Friday, November 29, 2013

Why Markets Prepare for Thanksgiving and Christmas

“Thanksgiving and plenty” article by Tom Dennis in “Grand Forks HeraldHERE
“Our opinion: Visible evidence of the invisible hand”
And all of it testifying to the power of the free market — to Adam Smith’s world-changing insight from 1776, which holds that if a man simply is left free to pursue “only his own gain,” then “he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention” — namely, the gain and good of society as a whole.
Today, we Americans remain largely free to pursue our own interests. The invisible hand, through its still-mysterious alchemy, smelts the base metal of that effort into 24-carat societal gold.
This time last year I reported on Lost Legacy on an initiative in our local Butcher shop in respect of the Christmas turkey market that mirrored the annual thanksgiving in the US celebrations regarding how retail shoppers can be assured that turkeys are ready in sufficient numbers for consumers expecting to find them in their local shops for these festivals in which demand is expected to be higher than normal.
Well, this week I placed our family’s order for a 16lb (I still don’t understand kilo’s) turkey to be delivered for collection by myself.  It’s my family’s “tradition” that I handle the ordering, pay for it, and deliver it to the chosen 'chef' on 23rd December in time for serving on 25th December – NB: my key role is the paying for it! 
Thanksgiving in the US is usually accompanied by articles across the media celebrating aspects of the “miracle” of the market economy, by which they mean that a totally free market guarantees the appropriately certain delivery of turkeys to suit all tastes across the country, as it supposedly does for every other product that consumers wish and pay for it to happen. 
This “miracle” is down to the mystical “invisible hand”, credited to Adam Smith, and which remains true today in that it happens annually without fail, because “self-interested” producers so arrange their affairs to make it happen, which benefits the public interest.  It follows that if governments tried to do the same they would fail miserably.
I do not argue with the last bit about governments as economic managers.  I do argue with the first bit, specifically that it is a “miracle” of an “invisible hand”. Markets, however, work by human actions and visible price signals.  No producer in the supply chains needs “an invisible hand” to prompt them to act in their regular anticipation of a popular sales event.  If they can’t get that right they will soon learn and adapt their behaviour or they will go out of business.  Given the dates of major events are known year on year and they are incentivised by the consequences of not anticipating what everybody else knows, especially their potential customers, who direct their purchases by their own experience and by their family’s anticipation (children know when it’s a birthday or an annual celebratory feast which generates expectations – other kids learn and share what they know with other kids), it is not surprising that their excitement spreads such knowledge.
So the two sides of the market are present: sellers act to secure future sales and buyers act to anticipate future consumption.  In all this I cannot see what role there is for a mysterious “invisible hand”, certainly not a “guiding” or “intentional” spiritual entity that nobody can explain, except those given to theology.
Some slide over this superfluous requirement for an “invisible hand” by associating it with Adam Smith to give it credibility, without realising Smith did not assert that the IH metaphor applied to “markets”, “prices”. “supply and demand”, “unintentional consequences”, or whatever else they imagine.  He used the metaphor in his two (only) examples to described the “invisible” motives that caused the identified persons to act and those actions had consequences which the actors neither intended nor even necessarily thought about.  The consequences were unintended. 
For the turkey farmer he knows when he can sell an abundance of turkeys over the regular number throughout the year (in Scotland its at Christmas and in the US its at Thanksgiving ad Christmas). Hence they act to adjust their supply chains accordingly. 
The “proud and unfeeling landlord” in Adam Smith’s example feeds his labourers each day because unless he does so, no amount of coercion can force dying labourers to labour after a few days without food.  By feeding them his farmlands are laboured upon which is what he intended.  But also by feeding them the “proud and unfeeling landlords” unintentionally enable the labourers to procreate their children and the population increases. 
Smith’s point of his metaphor is that this long-term outcome is unintended though the landlords' motivation to secure short-term labour is invisible  (we cannot see into the minds of others).  That is why Smith described the role of metaphors is to “describe in a more striking and interesting manner” their “object” (Smith on "Rhetoric and Belles Lettres").  In the case of landlords he used the IH metaphor in “Moral Sentiments” (1759). Moreover, in this example there were no “markets”, “prices” or whatever in play.
These alleged meanings were added in the 20th century in popular economic discourse and teaching.  Nobody while Smith was alive, nor from 1790 to 1875, mentioned or hinted about the modern invented meaning.
Tom states it thus: "world-changing insight from 1776, which holds that if a man simply is left free to pursue “only his own gain,” then “he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention” — namely, the gain and good of society as a whole".  
The merchant is actually led by his motive, in the case Smith describes metaphorically in a "more striking and interesting manner", the merchant's feelings of insecurity if he trades abroad, to invest "domestically".  There is no "invisible hand" guiding him - its metaphor - and certainly he is not "led by an invisible hand" to cause "unintended consequences" (how would an "invisible hand" intentionally cause "unintended consequences?  Does it have foresight too?).  The self-interests of merchants need not, and throughout history, have not been benign (Enron, and etc., anybody?).  Add in what Smith called the "vile rulers of mankind" and the suffering of slaves, serfs, and powerless people, and the truth of Smith's humanitarian remarks, and the myth of automatic benignity is exposed.
I suggest that Tom Dennis and most modern economists are wrong in their strong beliefs in the invented notions of “invisible hands” in their associating such ideas to Adam Smith.
And Tom's rhetorical flourish of "still-mysterious alchemy, smelts the base metal of that effort into 24-carat societal gold” is starkly inappropriate as a generalisation.

