Thursday, September 08, 2005

How to Spoil an Excellent Suggestion for Disaster Relief

Steven Bainbridge in an article on “The Invisible Helping Hand” in Tech Central Station repeats the usual canard about the Invisible Hand (I have had occasion to comment on the errors on this topic published in Tech Central Station before).

Now the case he is making is a good one. He advocates the use of public expenditure to pay the private sector to deliver needed goods and services, in this case rescue assistance, organization and rebuilding of infra-structure in New Orleans.

Where that expertise can be supplied by large corporations (Bechtel, Halliburton, etc.,) they should be put under contract and stand-by to provide those services anywhere needed in the USA. It was always a principle of Adam Smith, when considering public expenditure in “Wealth of Nations” (Book V) that the decision on whether to use public commissioners or private contractors should be an empirical one: which would do it most efficiently?

Only myopic ideologues believe that public expenditure should always be provided by public employees.

In these arguments in the UK, the advocates of public provision only would rather that the provision was not made than that it be delivered by private contractors paid for out of public funds, no matter how important it is for the beneficiaries of the provision. Ironically, the much vaunted National Health Service in Britain, since its inception in 1949, has always had its General Practitioner services (GPs are the local doctors who provide medical services to households in their local areas; they are most common access point to health services for most people) provided through independent self-employed private contractors under contract to the NHS, and are run on a profit basis. As this is not widely known by ideologues, it has escaped their attention and their sabotage.

It follows that “Lost Legacy” is not at all opposed to the contracting out by the US Government, Federal or State, of disaster relief services. Apparently, Steven Bainbridge considers that some US citizens would be uncomfortable about this being the case. He writes:

“Some will have an immediate knee-jerk antagonism to the idea that someone will make money off the suffering of others. We've known the answer to those complaints for centuries, however, thanks to Adam Smith:

...every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, 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. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest 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.

Outsourcing works precisely because it takes advantage of Smith's invisible hand.”

Oh, dear! How to spoil an excellent case with an unnecessary blemish. Invoking Shakespeare’s invisible hand (Macbeth, 3.2) under the guise that Adam Smith used the metaphor too, and also adding gratuitous nonsense about its application that was never intended or said by Smith is an avoidable error, all too common among US academe, who heard from their professors tell ‘em so, who also never read “Wealth of Nations”.

Could I suggest that Steve Bainbridge (and the editors at Tech Central Station, an otherwise excellent production, as I have also noted here – see my comments on the stance taken on the Chinese trade by them) acquire a copy of “Wealth of Nations” (the Liberty Fund publish a low price paperback copy of the definitive Glasgow Edition, originally published by Oxford University Press for over ten times the price Liberty charges).

Now turn to Book (IVii.4) and commence reading from page 454 to 457. Embedded in these pages (IV.ii.9: 456) you will find Smith’s only reference to the invisible hand in “Wealth of Nations”. Nowhere else does it appear. It was never a general statement of the utility of the invisible hand.

The relevant passage quoted from refers to the preference of home traders to deal in their local markets over risking their capital out-of-sight in foreign markets. Their motivations for doing this are partly risk aversion and partly because that is where they make their money. This preference, spread among many individuals, has the effect of raising the annual produce of their own country.

It is the necessary consequence of their actions. This has nothing to do with markets. If you employ yourself in the national market then any gains you make (profits, etc., value added) cumulate nationally; if all domestic traders do the same, then the national market will grow faster than it would otherwise. That is Smith’s point. There is nothing mysterious about it – every Economics 101 student understands it. Smith was being rhetorical, as he often was.

How this ‘works’ for outsourcing is a mystery. It has nothing to do with the prodigious project management skills, organizational power, and competence of the outsourcers (Bechtel, Halliburton, etc.,). They are driven by very visible skills; so are markets, of which there is no mystery about either – how markets work has been known since Smith’s time and it wasn’t ‘miraculous’ even then, and should not be treated as such now.

Great suggestion, Steven Bainbridge; pity you spoiled it with a cheap quote that has no relevance to your subject.


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