MERCHANTS CAN BENEFIT SOCIETY BY THEIR MOTIVATED ACTIONS AND ALSO MAY HAVE THE OPPOSITE EFFECT.

Thomas Nowak posts 29 June on Euractiv HERE

“Can the invisible hand guide us towards a decarbonised energy system?”

“This is not a new idea: The Scottish economist and philosopher Adam Smith (1723-1790) used the term “invisible hand” to describe the connection between individual action and the common good. Striving to maximise the individual good would automatically benefit society he argued and it would achieve the common good even better than had this been the individual’s goal in the first place. This effect would be achieved automatically through the price mechanism facilitating trade and market exchange.

The invisible hand theory is at the basis of Europe’s neoclassical, market-based economies. It is therefore no surprise that it (maybe invisibly) guides policymakers when they defend their refusal to select the means to an end, be it in the areas of innovation, efficiency or renewables. “We do not pick winners” or “legislation must be technology neutral” is a phrase often used. It assumes that policy makers do not need to take these decisions, because the market mechanism based on prices and rational decision making leads to a better result. Rational choice by the individual will help society to achieve its goals.

This would be very elegant if it worked. What is typically forgotten is that Adam Smith was a moral philosopher too and his theory included one important side condition: human virtue. A responsible individual would include the side effects of its action into the rationale of his decision making. If decision making is solely based on the price as carrier of information, the invisible hand must fail in maximising the common good whenever the price does not tell the truth.

This is the case for our energy system: The price mechanism does not work – the invisible hand is broken. Prices for many energy sources do not reflect the cost of environmental and social impacts of their use. …

…Policy makers are the doctors of the system. Applying the medicine suggested here will not only fixe the invisible hand, but will also allow much higher ambition levels and thus accelerate the energy transition, even possibly on time to limit global warming.”

COMMENT

Adam Smith did not use the metaphor of an “invisible Hand” as a ‘term’ (whatever that means). He used the “invisible hand” as a metaphor. To understand his views on the role of metaphors: see Adam Smith’s “Lectures on Rhetoric and Belles Lettres”, delivered in 1748 in Edinburgh as public lectures for fees from his audiences, and later at the University of Glasgow from 1751 to 1763. The lectures are available from Oxford University Press. Absent a knowledge of Adam Smith on metaphors disqualifies modern authors from writing about his meaning of “an invisible hand”.

Thomas Nowak writes:

“Striving to maximise the individual good would automatically benefit society he argued and it would achieve the common good even better than had this been the individual’s goal in the first place. This effect would be achieved automatically through the price mechanism facilitating trade and market exchange.”

He is muddled rather than correct. Adam Smith made many assertions that individual merchants also acted intentionally to maximise their “own” interests with detrimental consequences for the common good, such as, to take one example mentioned several times by Smith, when they lobbied governments to impose tariffs on imports or to ban them outright, thus enabling said merchants to reduce competition and thereby raise their prices.

If Thomas read Adam Smith carefully he would refrain from making such generalisations as he does in his article. The error lies in the writings of modern economists, and their readers, nor in anything written by Adam Smith.

Markets work by visible prices, not by invisible hands, which metaphorically describes how the self-motivated actions by merchants, who invest their capital in their local economy, automatically and inescapably adds to domestic aggregate output and to aggregate employment, which is a public benefit. That’s all.