Thursday, November 28, 2013

Loony Tunes no. 87

invisible hand stopped working what can I do?”
{GK: Sorry but I have lost the link.]
Fazıl Say, an internationally known Turkish pianist In “Today’s Zaman”: The invisible hand of the status quo in Turkey” HERE 
As the invisible hand regulates the market in the economy, an invisible hand of the oppressive state in Turkey desires to influence the direction of the country.”
“evil devil” at ONTD HERE  
The Invisible Hand of the Free Market is Holding an AK-47.”

Paul Walker on the "Invisible Hand" Part 2

Paul Walker of Anti-Dismal writes “Invisible Hand 2” HERE
Perhaps the point I'm trying to get at is better said by James Otteson. When discussing Smith's essay on "Consideration Concerning the First Formation of Languages, and the Different Genius of Original and Compounded Languages" Otteson writes: “The reader, furthermore, would be correct to detect in this essay the early hints of an argument that Smith will later develop into perhaps his most powerful, what we will call the Invisible Hand Argument: individuals, when seeking to satisfy their own localized desires will tend to behave in ways that will also benefit other - even others they do not know and about whom they therefore have no particular concern, and without their intending to do so.
 This Invisible Hand Argument would, I feel, be seen in Smith's work even if the actual references to the "invisible hand" were removed.
When Otteson goes on to talk about "What Smith Got Right" the first thing he mentions is Smith's model of spontaneous order. Otteson argues this is made up of several elements, one of which is "general welfare and the "invisible hand"". Otteson says, “Smith was under no illusion that people in their normal daily activities actually care about the general welfare. Luckily, however, people do not have to. The nature of the unintended system of order suggests that they will tend to conduce to the benefits of everyone concerned regardless - at least in the long run.
So I would (says Paul) argue that the "invisible hand" in a broad sense, permeates Smith's works.”
Paul’s post includes a full extract from Lost Legacy of my post of yesterday, which again is an example of the fair treatment of contrary opinions in scholarly debate.  In his response above, Paul gives a straightforward example of how he thinks about the issues of Smith’s thinking and my initial remarks here are directed to that example.
James R. Otteson is a distinguished scholar on Adam Smith for whom I have considerable admiration, especially from my meetings with him and from his books and papers. James Otteson. 2002. “Adam Smith’s Market Place of Life”.. Cambridge University Press, develops a most interesting perspective on how Smith’s thinking can be seen as much deeper than he often specifically specifically articulates, provided the reader takes all of his surviving works into consideration, including in this example, Smith’s essay, “Considerations Concerning the First Formation of Languages and the Different Genius of the original and compound Languages” (1761; published in “Lectures in Rhetoric,& etc.” 1983, which also includes in Lecture 3, 22 November, 1762: “Origins and Progress of Language”.
Paul describes James Otteson’s speculative assessments of Smith on “Language” and concludes that it describes “what we will call the Invisible Hand Argument”, without of course mentioning the invisible hand, or what authority such a decision had anything to do with Adam Smith.  My caution to Paul here is that subsequent interpretations of the meaning of the “IH” may not (and I suggest” do not) explain Smith’s intended meanings. 
The “invisible hand argument” itself owes much to Robert Nozik’s, 1974, “Anarchy, State, and Utopia” (Basic Books) written by a political philosopher, from which it spread across political philosophy and throughout economics.  It was an attractive idea or concept and those economists educated in the modern orthodox schools generally applied it to Adam Smith’s use of the ”IH metaphor” as if Smith meant that without explicitly saying so.  Recently, for instance, N.Emrah Aydinonat, published, 2008. “The Invisible Hand in Ecconomics: how economists explain unintended consequences”, Routledge, with complete assurance what Smith meant by the “invisible hand” that is conveyed by an “invisible hand explanation”, but without the textual authority from what Smith wrote within the grammatical confines of the role of metaphors in the English language or with the explication of what Smith taught in his lectures in the 15 years that he taught Rhetoric in Scotland.
I recognise that scholars since Smith are perfectly entitled to advance their ideas, as Robert Nozik, James Otteson, Craig Smith, Emrah Aydinonat and a multitude of others have done regarding a potentially attractive use for the mysteries of Adam Smith’s meaning in using the ”invisible hand” as a metaphor, but I question whether it is appropriate to back-project their ideas onto Adam Smith, as if their ideas are derivable from Smith’s perfect sense as a metaphor in English grammar (or in Latin for that matter).
Hence, my continuing efforts to bring this subjet to the attention of fellow economists.  “La Lotta Continua”! (to crib from an Italian leftist group’s posters around Rome when I worked at FAO.
I also think Owen hits the target too.  He writes in the comments to Paul’s post: “I also wonder if by using the invisible hand in this way misleads us into thinking that unintended consequences are generally positive, ignoring the very often negative consequences.”  Species can die out from unintended consequences too.
The consequences of unintended events are not always or necessarily positive – maybe even most times – as expressed in the popular warning: “Beware what you wish for”.  Archeologists report on the detritus of previous civilisations and earlier societies that vanished from unintended events and consequences. I surmise that self-interest played a role in those events and that self-interest is and was not always benign.  Markets can be more benign than past civilizations but there is no automatic certainty that they will be unless the necessary protections are in place, especially the rule of liberty and justice, as Smith advised and “men of system” ignored.

