Monday, January 30, 2012

Looney Tunes no 21

“The Invisible Hand's Green Thumb”

Shawna Stirrett, Robbie Rolfe and Stephanie Shewchuk HERE


Are You With Us?

The Entity
Box Office Prophets HERE

“I was shaken again when the same invisible hands raped her again… seven minutes later.


Nation First

Beijing Review HERE

While acknowledging China has legitimate grievances against Western powers, some Western observers tried to justify themselves by asserting the national sentiment was manipulated by an invisible hand.”


Saturday, January 28, 2012

An Economics Historian (and much more) Who Speaks Good Sense About Capitalism

Dalibor Rohac, deputy director of economics at the Legatum Institute, reports on a lecture by Deidre McCloskey at Hartwell House, Buckinghamshire, London and post in the Wall Street Journal HERE

“The New Theories of Moral Sentiments”

“…But humor and witticisms aside, the talk revealed her conviction that economists should not shy away from the subjects of love, friendship or virtue.

Ms. McCloskey sees a problem in the way that economic models are dominated by a strange, sociopathic character—"Max U" as she calls him, referring to the standard economic problem of maximizing utility subject to various constraints. Her own scholarly work has become increasingly focused on bringing love, hope, faith, courage and other virtues back into economics.

… If her talk of ethics sounds fluffy, recall that in 1759 Adam Smith earned his reputation by publishing "The Theory of Moral Sentiments," in which he accounted for the emergence of sympathy and moral judgments. It was only in the 20th century that ethics disappeared from economics, partly as a result of the increased mathematization of the discipline. Ms. McCloskey says it was a fundamental error for economists to start making their arguments in terms of "Max U" alone. "In fact, 'Max U' would be a much more sensible person if he had gender change and became 'Maxine U,'" she chuckles.

... [In 2010} she completed a 600-page sequel, "Bourgeois Dignity: Why Economics Can't Explain the Modern World." ...

... "Bourgeois Dignity" makes a historical argument. Modern economic growth, she claims, is a result of an ideological and rhetorical transformation. In the Elizabethan period, business was sneered upon. …

… She contrasts this with attitudes 200 years later. When James Watt died in 1819, a statue of him was erected in Westminster Abbey and later moved to St. Paul's cathedral. This would have been unthinkable two centuries earlier. In Ms. McCloskey's view, this shift in perceptions was central to the economic take-off of the West. "A bourgeois deal was agreed upon," she says. "You let me engage in innovation and creative destruction, and I will make you rich." A commercial class that was not ostracized or sneered at was thus able to activate the engine of modern economic growth.

Ms. McCloskey insists that alternative explanations for the Industrial Revolution fail, for a variety of reasons. Property rights, she says, could not have been the principal cause because England and many other societies had stable and secure property rights for a long time. Similarly, Atlantic trade and plundering of the colonies were too insignificant in revenue to have made the real difference. There had long been much more trade in the Indian Ocean than in the Atlantic, moreover, and China or India had never experienced an industrial revolution.

By elimination, Ms. McCloskey concludes that culture and rhetoric are the only factors that can account for economic change of the magnitude we have seen in the developed world in past 250 years.

The danger of our era is that the bourgeois deal is slowly crumbling away. It is under attack from the political left and also from economists whose work revolves around one sole virtue—prudence—thus eroding the public understanding of markets and economic life. Looking at the West's current economic woes, it is easy to share Ms. McCloskey's concern that unless we revive a sense of dignity and approbation for entrepreneurship and innovation, we might easily kill the goose that lays the golden eggs of our prosperity.”

What a splendid account of McCloskey’s scholarship, warmly reported on Lost Legacy when I read her “Bourgeois Dignity” recently.

She combines heavy original scholarship with much erudition and a light writing style. I recommend her works to readers (follow the link to read the full report). Publicity on the Wall Street Journal will catch the eye of many working economists, though I suspect many of them will not have been exposed to McCloskey’s themes with their critical focus on the equations of “Max U” that eliminate any real human relationships, or even real people. She is well versed in Adam Smith’s works too.


Friday, January 27, 2012

Actions Speak Louder Than Mystical Forces

Anonymous writes (27 January) in The Point (Gambia) HERE

“Tolerance in the teaching of the great prophet(s) and in liberalism: A contrastive analysis (Part 2)”

“The humans of today feel that they have reached mature self-sufficiency and are no longer like the children of yesterday who had to hope for an invisible hand to reach out and do something.”

Nobody ever had to wait for an invisible hand to do anything. It has always required people to act and do something.


Thursday, January 26, 2012

Who is Kidding the Good Folks of Nappa Valley?

Bill Dyer writes to Napa Valley Register HERE

"Unchecked free markets risk unfair playing fields"

“Adam Smith believed there is “an invisible hand” that regulates free markets, but we have found that without some fair-minded regulation to level the playing field, we have to watch out for the invisible fingers getting into our wallets.”

What does “an invisible hand” add to our understanding of markets?

Why not try checking very visible prices?

Adam Smith never said anything about “regulating markets”, other than by price competition.

Regulations may be necessary for safety (banking, fire risks, quality stamping, and such like) but these regulations can never be invisible for them to apply, and no "invisible hand" implements of initiates them.


Wednesday, January 25, 2012

A Correspondent Spots a Looney Tune

"This is just like Adam Smith's economic "Invisible Hand" concept! Only Obama's invisible hands are wrapped in a death grip around America's economic throat." HERE

and writes (A correspondent (25 January):

It seems more likely that Americans have a death grip round the last remnants of the Enlightenment.”

To which I would respond:

I agree. You make a good point, which expresses brilliantly what I have been coming to in my current writing of a review of Warren Samuels’ last book, ‘Erasing the Invisible Hand’ (Cambridge University Press, 2011), for colleagues working in the history of economics sub-division within the broad discipline of economics.

Specifically, the modern myth of the so-called “invisible-hand” of the market that supposedly ensures that complex economies end-up reaching an equilibrium that benefits everybody, whatever the motives of the agents who make investment, pricing, and production decisions (it doesn't). Allegedly it is substantiated in practice (it isn’t), and apart from asserting that the said “invisible hand” exists and carries out this imaginary function, it most importantly, is claimed to carry Adam Smith’s prestigious endorsement (it doesn't).

And that is the rub. This major ”theory”, for that is what it has become by a tidal wave of assertions to that affect, even from Nobel Prize winners, particularly from the 1960s – though initiated in 1948 by Paul Samuelson in his best-selling textbook, ‘Economics: an introductory analysis’ - carries a heavy burden from the extent to which its complaisant policy has been adopted and applied in practice across the world’s economies, with the results with which we are now living under.

Looney Tunes no. 20

Flavius (23 January) on dagblog HERE

“That invisible hand's not holding a bandage”


Neoliberal Globalization – Is there an alternative to plundering the ...

By dagobertobellucci HERE

“Neoliberal Globalization – Is there an alternative to plundering the Earth? by Prof. Claudia von Werlhof”
The question remains: why has Adam Smith's “invisible hand” become a “visible fist”?


“Economists' 'Inside Job' problem requires more than just disclosure”

‘Richard” writes in “Trust Your Instincts” HERE

“The invisible hand does not require that buyers know what they are buying. …”
“The invisible hand can work properly in the presence of information asymmetry. …”
“The invisible hand can work properly in the presence of opacity. “

Jason Unger writes (24 January) for Environmental Law Centre (Alberta) HERE

“Pipelines and participation: radical rhetoric, planning and public interest”

“we can rely on the invisible hand but don’t be surprised if there is a “radical” slap to the face, coming from those with legitimate public interest concerns.”


Monday, January 23, 2012

Even the Left(ish) Buy the Myth

Dadepfan post in Reverse Spin HERE

"American Political Myths – The “Invisible Hand”

As the theory goes, in a free market, each individual strives to maximize his or her own gain, and in doing so is “led by an invisible hand to promote an end which was no part of his intention.” The end that is promoted is “to render the annual revenue of the society as great as he can.” As explained by Investopedia: “Smith assumed that individuals try to maximize their own good (and become wealthier), and by doing so, through trade and entrepreneurship, society as a whole is better off. Furthermore, any government intervention in the economy isn’t needed because the invisible hand is the best guide for the economy.”

Well, this makes some sense and does seem logical, at least on the surface. I believe that the “invisible hand” does have the
postulated effect, but certainly NOT to the magical extent claimed by free market advocates and anti-government zealots.

