myth of Adam Smith and the metaphor of “an invisible hand” have not read his “Lectures on Rhetoric and Belles Lettres”, in which he describes the role of metaphor in rhetoric.

If they, including regrettably various Nobel Prize Winners, had done so they could not possibly believe that “Adam Smith's notion of the invisible hand guiding the market economy” was a valid representation of his thoughts on his use of the now famous metaphor.

His use of the metaphor did not relate to ‘market equilibrium’ at all. In WN he referred to the arithmetic addition of a merchant’s capital to what we would call GDP, if his felt insecurity about sending it abroad led him to invest domestically. That is all. The unintentional consequences of his investing locally were to increase “domestic industry and employment” neither of which were his original intention. In TMS the landowner hired labourers to work in his fields for their subsistence and the unintended consequence of his actions were to enable the “propagation of the species”. Neither of these outcomes added anything to “equilibrium”.

L. Randall Wray has contributed mainly to theories of money and he is worth reading. I am less familiar with Minsky. They both appear to share the modern myth of Smith’s invisible hand metaphor. I shall find out more about Minsky in due course.

THE SHIBBOLETHS OF INVISIBLE HAND THEORIES

Posted on Bella Caledonia, a Scottish Blog, broadly supportive of Scottish Independence, (20 December), HERE https://mail.google.com/mail/u/0/#inbox/151c06d98f021f32 addressing an entirely different issue from the usual one of “invisible hand metaphor:

“It is a remarkable characteristic of major shibboleths in our society that matters that would quickly be seen as being logically contradictory, factually unsustainable, rationally incoherent or merely ridiculous can survive unscathed as conventional, unchallengeable wisdom for endless decades simply because they are long established in society as sources of unexamined authority, and the incoherence is never allowed to be exposed to critical, independent examination outside the narrow context of the established, even revered convention, or beyond the control or reach of the arbiters who manage it; the priesthood of the conventional wisdom.” 

Comment

Nevertheless, the paragraph could have been written as a direct description of the false post-Paul Samuelson account of what Adam Smith meant when he used the metaphor of “an invisible hand” on two distinctly different occasions and how it subsequntly spread throughout the economics profession from 1948 and today straddles the entire “priesthood” of the discipline.

Certainly the “priesthood” of our discipline from Nobel Prize winners down through to junior staff teaching in Economics 101 tutorials across the entire world appears to be self-mesmerised by a supposed "invisible hand" at work, variously, in "free markets", which do not exist anywhere (and never have), in "supply and demand" theory, in "price theory" and in doctrinaire ideologies of Left and Right.

WHO IS KIDDING WHO?

Harrison Barnes from Los Angeles Office Managing Director, posts on BCGSearch HERE

"How the “Invisible Hand” Operates in Law Firm Employment Decisions: The Top 12 Most Important Factors Firms Consider When Hiring (and Firing) Attorneys"

"To my amazement, I have even read various books and papers about this. None of this really matters. The qualities that law firms and their clients are looking for in attorneys are driven by the “invisible hand” and this market-driven phenomenon controls who succeeds and who fails.

For the most part, law firms hire attorneys based on their attempts to maximize their own self-interest and what is most likely to make their groups survive and grow. Similarly, for the most part, attorneys accept jobs based on their own self-interest and on what is most likely to benefit them. The invisible hand is thus operating in law firm hiring decisions and the result is that the attorneys who get hired are the attorneys who are the most motivated, qualified and suitable to the profession.”

Comment

No explanation of what the ‘invisible hand” is or what people mean who quote it. Harrison Barnes seems to believe in individuals maximising their self interest, as if in doing so they seamlessly maximise the self interest of the firms they join, as if individual self interestss somehow automatically maximise the self interest of the group.

What about where individual self interests conflicts with other partner’s self-interest? And what is the meaning and role of an invisible hand? If its invisible how do you know its operating? If results determine if the IH is working (and under whose direction)? If it is by results after the fact how do you protect the group from wayward individuals who compromise the integrity of the grou and, as important, how does the group protect itself from reputational damage?

