Wednesday, December 31, 2008

A Professor Forgets The Fallibility of Merchants and Manufacturers and That Ayn Rand was Not a Smithian

From comments published in (Winston-salem) 31 December (HERE):

"Matter of degree"

"Jay Ambrose ("The end of talk about greed," Dec. 22) argues that criticism of greed during the current financial crisis is misdirected because economic self-interest is different from greed. Perhaps, but it is only a matter of degree.

Ambrose essentially restates Adam Smith's claim that an "invisible hand" harmonizes many self-interested actions to produce the public good. One way to state this is that motives don't matter much, because good results emerge anyway.

Unfortunately for Smith's modern disciples, motives do matter. Smith never revealed how real, fallible humans would keep too much of the "self" out of self-interest. And when the excess of self appears, Smith's magical "invisible hand" usually goes missing. Fraud, now making headlines, is only one of the results.

Allen Greenspan, former Federal Reserve chairman, and a disciple of the self-interest-takes-care-of-everything school, recently recanted. Said he, his faith in "the self-interest of lending institutions to protect shareholders' equity" had been replaced by "shocked disbelief" as the system collapsed. His awakening was too late. As Fed chairman, Greenspan's faith in self-interest led to his failure to regulate institutions that were engaged in blatantly risky behavior.

If Greenspan had regulated more, we might have avoided the disaster that is upon us. The public good is too important to leave to "invisible hands" that are invisible because they aren't there when it matters."

Professor Donald Frey is incorrect to assert that “Smith never revealed how real, fallible humans would keep too much of the "self" out of self-interest”.

It is a clear from Smith’s many references in Wealth Of Nations to the rapacious behaviour of ‘merchants and manufacturers’, when they are helped by legislators and those who influence them to ‘fix’ markets so that they can narrow the competition and increase prices through their monopolizing spirit, that he was well aware, and said so often enough, that ‘merchants and manufacturers’ often acted against the public interest whenever they could do so.

Allen Greenspan was a adherent to the philosophy of selfish egoism of Ayn Rand, which had little enough to do with the self interest and moral philosophy of Adam Smith.

I hope Professor Frey conveys the difference between Ayn Rand and Adam Smith to his students (and staff), and also understands that the modern notion of ‘the invisible hand’ bears no resemblance at all to Adam Smith’s sole use of the metaphor in Wealth Of Nations that had nothing to with markets.



Blogger Gavin Kennedy said...


To be frank, 'it ain't going to happen'.

There is no way that the world's econmomy is going to be transformed around a single idea, not matter how well thought out it may be.

Worlf political economy does not work like that.

Read Adam Smith on 'men of system' in Moral Sentiments (VI.ii.2.16-18, pp 233-34; 1872 ed. Kessinger Rare Reprints, pp 207-08]

12:25 pm  
Anonymous Anonymous said...

When there is no demand people will look at where it is in order to get rid of their excess supply:

"But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value.

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; 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. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."

Adam Smith
An Inquiry into the Nature and Causes of the Wealth of Nations
IV.2.9 March 9, 1776

If you read our proposed Implementation at 1776 - Annuit Cœptis you will notice that we use the €5 bank note as what is known in game theory as a cheap talk whose purpose is to coordinate the actions of players.

It is evident that we don't count on man's wiseness to jump start this system. But when people will recognize how deep the depression is they will act:

"Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic.

Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits—of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die;— though fears of loss may have a basis no more reasonable than hopes of profit had before."

John Maynard Keynes
The General Theory of Employment, Interest and Money,
Chapter 12: The State of Long Term Expectation, VII

December 13, 1935

1:01 pm  

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