Monday, September 26, 2005

Nothing to do with Invisible hands

From the Orlando Sentinel (Florida), 25 September: “Gas prices fast to rise, slow to fall: Economists call this phenomenon the 'rockets and feathers' syndrome.” It is written by Paul Adams the (Baltimore Sun) with contributions by Christopher Boyd of the Sentinel staff, so it is not clear which author is responsible for the following error:

“Theories vary as to why this happens, but economists say it has much to do with the vagaries of the nation's fuel markets, which are routinely buffeted by a volatile mixture of politics, natural disasters, erratic consumer behavior, and the unforgiving forces of supply and demand -- all guided by what 18th-century Scottish economist and philosopher Adam Smith described as an "invisible hand."

Hopefully, regular readers of the “Lost Legacy” Blog will recognise the avoidable error, picked up from woefully inaccurate lectures in Economics 101 (or possible something called “Bluff Your Way through Adam Smith”, authored by someone who never read a word of his).

I challenge Adams and Boyd (and anybody else) to show anything that Adam Smith wrote that links the well-known economics of supply and demand – of which there is nothing mysterious – to Shakespeare’s metaphor of the invisible hand (Macbeth, 3:2), which was used by Smith only once in “Wealth of Nations” (Book IV.ii.9, page 456), as a metaphor for something else entirely and and it had nothing to do with markets.

What happens when buyers panic in the face of a rumour of petrol shortages, following an event like Katrina, is predictable, well known and inevitable: they create the shortage they want to avoid.

That prices rise when a shortage threatens or eventuates is also predictable in a free market. It delays the time period during which the commodity (petrol/gas) become totally non-available. Leave prices where they are only speeds up the transfer of the commodity stored in garages to supply the normal quantity demanded to the tanks of consumers who take time to use it (and perhaps continue wasting it on non-essential travel). Meanwhile, the normal quantity demanded cannot be met because of the surge in the demand and the drop in supply, even before the quantity supplied actually falls because of whatever natural calamity causes the rumours. It 'brings on' (as Americans say) the effects of the calamity.

Again this has nothing to do with the invisible hand. In “Wealth of Nations” (Book IV.v.b: pages 524-543) when Smith discusses ‘dearth’ (in this case situations that lead to famines) he does not mention invisible hands at all. Where Adams and Boyd get the connection from I have no idea, except it never came from Adam Smith.


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