THE OBVIOUS MEANING OF ADAM SMITH'S USE OF THE 'INVISIBLE HAND METAPHOR

Fiscal Poicy in an Islamic Economy

HERE

Adam Smith’s Theory

“Every individual necessarily labors to render the annual revenue of the society as great as he can … He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention … By pursuing his own interests, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”

• Adam Smith’s believes that there is no need for external party to intervene in the market.

• He believes that the market are capable of correcting itself because of the ‘invisible hand mechanism’, which is the the unobservant market force that helps the demand and supply of goods in a free market to reach equilibrium automatically.

• He explained that an economy will comparatively work and function well if the government will leave people alone to buy and sell freely among themselves.

• He suggested that if people were allowed to trade freely, self interested traders present in the market would compete with each other, leading markets towards the positive output with the help of an invisible hand.

COMMENT

Adam Smith’s use of the “invisible hand” was not a theory. It was a metaphor. Moreover his use was ignored until the 1880s, even by several prominent 19th century commentators who wrote extensive comments of his Wealth of Nations. It became widely referred to only after Paul Samuelson (Nobel prize inner) published his Economics textbook in 1948.

Adam Smith died in 1790, before even the word ‘capitalism’ appeared in English in the 1830s.

The modern ‘theory’ of “an invisible hand” is based on a myth. Smith's use was so obvious it was not commented on by any leading economists in the 19th century.

If a merchant invests capital in an economy he/she adds to aggregate domestic capital investment,which metaphorically is a social benefit from the expense of the investment, which automatically becomes income for those employed by the investment, which in turn adds to subsequent rounds of their expenditures. That is all Smith meant by his use of the metaphor.

IS ECONOMICS A SCIENCE?

BLOMBERG (19 February, 2016) HERE

Shell Game: Their Leveraged Derivative Trade Is The Market Fundamental (25 Nov. 2017)

Summary

Shell dominated Brent oil trading to such an extent that it moved the market even against global fundamental supply & demand.

Physical supply & demand fundamentals are insufficient in modeling a complex, dynamic system like global oil markets.

Leveraged derivatives create herding behavior, inter-connectedness, and price extremes.

In this article, we will examine a specific market event in which it is alleged that Royal Dutch Shell moved the global Brent price against the fundamentals of global supply and demand.

February 2017: Shell Shakes Up Oil Trading World

This Bloomberg article from 19 February 2017 discusses Royal Dutch Shell’s involvement in the Brent derivative market in April 2016. The article asserts that Shell was a buyer, sufficient in quantity, to move the market price contrary to the fundamentals of global supply and demand. Shell is the world’s largest oil trader, and as a result can amass leveraged positions that dwarf physical trade volume. Shell, like all large market participants, can accomplish this activity because the global crude oil market is a financialized, globalized, complex adaptive system. In such a system, their leveraged positioning (certainly amongst other inputs) IS the market fundamental. To understand this more clearly, we need to briefly look at classical economics and complexity economics.

Financial media, like much of consensus financial industry analysis, is guided by linear, deterministic cause and effect models, largely borrowed from classical physics. Additionally, the equilibrium paradigm is a borrowed concept from classical science especially relevant in attempting to explain price movement from fundamental supply/demand equilibrium or lack thereof (Adam Smith’s Invisible Hand as an example). Finally, reductionism (the idea that society and its institutions do not differ from its individual agents) rounds out the major pillars of what could be called classical economics. While this system and its derived models might have been sufficient in an era of predominantly industrialized economic activity, the development of modern globalization, financialization, and post-industrial economic activity (informational/technological) render classical economic models and thinking, at minimum, incomplete in adequately understanding capital flow and properly assessing risk in a complex adaptive system like the global crude market.

Comment

Unfortunately the rest of the article is behind a pay wall (a spreading habit in web posting, I note). Hence, I cannot comment on the phenomenon).