That “market-driven phenomenon controls who succeeds and who fails” is not encouraging for hiring individuals seeking employment; they may read the “market" drivers wrong and behave accordingly, taking personal goals to extremes and cause reputational damage to other partners. 

Harrison Barnes as gatekeeper selects according to his norms of desirable conduct, not by the influence of a supposed inanimate invisible hand. If he recruits someone who turns out to be lemon, his defence to the Partners is that it wasn't his fault at all. It was the invisible hand's!

FACTS HELP A CASE BUT AVOIDABLE ERRORS DO NOT

David Gura posts (15 March) HERE 

“The rich history of money and why we can't master it”

“The first person to reference the invisible hand wasn’t Adam Smith; it was John Calvin, notes Columbia University humanities professor Mark C. Taylor. Calvin believed that God’s hand brought order to an otherwise chaotic world. By using this terminology, Smith changed the “source of order” from “God, to internal relations among individual human actors. From this point of view, the market is a self-organizing system that regulates itself,” writes Taylor.”

Comment

Early usage of the metaphor of “an invisible hand” long pre-dated both Adam Smith and Calvin. 

A short and by no means exhaustive summary shows its previous usage by numerous authors going back to 720BC (see Kennedy: Adam Smith and the Invisible Hand: From Metaphor to Myth, Econ Journal Watch:

Homer (Iliad, 720 BC): ‘and from behind Zeus thrust him [Hector] on with exceeding mighty hand’. Smith had several copies in his library.
Horace: Fulminantis manus Jovis’ (The mighty hand of thundering Jove) odes 3.3.6, ‘which smith knew well’ (Force 2003, 70).

Ovid of Caeneus at Troy: ‘twisted and plied his invisible hand, inflicting wound within wound’ (Bonar 1966, 125).
Lactantius (c.250-325), De divinio praemio: early use of ‘invisibilis’.

Augustine (354-430): ‘God’s “hand” is his power, which moves visible things by invisible means’ (Force 2003, 71).
Shakespeare (1605): ‘Thy bloody and invisible hand’ (bonar 1966, 166). 

Glanvill (1661): ‘nature work[ing] by an invisible hand in all things’; ‘invisible intellectual agents’ (andriopoulos 1999, 739n-758).

Voltaire (1718): ‘Tremble, unfortunate King, an invisible hand suspends above your head’; and ‘an invisible hand pushed away my presents’ (Bonar1966, 192).
Daniel Defoe: ‘a sudden blow from an almost invisible hand, blasted all my happiness’, in Moll Flanders (1722) (Buchan 2006, 2) ‘it has all been brought to pass by an invisible hand’ (Colonel Jack, 1723). (Force 2003, 71-2, & n 102).

P. burman (1734) trans.: Jupiter, invisible to humans, ‘armed his hand with winds, rains, storms, thunder and whatever else belongs to this kind of things’ (bonar 1966, 38; vivenza 2008).
Nicolas Lenglet Dufesnoy (1735): an ‘invisible hand’ has sole power over ‘what happens under our eyes’ (Force 2003, 72).
Charles rollin (1661-1741): whom Pierre Force describes as ‘very well known in English and Scottish universities’, said of the military successes of israeli Kings ‘the rapidity of their consequences ought to have enabled them to discern the invisible hand which conducted them’ (rollin 1730-8 1(l); Force 2003, 72).
William Leechman (1755): ‘the silent and unseen hand of an all wise Providence which over-rules all the events of human life, and all the resolutions of the human will’ (Leechman 1755, xii; Bonar 1966, 92).

Charles Bonnet (whom smith befriended in Geneva in 1765) wrote of the economy of the animal: ‘it is led towards its end by an invisible hand’. (Bonar,1966, 32; smith 1987, 181-2; Force 2003, 73).
Jean-Baptiste Robinet (1761) (a translator of hume): refers to fresh water as ‘those basins of mineral water, prepared by an invisible hand’ (Bonar 1931, 158).
Walpole (1764): ‘the door was clapped-to with violence by an invisible hand’ (Andriopoulus 1999).