Wednesday, November 27, 2013

The "Anti-Dismal" Blog Moves Closer to Adam Smith on the Metaphor of the Invisible Hand

Paul Walker  writes an interesting and informative Blog, “Anti-Dismal (A blog on all things to do with economics and related subjects)” HERE 
I strongly recommend readers of Lost Legacy to bookmark “Anti-Dismal” (I read it most days). Here is yesterday’s post by Paul Walker on a subject that I often discuss on Lost Legacy. 
Regular readers will note that while Paul’s take on the “invisible hand” metaphor, as used by Adam Smith, is fairly close to mine, they will also note that he also differs from my take.
So read my extract below of his post and his response to a comments made by one of his readers, where he outlines his differences with my views:
Paul Walker, Anti-Dismal:
“Use of the metaphor of the ‘invisible hand’”
In the comments section to the previous post on the Foundations of a free society Owen writes, “Shame he mis-quotes Smith. AS never mentioned an invisible hand in reference to markets, in fact he only mentioned it once in Wealth of Nations. Also, AS notion of self-interest was appealing to others self-interest to gain what you wanted, ie mutual trade, nothing selfish about it. I'm not aware of any evidence that markets automatically lead to good outcomes for society, I do think they are the best allocative mechanism though (in most cases).
Butler is not quoting Smith and I'm sure that he is aware of the use Smith made of the term "invisible hand". To quote [Eamonn] Butler, [the Director of the Adam Smith Institute, London] at some length,
Adam Smith is famous for his ‘invisible hand’ idea. Most people take this to mean that our self-interested actions somehow produce an overall social benefit. Our hard bargaining, for example, creates a market system that allocates resources with great efficiency.
In fact, apart from a mention of the ‘invisible hand of Jupiter’ in The History of Astronomy, Smith uses the phrase just twice in his entire output and not really in the commonly presumed sense. The rich make work for the poor.
In The Theory of Moral Sentiments, Smith suggests that the hand of ‘Providence’ equalises economic rewards. The rich can eat no more than the poor. Their only use for most of the food produced by their land is to exchange it with others – those who supply the luxuries, the ‘baubles and trinkets’, that the rich demand. Thinking only of themselves, the rich provide employment to thousands …
These two passages suggest to critics that Adam Smith’s real ‘invisible hand’ concept is far removed from the popular notion of it. In one, the happy outcome of self-interest is attributed to ‘Providence’. In the other, it is a side comment in a discussion about the export trade.
In fact, the critics read too narrowly. The invisible hand idea, as commonly understood, pervades Smith’s work, and would do so even if these two specific references had never existed. For the phrase is a very convenient shorthand for Smith’s idea that human actions have unintended consequences; and that provided a few fundamental rules such as the principles of justice are followed, the self-serving actions of individuals can unintentionally produce a well-functioning and beneficial overall social order.
Or as Craig Smith has point “It is the idea of the invisible hand, or more generally the idea of social evolution through unintended consequences, which represents Smith’s chief legacy to the modern world. The recognition that many of the most important human achievements are, as Smith’s friend Adam Ferguson observed, the results of human action, not the product of human design, is a profound lesson to us all. It is this observation which leads Smith to his deep scepticism towards ‘men of system’ who would organise humanity to achieve noble ends.
As to whether markets automatically lead to good outcomes for society, Butler is not claiming that they do and Smith never claimed that they do. What I think most economists would say is that markets lead to good outcomes for society more often than any alternative method of resource allocation. A system of rules are required to achieve this end - such as competition and a system of justice - but as long as these are in place then markets are a better bet to achieve good outcomes than "men of system".
And below are comments by “Owen”, and alo Paul’s response:
Owen said...
“Whoops, may have jumped to conclusions there a bit!! Im too used to seeing invisible hand = markets. Thanks for the clarification.”
Owen said...
“Further to this, when I first came across the notion that the invisible hand was not what was taught in uni, it was a revelation and I also assumed it was rather the unintended consequences, but reading more im not so sure thats the correct interpretation either eg”
Paul Walker responds:
Yes, Gavin does take a different view. For a detailed discussion of his view see chapter 12 of Gavin Kennedy, "Adam Smith: a moral philosopher and his political economy" 2nd ed., New York: Palgrave Macmillan, 2010. Also read all of Gavin's excellent blog, Adam Smith's Lost Legacy. To see differing views on the "invisible hand" see "Econ Journal Watch", "Adam Smith and the Invisible Hand: From Metaphor to Myth" by Gavin Kennedy, May 2009 and "In Adam Smith’s Invisible Hands: Comment on Gavin Kennedy" by Daniel B. Klein along with "A Reply to Daniel Klein on Adam Smith and the Invisible Hand" by Gavin Kennedy, September 2009. Also Klein and Kennedy do battle again in "Economic Affairs": "In a word or two, placed in the middle: the invisible hand in Smith's tomes" by Daniel B. Klein and Brandon Lucas and "Adam Smith and the role of the metaphor of an invisible hand" by Gavin Kennedy. There are additional comments on the Klein-Lucas paper by other Smith scholars: "A comment on the centrality of the invisible hand" by Craig Smith and "A comment on the centrality of the invisible hand" by Ryan Hanley. All these are in Volume 31 Issue 1, 2011. A reply by Klein and Lucas appears in Volume 31 Issue 2, 2011: "On the deliberate centrality of an invisible hand: reply to Gavin Kennedy, Ryan Hanley and Craig Smith".