However, there is enough to suggest that the old tools of ‘suppply and demand’ diagrams are increasingly irrelevant. Recently, I have been given to questioning these former fundamentals in Economics, even classing some uses of S-D relationships as systemically flawed, especially in the case of Marshallian S-D 'cross' diagrams as taught and drawn endlessly in Economics 101 and believed in right throughout the profession.

Take this extraction from the above: “the equilibrium paradigm is a borrowed concept from classical science especially relevant in attempting to explain price movement from fundamental supply/demand equilibrium or lack thereof (Adam Smith’s Invisible Hand as an example).”

I would swap the statement in the above quotation:

“in attempting to explain price movement from fundamental supply/demand equilibrium or lack thereof” with “perporting” to “explain” price movement. There is no “supply/demand equilibrium”. Any way, how would participants in markets know that their agreed price was in a unique “equilibrium”? All agreements on price are in a sort of ‘equilibrium’ for that transaction but not for all transactions across all transactions.

On ‘Black’ Friday or ‘Cyber’ Monday where is the uniquely “equilibrium” price?

As for 'Adam Smith’s Invisible Hand as an example' I can only shake my head in despair ...

Report on Progress of "An Authentic Account of Adam Smith" November

My new book, "An Authentic Account of Adam Smith" is nearing publication, but it has someways to go before an actual date is announced.
As an author of 25 books I have not experienced the latest in publishing technology which my 'Authentic' book is experiencing.
Formerly, an author submitted a manuscript to a publisher and awaited the inevitable editorial queries from the publisher's staff assigned to the publishing process. 
The first task being to prepare the author's manuscript for a final version; the second task was to hand over the final edited manuscript to a printer; the final task was to print the final text, bind the pages into a book format and send copies of the newly printed book to booksellers, with finished stocks of the new book warehoused for future sales.
In the new process, the author's copy text is prepared by the publisher's staff, thoroughly edited until a printable copy text is created (inclusive of all author queries answered plus an Index supplied by the author) from which the book is printed, bound and made ready for delivery direct to cash purchasers.
Print runs can be singular copies only and sold direct to purchasers, or in varying quantity runs, again as per cash orders, i.e. no unsold stock stored in large warehouses.
The above is what I have surmised. No explanation has so far been supplied by the publisher, so some of my details above may be off the mark, for which I apologise.
Next step? I await final printed pages and any further queries that may have arisen. I shall keep readers informed, more for your general information on the grounds that readers who are already experienced authors or who are about to become one may also became aware of the pending revolution in the book publishing process.
I shall let you know of the next steps and my general impression of its advantages for authors and, of course, readers.

MORE CRITICISM OF MATHEMATICAL ECONOMIC THEORISING

Jeffrey Snider, the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor, posts (17 November) on Real Clear Markets: HERE

“Trying to Make It a Legitimate 'Science', Economists Achieved the Opposite”

[Economics now publicly chastises as it tries as it tries to degrade the most significant markets on the planet] is perhaps a case study in the unraveling of a theory.  The contradiction is just too good to ignore.

And it is a very simple case of not being able to see the forest for the trees.  Central banks around the world claim they are normalizing monetary policy for the first time in a decade because their respective economies have finally healed more than enough to warrant some normalness.  Several of them, including the Fed and now the Bank of England, are raising rates to that end.

Yet, in doing so they are increasingly perplexed, visibly miffed even, at what little respect for their power is being displayed practically everywhere.  Inflation is coming, they say. Growth is picking up, they say.  With those can only be higher rates….

That’s true.  If inflation was to actually accelerate along with economic growth and opportunity, bond rates especially at whatever long end would be rising.  Each yield curve would steepen first in doing so, and then flatten as the process wound down into full recovery and an actual rather than imagined economic boom.