Reeve (1778, 13-14): ‘Presently after, he thought he was hurried away by an invisible hand, and led into a wild heath’ (Andriopoulus 1999).

Peter Harrison (Oxford) has traced c.40 theological references to the metaphor before Smith in “Adam Smith and the history of the invisible hand”, Journal of the History of Ideas, 2011, 72 (1) pp.29-49.

The facts are conclusive. David Gura may wish to take note, as might humanities Professor Mark C. Taylor at Columbia University.

FROM PAUL SAMUELSON TO THE WORLD BANK

Kaushik Basu, Senior Vice President and Chief Economist of the World Bank, is Professor of Economics at Cornell University. HERE 

Extract (October 17, 2015) from a conference at Columbia University honoring Joseph Stiglitz for a half-century of teaching. HERE 

“Stiglitz’s Sticky Prices”

WASHINGTON, DC – For a long time, the assumption underlying  much of mainstream 
economics was that the invisible hand worked its magic seamlessly. Prices moved smoothly
up as demand outpaced supply and rushed back down when the tables were turned, 
keeping markets in equilibrium.

To be sure, many observers realized the truth was actually quite different – that prices, and wages and interest rates in particular, were often sticky, and that this sometimes prevented markets from clearing. In labor markets, this meant unemployed workers facing prolonged job searches. But the response by others in the field was that what their colleagues described as “unemployment” did not truly exist; it was voluntary, the result of stubborn workers refusing to accept the going wage.

Among those who recognized the reality of involuntary unemployment were John Maynard Keynes and Arthur Lewis, who incorporated it into his model of dual economies, in which urban wages do not respond to labor-supply gluts and remain above what rural workers earn. Both Keynes and Lewis used the stickiness of prices extensively in their work. But even for them, the concept was only an assumption; they never managed to explain why wages and interest rates so often resisted the pressures of supply and demand.

Columbia University’s Joseph Stiglitz, who celebrates 50 years of teaching this year, solved the puzzle. In a series of innovative papers, Stiglitz picked up some elementary facts about the economy that lay strewn about like jigsaw pieces, put them together, and proved why some prices were naturally sticky, thereby creating market inefficiencies and thwarting the functioning of the invisible hand. In Stiglitz’s words, the invisible hand “is invisible at least in part because it is not there.”

Comment

The first sentence exposes the fallacy prevalent in mainstream economics:

“For a long time, the assumption underlying  much of mainstream economics was that the invisible hand worked its magic seamlessly.”

Check Kaushik Basu’s language: “the invisible hand worked its magic seamlessly”. But that was a myth largely created in modern times by Paul Samuelson in his popular textbook, Economics: and introductory analysis, 1948, from its 19 editions with 5 million sales, plus an active second-hand market. (See: G. Kennedy. 2010. Paul Samuelson and the Invention of the Modern Economics of the Invisible hand. History of of Economic Ideas, XVIII 2010/3. pp 105-119).

Stiglitz broke cover and announced “the invisible hand is invisible at least in part because it is not there.” The modern profession has taken little notice of Stiglitz’s announcement, nor the empirical evidence whereas the empirical evidence of Samuelson’s role in spreading the myth of a “magical” invisible hand is conclusive, and can be shown in a graph of mentions of the "invisible hand", published by me when I discussed the myth of the “invisible hand post-Paul Samuelson in my paper, Kennedy, G. 2010 “The Myth of the Invisible Hand – A View From The Trenches” Gavin Kennedy (Heriot-Watt University, Edinburgh) (readers seeking a copy of this paper, please contact me at: gavink9@gmail.com).

The data upon which the graph in the above paper was published was prepared by kind Dan Hirschman, a post-graduate PhD student from data from: Warren Samuels, (with the assistance of Marianne F. Johnson, William H. Perry). 2011. Erasing the Invisible Hand: Essays of an Elusive and Misunderstood Concept in Economics, New York. Cambridge University Press. 