Dadepfan does not have to accept any vestige of the "invisible-hand" myth. Adam Smith was not responsible for the modern myths, largely invented in American academe in an oral tradition (possibly emanating from Cambridge, England), which gained traction after Paul Samuelson published his popular best-selling textbook, 'Economics: an introductory analysis', 1948.

For Adam Smith, it was a useful metaphor, popular in his days in theology, sermons, plays, and novels. Smith used in only twice in his published works, and hardly any notice was take of it until the late 19th century, and then rarely before Samuelson gave it a boost in his 5- million best seller and graduates taught what they had read.

Smith used it as a metaphor for the behaviour of some, but not all, traders who felt the "foreign trade of consumption" was too risky and therefore, preferred to invest only "domestically", which on the arithmetic rule that 'the whole is the sum of its parts' increased domestic 'annual revenue and employment", the latter of which Smith considered an public benefit, given the dire circumstances of the 18th-century poor, and the former raised capital available for new investment. Their "insecurity" was the object of the IH metaphor - all metaphors have "objects" which metaphors "describe in a more striking and interesting manner" (as taught by Smith in his "Lectures on Rhetoric and Belles Lettres", 1763, and in the Oxford English Dictionary, 1983).

Smith mentioned nothing about all 'self-interested' actions benefiting the public - indeed, he gives over 70 examples of malign 'self-interested' actions that hurt the public in Books I, II, and III of Wealth Of Nations. Today, we could give many more. Tariffs, protectionism, prohibitions, monopolies, mistaken government policies, and poor education were among his targets. He used the IH metaphor only once in Wealth Of Nations and not in connection with markets.

[I tried to post this as a comment on the Reverse Spin Blog to no avail.]


Sunday, January 22, 2012

Looney Tunes 19


Daily Kos Week in Review: Juan, the Whipping Boy

NewsBusters (blog)

"The real conservative religion is the worship of capital, as the burnt-offering smoke that feeds the Invisible Hand.."

The Harper house rules: An intervention


“And given that the majority of the damage occurs during or after you have been entertaining your friends, your repeated insistence that the "invisible hand of the marketplace" -- not your deliberate actions -- is responsible is just plain weird.”
[GK: agreed!]

Fort Worthology » The Forces Behind the Market Forces

Kevin Buchanan (director of transportation for the North Central Texas Council of Governments) has some thoughts on a recent interview the Dallas Morning News did with Michael Morris, HERE

“If market preference is the invisible hand, government policy provides the invisible arm.”


Saturday, January 21, 2012

No, Tristan, A thousand Times No!

Tim Worstall writes (21 January) on his Blog HERE
a repudiation of the latest nonsense about Adam Smith’s use of the Invisible Hand metaphor:

Can I call Tristram Hunt a Twat?”

“Or should I use the more obvious word?

“It is a tradition of redistribution, intervention and socialism equally as compelling as Adam Smith’s “invisible hand” (which, one should remember, was a satirical attack on laissez-faire morality, drawn from Shakespeare’s Macbeth).’

It’s got bugger all to do with laissez faire morality. It’s about how the merchant (read, capitalist, for the word had not been invented in Smith’s time) will, despite the greater profits of the foreign trade, find himself still likely to invest at home.
The most important modern result of which is that even if we have perfect theoretical capital mobility it still isn’t true that labour bears all of the incidence of corporate taxation

Tim Worstall is a lively blogger. See Tim’s regular contributions to the “Pin Factory” Blog of the Adam Smith Society (HERE)

Scroll through Tim’s Blog (where he doesn’t take prisoners). Read some of his long-running contra-temps with Richard Murphy, a left-of-centre chartered accountant.

Tim’s economics are usually spot on for accurate presentations of good, common-sense economics. (He is a Fellow of the Adam Smith Institute).

The above is a clear step from Tim towards a correct reading of Adam Smith’s use of the IH metaphor on “an invisible hand”. OK, his robust use of the English language is characteristic of his style on his own Blog (somewhat toned down on the ASI Blog), but he is never boring, nor slavishly mealy-mouthed.

I do not know of ‘Tristram Hunt’, but if Tim’s quote is representative, Tristan writes rubbish on Adam Smith’s use of the IH metaphor.


Friday, January 20, 2012

Bernard Mandeville and Adam Smith

Jan Peter Hammer is reported on HERE

Jan Peter Hammer produces a ‘U-tube’ video cameo asserting, wrongly, that Adam Smith’s use of the “invisible hand” metaphor was an “off-shoot” from Bernard Mandelson’s (1705-1724) ‘Fable of the Bees, Private vices, Public benefits’ theme. It wasn’t.

“The Fable of the Bees by Jan Peter Hammer at Supportico Lopez in Berlin”

“The Fable of the Bees by Jan Peter Hammer is an exhibition based on the 1705 poem by Bernard Mandeville “The Fable of the Bees: or, Private Vices, Public Benefits.” In his poem and ancillary prose Mandeville brings into being the counter-intuitive argument that better people make the world a worse place, since so-called vices such as egoism or greed stimulate social prosperity, whilst altruism or honesty result in collective atavism and disinvestment. In spite of the harsh reception of Mandeville’s work, which gave great offense to contemporary readers, his core idea that private vices lead to an increase in public benefits was later recovered and popularized by the British Utilitarian School. Adam Smith’s “invisible hand” parable is an off-shoot of Mandeville’s fable minus the cynical crudeness, with an added veneer of scientific respectability that makes the argument much more palatable and less contentious. Fables and parables are moral tales whose aim is to instruct, each of which contains a lesson to be learnt by its readers. Though 18th century’s classical political economy embraced a moralizing function, economics has since gone to great lengths to hide its ethical foundations. Claims of neutrality notwithstanding, choices of economic policy remain largely political.

In Jan Peter Hammer’s eponymous video “The Fable of the Bees” – shot in the guise of a You Tube home-made production – an eager young professional unwittingly channels Mandeville’s reasoning, providing a good illustration of the adage that “practical men who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”(J.M. Keynes)”

“That Which Is Seen and That Which Is Unseen” is a title borrowed from Frédéric Bastiat’s 1850 text “Ce qu’on voit et ce qu’on ne voit pas”, in which Bastiat lays out yet another parable, the “parable of the broken window”. Positioning himself against Mandeville’s notion that destruction brings net-benefits, Bastiat states that, “In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.”

Two erroneous ideas may make a passable ‘U-Tube’ video that amuses viewers, but art is not necessarily history, nor instructive. Adam Smith did not deduct Mandeville’s “cynical crudeness” to add a “ veneer of scientific respectability” to make Mandeville’s “argument much more palatable and less contentious”.

He dismissed Mandeville’s satire as a “licentious System” and regarded it in “almost every respect erroneous” (Moral Sentiments, Book IV, Chapter 1.10.185); which should be read to appreciate Smith’s rejection of it in every respect). He attacked his ideas about vice and vanity as being wholly vicious, and a “mere offspring of flattery begot upon pride”. He concedes that Mandeville “once made so much noise in the world” because “in some respects [it] bordered upon the truth”, which is necessary to “deceive us” and “yet [it had] no foundation in nature, nor any sort of resemblance to the truth”, much like the “groundless and absurd fictions” about a “distant country” (which the 18th century abounded in). Such authors, concluded Smith, “appear absurd and ridiculous [even] to the most injudicious and unexperienced reader”.

Adam Smith’s “invisible hand” was never a “parable”, nor an “off-shoot of Mandeville’s fable minus the cynical crudeness”. Treating his use of a metaphor as a parable confuses a figure of speech in English grammar with a moral-type of “story”. How this particular and common 17th-18th-century metaphor became mythical story in modern economics, has to do with those neo-classical economists from the 1940s who felt a need to give their direct opposition to Soviet central planning by invoking the credentials of market solutions for problems of economic growth, living standards, innovation and technologies, in which they felt (rightly) that capitalism was far superior to communism. The Soviets had Karl Marx as their fount of wisdom; western economists rediscovered a mythical Adam Smith who had nothing to do with the Adam Smith born in 1723.