Yield curves are flattening, alright, only at the start of the process rather than at its end.  It’s this that has central banks, and the media, nearly apoplectic.  Central banker after central banker says things are working and getting better, and that because of this they will raise the short end of each curve. The bond market reply isn’t that central bankers are wrong about what they will do, it’s more so that markets don’t care one bit because they are wrong about why they will do it. …

… The problem is science. What I mean by that is Economics can never really be one, at least not in the same way as physics or whatever other hard science. The scientific process is about observation, replication of results, and predictability.  Any hypothesis must be observed, verified by results that anyone else can replicate, and lead to predictable outcomes. 

For Economics, what truly counts as an observation? What actually happens inside any economy down to the smallest one is unobservable. We know that transactions and trading takes place, but there is no possible way to track and measure every single thing that occurs.  Even if it was possible to track all of it, there is no clear method for aggregation and then useful analysis. Thus, any economic observer is always at the start forced into short cuts to try to make sense of Adam Smith’s invisible hand. …(GK my emphasis)

..In short, bonds are calling the inflation/growth bluff.  And why wouldn’t they?  We’ve heard all this before, several times, and often in just as emphatic terms as now....

...The chief difference between that conundrum and this one, though, isn’t just numbers.  ...

...Rather than listening to the market, central bankers and economists are telling everyone else not to. This is extremely odd given that rational expectations demands respect for market prices.  We know from history, however, especially the crisis history over the last ten years, that central banks don’t actually operate based on market reality but instead theoretical market “reality.”…

…Rather than turn it into a truly scientific process, however, the focus on mathematics has inverted the whole of it. The mathematics have become all that matters to an Economist, so that without it he can make no sense of anything that doesn’t fit.  The main part of any scientific process is falsification, but in Economics there can be none. The models have become more real than reality. …

COMMENT

More evidence that some economists are becoming wary of the accepted (imposed?) models that are   celebrated within the discipline and are repeated in the popular media.

The irony is that the celebrated quality standards that count for promotion and prominence in economics are now those of higher mathematics supposedly replicating reality. Hence, the mindless celebration of the "invisible hand", the wholly misunderstood metaphor used once by Adam Smith in Wealth of Nations, which sat unrecognised in his now famous textbook for 60 years by those who read and wrote about it from its last edition (1789) until the 1850s. Even then it was another generation before a brilliant mathematical economist, Paul Samuelson) misinterpreted Smith's metaphor, supposedly as the most significant theoretical contribution to 20th century economics in his 1948, textbook., and misled generations of economists (and their students) to repeat his error.

GOOD SENSE IN BOSTON

Professor Emeritus, John Hill, posts (16 November) on Boston Globe:

“Automation can benefit us all, but first let’s bid laissez faire adieu” 

L. Rafael Reif’s “Transformative automation is coming — the impact is up to us” (Opinion, Nov. 10) is laudable. But without a significant change in the political economic mind-set of this country, a smooth transition will be difficult to attain. Reif seems aware of the difficulty when he writes: “Whether the outcome is inclusive or exclusive, fair or laissez-faire, is up to us.”

Unfortunately, our economic mind-set is poisoned by the myth of laissez-faire. For well over a century, American capitalism has been based on the fake news that Adam Smith, the so-called father of capitalism, advocated laissez-faire. Smith never used the term. In fact, he advocated capitalism with justice, liberty, and equal opportunity. Smith also wrote that increased productivity, due to the division of labor, made it possible to spread wealth to the lowest ranks of the people. Automation could benefit everyone in society if Smith’s moral capitalism were combined with Reif’s proactive and thoughtful reinvention of work.

John E. Hill

Milton

COMMENT

Absolutely right!  Professor John Hill knows the truth about Adam Smith's ideas.

Another step towards good sense and historical accuracy about Adam Smith’s political economy. Spread the news ...

