Wednesday, February 20, 2013

Now There's an Invisible Foot!

Reihan Salam reports in National Review Online HERE
This is why Ashwin places such heavy emphasis on the importance of the “invisible foot,” a concept he attributes to Joseph Berliner:
“The concept of the “Invisible Foot” was introduced by Joseph Berliner as a counterpoint to Adam Smith’s “Invisible Hand” to explain why innovation was so hard in the centrally planned Soviet economy: “Adam Smith taught us to think of competition as an “invisible hand” that guides production into the socially desirable channels….But if Adam Smith had taken as his point of departure not the coordinating mechanism but the innovation mechanism of capitalism, he may well have designated competition not as an invisible hand but as an invisible foot. For the effect of competition is not only to motivate profit-seeking entrepreneurs to seek yet more profit but to jolt conservative enterprises into the adoption of new technology and the search for improved processes and products. From the point of view of the static efficiency of resource allocation, the evil of monopoly is that it prevents resources from flowing into those lines of production in which their social value would be greatest. But from the point of view of innovation, the evil of monopoly is that it enables producers to enjoy high rates of profit without having to undertake the exacting and risky activities associated with technological change. A world of monopolies, socialist or capitalist, would be a world with very little technological change.” To maintain an evolvable macro-economy, the invisible foot needs to be “applied vigorously to the backsides of enterprises that would otherwise have been quite content to go on producing the same products in the same ways, and at a reasonable profit, if they could only be protected from the intrusion of competition.”
The use of an “invisible foot” metaphor is more aimed at attracting attention by using it as an alternative to what is called Adam Smith’s metaphor of an “invisible hand”, itself a false association entirely due to modern economists inventing (there is no kinder way of putting it) his role who do not seem to know what a metaphor is used for in English grammar – I assume they were not paying when it was explained to their classes at school, nor do they seem to know how Adam Smith defined the role  of metaphors when he was teaching Rhetoric from 1748-63 in Edinburgh and Glasgow (they can catch up by reading Smith’s “Lectures On Rhetoric and Belles Lettres”, Oxford University Press). 
Adam Smith never taught anybody “to think of competition as an ‘invisible hand’ that guides production into the socially desirable channels”. He never mentioned ‘competition’ in relation to his use of the IH metaphor and neither was either case in which he used the IH metaphor remotely linked to competition issues.
However, the point that Joseph Berliner makes about firm’s relaxing from innovation behind monopolistic barriers to competition, exacerbated often by government regulations, is most interesting and relevant – Apple is referred to as an example (click the link ad read it in full, it’s well worth your time).
Markets operate through visible prices, they compete through entrepreneurial innovations in aspects of the products or services


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