Marxists disparaged Adam Smith; neo-classical economists invented a role for the invisible hand metaphor and ascribed their inventions (wrongly) to Adam Smith by asserting that the invisible hand operated in the “miracle” of markets (but without showing precisely what it did and without a term for it in any of their mathematical abstractions). Marxist theorists simply side-stepped the “wonders” of “an invisible hand”, saying that central state planners replaced the market’s invisible hand (see Oscar Lange: ‘Economics of Socialism’, 1937 and 1947).

Keynes may have been right about “practical men” being “the slaves of some defunct economist”, though neoclassical exponents of “invisible hand” myth are the slaves of a wholly invented role for a lowly metaphor that has nothing to do with Adam Smith (see Warren Samuels, “Erasing the Invisible Hand: essays in an elusive and misused concept in economics” 2011 – and Lost Legacy, passim).

Jan Peter Hammer’s quotation from Frédéric Bastiat’s 1850 text “Ce qu’on voit et ce qu’on ne voit pas”, is interesting. It is not clear what Jan Peter Hammer makes of what Bastiat was saying: “the first [effect] alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.” This formulation has nothing to do with the “invisible hand” metaphor.

In both cases of Smith’s use of the IH metaphor its object is clear (but unseen). In Moral Sentiments, the rich landlord is led to his action in feeding his dependent serfs (“the thousands he employs”) by his unseen dependence on their toil (‘no food, no toil’), but the consequences of his action are seen in the subsistence paid to his toilers and their families, which results in the “advance of society and the multiplication of the species” (‘no toil, no food’) (TMS IV.1.10: 185).

In Wealth Of Nations, those insecure traders who prefer to invest in “domestic industry” rather than risk investing in “foreign trade” (unseen attitudes to risk), which unseen motive results in higher and seen “domestic revenue and employment” (WN IV.ii.9: 456). Bastiat’s quotation is about seen causes and unseen consequences, while in Smith’s use of the IH metaphor, the causes of being led are unseen; the consequences are seen. The IH metaphor describes these relations in a “more striking and interesting manner” (Adam Smith, Lectures in Rhetoric and Beller Letters, [1762] 1983, p 29).

Smith’s point was specific too: both the landlord and the investors act without “intending, without knowing” the consequences of their actions (Moral Sentiments, TMS IV.1.10: 185), and a risk averse investor acts to “promote an end which was no part of his intention” (WN IV.ii.9: 456). In neither case can we see the cause, but we can see the consequences in both cases.

I am all for art and such-like creative endeavour as demonstrated by Jan Peter Hammer, but let's keep my feet on the ground, not in the clouds, when it comes to interpreting historical licence from artistic subjects.

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Thursday, January 19, 2012

Small Steps in the Right Direction

James Higham writes for Orphans of Liberty HERE

James covers some of the distorted ideas about Adam Smith, especially about markets and morals. He picks up the distortions of Smith in the “concept” of the invisible hand and the claims of Ayn Rand (and her mentor, Bernard Mandeville, 1724, in “Private Vice, Public Virtue”, today known as the “greed is good” school of mindless radicalism.

“Adam Smith”

“Thought this a most significant take on Adam Smith who, like all great ideas people who’ve influenced humanity, has been partly read and misread as has been people’s wont and their own prejudices:
Smith saw economics as a branch of moral philosophy, and he saw capitalism as an ethical project whose success required political commitment to justice and freedom, not merely an understanding of economic logistics.
The notion of classical liberalism certainly embraces economic freedom but it also embraces that pesky bit “unless/until it is to the detriment of others”. Cue the moral dimension.

A great deal of contemporary (neo-classical) economics can be understood in terms of translating Smith’s Invisible Hand metaphor into a systematic theoretical form, with a particular emphasis on the economic efficiency of perfectly competitive markets.

However the popular view of Smith that has resulted from this emphasis is twice distorted.

Firstly, it is based on the narrow foundations of a few select quotations from The Wealth of Nations (WN) that are taken in isolation as summing up his work (Smith only mentions the ‘all important’ Invisible Hand once), and secondly these quotations have been analyzed in a particularly narrow way.

Both selection and interpretation have been driven by contemporary economists’ interest in justifying orthodox economic methodology and their peculiar (Mandevillian) assumption of the selfish utility maximising homo economicus.

And that’s the nub of the matter.

But anyone who cares to read Smith’s Wealth of Nations for themselves will find an economics discussed and justified in explicitly moral terms, in which markets, and the division of labour they allow, are shown to both depend upon and produce not only prosperity but also justice and freedom, particularly for the poor.

This is more than just a philosophical nicety and sets it at odds with the Randian dystopic view of freedom, the free market’s motivation and the cold indifference of the amoral “business is business”. This extremist position is a central plank in the platform of the crony capitalists and justifies all the corruption and I’m all right, jack of the Dimons et al.
It has zero to do with classical liberalism
. “

Steps in the right direction are always welcome away from the neo-classical inventions of an Adam Smith not born in Kirkcaldy in 1723, but invented in US academe in the late 1940s (Paul Samuelson) through to today. It was an ideological attempt to defend capitalist market economies from the pressures of the competing Soviet experiment in totalitarian centralised planning, which fortunately collapsed after 1989, before the Cold War turned Hot.

Some erroneous ideas die slowly, some at a glacier-like pace. The ‘invisible hand’ and ‘greed is good’ fantasies are two such erroneous ideas.

Lost Legacy welcomes even the smallest steps away from the largely Chicago Adam Smith.

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Pay Attention to What Adam Smith Actually Says

Christina Free posts (19 January) in e-International Relations (“the world’s leading website for students of international politics") HERE

In doing so she repeats the false exposition of Adam Smith's use of the metaphor of “an invisible hand” and repeats the modern economists’ myth that this metaphor is related to several ideological (i.e., not founded on facts) assertions about how Smith considered economies functioned. The result is a misreading – and by the aims of e-international relations – a false presentation of Adam Smith’s views for ‘students of international politics’.

“The Goldman Sachs Abacus 2007-ACI Controversy: An ethical case study”

“The 21st century economic landscape is a reflection of the philosophy and ideas set forth by Smith and his contemporaries. Among Adam Smith’s works, two stand out as his most influential; the Theory of Moral Sentiments published in 1759 and Wealth of Nations published in 1776 (ibid). The Wealth of Nations, in part records what Smith considered to be the benefits and potential problems of a market economy, and lays the foundations of the modern economic system. What many consider to be his most important contribution to economics is his theory of the “invisible hand”, which recognizes the benefits that can be derived from allowing people to follow their self-interest (Smith, 1776). He analyzed the way in which a market system could combine the freedom of individuals to pursue their own objectives “with the extensive cooperation and collaboration needed in the economic field to produce our human needs” (ibid).

Adam Smith’s economic theory claims that when individuals are granted the “natural liberty” to pursue their own interests, they also end up promoting the interests of the greater good (Bruni and Sugden 2008). His famous theory of the ‘Invisible Hand’ states that if consumers are given the opportunity to freely choose what to buy, and producers are allowed to freely choose what to produce and sell, the market will settle on a “product distribution, and prices that are beneficial to all the individual members of a community, and hence to the community as a whole” (Keller 2007). This “invisible hand”, or the market, consists of self-interested suppliers on one side and self-interested buyers on the other. It is each parties self-love which Smith considered to be the best motivator for fair pricing and quality production in the markets (Smith 1776). The harmony of these individual pursuits which “often produce social and economic good” creates a “self-constraining system” (Werhane 2006). Thus, the “invisible hand” which governs market transactions, functions as a regulator of self-interests, and simultaneously promotes economic growth and well-being. In the Wealth of Nations, Smith gives several examples of how this mechanism works, and how it gives rise to the division of labour. He states that “it is by treaty, by barter, and by purchase, that we obtain from one another the greater part of those mutual good offices which we stand in need of” (Smith 1776).

[Follow the link HERE to appreciate Christine Free’s essay in full. ]

Some questions of fact: where does “his theory of the “invisible hand recognize “the benefits that can be derived from allowing people to follow their self-interest”?

Smith never had a “theory” of “an invisible hand”. He mentioned it twice, once each, in his two published works (Moral Sentiments and Wealth Of Nations). It was a metaphor, not a theory. It became a “theory” because modern economists claimed that it was a “theory”, and from the 1940s invented content to demonstrate that it had one.

The theory of “natural liberty” was promoted by Grotius and Pufendorf, and taught at Glasgow University (and other Scottish Universities) in the Moral Philosophy courses, but it had nothing to do with the metaphor of an “invisible hand”. Not did Smith assert that it had any connection.

