A Sad Case

‘Steve M’ writes (or rants on) (28 May) the 'No more Mr Nice Guy Blog’ HERE

‘YOU CAN COMPROMISE ON IDEOLOGY. YOU CAN'T COMPRISE ON THEOLOGY’

‘At best, Ryan and the Ryanettes believe that Ryancare will provide satisfactory coverage of seniors' health care needs, at an appropriate cost to both government and seniors themselves, because the omniscient, omnipotent Invisible Hand will provide -- it is God, therefore it must provide. It is good and beneficent; it can do no wrong.

… Either way, the Republicans will never negotiate in good faith. You can't show them numbers demonstrating that their assumptions are wrong, because their numbers can't be wrong -- the God of the Free Market would not forsake her people. Either that or the God of the Free Market would not forsake anyone who did not deserve to be forsaken. They don't negotiate from our reality -- the one we think of as everyone's common reality. They're completely faith-based.’

Comment
This not a typical reference to the so-called ‘invisible hand of the market’ (there is no such thing – markets are very visible through the very visible prices that are necessary for them to work) but it is, however, as wrong as the other rubbish posing as an economic theory, usually ascribed erroneously to Adam Smith, of which the internet is overfull of others who make similar assertions across numerous fields.

I would not normally refer to specific items – most of the daily output on such lines, I delete as not worth a blog post – and of the example above I have no idea to whom ‘Steve M’ refers as “Ryan’. The ‘ideology’/ ‘theology’ angle is new, but I suspect ‘Steve M’ of the rant is using the distinction to make an ideological case against what he calls Ryan’s ideology and which he believes in as adamantly, not to say, ‘theologically’, himself about as rigidly as Ryan believes in his ideology.

Merchants and manufacturers in Smith’s day were not known widely as supporters of free enterprise and markets, any more than their successors to day. Consumers are not in favour of tariffs to keep them away from cheaper products; it’s the merchants and manufacturers of both times who lobby for tariffs, prohibitions, and, yes, barriers of higher costs in foreign wages, to disqualify foreign products from domestic markets, which are anything but free.

Look at any ‘trade association’ that funds lobbyists and count the demands they make on governments and their agencies that all businesses in their trade of interest be of minimum size and minimal regulation standards to be legal and eligible for government contracts, and that they comply with certain expensive requirements to remain in business at all. Only the really big firms can bid effectively for big contracts. I am familiar with this situation in the UK and I have no reason to suppose it is any different in the USA (I suspect it is even worse in the capitalist country with the largest government spend in the world).

So, ‘Steve M’ and ‘Ryan” fight a phoney war, using the common misperception of the ‘invisible hand’ – ‘Steve M’ believes his own propaganda and ‘Ryan’ spouts the myth that there is such an entity. Neither has actually read Adam Smith. Both traduce Adam Smith’s work. Sad.

Governments Are Not the Solution to Many Problems

A piece in the New York Times: A fast, so-called car; Let our economy run free, save the planet; they shoot wild horses don’t they? (but no bullets please), etc…. HERE:

“One suspects the most controversial piece in the section is some non-newswriting by columnist John Tierney. It is non-newswriting because few citations of sources and no opinions counter to his theme appear. It is a column. He channels the late and smart economist Julian Simon while arguing that the way to a greener, low-carbon future will be automatically followed if we just encourage national - and presumably individual - wealth. He doesn’t say it this way, but the implication is that individual self-interest and the hidden hand of Adam Smith will deliver us from the evils of a hothouse world. There is much truth in the piece: that wealth permits nations to maintain their environments, establish and maintain nat’l parks, provide healthy air and water, perform eco-tourism, etc. Which is why The Tracker firmly believes that right now, while we still have some wealth to gather up with our taxes, it is time to spend trillions and trillions of dollars in gov’t money (and stimulate even more in private capital) to transform the economy - by deliberate, political decision. Unfettered new coal plants ought, as soon as possible, be illegal. Tierney’s example of wealthy-means-green is the cleanup of sulphur from the air. That was by government cap-and-trade fiat. But Tierney’s approach appears more on the laissez faire, relax-already side. He says more on his blog. And there, readers have a lot to say in reply.”

Comment
Advocating spending ‘trillions and trillions of dollars in government money’ and at the same time ‘stimulat[ing] even more in private capital’, I am bound to ask from where is the government going to get this money?

Presumably, by taxing the private incomes, corporate profits, private spending, and private savings of the taxpayers, plus anything that can be ‘saved’ from government spending.

So, from what current/income and expenditures is this vast stream for the government’s coffers to come from? Which current spending is to be curtailed and taxed to pay for the approved goals of John Tierney?

As important, we should (always)ask what assurances, let alone certainties, are available for taxpayers (the electors) that the government’s institutions and the legislators (and those who influence them) are able to spend these vast sums efficiently and effectively?

Few governments, if any, and certainly for very few for long, have commendable records when it comes to large scale public spending, and this is especially true among the world’s governments where personal liberties are absent and not protected by independent justice systems.

Perhaps Milton Friedman was border-line hyperbolic when he surmised that if the Federal government in the USA was in charge of the Sahara desert, it would run out of sand.

But we know what he meant and suspect it would not be safe to trust any government ‘to spend trillions and trillions of dollars [of our] money’ productively to ‘deliver us from the evils of a hothouse world’.