GK: Comment
I agree with Paul broadly on his critique of the popular modern economist’s idea of the “invisible hand”.  I regard Paul’s treatment as a step or two forward in this debate, and praise him for taking it.  In his subsequent comment to “Owen”, Paul kindly refers “Owen” to citations of my published assessments on the IH metaphor from 2008-2011.
However, Paul makes a suggestion also made by my scholarly friend, Craig Smith, several times, including in his excellent book, Smith, C. 2006. “Adam Smith’s Political Philosophy: the invisible-hand and Spontaneous Order”, Oxford, Routledge.  Craig is the Reviews Editor of the “Adam Smith Review” (International Adam Smith Society), and a co-editor (with Chris Berry  and Maria Paganelli “Handbook on Adam Smith”, 2013, Oxford University Press. Neither Paul nor Craig fully agree with my interpretation of the significance to Adam Smith of his use of the “IH” metaphor, though they both are disturbed with modern interpretations of it to an extent.
Nevertheless, they present an alternative view to mine (argued on Lost Legacy since 2005).  In their presentations they agree in effect: “The invisible hand idea … is a very convenient shorthand for Smith’s idea that human actions have unintended consequences; and that provided a few fundamental rules such as the principles of justice are followed, the self-serving actions of individuals can unintentionally produce a well-functioning and beneficial overall social order” (Paul) and: “generally the idea of social evolution through unintended consequences, which represents Smith’s chief legacy to the modern world” (Craig).
I am pleased to see that Paul and Craig both are further away from the post-Samuelson (1948) invention that conflates Smith’s use of self-interest as “selfishness” that “miraculousy” has the effect of creating a “public” benefit. 
I can agree with Paul and Craig in so far as they reject the invention, which is a step forward.  However, I do not think that they have shown that Smith used the IH metaphor “as Smith’s friend Adam Ferguson observed, the results of human action, not the product of human design”.  The phrase was indeed used by Adam Ferguson, and in Smith’s case it is true that Smith also referred to ‘unintended consequences” in the (long) IH paragraph, but Smith's statement says: [The merchant who invests domestically]generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it. By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. (WN IV.2.9: 456).
To argue from the above that the IH metaphor is about “unintended consequences I suggest misreads the sense of Smith’s paragraph.  Smith Lectured on Rhetoric in Edinburgh and 1748 (privately sponsored public lectures) and at Glasgow University from 1751 to  1763 as a member of the Glasgow faculty and the Professor of Moral Philosophy). He was also fluent in Latin and Oxford English grammar.  He was therefore most unlikely to make grammatical errors.  He taught about the grammar of metaphors as figures of speech, for which we have student notes: Smith. [1762-3] 1983. “Lectures on Rhetoric and Belles Lettres”, Lectures 6, 7, 8 and 9. Oxford University Press.
Smith refers to the “objects” of metaphors, which in this case refers to the specified objects in each of the two cases in which he used the IH metaphor to “describe in a more striking and interesting manner” its “object”.
In the two (only) cases he mentioned, first in Moral Sentiments (the actions of the “proud and unfeeling Landlord” feeding his serfs, labourers, servants, and overseers, which was an absolute necessity – no food meant no labour!).  It was that necessity that led the landlord to feed those employed on his estate – described by Smith that he was “led by an invisible hand”.  In the second case, mentioned in Wealth Of Nations, the merchant who felt too insecure to send his capital abroad, hence he invested in “domestic revenue and employment”.   It was the “merchant’s insecurity that led him to invest locally – described by Smith of him being “led by an invisible hand”.
In short, the IH metaphor refers to the motives of the landlord and merchant that LED them to act as they did.  It was NOT the IH that separately intentionally led either of them to create the “unintentional consequences of their actions.  The IH describes their actions. That is why the consequences of their actions were “unintentional”!
To argue otherwise makes no-sense of Smith’s use of the grammar of metaphors (still exactly the same as defined in today’s Oxford English Dictionary, 1983, as Smith described it in 1762-62).
Moreover, Paul and Craig imply a theological interpretation of his use of the IH metaphor – what, whomsoever, or whatever, leads an “IH” to cause the “unintentional outcomes”?   (see Kennedy, “Adam Smith on Religion”, Handbook on Adam Smith, Oxford UP 2013, or shorter, earlier version, Kennedy, 2011. “The Hidden Adam Smith in his Alleged Theology” Journal of the History of Economics, no 3, 2011).
An action has motives which actions may have consequences, but unintended consequences do not have intentional motivated causes!