The graph shows the spectacular rise in modern mentions of the “invisible hand”. Samuels reported that “Incomplete data for materials published in the English language – principally, but not solely, economic writings – suggest that between 1816 and 1938, the average annual level of writings in which the “invisible hand” appeared was very low”, confirming my assertion from library searches. Thereafter, writes Warren Samuels, “from roughly 1942 through 1974, the average annual level of writings doubled; from 1975 through 1979, it roughly doubled again; and between 1980 -1989, it was approximately 6.5 times higher than it had been during 1942 through to 1974. Between 1990 and 1998, the average annual level was a little more than eight times that of the 1942-1974 level and slightly more than 20 percent higher than the 1980-1989 level. During 2000-2006, the average annual level seems to have receded to a level slightly more than 60 per cent of the 1990- 1999 level, the highest level reached so far” (Warren Samuels, 2011, 18-19).

Kaushik Basu, at the World Bank, has access to considerable data collection resources which he could mobilse to follow the trajectory of mentions of the invisible hand in both the scholarly press and the public media, from those associating the "invisible hand" with market economies, since Paul Samuelson's 1948 assertions about Adam Smith's alleged meaning when he used of the now famous metaphor, which was  ignored while he was alive and afterwards hardly commented upon for a 100 years and more after he died in 1790. From 1875 the myth of the invisible hand's so-called "magical" (indeed "miraculous") powers took root in Cambridge (England). Once Paul Samuelson got hold of the wrong-end of the stick, it spread out from MIT and conquered the Academy and the modern media.
It has done much to confuse Smith's modest use of the now famous metaphor with a wholly invented interpretation of it by late 19th and early 20th century economists and it is now embedded in folk lore, even among most Nobel Prize winners.

BETTER NEWS AT LAST OR THE SAME OLD STORY?

Fetsum Berhane posts (15 December) on ALLAFRICA HERE http://allafrica.com/stories/201512151234.html

“Ethiopia: Beyond the MDGs - the Post-2015 Development Agenda”

“The solutions for poverty reduction were seen to arise from visible hands of states after the "the invisible hand" failed to correct anything for decades.”

Comment

African states have a long record of corruption, mismanagement, and abject failure. It may be encouraging if the Development Agenda claims are accurate and warranted.

There can be no blame on the so-called “invisible hand” because no such miraculous power exists. Markets are as corrupted as the echolons of the states that govern in Africa.

All too often there is no “visible hand” as governments hide their actions and publicise their claims as much as participants in markets. Ideologists of the Right make claims for “an invisible hand” of markets, supposedly “coined” by Adam Smith (it wasn’t) and ideologists of the Left make claims for “visible hands” of states, where there is much open and hidden corruption and personal power.

The result is total failure.

If there signs of rising living standards, which is excellent news, that is good news and long overdue. Neither Right or Left can claim the credit.

NEWS ABOUT ADAM SMITH'S EDINBURGH HOME

Wonderful news at last!

Adam Smith’s Edinburgh home that he lived in with his mother, Margaret Douglas Smith, and his aunt and housekeeper, from 1778 until his death in 1790, is to complete its restoration work from 2016 to the Autum of 2017.

Readers can keep abreast with the restoration programme by contacting: 

panmureenquiries@ebs.hw.ac.uk

Among the many contributions to the Panmure House project its has received a generous gift of a first edition of The Complete Works of Adam Smith edited by Thomas Cadell Jr and William Davies by the late Ian Simpson Ross, author of the definitive biography, The Life of Adam Smith, (1995, 2nd. ed. 2010, Oxford University Press). 

These works will be on display within the reception area along with interactive information on Adam Smith’s writings, his continuing relevance to the issues facing the modern world and the impact of the Scottish Enlightenment.

 

LOONY TUNES NO. 124

1

George Kacher reviews (23 November) a new Ferrari in Motor Mag HERE http://www.motormag.com.au/reviews/1511/ferrari-laferrari-review/

“Everything this car does seems to happen in warp speed. Throttle response is claimed to be twice as quick as the Enzo, hard acceleration making LaFerrari jolt forward as if forced by some invisible hand.”

