Monday, September 05, 2005

Loose Language is Not Needed

In National Business Review, New Zealand, 5 Sep 2005 in “Analysis: Katrina shows strength of open market,” Pavel Molchanov, a financial analyst in Texas, writes, the course of an otherwise excellent article on how markets tackle shortages:

“The beauty of an open economy is that Adam Smith’s famous invisible hand diverts scarce supplies to where they are in peak demand – that is, where prices are the highest. With US refining margins spiking higher after Katrina, European refiners almost immediately booked 30 petrol cargoes across the Atlantic – in addition to the emergency fuel provided by European governments.”

Adam Smith’s (it was Shakespeare’s actually: MACBETH 3.2) famous invisible hand is famous because it is widely misinterpreted, mainly by American academe, who infect their students with its application to everything. It was never Smith’s meaning to attach his metaphor to markets (they work perfectly well without ‘invisible’ or ‘miraculous’ assistance by well known price signals). In fact, in the only three times he used the invisible hand metaphor (and only once in “Wealth of Nations”) he was not referring to markets at all.

His first use was of Shakespeare’s metaphor in his essay on the philosophical method (illustrated by the “History of Astronomy”, written between 1744-1749 and first published in 1795, posthumously) he was referring to pagan religious beliefs in invisible gods, notably Jupiter, or Jove, not to markets.

His second was in “Moral Sentiments” (1759: page 184) and referred to feudal lords, from their ‘mean rapacity’, maintained their retainers and serfs on ‘nearly the same’ distribution of food, etc., that they would have obtained if the land was divided equally among them. Again nothing to do with markets!

His third, and last, use was in “Wealth of Nations” (1776: page 456) in which he notes that because traders prefer to keep their operations where they can see them, believing it safer or more convenient, they ensure that the home economy (national output) grows faster than foreign economies. This, again, has nothing directly to do with markets; more with motivation and its consequences.

In analysing markets in “Wealth of Nations”, and how they function efficiently, he did not make use of Shakespeare’s metaphor and those who continually write as if he did, and teach others the same fallacy, should ask themselves why he abstained in this manner?

As a moral philosopher, Smith knew very well that motivations could be benign (the virtues) and malign (the vices). He spent pages denouncing the anti-social motivations and actions of ‘merchants and manufacturers’ in conspiracies to raise prices, in monopoly behaviours and in prejudicial legislation against consumer interests.

By using the invisible hand metaphor indiscriminately and giving its use false credibility by linking it with Adam Smith’s name (instead of Shakespeare’s: ‘thy bloody and invisible hand’), the consequence, unintentional I am sure, is to give an unjustified cover to all kinds of economic policies to which such benign intentions are not justified. That is why Smith never endorsed laissez faire economics which could mean: 'leave business alone to do whatever it wanted, as if ordained by a greater good' (e.g., pollution, dumping, savage labour practices, slavery, monopoly and such like).

Leaving business completely alone leads to the scandals infecting corporate life all over the world. Leaving markets alone, within the rule of law and justice, to do their well-known and well-understood work, makes good sense, and good economics. Loose talk of invisible hands only confuses the distinction.


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