The “invisible hand” was never a synonym for “the market”. Smith discussed how markets operated in Books I and II of Wealth Of Nations, without mentioning anything about the presence of “an invisible Hand”. It is mentioned only once in Wealth Of Nations (in Book IV) as a metaphor for the ‘insecurity’ of some, but not all investors, who, from their insecurity, were led to prefer to invest in “domestick industry” rather than the “foreign trade of consumption” (WN Book IV, chapter 2, paragraph 9: 456). Modern economists generalized that single (and singular) mention of the invisible hand into a “theory” about something else entirely.

They also, apparently, did not know about the role of a metaphor in English grammar, though Smith did. Smith taught Rhetoric each year from 1748 (his public lectures in Edinburgh to 1751 and at Glasgow University from 1751-64). We also have a set of student lecture notes for 1762, which were found in a house-clearance sale in Aberdeen in 1958 and published as Adam Smith, ‘Lectures in Rhetoric and Belles Lettres’ in 1983. Lecture 6 is devoted to metaphors and figures of speech. On page 29 he defines a metaphor as: “describing in a more striking and interesting manner its object”. Clearly, concerns about the security of an investor’s capital (the object) are brilliantly described in a “more striking and interesting manner” by the metaphor of “an invisible hand” leading the investor to act in this manner because of his “insecurity”. Everybody remembers the metaphor, but few – too few – remember, or even recognise its object, namely their insecurity, mentioned 6 times by Smith in the paragraphs leading to the metaphor of "an invisible hand".

Smith never claimed, or mentioned the “invisible hand” as “govern[ing] market transactions,” or “function[ing] as a regulator of self-interests” that “ simultaneously promotes economic growth and well-being”. That is pure fiction. Respectfully, Christine Free should read Smith’s original 1759 and 1776 texts rather than rely of second- or third-hand reports by Werhane (2006), Keller (2007), Younkins (2011), and Jennings 2004, and many others since the 1940s. She should also read the authoritative analysis of the modern ‘invisible-hand’ phenomenon by Warren Samuels, “Erasing the Invisible Hand: essays on an elusive and misused concept in economics”, 2011, Cambridge University Press, to locate the ideological source of the errors she relies on and about Smith’s innocent role in the modern “invisible hand” myth.

Turning to Moral Sentiments, Christine acknowledges that “What has been lost from Adam Smith to the neoclassical economists (although his ideas and theirs at first glance seem quite similar) is the basis of morality and control that he envisioned would go hand-in-hand with the markets (Keller 2007)”, (a most controversial statement) and she wriggles to maintain the “invisible hand” theory”, asserting that “it was Smith’s “invisible hand” which laid the foundation for the neoclassical economic ideology”. This is partly true, but not in the manner as she understands it. The so-called “theory” (an invented construction by neo-classical – and, sadly, also maintained by many heterodox economists) is at ”the foundation for the neoclassical economic ideology”, but it was not put there by Adam Smith! Neo-classical ideologues back-project their erroneous claims about Adam Smith by misrepresenting his texts.

Christine also misrepresents Smith in Moral Sentiments in presenting Smith’s theories of morality. The separation of an individual from all of the vast anonymous members of the human race, except for a few family and friends, is a fact of life. It is impossible to know everybody in a neighbourhood, let alone on other continents (the world and the people in it beyond Europe were virtually unknown for millennia) The power of the division of labour brought the possibility of peaceful and moral relationships, alas somewhat tarnished by actual experiences of European violence, though, hopefully, not excluded as a more peaceful relationship in the very long run.

However, Christine misreads the old canard that Smith stated in Moral Sentiments that “a man would ultimately have more distress over the loss of a finger than hearing the loss of millions of lives in some distant land”. This is not a quotation from Mortal Sentiments; it is a misleading summary of what the 1759 passage actually said. I suggest that Christine reads it again. It is an easy mistake to misread Smith here (I did, until Sandra Peart, Dean at Richmond University in Virginia, kindly pointed out my error). Smith, after setting up the counter-point of a man preferring his little finger over the lives of “a hundred millions of millions of his [Chinese] brethren”, then excoriates (to put it mildly) any person who actually acts in that manner, his language unrestrained, and his moral tone deafening (Moral Sentiments, Book III, chapter 3.5. para 4: 136-7). Remember, Smith was teaching young teenage boys and used such devices to maintain their attention.

Readers of Adam Smith do best by paying attention to what he says, unadorned with modern interpretations and inventions.

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Wednesday, January 18, 2012

Memo to John Kay: read Warren Samuels' new book

John Kay writes (18 January) the “accessible and relevant economics” Blog HERE

A real market economy ensures that greed is good”

“Adam Smith’s insight about the invisible hand is often interpreted in this way and modern mathematical economists have established that proposition more precisely. But if co-ordination were the only strength of the market economy, a computer could do that job equally well. Computers are very good at processing information.

I have known John Kay since he was a student at Edinburgh University in the 1960s and I have followed his impressive career as a top UK economist. However, not unexpectedly, perhaps, for regular readers of Lost Legacy, I do not agree with the implications of John’s assertionoft “Adam Smith’s insight about the invisible hand”, nor the allusions to market economies ensuring “that greed is good”.

The connection between markets and “greed” is a wholly “licentious” idea from Bernard Mandeville (1724), and more recently by Ayn Rand in the 1970s, but not by Adam Smith either in Moral Sentiments or Wealth Of Nations.

Fortunately, Warren Samuels’ new book, “Erasing the Invisible Hand: essays on an elusive and misused concept in economics”, 2011, (Cambridge University Press), is now available to tackle the issues raised in John’s post (probably he would not be satisfied by reading Lost Legacy passim, being the thorough economist that he is).

Samuels would more likely satisfy him from his thorough scholarly exploration of the history of the invisible hand covered in this new book, both from Adam Smith’s time (Smith is shown to be innocent of the attributions made to him for the modern misreading of Smith by modern economists, since the 1940s).

In what manner “modern mathematical economists have established that [invisible hand] proposition more precisely” is not shown. Warren Samuels shows by his exhaustive analysis of the many arguments claiming that “an invisible hand” operates in the economy that no such entity exists nor can add anything to our understanding of how markets work. I suggest, also, that no mathematical terms representing “an invisible hand” appear in any of the mathematical equations of those claiming to show that such a terms exists.

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Adam Smith and Karl Marx

On Quora (a social website), sent to me by a Lost Legacy reader: HERE
“Was there something fundamentally different between 1776 and 1867 in the world that led to Adam Smith's and Karl Marx's books being so different?”

‘I'm asking about Wealth of Nations and Kapital”:

To which question, Lawrence Kurnarsky, director, writer -, contributes an answer:

Adam Smith foresaw a world that was very much in harmony. He envisioned, as did most of the intellectual founders of the American experiment, humanity bathed in light, arguably divine light. Smith believed that freedom was the natural condition of man and envisioned a society modeled on a natural ecology. If allowed, that society based on farming and village life, with a few shining cities on the hill, would keep itself in balance perpetuating a world in which natural forces acted beneficently on human beings so that they would be happy and thrive. If society was properly ordered, with merit, good will, mutuality, fair play, and free competition, the good life would usher forth like cordial rains. As in Jefferson's beloved garden, the societal garden, well tended, would be bountiful. Adam Smith argued well for his vision but Marx argued better for his.

Marx saw a world that was very much in disharmony. He did not believe that nature was beneficent but neither did he believe it was malevolent, Similarly, he did not believe that the basic nature of human beings was good. He believed that Nature was nature, and that human nature was plastic and molded by the forces acting upon it. Karl Marx saw the mills and smoke belching factories in which men and woman were mercilessly worked to death. He saw the workhouses in which entire families languished for generations. All of this was so that a small number of greedy, unscrupulous, wealthy men could become wealthier.

Marx saw exploitation and class war as the way of the world, yet, he too, was no pessimist. Marx shared with Smith the vision of a better world. Like Smith, Marx believed in progress and human liberty. Like Smith, Marx was well intentioned. You could call both men humanitarians. But Marx believed that for the potential of humanity to blossom, more than rational discourse was necessary. The class war needed to be fought and won by what he viewed was the most progressive of social classes, the class of people who did not live by exploitation.”

