Sunday, February 03, 2013

Are You Waiting For Godot?

Jeffrey Carter, an independent speculator, posts on “Before its NewsHERE 
“Microeconomics Monday-The Invisible Hand”
“People often refer to the invisible hand.  However, many markets that are over regulated make it impossible for the invisible hand to do its dirty work.  For example, the government policy for banks, “too big to fail”, is a clear violation of the invisible hand.  It’s one reason among others that we should have allowed banks to go broke.
People and politicians ignore the invisible hand at their peril.  Instead of trying to force markets, they ought to use economic jujitsu and utilize the power behind the invisible hand to increase economic output.  Instead, time and time again they try to put round pegs in square holes through law, regulation, subsidy or tax.
The invisible hand is a positive economic force, not normative. It doesn’t care a whit about outcomes for individual entities-but only enforces maximum efficiency on the marketplace. The invisible hand sweeps through markets and allocates resources far more efficiently than any central planner could. A well functioning competitive industry has important properties, especially related to efficiency.  …
 Of course, we might say it more simply.  Competitive markets bring powerful intrinsic incentives to innovate and be creative.  The most creative class in the world are the businesspeople that populate it. …
Adam Smith first postulated the invisible hand of markets.  Over time, it has been proven to work academically and in reality.  The Invisible Hand is something that actually works in theory-and practice.”
[Follow the link to read the full article and sample the Blog]
I am sometimes asked – even chided – why I spend so much time castigating the idea of the “invisible hand”, variously credited by most economists to be about markets, supply and demand, equilibrium, capitalism, and so on.
The above piece is a perfect example of why I consider the misuse to the IH metaphor, usually, even by a speculator, extended it well beyond the role of a metaphoric figure of speech into a major phenomenon at work in the economy. 
The assertion that we “ignore the invisible hand at [our] peril” is laughable. As for describing the invisible hand as “a positive economic force, not normative” is from an over-active imagination.
Adam Smith, is often claimed to have invented, first used, and publicised it.  That claim is supposed to give the modern notion of the invisible hand both pedigree and credibility.  Anybody who knows Adam Smith’s works, his two only uses of it, and who has some knowledge of the role of metaphors in English grammar, should be surprised to read that claim from Jeffrey Carter. 
Even some noted Nobel Prize winners have described it as Smith’s “greatest idea” and untold hundreds of thousands of economists repeat what they were taught about it in First Year Economics, specially the five million readers of Paul Samuelson’s textbook, “Economics: an analytical introduction”, since it was first published in 1948 and in its 19 editions since. 
I would suggest if we “ignore the invisible hand” so-called theory we are in no greater “peril” than if we ignore Jeffrey Carter and leave him to “use economic jujitsu” to “utilize the power behind the invisible hand to increase economic output”.   The only means to “increase economic output” is by visible humans using capital and knowledge in some known productive processes in pursuit of objectives that supply real wealth – the annual output of “necessaries, conveniences and amusements”, as Smith called it, to consumers. 
The most satisfactory ways to organize such activities is by entrepreneurial-led endeavours in markets and their very visible prices (if possible) or by state-sponsored activities if necessary. (Markets cannot operate outside a system of justice. No people will be enjoy opulence for long or at all without stable government and its essential services).
Waiting for “invisible hands” to carry out these activities is akin to the watching ‘Waiting For Godot”.


Blogger Unknown said...

Gavin, great post. I really enjoyed the Waiting for Godot analogy...which is actually about to start on broadway soon. Have you seen it in London?

Although I'm not a Smith scholar, I'm similarly rankled by the IH misrepresentation—especially when it is being used to advance a far right laissez-faire ideology (fox news).

Many Republican commentators in America use the IH metaphor to give credibility to their extreme free market stances. From the perspective of the general public, invoking Adam Smith's name provides the semblance of a strong foundational understanding of economics.

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