Comment

Earlier George describes the car’s performance with a similie as “like greased Lightning” and the circuit as more “grease” than “lightning”. 

2

In FOREX STREET (Mumbai) (27 November) HERE

http://www.fxstreet.com/news/forex-news/article.aspx?storyid=b0c7be3b-91c5-41d4-afc5-393a45ec1d8a

“The GBP/CHF pair trimmed gains to trade below 1.55 levels as the broad based sell-off in the CHF reportedly due to SNB’s invisible hand came to a halt.” 

Comment

Q: How does a metaphor “come to a halt” - even how does it move?

3

Devon Scoble in Toronto (4 December), a Libertarian, argues for a “Pot luck” party in National Post (Canada)

HERE http://news.nationalpost.com/life/food-drink/when-it-comes-to-potlucks-its-time-to-give-the-people-what-they-want-to-bring

“When it comes to potlucks, let people bring what they want — who cares if it’s all dessert?”

“A potluck isn’t forever; it’s one special event defined by a sharing spirit. And if that spirit produces nothing but a table laden with sweets? Instead of biting the invisible hand that feeds, lick the frosting off instead. Trust me, it’s delicious.”

4

Hyelim Son posts HERE from a set of slides for Lecture 12 of a set of downloadable Course Notes:

“The Invisible Hand

Previously, we have learned that when people

act out of self-interest, the market will

allocate resources to the highest value users.

The market achieves this through price

signals (The invisible hand)”

Comment

That is the most nonsensical statement I have read for a very long time.

True: markets work by using VISIBLE prices and without them markets would not function.

False: this has something to do with “an invisible hand”. 

But If all prices are visible, what does an invisible hand do?

ONE STEP FORWARD, TWO STEPS BACK

Karl Rove, described as a “Republican Strategist”, (6 September) offers in The Week his 6 favourite books, of which no.3 is one of Adam Smith’s HERE 

“The Theory of Moral Sentiments by Adam Smith (Liberty Fund, $14.50). Nearly two decades before the publication of The Wealth of Nations in 1776, Smith examined how people seek to live lives of virtue by attending to their own moral urges. This book's attempt to develop a science of morals deeply informed Smith's later work on the invisible hand that powers market economies.”

Comment

Whilst applauding Karl’s choice of Smith’s Moral Sentiments (1759), I am bound to carp at Karl’s assertion that TMS “deeply informed Smith's later work on the invisible hand that powers market economies.”

How a major treatise on moral philosophy deeply informed Smith’s use of a single metaphor in a 2-volume book, I am at a loss to understand or explain to readers, especially as Karl asserts that “the invisible hand … powers market economies.” 

Smith did not claim that “market economies” (Wealth of Nations) “powered market economies”, and neither did he claim that “the invisible hand” powered pre-market economies such as agriculture”, which was his subject in TMS which contains his other reference to the IH metaphor.

Market economies said Smith were “powered” always by VISIBLE prices - they could not work without them!

Moreover, his two (only) uses of the metaphor of “an invisible hand” were about different subjects, namely in Moral Sentiments it described the motivations of the parties, namely, “proud and unfeeling landlords” (in agricultural economies) and dependent serfs and labourers, working the landlord's fields in return for their families subsistence, leading unintentionally, over time, to the “propagation of the species” (TMS, part IV, chapter 1, pp 184-5), and in Wealth of Nations it described how a merchant, seeking safe investments, intentionallly invested his capital locally, thereby unintentionally adding arithmetically to “domestic revenue and employment” (WN Book IV, chapter 2, pp 456; think GDP). 

In neither case was it about market economies being “powered by an invisible hand”. 

(For the record, I know Smith referred to “the invisible hand of Jupiter” in his History of Astronomy (1748-c.58) which, of course, had nothing to do with “market economies”. Anyway, his use of the "IH" on the occasion was as a proper noun, not as a metaphor!).