Adam Smith was not given to predicting the future. He seldom commented on anything but the 18th-century present and the past. Associating him with ‘harmony” misreads his moral philosophy and political economy.

I do not recognize Adam Smith in the assertions:

that society based on farming and village life, with a few shining cities on the hill, would keep itself in balance perpetuating a world in which natural forces acted beneficently on human beings so that they would be happy and thrive. If society was properly ordered, with merit, good will, mutuality, fair play, and free competition, the good life would usher forth like cordial rains”.

Sounds more like a campaign speech by an aspirant US President (or Hollywood scriptwriter).

The only specific prediction that Smith made appears to be his comment in Wealth Of Nations that the (about-to-be former) British colonies in North America in about a hundred years time would be more significant economically than Great Britain (WN IV.vii.e: 625).

He added, over the page, when discussing the “discovery of America”, and the “passage to the East Indies by the Cape of Good Hope”, as "the two greatest and most important events recorded in the history of mankind”, his approach to predictions of the future:

What benefits or what misfortunes to mankind may hereafter result from those great events no human wisdom can foresee” (WN IV.vii.e: 626).

And that was his approach to the future.

As I understand of Karl Marx’s biography, it is doubtful if he ever visited any actual “mills of smoke belching factories”. We know that Engels did – he owned one.

Karl Marx saw the mills and smoke belching factories in which men and woman were mercilessly worked to death.”

Yes, there was mass deprivation and dreadful conditions in factories and mines. For perspective consider the records of Egyptian, Babylonian, and Chinese Emperors and Kings, feudal landlords, and slave-masters (Arab and American) which were not much different in spreading 'shortgevity' and misery among those under their control.

A founding member of what was eventually to become Heriot-Watt University, Leonard Horner, became the first UK appointed Factory Inspector and fought valiant battles to bring such practices to an end. Legislation and common practice was eventually successful, paid for by the highest living standards the world had, and still has, ever experienced.

But through all this misery, per capita living standards gradually rose at historically impressive rates from 1800 until they reached today’s unprecedented levels (see Deirdre McCloskey’s ‘Bourgeois Dignity: why economics can’t explain the modern world’, 2010, Chicago). And these increases in real incomes have never gone back to pre-1800 rates, or anything like the rates common across the world since the Age of Hunting commenced about 200 millennia ago, or the Ages of Shepherding and Farming, about 11 millennia ago. No wonder that even Marx lauded the achievements of the commercial and, later, the capitalist century. It was not all doom and gloom.

There was a fundamental difference between Adam Smith and Karl Marx. Smith saw the role of the philosopher to “do nothing and observe everything”; Marx saw the philosopher’s role as not to “understand but to change” the world. Be careful for what you wish for!

In their different approaches, we see the roots of the inevitable tragedy bound up with what Smith described as the fallacy of the view of people regarded like wooden pieces on a chessboard, as easily moved by “men of system”, “wise in their own conceit” when in fact ever single man has a “principle of motion of their own”, which, if recognized, society would “go on harmoniously” and not “miserably” and would avoid the ‘highest degree of disorder” (TMS VI.ii,2.17 234).

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Monday, January 16, 2012

A Must-Read Book For All Modern Economists

Warren Samuels with the assistance of Marianne F. Johnson and William H. Perry, 2011, Erasing the Invisible Hand, Essays on an Elusive and Misused Concept in Economics, New York and Cambridge: Cambridge University Press. ISBN 978-0-521-51725-6

This is a welcome and authoritative contribution to a central problem in modern economics, specifically that of the so-called ‘invisible hand’ and its prescriptive implications for policy. Its author is well-known among economists for his life’s work in the broad field of the history of economic thought, especially, of course, among historians of economic thought, where he is well-known and rightly admired.

Sadly, Warren Samuels (14 September, 1933 – 17 August, 2011) died just before his last major book was published last September. Many messages of sympathy and commendation have circulated among the various academic communities across the world (see, Lost Legacy, 19 and 21 August for mine HERE .

Samuels started on his thorough examination of the ‘invisible-hand’ in 1983 and, 28 years later, it was completed and published in September, 2011. His examination begins with Adam Smith’s initiation, so to speak, of the debate in 1744 when he began his Essay on Astronomy while at Oxford, published posthumously in 1795. He made two further mentions only of the IH in his two other works, Moral Sentiments (1759) and Wealth Of Nations (1776). Smith did not invent the IH metaphor; he used what had been widely used by many others in the 17th and 18th centuries (and was used by many others going back to classical times).

After Adam Smith, there was a long period of silence about his use of the now famous metaphor until the last quarter of the 19th century, when scattered references surfaced occasionally through the 20s and 30s of the 20th century and then flooded into print from the 1950s (with over 33,000 book titles on Amazon) and daily mentions on all media (see Google).

Warren Samuels' main critical focus is on the uses and the various attributed meanings given to the IH from the 1940s by modern economists. His examination of the modern period is detailed, exhaustive, and relentless. He provides the data: between 1816 and 1938 the “average” number of references was “very low” [I would say close to zero, especially from 1790 to 1875); from 1944 to 1974 that number “doubled”, from 1975 to 1979 it “doubled again”, between 1980-89 it became 6.6 times higher than between 1942 to 1974, between 1990-99 it was 8x that of 1942-74, and less than 20% higher than the 1980-89 level. In 2000-06 mentions fell back to 60% of the 1990-1999 level (p 18). In short, the ‘noise’ of the modern periods became awesome, in contrast with the trappist-like silence of the period 1790-1875.

I agree with Warren Samuels there is some connection with the Cold War years when “capitalism’, as an idea, was under pressure from the Soviet challenge, and I would add, from domestic challenges from communist, social democratic and anti-colonial movements at least to 1989.

By the time that Warren concludes his ten essays, no stone is left unturned. There is nowhere left to hide from Samuels' definitive and confident conclusion: there no such thing as an actual “invisible hand” at work, or present, in the economy, at any level or for any particular purpose. The idea adds nothing at all to our understanding of how markets or anything else works. It is empty of relevant meaning. It is a myth, a religious-like belief, yet some of the finest economists of our modern age, including several Nobel Prize winners, believe in it with a worrying passion.

However, even with this welcome demolition of the IH myth, I have one area of concern with Warren Samuels' absolutely splendid book. At Lost Legacy since 2005, I have focussed a lot on Adam Smith’s use of the IH metaphor, in particular on the simple test of what Adam Smith taught on the role and use of metaphors. Strangely, Warren devotes Essay 6 (pages 135-63) to a thorough examination of ‘figures of speech’, including metaphors, using mainly specialists in modern English literature, with a singular exception of a two references to Dr Johnson’s Dictionary (1755), whom Smith criticised for being "insufficiently grammatical".

What Warren does not do is consult the most relevant source: Adam Smith, a better guide than Dr Johnson! Smith’s teaching on metaphors is highly relevant, particularly when we try to consider what he meant when he used the IH metaphor so sparingly. In his Lectures on Rhetoric and Belles Lettres, delivered from 1748-64, for which we have a set of student notes [1763] 1983. Smith’s words cut through all the speculation about the meaning of the IH metaphors, which negates the wilder assertions of those modern economists and philosophers who have invented and continue to invent numerous ‘meanings’ of the IH as discussed (all demolished in a scholarly and always polite manner by Warren Samuels).

Adam Smith was clear: a metaphor “describes in a more striking and interesting manner it object” (LRBL, page 29); and the definitive guide to the English language, The Oxford English Dictionary (1983) endorses Smith’s 1763 definition. So what is the problem?

Currently, I am writing a longer scholarly review of Warren’s book for EH.Net (an internationally read eReview service for history of economics specialists across academe), in which I shall report on Warren Samuel’s assessments of the modern myths of the IH and its ideological role in recent and current economic policy and political debate (see Lost Legacy passim). When it is published in March I shall report it to Lost Legacy.

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Saturday, January 14, 2012

Looney Tunes 18


Monkey Appetite
Salon (blog) Füsun Atalay HERE

It has become the obsession of a mind that has been continually cleared and rearranged by an invisible hand, which, at the same, time rewrites herstory.

Jack Lacton: Butter Chicken delivered by Adam Smith's 'invisible hand'

"Butter Chicken delivered by Adam Smith's 'invisible hand'."


Butter Chicken delivered by Adam Smith's 'invisible hand'.

Gingrich is a Perverse product of political system | M ...