Sunday, November 24, 2013

Smith on the Liberal Reward for Labour

"The liberal reward of labour, therefore, as it is the effect of increasing wealth, so it is the cause of increasing population. To complain of it, is to lament over the necessary effect and cause of the greatest public prosperity. …
The liberal reward of labour, as it encourages the propagation, so it increases the industry of the common people. The wages of labour are the encouragement of industry, which, like every other human quality, improves in proportion to the encouragement it receives....Where wages are high, accordingly, we shall always find the workmen more active, diligent, and expeditious, than where they are low."
See the full account by Smith of the positive role of high wages in Wealth Of Nations, (WN I, VIII: Of the Wages of Labour).
Most of the deplorable affects of modernization from industrialism in the 19th century, that Marx and Engels focussed upon, and is now firmly embedded in the folk-lore of modern leftish social democratic movements (though their political and trade union leaders ensure that they achieve high incomes in the highest tax brackets of their respective economies).
As it happens, the extremely low incomes of labourers, certainly in the 18th and 19th centuries, were partly occasioned by the dulling affects of large-scale migration of populations fro the countryside and inward migration from Ireland, rather than inherent or necessary for a growing market economy.  This rapid growth of population filled the towns and cities and turned housing into slums, and lowered wages rates in such jobs as in the mines (where my own family came from) and manual manufacturing. 
Despite this dreadful experience suffered by many people, industrialisation, particularly in engineering, also occasioned the growth of skilled, technical and supervisory employments, on higher wages and promoted education of those entering this work.  It also promoted small businesses using skilled labour and produced the high wages that Smith applauded. The founding institutions of Heriot-Watt University, in Edinburgh, was the first school for training mechanical, chemical, mathematical and general technical education in 1821.  Many other such schools were founded thereafter, feeding the demand for skilled and technical labourers that the growing UK economy needed.               
Once that process takes-off in an economy it can rapidly transform the situation in respect of wages for a slice of the labouring classes.  Nigh-schools were a route for young labourers to climb out of low- wage poverty.  [It was my route to university.] It’s happening now quite quickly in Africa and in the BRIC economies, not neatly – history is messy – but inexorably.
Readers of Cora Robin’s Blog should have that drawn to their attention.

Student Challenges to the Orthodox Economics Teaching Monopoly

Chris Dillow at Stumbling and Mumbling Blog HERE 
From the left, we have Seamus Milne. He points to Manchester University students who are campaigning for a more pluralistic economics curriculum as a sign that "orthodox economist have failed their own market test. Granted, he could have widened the evidence base; there's a similar movement at Cambridge, at least. But he omits two facts:
- Demand to study ("orthodox") economics at university has risen 33% in the last six years, whilst applications to university generally are up by only 19%.
 - At least two universities  - Oxford and Manchester; I know coz I took 'em - used to offer courses in the history of economic thought, but dropped them in part for lack of demand.  
These two facts suggest that demand for "orthodox" economics is strong. It's too damned strong in my book, but things are as they are, not as we'd like them to be. (And anyway, the truth or not of "orthodox" economics is not to be decided by what undergraduates think.)
The always interesting, as he challenging, Chris Dillow, an economist with his feet on the ground, not in the clouds, who’s particular interests in aspects of the history of economic thought (Ricardo, Sraffa) is not a standard fixed-track, neoclassical economist. 
