Saturday, September 22, 2007

Why I Criticise Misattributions on the Invisible Hand

Correspondents suggest occasionally (politely) that I should ease up on my critiques of the many references made to the ‘invisible hand’, on the grounds that it is: a) a hopeless quest given the widespread belief that it was Adam Smith’s ‘theory’, even if its wasn’t; b) it is not all that important to the world as it stands; c) it looks obsessive, which is not good for one’s reputation; and d) why does it matter?

I have always replied to these comments, explaining my reasons, not least because this is Adam Smith’s Lost Legacy, not a hagiographic column to his memory, and that the intellectual case against interpretations of markets as somehow (never explained) ‘magic’, ‘beyond human understanding’, and, occasionally, proof of ‘divine’ intervention in human affairs, is as unscientific as you can get, and economists, who claim pretensions to a science and at the same time pander to popular misunderstandings, that exclusively emanate from Chicago deserve the treatment that they get from my posts here.

Does it make any difference? Probably, but not all the time. Some of the people whose misattributions I have criticised, reply and acknowledge their ‘errors’; some acknowledge their ‘errors’ but as brazenly declare they will continue with their attributions because that is what the modern profession has decided to do, and it’s now ‘irreversible’ (a strange stance for scholars); and the third group simply ignore the posts (out of courtesy I try to send them a copy if I can find an address).

However, in case anybody wonders if I am imagining the impact of the misattributions of ideas to Adam Smith that he didn’t have, here is an example from today’s selection, this one from an OpEd in the (Me; USA):

Richard B. Abbott: ‘Don't slap Adam Smith's invisible hand so hard’ (22 September 22 - Bangor Daily News):

Daniel Callahan’s portrayal of Adam Smith’s "invisible hand" free market breakdown (BDN, Sept. 6) misses the mark. Adam Smith’s free market invisible hand is the result of thousands of free individual choices made in their own self-interest. These choices naturally flow to the most valued, efficient and highest-quality goods or services benefiting both the producer and the consumer, effectively raising our standard of living.

Daniel Callahan blames the problems of Ford and General Motors on failure of Smith’s "invisible hand" when, in fact, the "invisible hand" was working as it should as competitors produced vehicles that were more efficient and less expensive, taking market share away from them. Both vehicle manufacturers survived the competition by what Smith called the "home bias." There is always some local support for local products.

Adam Smith did not say that all self-interest was good, but in a free market desired goods are usually produced. Certainly Enron and WorldCom were not good due to criminal behavior. And the mortgage industries’ sub-prime woes are the consequences of home buyers taking on a low payment for the first year or five years, and hoping they can afford the later higher payment. "Those are flaws that can be corrected."
Callahan recommends universal health care based on several European models which would solve our morality issue — the many who do not get needed care with our expensive, fragmented system. This type of reform would satisfy the egalitarian distribution of social welfare. I’m sure Adam Smith would not object, but he would probably recommend a high deductible (true insurance) for everyone so a free market below the deductible between the patient and the doctor would develop, allowing his "invisible hand" to eventually produce less expensive, high-quality care just as it does in all other industries where a free-market economy exists with minimal third party interference.

Some health care experts, like Dr. Dean Ornish, believe that 50 percent to 60 percent of health care is due to poor behavior. People paying for their own routine health care bills would provide a powerful incentive to change poor behavior, and use resources wisely.

I am sure Adam Smith, or any economist, could argue that health insurance, as structured, private and government both, has added a layer of injurious regulations and costs, preventing a free market between patient and doctor and, essentially, has committed a cardinal economic sin by allowing free access and unrestricted demand that would normally destroy a finite resource through over-exploitation. But because health care is not a finite resource, as the industry grows, it simply crowds out other uses of our limited resources resulting in a lower standard of living, squeezing forever the bottom half of the income ladder. Continuing a noneconomic system where it is in the self-interest of the patient and the health care provider alike to overuse resources is a model for a death spiral and no amount of tweaking by government policy makers will change this.

To produce high-quality, less-expensive needed care, health care needs to be put on a sound economical footing. Patients need to be empowered with a high deductible (true insurance) policy for everyone (subsidizing the lower income with cash health savings accounts), which will allow Adam Smiths free market "invisible hand" to work its magic.

I have reproduced the OpEd in full so that you can get the full flavour of its arguments about Adam Smith and ‘his’ (actually it was a common metaphor in 18th century literature – plus in Shakespeare in 1605) invisible hand.

Note the last sentence: ‘which will allow Adam Smith’s free market ‘invisible hand’ to work its magic.’

The whole point about markets is that either side of the chains of connections among buyers and sellers, they do not need to know anything about what happens or might happen two or more links in any direction. That is not ‘magic’, nor divinely inspired. Because it works it is repeated. What doesn’t work is not repeated and over time is not replicable (the players run out of resources, just as a bird that does not look in the proper places for its food will run out of energy and not reproduce).

Of the argument about health-care finance I have no comments. Richard B. Abbott is billed as having 30-years experience in health care and he knows more about health-care provision in the US than I do. It’s not his health-care policies I am criticising; it’s his misuse of Adam Smith’s ideas that I am commenting upon.

If you read down today’s posts you will see arguments against Richard B. Abbott’s misunderstanding of Smith’s use the metaphor in Wealth Of Nations, hence I shall not repeat them here.

You can read Bangor Daily News (here).


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