Wednesday, February 14, 2018

DIRECT SUPPORT FOR LOST LEGACY ON THE INVISIBLE HAND

On Kennedy’s Literary Proof of the Impossibility that Smith had a ‘Theory of the Invisible Hand of markets’ in The Wealth of Nations, by Michael Emmett Brady, California State University, Dominguez Hills, Carson, California, 
Abstract- G. Kennedy carefully examined the conflict that Smith covered in The Wealth of Nations brought about by Upper Income citizens that Smith classified as “ Projectors, Imprudent risk takers, and Prodigals” . Their behavior led to very detrimental , negative outcomes in the macro economy as a whole.
Invisible Hand that turned the self interested, self serving interests of the Projectors, Imprudent risk takers, and Prodigals into benefits for society as a whole. Instead, there was massive bankruptcy , economic decline,and depression. Kennedy’s literary proof has been ignored, as has Smith’s extensive discussion of this problem in The Wealth of Nations
The reason for this may be that most modern economists have forgotten how the use of the English language can be applied to provide an effective economic analysis of an economic problem as demonstrated by Smith. A separate paper provides a purely mathematical treatment on this problem. It is available at SSRN. [Electronic copy available at: https://ssrn.com/abstract=3097609] 
That article translates Smith’s analysis of the impact of Projectors, Imprudent risk takers, and Prodigals on the macro economy into mathematics. 
Section 1.Introduction 
Adam Smith analyzed the impact in The Wealth of Nations(WN,1776) of a group of individuals he classified as Projectors, Imprudent risk takers, and Prodigals. Smith introduced the ”projectors “ on pages 114-115 of The Wealth of Nations (Modern Library(Cannan) Edition).He returned to them again on pp.279- 341.We will cover Smith’s neglected, but highly relevant analysis of the impact this particular group of individuals has on the economy as a whole.Section Three will cover Kennedy’s demonstration that no Invisible Hand could possibly be at work in any kind of situation where such a group is free to practice their own self interested actions. … 
,,, Section 3.Kennedy’s demonstration of the Impossibility that any such “Invisible Hand” Theorem can be ascribed to Smith 
Kennedy needs only one of the Adam Smith quotations from Section two above to make his point : 
“To restrain private people, it may be said, from receiving in payment the promissory notes of a banker for any sum, whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty, which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as or the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed. .(Smith,1776,p. 308). 
Kennedy draws the following conclusions: 
A too liberal a lending policy, whether from fraud by borrowers(S & L-junk bonds scheme,Dot.Com scheme, Sub prime mortgage banked bonds scheme) or from the false beliefs of bankers,was ruinous of the general interest of society…”(Kennedy,2008,p.110) 15 
“The self- interests of these players worked directly against the best interests of everyone affected by their actions. His frankness about imprudent behavior shows awareness that private interests are not always conducive to the good of society. If this point were understood among modern economists, the consensus that Smith had a ‘theory of the invisible hand of the markets ’leading to harmony would be heard no more.”(Kennedy,2008,p.110). 
Section 4. Conclusions 
The claim that Adam Smith had an Invisible Hand Theorem that postulated that individual self interested,self serving decisions ,made at the microeconomic level, were transformed by market mechanisms into societal or social benefits for all at the macroeconomic level,is false .It is false because Smith’s sixty pages of discussions in the WN from pages 279-340,related to self interested,self serving decisions, made at the microeconomic level by projectors and prodigals ,shows that this kind of behavior DOES NOT lead to societal or social benefits for all at the macroeconomic level,but to depression and the destruction of the banks unless bailed out by tax payers. 
Kennedy is the only academic who has carefully sifted these pages of the WN.The only way that Kennedy’s literary proof,based directly on Smith’s own assessment of the Ayr bank’s collapse,as well as his great knowledge of other projectors ,such as the British East India Company’s ultimately failed projects in Africa,India, and the United States and John Law, is to, like West and Viner, try to sidestep the problem.
COMMENT
Naturally, I am obliged to Michael Emmett Brady for publishing his analyses of the modern misperceptions of Adam Smith’s reference to the ‘invisible hand’ metaphor that has acquired the unique status of a cult figure in modern economics since Paul Samuelson launched his erroneous theory on the world in 1948.
Readers can also sample Brady’s quality arguments on the invisible hand by following the link, and also read his thorough analyses of Keyne’s General Theory in a series of his papers ipublished in SSRN. [Electronic copy available at: https://ssrn.com/abstract=3097609]

I would add Michael Emmet Brady to the albeit slowly growing list of modern economists who are waking up to myths of the invisible hand within their subject as presented by the majority of their colleagues across the world.

1 Comments:

Blogger Rambling Madman said...

Beautiful discussion. Needs broad circulation, especially to legislators interested in the free market. We can't regulate out greed, self-interest or persuasion, so how would Smith mitigate the effects of corporate self-interest, when he argues that any regulation aimed at protecting the people is just? I believe, and maybe I'll get something published on this soon (maybe not), that Chalmers' implementation of character training through the church is a part of the answer, regardless of Smith's religious persuasion. If we all exhibited the character described by Smith in TMS, we would need far fewer regulations. Never happen, unfortunately.

2:11 pm  

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