By Timothy P. Carney HERE

Layoffs cause pain, and conservatives and free-traders have historically had trouble sympathizing with the emotional and financial difficulties caused when the invisible hand determines that one's job does not yield the optimal allocation of wealth.”


Lao Alps: A place of mystery HERE

Middle East North Africa Financial Network

Hundreds of jars are dispersed over the site as if an invisible hand had thrown them there like pebbles. Some of the jars are small like a pumpkin, others are huge and weigh as much as 2 tonnes.


The Invisible Handshake
Economic Populist HERE

“Adam Smith's invisible hand wasn't allowed to work here. What took its place was an invisible handshake,…”


Friday, January 13, 2012

If You Must Quote Adam Smith, First Understand Him

The author of a Blog, Decline of the Logos HERE has commenced a series of critiques of the Adam Smith Institute. His\Her “No 1” quote is unpromising as to whether he/she understands Adam Smith’s Wealth Of Nations, while quoting from it to find quote “with “which annoy the Adam Smith Institute”. What an ambition!

Logos’s “no 1” quote is from Wealth Of Nations (WN 1.viii.11-12: 83-84):

What are the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little, as possible. The former are disposed to combine in order to raise, the latter in order to lower, the wages of labour.
“It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily: and the law, besides, authorises, or at least does not prohibit, their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work, but many against combining to raise it. In all such disputes, the masters can hold out much longer. A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks, which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year, without employment. In the long run, the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

To Which Logus observes:

Smith is here observing that the freedom of contract between capitalist and worker is, in reality, no such thing. The relative levels of capital each holds distort the negotiation: the capitalist can always afford to hold out for longer. However, within procedural justice libertarianism, freedom of contract is interpreted as absolute: any Government intervention, whether it be through regulation of rights or wages, is an immoral intrusion into a private negotiation.

The above quote appears to indicate that Smith understands that the freedom to make contracts varies between capitalist and worker, in a manner dependent on their relative wealth. This particular freedom appears to be determined less by Government intervention and much more so by possession of capital. Being a strong believer in the power of freedom, I would advocate that some way be found to bring a greater equality of freedom to negotiations between a capitalist and a worker, as an end in itself. I am agnostic as to how this can be achieved, whether it be through the State or through a non-state body, such as a trade union

The first thing to note here is that Adam Smith, writing in 1763-76, was observing the prevailing system of wage bargaining in the mid-18th century. It was not just a matter of relative “wealth’ that determined the outcome; the powers of local magistrates given them by Acts of Parliament, and the Combination Acts, contributed a great deal too. A lot has changed since then to the current situation in the 21st century. Not only has the law changed to allow wage bargaining (and much else), but also we have accumulated much experience of how trade unions operate in practice, some for the good of their members and some not so good. In so far as the, now defunct, ‘closed shop’ experiences are concerned, it was not freedom to bargain that was sanctioned, so much as restrictive trade union monopolies and, sadly, on occasion localized tyranny against individual employees. Also, the state continued to intervene, sometimes for the good and sometimes less so.

In the 18th century, Adam Smith observed what actually went on across the land. Local magistrates (a social set intimately identical with “merchants and manufacturers” and landowners) set low wage rates for many labourers. Adam Smith tended to despise their partiality. The State also prohibited freedom of assembly and strike-related “outrages”, with flogging though the streets, jail terms and transportation for transgressors (K. J. Logue, 'Popular Disturbances in Scotland, 1780-1815'). These and other examples of judicial outrages were known and commented upon by Smith within the strict and judicious self-censorship of the times. By the post-war decades of the 20th century, these had passed away, replaced by anti-liberty legislation enforcing the extra-judicial powers of trade union leaders (a phenomenon noted in Michel’s ‘Iron Law Of Oligarchy’, earlier in the century) and by the semi-corporate state established by Labourism in the 1960s.

Logos wants “a greater equality of freedom to negotiations between a capitalist and a worker, as an end in itself.” He/she is “agnostic as to how this can be achieved, whether it be through the State or through a non-state body, such as a trade union”. It is not clear exactly which age-group Logos is in, but any knowledge of post-war industrial relations shows that solving the dilemma of “freedom of contract” for firms and employees is a problem for which there have been many efforts, few of them successful.

How close Logos is to running a large (or small) organization is also an experience that might also inform him/her of the daily realities of 21st-century management, for which many reforms have been proposed (and tried), and all have failed. Cop-outs are not one of the workable solutions in the real world.

Logos concludes: “However, the Adam Smith Institute has recently put forward a proposal that runs counter to this aim of securing greater freedom of negotiation, which they have dubbed the ‘Self Employment Option’. This calls for greater use of the self-employed status amongst workers, which “sidesteps the burdens not only of PAYE and NI, but also of unfair dismissal, discrimination suits, maternity and paternity leave, statutory sick pay and holiday pay“. The self-employed, being freed from the ‘burden’ of rights, will have less freedom in negotiation than the employed. It is difficult to interpret this in any other way than the ASI having a very different understanding of freedom of contract to Adam Smith.”

Where a total, all-embracing solution is not viable, we are left with partial tinkering. Where experience shows that what we have is not working, which is certainly the case for many firms and institutions that experience the problems created by, no doubt well-meaning measures, like “PAYE and NI, but also of unfair dismissal, discrimination suits, maternity and paternity leave, statutory sick pay and holiday pay“, it is very Smithian to offer suggestions, if only to experiment at the margin to see what works or doesn’t, and move on from there. Just because we cannot change everything, that is no reason to oppose changing something. Blanket faith in all-or-nothing quick changes, with dire predictions of what could, might, or will happen as a consequence, is, with respect, very unSmithian.

ASI, as I understand it, is about pragmatism – including imaginative suggestions, which are what ASI does best – and I suggest, modestly, that Logos has some ways to go before its advice is credible, either in the selection of quotations from Adam Smith or in understanding the problems of 21st-century Britain.

[Disclosure: I am a Fellow of the Adam Smith Institute, writing on this occasion in a personal capacity.]

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More Good Sense From Western Washington University

Brandon Dupont, associate professor of economics at Western Washington University writes (12 January) for his Economic Incubator Blog HERE

“On the Fallacies of Free Markets”

“Misconceptions about “free markets” are not unusual but here’s the latest from Justin Semion, with some of my comments below:
According to Semion:

‘The concept of the “invisible hand of the market” underlies classical and neoclassical economic theories advocating for a free market economy, one with no government regulation. In summary, free market theory proposes that supply and demand in the unregulated marketplace naturally reach a state of equilibrium where the maximum possible social good is achieved.’

[To which Brandon replies:]

“First, the “invisible hand of the market” is widely attributed to Adam Smith, yet Smith did not intend it as a theory of markets and only mentioned it once in the Wealth of Nations. Paul Samuelson used the phrase to provide some color to his efficiency theorem of competitive markets, but it is not due to Adam Smith. More importantly, no free market economy (especially the version proposed by Smith) is one in which there is “no government regulation.” Smith himself proposed a variety of government regulations as do nearly all modern economists.”

Follow the link and read the rest of Brandon’s excellent critique of Justin Semion’s (of Presidio Graduate School) piece. Brandon writes a correct representation of Adam Smith’s views on markets, government, and the invisible hand.

Justin’s piece is typical of modern economics as taught on most campuses and is published in Triple Pundit HERE

The more professors who critique the views of economists like Justin Semion, the better.

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Thursday, January 12, 2012

Where John Emil in Daily Kos is Absolutely and Comparatively Wrong

John Emil (11 January) writes for the Daily Kos blog HERE

It is an essay on how to get everything about Adam Smith wrong while embarrassing its author.

“Where Adam Smith was Wrong”

“I grew up on Adam Smith’s The Wealth of Nations. I was a CPA, corporate executive, and top-5 business school MBA from Mitt Romney’s era, and Smith was God. But one strange, often repeated phrase nagged at me. What was this “carrying trade” that Smith harped on, over 35 times?

"The phrase is central to his über-capitalist argument about comparative advantage, and time has proven him dead wrong.”

… Smith divided the economic trade world into three parts – the “home trade,” with goods produced and consumed locally, the “foreign trade of consumption,” where you sell your production to a foreign country, and, finally, the “carrying trade,” the third party that cut the deal and delivered the goods, taking great risks over perilous waters to do it.

