QUICK BITS NO 5

Alex Otti posts (23 May) in Today HERE 

“When and how to spend the money you do not have”

“The classical (including the neo classical) school of thought was led by the father of economics himself, Adam Smith (1723-1790). Their argument can simply be summarized thus: In time of crisis, there is an invisible hand, a sort of inbuilt self-regulating mechanism that would stabilize the economy to bring everything to an equilibrium level. To demonstrate this, if demand goes up, prices are bound to go up in the short run. Because prices are up, producers are going to produce more which will in turn bring prices down as the rising demand is met. All these economic activities are regulated by the market because people who are assumed to be rational, will always act in their best interest. The proponents of this view, therefore, advised government not to intervene as doing so is bound to distort the economy. One of the writers emphatically states that “it is not out of the magnanimity of the baker that we have our bread, nor the generosity of the butcher that we have our meat, but out of their self-interest”. It therefore, follows that altruism is not a virtue and selfishness is not necessarily a vice in the world of classical economists.”

Comment

The above is almost beyond taking seriously. Smith used the “invisible hand” as a metaphor, for the motivation that leads a person to an action for an intended end, and in doing so that motivated action may have unintended consequences that may be benign or malign, depending on the circumstances.

The “metaphor” was not a “self-regulating mechanism that stabilizes the economy”. Also, people are not all “rational”; it is an unsafe assumption that they “will always act in their best interests” or that everybody’s best interest are a reliable guide to how to act. Each person, wrote Smith, does not act like a chess piece on a chess board; each person has a principle of motion of his own.

Alex Otti should read more and pontficate less.