ANNOUNCEMENT NO 3

Writing and preparing my manuscript for my 'Authentic Account of Adam Smith' has brought to my attention the new world of modern publishing.
After 25 books since my graduation everything has changed and my first book, The Military in the Third World (Duckworth).
No more writing a book and sending its manuscript to a publisher and sitting back, awaiting the proofs for final correction and leaving the rest to the publisher, who arranged the printing, binding and delivery of finished books to the market.
Now the finished electronic book is sent back to the writer for final corrections and then sent back to the publisher for final production.
Sounds simple. 
A giant leap forward to the new technology.
Published books, from single copies, to large print runs all to order.
No more warehouses full on unsold books. Electronic storage only of the master copy.  Books sold per copy, all published and printed to order, or sent as single electronic copies - even single chapters - to cash supported orders.
I had no idea of what I was taking on when I agreed to the contract terms this time round.
Well, my final electronic manuscript is with the publisher's printer. I await the final verdict.
I expect more work to be required.
In the meantime, Lost Legacy Blog will resumed its commentary on passing events associated with the historic Adam Smith and his modern scholars. 

MORE MYTHS ABOUT ADAM SMITH

"Adam Smith (Critical Lives) by Jonathan Conlin

Overview: Universally acknowledged as the father of capitalism, the eighteenth-century Scottish thinker Adam Smith is best known for his "invisible hand" theory. This theory argued in favor of setting individuals free to pursue their self-interests for the good of all and has helped to make Smith's name synonymous with unfettered free market capitalism. In this book, Jonathan Conlin rescues Smith from the straight-jacket of economics, reattaching the "invisible hand" to Smith's philosophy of ethics.

As Conlin shows, Smith rooted our instincts to trade in human psychology. Analysing the contrasts he saw between the industrialising Scottish lowlands and the clan-based pastoralism of the Scottish highlands—as well as the contrasts between the ideas of contemporary thinkers such as Jean-Jacques Rousseau and David Hume—Smith advanced a system of ethics founded on sympathy. Weaving together Smith's life and ideas, Conlin shows how the latter anticipated much more recent developments surrounding behavioural economics, virtue ethics, and social inequality. Ultimately, Conlin argues, Adam Smith offers us a set of tools to face today's challenges and become better and happier human beings.

Genre: Non-Fiction, Biographies & Memoirs." HERE 

COMMENT 

From the blurb above I am inlcined, half seriously, to challenge Conlin’s inclusion of his book in the non-fiction category of recent publications.

Whatever Smith’s popular reputation - mainly made by ill-informed, non-readers of his Works - he was not the ‘father of capitalism’ (whatever that means), nor was he “best known” - by whom, on what basis? - for his so-called “invisible hand theory”. 

Adam Smith’s contemporaries said virtually nothing about his ultra-limited use of a literary metaphor of an ‘invisible hand’. 

Moreover, those political economists who published their major books on political economy, while discussing in great detail, Adam Smith’s two major Works, ‘Moral Sentimens’ (1759) and ‘Wealth of Nations” after he had died in 1790, said not a word about the ‘invisible hand’ throughout most of the 19th century. 

The modern image of Adam Smith and the romance of the ‘invisible hand’ is a purely 20th-21st century invention, led by Paul Samuelson, beginning in 1948 in his basic 101 Economics Text book, through 19 editions to 2010,  and 5 million plus sales. From Samuelson, a brilliant mathematical, Nobel Prize winnning economist, but a poor reader of Adam Smith, the romance of the Invisible Hand began and has spread across the discipline and thoughout the mass media.

Whatever, Conlin ‘weaved together’, they were not the ideas of Adam Smith, born in Kirkcaldy, Scotland in 1723, who died in Edinburgh in 1790. They appear to be ideas circulating across the mass media and the myths spread by literate publicists on University campuses, who should know better by checking their sources. 

Incidently, ‘capitalism’ is a word first used in print in th 1830s, 40 years after Smith died in 1790. Moreover, commercial markets began to appear centuries earlier in Europe and Asia, before Adam Smith was born in 1723. 

Seriously, if Smith had continued his Ordination studies at Balliol College and had become a Priest in the Church of England as was intended, we would never have heard of him. However, commerce would have continued to develop towards capitalism without the many blessings of Smiths genius, more or less exactly as it did, quite independently of Wealth of Nations. 

Just a thought…