The carrying trade was central to his argument that basic home-produced goods would always have comparative advantage over competition from abroad, which would largely consist of luxury goods and agricultural products your local climate could not support. The costs of the carrying trade in getting low-priced goods to market protected the local basics from foreign competition, and even if there was a low-cost foreign competitor, your home market likely had a comparative advantage over the foreign market in another area.

…“Comparative advantage” goes down the toilet.

Damn! Here I am a CPA and “golden age” MBA and I’m channeling the one 19th-century writer whose name cannot be spoken in the public in the United States unless you precede it with “Groucho,” “Harpo” or “Chico.”

Adam Smith did not write about ‘comparative advantage’ – that was from the pen of David Ricardo, written in his Principles of Political Economy (1817), some twent-seven years after Adam Smith died in 1790. Smith described the theory of “absolute advantage”, which is quite different from “comparative advantage”, and, incidentally explained less than Ricardo’s refinement to trade theory in 'comparative advantage'.

Nor was Adam Smith a "19th-century writer”. Smith was born in 1723 and died in 1790 – in the 18th century!

John Emil advertises the fact that he was “a CPA and “golden age” MBA. Some “golden Age” CPA!

I would have thought numbers and dates were John's forte. Someone showing off that he was a graduate of a “top-5 business school MBA” should be more careful with his facts. The British carrying trade was protected by the Navigation Acts which policed all trade with Britain through the Royal Navy, paid by UK taxes. It certainly did not make anything cheaper for people in the British colonies of North America and denied them the right to trade freely with the rest of Europe.

Let alone, John’s misunderstands comparative advantage.

Though, as Adam Smith pointed out, Scotland could grow passable wine products at enormous cost in glass hothouses, instead of importing cheaper, high quality, fine wines from France, which was an important source of trade between Bordeaux and Edinburgh and major feature of social-life in central Scotland – local water was often dangerous to drink - until Britain's wars, and trade-wars, against France.

Scottish wine-producing glass-houses may produce more employment to produce local wine, but it would lower Scottish living standards (already pretty low in poverty-stricken late 18th-century Scotland) from the expenditure of scarce capital on something that could be imported at lower costs, and from diverting wage incomes unnecessarily, and raising wine prices.

Similarly, if Alaska now ignored Adam Smith on needless glass houses and diverted massive funds to setting up a subsidised domestic wine producing facility, it would become poorer.

What kind of business-models did John study as a “CPA” and a “golden age MBA”? He clearly knows little about Adam Smith.


Wednesday, January 11, 2012

Adam Smith Was Innocent

Juliet Schor, author of True Wealth, writing (10 January) for the Guardian blog HERE

Adam Smith's famous maxim that the self-interested behavior of individuals produces the common good is one widely-held fallacy. It was spectacularly debunked by the selfish behavior of the 1% who crashed the world economy in 2008.”

I wonder where Adam Smith expressed this modern attributed view as a “maxim”. Among some unidentified ideologues, surely?

Adam Smith is the subject of many ideological myths, based on a misreading (more likely a non-reading) of his works. Self-interest is one such misreading – “an invisible hand” and “laissez-faire” are two others. That the fallacies are widely held is of no relevance to Adam Smith.

Smith pointedly expressed his view that for self-interest behaviour to contribute to the common good, it must be mediated by the self-interests of others. The famous example of everyday bargaining in the “butcher, brewer, and baker” example (Wealth Of Nations, Book I) is not a praise of “selfishness”, nor a rejection of “benevolence" (there was not enough to go round – he praises the virtues of benevolence in Theory of Moral Sentiments). He specifically says that you serve your self-interest, not by addressing your own wants, but by addressing the other party’s. Self-interest is best served by being other-regarding.

Wealth Of Nations also gives many examples of the self-interests of sovereigns, monopolists, protectionists, merchants and manufacturers, invading European colonialism in the Americas, and of mercantile political economy, working against the “common good”.

He gives over 70 specific examples in Books I, II and III of the malign outcomes of self-interested actors on the people they affect. The “widely-held view” of the fallacy has nothing to do with Adam Smith.


Tuesday, January 10, 2012

Looney Tunes 17


Dropped text from UNTIL I DIE (read it or watch it!)

By amy on Amy Plum

“His languid smile did its regular job on me: It was as if an invisible hand took my insides and squeezed. Hard.”

The Faustian Bargain Economists Never Mention

Dr Gary Peters posts on Our Finite World HERE

“Recently, beliefs have shifted again, with people worshipping just one part of a god, the invisible hand. Thanks to Adam Smith and those who followed him, especially the current neoclassical economic theologians …”

Wall Street's Monday Lunch Options
Optionetics HERE

“They or some might say, the invisible hand, doesn't make it easy for bulls these days.”


The Olive Press: Dmitri Chapter 3

Abhi Tadakamalla posts on HERE

“Draco stood up, and was soon pulled by the invisible hand. He stumbled, but followed as it led him down the wall. They ran until they reached the tower. The hand led him toward a far, dark corner.”


Walz Talks To Business, Education Leaders About Jobs


“Walz says, "[The idea] [t]hat the marketplace itself will start matching skills to positions, that it will balance itself out - if you will - Adam Smith's Invisible Hand will move those nurses over to be welders, or whatever it will be. ...”


Monday, January 09, 2012

The IH Debate Acquires Scholarly Traction

'Steve J' posts on Radamisto, 6 January, HERE


Before Smith and Mandeville, there was Descartes, who in 1645-46 not only described the Invisible Hand but also provided a causal explanation of why it works. From Alexis de Tocqueville : the first social scientist (2009) by Jon Elster, page 53:

In one letter, Descartes merely affirms the existence of an invisible hand:

[It] is difficult to determine exactly how far reason orders us to interest ourselves in the public; yet that is not something in which one must be very exact; it suffices to satisfy one's conscience, and in doing that, one can grant very much to one's inclination. For God has so established the order of things, and has joined men together in so connected a society, that even if everyone related only to himself and had not charity for others, a man would nevertheless ordinarily not fail to employ himself on the behalf of others in everything that would be in his powers, provided he uses prudence."

Challenged by Elisabeth to explain his argument more fully, Descartes replied as follows:

“The reason that makes me believe that those who do nothing save for their own utility, ought also, if they wish to be prudent, work, as do others, for the good of others, and try to please everyone as much as they can, is that one ordinarily sees it occur that those who are deemed obliging and prompt to please also receive a quantity of good deeds from others, even from people who have never been obliged to them; and these things they would not receive did people believe them of another humor; and the pains they take to please other people are not so great as the conveniences that the friendship of those who know them provides. For others expect of us only the deeds we can render without inconvenience to ourselves, nor do we expect more of them; but it often happens that deeds that cost others little profit us very much, and can even save our life. It is true that occasionally one wastes his toil in doing good and that, on the other hand, occasionally one gains in doing evil; but that cannot change the rule of prudence that relates only to things that happen most often. As for me, the maxim I have followed in all the conduct of my life has been to follow only the grand path, and to believe that the principal subtlety [finesse] is never to make use of subtlety.”

This extract from Descartes’ correspondence (1645-6) is of historical interest. It shows that Descartes was in line with conventional 17th-century theological thinking of what became known as the “hand of God”, without mentioning the IH metaphor.

Professor Peter Harrison (Oxford University) published a detailed summary of mainly theological authors in the 17th-18th centuries, who referred directly to the “invisible hand” of God, from which Peter deduces that Adam Smith thereby used the IH metaphor in a theological sense, an assertion I find unconvincing.

See Harrison, 2010, September, Journal of the History of Ideas, and my own discussion, “The Hidden Adam Smith in his Alleged Theology”, Journal of the History of Economic Theory, 2011, September.

Presently, I am reviewing: Warren Samuelson, Marianne Johnson, and William Perry, “Erasing the Invisible Hand: essays on an illusive and misunderstood concept in economics”, 2011, Cambridge University Press, which is a promising blockbuster of a scholarly work, settling for once and all the much vexed debates we have on Lost Legacy, of which more soon when I have completed it.


