Sunday, June 15, 2008

Neat Illustration of the Meaningless Metaphor of An Invisible Hand

Erin Craig write on Terrapass blog (HERE):

“Non-financial barriers: a personal confession”

“What keeps us from moving forward with personal conservation?” (15 June)

“So why haven’t I lifted a finger? Am I lazy? Uncommitted? Irrational? Doesn’t Adam Smith’s invisible hand indicate that economically attractive pursuits will be pursued?

Maybe if I had that invisible hand, I would get these things done. But I don’t, I have only my two ordinary hands and they feel awfully full when I consider the phone calls, the design and technology choices, the bids, the fear of making the wrong choices and getting poor results or even getting good results but being ripped off in the process.”

She about sums up the meaningless of the metaphor turned into a metaphysical reality by its misuse by Chicago readers of quotations from Adam Smith from the 1950s onwards. Smith’s notion was much more sensible – a metaphor for human motivations (risk aversion) leading some, but not all, merchants to prefer to home trade to the higher risks of foreign trade and the lobger turn around of their scarce capital.

In Erin’s, case she wants to install heating system and drought-resistant grass in her yard – her commitment to the environment – but has to overcome her lethargy before undertaking the ‘toil and trouble’ of implementing her commitment. She notices there are some monetary incentives that may persuade her to make the phone calls. If she acts to affect her choices – moves her finger to call the number – she goes ahead; if she continues to dither for any reason, and does not act she doesn’t.

Why this needs an invented myth about invisible hands when the explanation is so obvious, can only serve the interests of those who want to mystify how markets work (as may be said of the General Equilibrium theorists).

Adam Smith fully explained why some merchants act in spite of their risk aversion to foreign trade – they had an alternative in domestic trade – and why some merchants felt compensated by the higher profits for their higher risks by acting to engage in foreign trade. His metaphor helped those of his readers unfamiliar with political economy; it was not meant to create a spiritual gloss on what was so reasonably explained.



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