He plays down in that traditional Oxford manner, so annoying to non-Oxford people, the significance of these latest challenges to the dominant paradigm among the majority of departments teaching economics that is immersed in mathematics.
Dillow is full competent in maths as his Blog shows regularly, but how far he his neo-classical is not so obvious.  He is a realist from the pessimistic wing of critics of the prevailing orthodoxy.
As I understand what the mainly Manchester and Oxford undergraduates are asking for is a wider curriculum that neo-classical, mainly maths, focus on what they teach them at university.  I find this indicative of a broader malaise I find among many economists with whom I converse on occasion.  They know something is not quite right in the hallowed truths they are taught, and were and are required to teach others, but are not yet sure what is missing that give them more assurance to happily teach the syllabi in future.
Having met several Manchester academics over the years, including recently, and including one or two authorities on Ricardo and Sraffa, who were also members of the UK History of Economic Thought Society, and who are close or beyond retirement, I sense changes are taking place that will reduce further open interest in work on classical economic thought and it modern derivatives
Maybe, the students are reacting to further dilution of studying beyond outright neoclassical orthodoxy, a prevailing dogma that answers fewer and fewer questions about the current economy, here and elsewhere. I remember vaguely, a similar ruffling of the feathers over at Professor Mankew’s class at Harvard, back a few months, and his strictly limited to neoclassical orthodoxy teaching and famous textbooks.  Chris reports something happening at Cambridge too.  I know of attempts in Australia to downgrade research in the history of economic ideas that met with furious resistance across the teaching departments.
Chris points to evidence that he implies challenges the students' views:
Demand to study ("orthodox") economics at university has risen 33% in the last six years, whilst applications to university generally are up by only 19%.
I am surprised that this is used as evidence by Chris.
1. Students applying to universities are hardly in a position to know what is in the syllabi in sufficient detail to make a judgement that they did not want to go to anywhere teaching the history of economic thought. I didn’t know at the time what the details were nor could I judge what was relevant or not-relevant, other than having passed A-level economics (and Scottish Highers).
As students become informed, they have a better ideas as to what is missing and that’s why they may eventually suggest to faculty their views in 3rd year (or 4th year in Scotland).
2. That ‘demand’ falls for a History of Thought class can be influenced by other faculty, or by a particular individual teacher’s performance.  I do know that even in the last ten years the number – and quality! – of History of Economic Thought societies, here and abroad, particularly in Europe, South America, Japan and China, has increased noticeably.
If I were fit enough to travel, I could attend at least a dozen new ones that regularly feature senior and outstanding scholars known to me each year.  
Moreover, the rising quality of the US and European History of Economics Societies is manifest in the quality of the papers published from senior and newly graduated students to the crowded journals, and in some of those that are narrowly rejected. I know this from refereeing a half-dozen or more papers each year and from reading the new ones that are published in my small segment of interest (Adam Smith studies).
For these reasons I am more enthusiastic about the future of non-orthodox economics theory and applications than Chris appears to be.
Equilibrium theory, rational expectations and the obsession with prediction ritual magic is, and deserves to be, under challenge.

