Monday, June 01, 2009

A Professor Speaks and Gets it Wrong

Pavlos Hatzopoulos interviews Yannis Stournaras (Professor of Economics at the Department of Economics, University of Athens and research director of the Foundation for Economic and Industrial Research) – ‘The economic crisis and beyond’ in Public –re-imagining democracy HERE:

Adam Smith, on one hand, believed that all the problems of society would be solved by the “Invisible Hand”; Karl Marx, on the other hand, believed that they would be solved by the “Dictatorship of the Proletariat”. Well, I think this says it all. We need realism and realism demands that we must neither be on the side of Adam Smith’s “Invisible Hand’’ nor of Karl Max’s ‘Dictatorship of the Proletariat”. Those systems were tested and failed; what happened recently was indeed their tombstone.’

Well that ought to be easy then. Adam Smith never said anything so silly as leave it all to ‘an invisible hand’. Modern economists, mainly due to Chicago influence on the teaching of economics from the 1940s, assert such ideas, calling a metaphor a ‘theory’, a ‘paradigm’ even’ and attributing it to Adam Smith, without deigning to open Wealth Of Nations (or Moral Sentiments) and reading it for themselves.

One would have hoped, but clearly ought never to expect, that a Professor Economics and a research director of a prestigious university would have checked what Adam Smith said in Book IV, chapter 2, of Wealth Of Nations (the whole chapter please; not just a quotation torn out of its context) for himself. He might also have wondered how the single use of a metaphor in Wealth Of Nations became such a one-word summary of nearly a million words of Smith's thinking.

Adam Smith even wrote ((Book II, chapter 2, Wealth Of Nations) on the need to regulate banks behaviour in an area that was suffering current problems in 1772, after the Ayr Bank crisis, namely the issuing on bank promissory notes for small denominations of currency, then convertible into gold or silver on demand:

To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.’ (WN II.ii.94: 324)

Without a doubt, this does not correspond in any way to the assertion of Professor Yannis Stournaras (nor the interviewer, apparently) that Smith ‘believed that all the problems of society would be solved by the “Invisible Hand’, does it?

Add to this example the others in the same chapter about unregulated banking behaviour and the vulnerability of banks to over-trading and re-drawing of bills to hide insolvency, and Professor Yannis Stournaras has some way to go before he can legitimately summarise Adam Smith’s work in a misleading phrase.

Harsh words? Yes. But Professors and Research Directors have no excuses for tramping on Adam Smith’s legacy. I suggest that Professor Yannis Stournaras reads my paper, 'Adam Smith and the Invisible Hand: from metaphor to mythHERE, and follow up with reading both Smith’s Wealth Of Nations and Moral Sentiments (or even the whole of Smith's chapter 2 in Book IV which he quotes from).

On Karl Marx's singular policy summary I have no comments.



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