Neoclassical theories Do Not Explain How Modern Economies Function

‘Crisis papers: editorials and other articles’ posts (16 Dec) on Democratic Underground.com (HERE):

“Theory vs reality: why market absolutism fails”

“The Perfect Market"

”Neo-classical economists, and their political acolytes, are convinced that “free markets,” completely undisturbed by government interference, yield optimum social and economic results. For example:

“In the free market, the individual would have to produce a good that the other person desired in order to receive a good in return. Adam Smith's "invisible hand" of the market guides all participants in society to promote the best wishes of everyone else by pursuing his own wants and desires.” (Jacob Halbrooks)

To sum up: “Economic man” and “perfect markets” are abstract constructs which, due to their clarity and simplicity, allow theoretical economists to devise complex mathematical models. However, they have no counterparts in the real world, which compromises the application of these concepts in public policy.”

Comment
Overall, most of the criticism of neoclassical economics contents in the article I have written myself in Lost Legacy. However, there are caveats that I would make in case this is taken as my agreeing that criticism of neoclassical economic theory amounts also to criticism of markets in the real world. It most certainly does not; neoclassical economics is not the same as real world markets.

Markets are real; modern economics is a theory, and theory in social sciences should be judged by how it reflects the real world. The theory that the earth was ‘fixed’ and ‘unmoving’ at the centre of the solar system was ‘elegant’, increasingly complex (72 separate vortices to make things ‘fit’ badly), and also utterly wrong. Observations eventually corrected the foundational error. But the constituent elements making up the solar system were predictable and hardly changing, unlike the constituent elements making up an economy.

With markets, observations of how they ‘worked’ led to theories about them closely related to what was observed, and a ‘foundational’ theory about them, as in Adam Smith’s 'Wealth Of Nations’, appeared before mathematical theories about markets from the 1870s were applied, refined, and given a ‘life’ of their own in the 20th century.

Scores of the brightest economists from mid-20th century onwards detached from observing how markets were evolving from those that Adam Smith had written about and how they were changing. The theorists wrote increasingly complex models of how their models worked, not how markets worked. In time, the scores became thousands and they trained tens of thousands of students about the ‘beauties’ of the models of markets. Precious few of whom observed what was going on around them (they ceased to look outside their windows).

Long detached from the real world inhabited by real humans, economists refined their assumptions about 'Homo economicus', ‘rational behaviour’, ‘perfect markets’, ‘growth theory’ and ‘general equilibrium’, until they came to believe that their ‘as if’ models were true factually as well as ‘proven’ mathematically. Those who had the attention of legislators and those who influenced them, turned their abstractions into policy absolutes and have few claims to ‘making a positive difference’ in how the world performed – and in developing countries their performance record is not good.

That ‘perfect free markets’ as an abstraction had never applied as a reality, (Smith, for example, never used the words ‘laissez-faire’) was ignored; they became a principle assumption of policy, even though the active presence of ‘big government’ falsified assumptions about ‘perfectly free markets’. Worse, the manifest competitive failings of corporate giants, which needed attention on grounds of competitive justice, were vocally protected on the authority of prominent economists on grounds that any corrective intervention was an ‘abuse’ of ‘free markets’!

Even policies that were perfectly compatible with Adam Smith’s advice on how to deal with legislative abuses by some ‘merchants and manufacturers’ were resisted, aided and abetted by lobbyists of legislators and those who influenced them from interest groups funded by the same abusers. These real and powerful active forces in ‘free’ markets' do not appear in the equations of general equilibrium.

Worse, the theorists of modern economics, from the very top of the profession right through to the keenest, brightest, and most convincing of graduates of the top schools, truly believed (yes, with almost religious conviction) the metaphysical assertion of Jacob Halbrooks, as quoted above, namely, that ‘Adam Smith's "invisible hand" of the market guides all participants in society to promote the best wishes of everyone else by pursuing his own wants and desires’.

And they believe this nonsense despite the contrary evidence of exactly what Adam Smith said in Wealth of Nations (WN IV.ii.9: p456); they neither “look outside their windows”, nor read the books that they misquote from.

So, in the abstract world of neoclassical markets, they introduced into them a mystical, abstract, and wholly imaginary force that is their sole claim to the relevance of their abstractions for the real world, namely that “an invisible hand”, disembodied, ubiquitous and multi-talented, ‘leads’ each and every player to do exactly what they are required to do by a mysterious force (some actually credit it to God!) that guides their every transaction, of which there must be trillions taking place each working hour, irrespective of the outcomes, into a utopian perfect harmony. Not only is this wishful thinking; it is contrary to ordinary facts.

It’s nonsense, but unlike the harmless fun of the myth of Santa Clause visiting each child with presents once a year, the myth of an invisible hand is pernicious when economists, who should know better, come to believe that it exists as the guiding principle of markets.

I have sometimes felt, when addressing my peers with the gist of my paper on the invisible hand myth (downloadable from the Lost Legacy home page), that I am spoiling their party by pointing out that, like Santa Clause, it is a myth.

First of all, Adam Smith did not relate his use of the metaphor of ‘an invisible hand’ to market transactions; this was an invention of neoclassical theorists, aided by propagandists (some paid, others out of their misguided, convictions) for the activities of large corporations, which corner markets and act non-competitively, and in some cases destructively.

Added to the waste and destructiveness of big government, the combined effect of monopolistic corporations and bad government is an indictment of the economics profession’s inability to realize their shortcomings as the subject is presently constituted. Economists who understand how markets work in the presence of big government would have something worthwhile to contribute, but economists, who onlyunderstand how their models work in the abstract, fall far short of what is needed to guide policy makers.