Thursday, November 21, 2013

Lost Legacy is Not Alone

“Nils” posts in The Sustainable Adam Smith HERE  
The idea of an invisible hand that guides the free market to produce mutually beneficial outcomes is perhaps Adam Smith’s best-known idea. It has been interpreted to mean that acting in self-interest can be virtuous. But this would be an odd interpretation, given Smith explicitly says that virtue consists of thinking less about yourself and more about others:
And hence it is, that to feel much for others and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone produce among mankind that harmony of sentiments and passions in which consists their whole grace and propriety (Theory of Moral Sentiments, Part 1, Section 1, Chapter 5).
What, then, is Smith trying to get at with the invisible hand metaphor? In interpreting this, it’s important to understand that Adam Smith really didn’t like rich people. InTheory of Moral Sentiments he makes it clear that they have mistaken wealth for virtue and are therefore likely to be less virtuous than the common man (Theory of Moral Sentiments, Part I, Section III, Chapters 2-3 ). Even within Wealth of Nations he argues that we shouldn’t trust profit seeking merchants when it comes to setting public policy. And while he certainly thinks that trade in mutual self-interest can be beneficial, he points out in Wealth of Nations over 70 cases where acting in self-interest is harmful to society. By contrast there’s only one mention of an invisible hand, so let’s look at the case Smith had in mind when he used the invisible hand metaphor.
Smith is discussing an individual merchant’s decision to engage in domestic trade instead of foreign trade (Wealth of Nations, Book IV, Chapter 2). The key tell here is that Smith is not arguing that a decision that’s clearly good for the merchant is also happens to be good for society. He’s arguing that a decision that’s clearly good for society (domestic trade) also happens to be good for the merchant (he spends a long time explaining the disadvantages of foreign trade to the merchant). In other words, while we might be tempted to think of the merchant as a virtuous individual for choosing to engage in socially beneficial activity, we shouldn’t, because as far the merchant is concerned it’s just incidental that he wound up helping society. It’s just so deliciously ironic that a passage which Smith intended to point out a lack of virtue among wealthy merchants is now widely cited as a justification for their virtue. If it weren’t so serious, it would be hilarious.  So, why is Smith so badly misinterpreted? The short and cynical answer is that an economic system that justifies self-interest is incredibly appealing, particularly to the people who are in the best positions to actualize their self-interest. So they saw what they wanted to see in Smith’s writings and left the rest. (You probably thought I was going to compare the short and cynical answer to a longer and more nuanced one….I’m not. Sometimes the short and cynical answer is also the correct one).
I came across The Sustainable Adam Smith several years ago and was delighted to see it is still operating today.  For some reason it was not sent to me by Google until last night. 
I would broadly agree with the above sentiments that I posted above which broadly are in line with Lost Legacy’s stance on the meaning of Adam Smith’s use of the “invisible hand” metaphor. [Note it links to Lost Legacy too.] 
Makes it less like a lone-single-man battle against the orthodox consensus among modern economists who, both neoclassical and heterodox, swear by the invented notion that Adam Smith used the “invisible hand” as a self-directing force for the common, public, good.
Clear such notions away and we are ready and open to the truly wonderful, because natural, and inherent consequences of markets in conditions of liberty and good government, in which the interests of consumers reign supreme under the rule of law (Wealth Of Nations). 