Saturday, January 07, 2012

Religion and the Invisible Hand

Benjamin H. Mitra-Kahn writes (6 January) HERE on:

“How God, Adam Smith, and the invisible hand changes over time” ([Cross-posted from the History of Economics Playground HERE):

So with a suitably provocative title I think we can declare 2012 open. And in starting the year I was struck by how words and sentences can change in meaning over time, particularly prompted by this quote:

‘In tendering this homage to the Great Author of every public and private good, I assure myself that it expresses your sentiments not less than my own, nor those of my fellow-citizens at large less than either. No people can be bound to acknowledge and adore the Invisible Hand which conducts the affairs of men more than those of the United States. Every step by which they have advanced to the character of an independent nation seems to have been distinguished by some token of providential agency”

It looks like an elegant statement of policy intent from a finely crafted presidential speech and we all know what it means. And it was exactly that, but the meaning may not be entirely clear when I tell you that the president was George Washington and the words were uttered in 1789. There is a lot of discussion of what the invisible hand means, or doesn’t mean (e.g. Kennedy 2009), but lets stick with Washington and his first inaugural speech to Congress.

Out of context it could have been any current president. With a little bit of context – here the surrounding sentences – it starts to become a very 18th century statement. That ‘Great Author’ or ‘Providential Agency’ is quite definetly a deity of some form, and then it is left to the rest of us to work out how Washington – who had a copy of Smith’s work on the shelves – had read Adam Smith’s expression of an invisible hand (or some previous reference to it). I’m partial to the religious side, but may have been swayed by Andy Denis (2005) – what do you think?

But George Washington could have taken the notion of “an invisible hand” from any of a dozen or more books on his shelves from predecessors or contemporaries of Adam Smith. It was a popular metaphor among many authors, particularly among theologians and church ministers in their sermons.

For a list of around forty 17th-18th-century authors using the IH metaphor, see Peter Harrison (an Oxford professor of Theology) in the Journal of the History of ideas, September, 2010). Both Harrison and the memorable Andy Denis (Andy Denis (1999) ‘Was Adam Smith an Individualist?’ History of the Human Sciences 12, 3, August, 71-86), hold the view that Adam Smith was a Calvinist and/or Deist.

I do not share religious interpretations of Adam Smith, for reasons explained in my paper: ‘The Hidden Adam Smith in his Alleged Theology’ Journal of the History Economic Thought, September, Vol 33, no 3, 2011.

For my earlier views on Adam Smith’s use of the IH metaphor, see: Kennedy: 2009: ‘Adam Smith and the Invisible Hand: from Metaphor to Myth’, Econ Journal Watch, vol 6, no 2, May 2009, pp 239-263 HERE

For more my recent statements, see:, passim, 2010-11.

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Tuesday, January 03, 2012

Looney Tunes 16


5 Fatal Flaws of New Traders HERE

“If you've been trading for a long time, you no doubt have felt like a monstrous, invisible hand sometimes reaches into your trading account and takes out money.”


Trust Your Instincts: Transparency and the invisible hand ...

“I discussed how transparency is the necessary and sufficient condition for the invisible hand of the market to operate properly.“
“Richard” Blogs at: Trust Your Instincts Blog HERE


Invisible Hand Refuses to Allocate Resources Efficiently

“Jay” writes:

“There is an invisible hand at work, but it is not the Market — it is central policy- making by a corporate controlled state for the benefit of the wealthy. “


The Incomplete Neoliberal Revolution

Reihan Salam quotes Ashwin Parameswaran in the National Review Online (blog) HERE

“The prior economic regime was a system where both the invisible hand and the invisible foot were shackled – firms were protected but their profit motive was also shackled by the protection provided to labour.”


“The Invisible Hand Thumbs Its Nose At Us (laissez-faire Illusions In An Age Of Bailouts)”

City Data HERE


A Siren Speaks, We should Listen

Bruce MacEwen, President of Adam Smith Esq, a modern US law firm founded in 2003, with a portrait-figurine of Adam Smith in its heading. Adam Smith Esq., “is an inquiry into the economics of law firms” and Its focus is on “the business and economics of the global legal sector”. It is not connected with Adam Smith scholarship as such, but, nevertheless, I have visited its Blog site regularly purely out of interest since 2005.

Bruce posted (30 December) HERE a thought-provoking article (too long for Lost Legacy reproduction, or editing without destroying its flow): “A Second Economy as Big as the First?”

I recommend that you read it before the hurly-burly of your labours (or search for a job) begins in 2012 because:

“Every once in awhile--and the calendar's odometric rollover from one year to the next is as good an occasion as any -- it's wise to stand back and try to gain a little perspective”.

It certainly has makes you think about the implications for the wealth of nations. Let me know what you think of it.

Sunday, January 01, 2012

Once More on Smith's Parable of the "Poor Man's Son"

Steve Ross posts in Vibinc Blog (self-described as ‘progressive politics from Memphis, TN’ HERE

We’ve been locked in this misguided notion of the Adam Smith’s “Invisible Hand” of the marketplace for a very long time. Smith was commenting more on how commerce, in a pre-industrial revolution economy, will produce goods in high demand and distribute the excess of those goods to the needy out of self-interest.

How does Adam Smith’s largely agrarian idea of an “Invisible Hand” apply to our current scenario? In the 18th Century it was customary for producers, be they farmers, bakers, or other merchants, to produce as much as they could which in turn resulted in an excess. Dealing with that excess left two possibilities: give it away (or sell below market) or allow it to spoil.
Given those two scenarios, the natural conclusion is to ensure that it is productive in some way, which may mean giving it away.

An interesting, because uncommon, take on Adam Smith’s meaning in using the invisible hand metaphor once in Moral Sentiments (1759). Steve's unusual interpretation is open to serious challenge by examining Smith’s point in his text.

It reminds me of the only other time where I read a similar assertion in an article by William Gamp, which was challenged by Peter Minowitz in a detailed response HERE . Gamp claimed that the ‘proud and unfeeling’ landlord was immortalised by Adam Smith as charity for the poor in pursuit of national defence! But neither Steve Ross nor William Gamp are supported by Adam Smith’s text.

Steve Ross develops his theme that in the 18th century “it was customary for producers, be they farmers, bakers, or other merchants, to produce as much as they could which in turn resulted in an excess”, a wholly speculative and unlikely assertion, not supported by credible evidence, nor by the context referred to by Adam Smith in Moral Sentiments.

There was no refrigeration available for butchers to kill stock beyond what they were likely (barring occasional accidents) to sell in markets on any day, even with a regular backstop of giving it away, nor for bakers to mill more flour to bake excess bread. Prudent petty-producers do not behave that way. Producers of storable commodities had the safer assurance that what they didn’t sell on a particular day they could sell to recover their costs and earn a profit on another day. There were, of course, excess – and deficit – product supplies in the normal course of marketing things, especially in farming, fishing, livestock, perishable vegetables, and fruits, and such like, but such mismatches between supplies and demands were unreliable events beyond the control of producers to make charity a significant source of subsistence for the unemployed poor. It is also debatable that such charity was ‘customary’ except at the margin. Regular free surpluses would undermine markets - the poor and the greedy were not stupid - and neither were the middle classes, nor even the "unfeeling" rich producers.

Smith’s far more penetrating observation was that the distribution that took place consisted of the ‘unfeeling’ landlord, viewing his fields, imagining that he consumed all the produce as evidence of his pride, forgetting momentarily, that some considerable proportion of his products were distributed in those feudal (or Southern US slave-worked plantation) times, not as charity (nor for Gramm's ‘national defence’. The distribution, out of the "unfeeling" owner's necessity, to the ‘thousands’ he ‘employed’ in his fields, was because without regular distribution from his fields, his labourers and their families would not survive – they had no other source of subsistence. And if they didn’t survive, who then would be fit enough to sustain the greatness of the ambitious, ‘unfeeling’, masters of change who had altered ‘the face’ and explored the ‘oceans’ of ‘the earth’ by the humble labour of the thousands whom they employed?

All parables have a punch line, and the invisible hand of mutual dependence was Smith's on this occasion, leading the"unfeeling" landlord, from his absolute dependence, to share some of the annual product of his fields with the 'thousands whom he employed', which, thereby, unintentionally, led him to help to "propagate and ensure the survival of the species".

Smith’s whole point in his Moral Sentiments (check the text!) was that this was part of the ‘delusion’ that the wealthy ‘unfeeling’ landlords (and US slave owners) had of their social role in life, and it was this delusion that drove the ambitions of the ‘poor man’s son’ in his parable in TMS (Book IV, Chapter 2), in which he used the IH metaphor.

(Note: in Moral Sentiments his use of the IH metaphor had nothing to do with ‘markets’!).