Wednesday, November 20, 2013

From My Notebook no. 19

In the novel The Antiquary (1816), Walter Scott paid homage to a third artist: ‘In the inside of the cottage was a scene which our Wilkie could have painted, with that exquisite feeling that characterises his enchanting productions.’   He wrote back with typical modesty to say that these had placed him under a ‘debt of obligation’ as ‘with as unseen hand in The Antiquary, you took me up, and claimed me, the humble painter of domestic sorrow, as your countryman.’ (Michael Fry, 2013. ‘A New Race of Men:  Scotland 1814-1915’, Berlinn Books, Edinburgh).
It’s some years since I read Sir Walter Scott’s ‘The Antiquary’, which I enjoyed reading, and it’s on my shelves somewhere. Clearly, David Wilkie played an important role in the history of Scottish Art. Unfortunately he died in 1841 and was buried at sea while returning from an artistic pilgrimage to Palestine. Wilkie was closely interested in Scottish Calvinist Presbyterianism of a kind that was similar to the Rev. Thomas Chalmers, who was an ardent enthusiast of his theological interpretation of Adam Smith.
The phrase, the “unseen hand in The Antiquary”, caught my eye as the “unseen hand” was a phrase also used by Chalmers.  It is close to being the theological equivalent of the “invisible hand” as the “hand of God”.
I have, so far, found no references to the “invisible hand” between 1809 (Dugald Stewart, as part of a long excerpt from Wealth Of Nations without comment) and 1875 (mentioned in a dissertation for a Fellowship at Cambridge).  I shall add David Wilkie’s reference to my list, though its connection to Smith’s use of the metaphor is very tenuous but surely weakens claims that Thomas Chalmers use it other than theologically.

Causes Are Not Consquences

Richard Cowart chairman of the health law and public policy departments at Baker Donelson law firm, writes in The Tennissean HERE 
The law of unintended consequences has its roots in Adam Smith’s ‘invisible hand’ of the marketplace. The concept is that mass actions, particularly those of government, always have effects that are unscripted.”
They may share a paragraph but that is all. The “invisible hand” is a metaphoric figure of speech that “that describes in a more striking and interesting manner” its grammatical “object”, which in Smith’s usage is the motive for the person in the for first case (Theory of Moral Sentiments, 1759), a “proud and unfeeling landlord” who is compelled by necessity to feed his serfs and labourers, his palace servants and, most importantly, his armed retainers, who kept these underlings in good order and discipline, and in the second only case in Wealth Of Nations. 1776), in which a merchant, who was fearful that the risks to his capital sent abroad were unacceptably high, hence he invested “domestically”. 
In both cases the outcome of their deliberate actions had unintended and unforeseen consequences.  The “metaphor” did not describe the consequences.  Nor did Smith speak of an "invisible hand" of the "market place".
 Modern economists who have reversed the consequences and wrongly assert that the metaphor describes the “unforeseen consequences”, which is woefully ungrammatical, even theological (‘hand of God’ and so on) because that implies that an entity, like a God, inspires the consequences of actions, when, in fact, the consequences are “unforeseen and unintended” by those whose motives lead them to certain actions.
Lawyers, widely known for being precise, ought not to make such elementary and illogical errors in their arguments. 
Smith certainly knew the difference.  He lectured on Rhetoric from 1748-63 and the words quoted above “a striking and more interesting manner”, come from his “Lectures On Rhetoric and Belles Lettres” p. 29 (1762-3) available from Oxford University Press, 1978.