Wednesday, February 26, 2014


Gavin is in hospital for a few days and will resume posting on his return home over the weekend.

Florence Kennedy
(Daughter and general dogsbody!)

Sunday, February 23, 2014


 David Warsh publishes Economic Principles HERE on  a superior weekly insider reporting on US financial journalism to the highest economics standard  (modest annual $50 subscription - try a free trial-run).
David Warsh writes on, among other topics, the still running debate on the economy and the causes of the 2008-14 crisis:
“A Fateful Year”
And at some point, I finally I realized who it was Martin* so persistently reminded me. Not David Graeber, the prolix London anthropologist whose book Debt: The First 5000 Years helped inspire the Occupy Wall Street movement. Like him, Martin attaches inordinate significance to a chicken-and-egg theory of the primordial ancient origins of credit. The two are convinced that no barter economy ever existed, that symbolic money, or at least ledger debt, preceded trade. Whatever.”
[*Felix Martin: Money: The Unauthorized Biography, Knopf, 2014.]
This paragraph is a small extract from David Marsh’s much longer piece in his “Economic Principles” (22 February). 
Regular Lost Legacy readers will have seen my earlier pieces on David Graeber’s ideas from the modern science of anthropology.  I had a brief attempt at an “exchange” of views with David graeber in 2011-12; brief because “David” terminated the ‘his non discussion’ abruptly with my first letter leading to an indignant assault on me for addressing him as “David”, though I was only attempting to ‘cool it’ as we had not exchanged criticism of each other’s views and I wished to avoid possible ‘agro’ with an influential speaker in the “occupy movement”, of which actions I had no view at the time. 
It was David Graeber’s confident misrepresentations on Adam Smith that I was attempting to criticise, but of which he said not a word in his assessment of Adam Smith’s paragraph in “Wealth Of Nations” on “truck, barter, and exchange” in his “Debt The First 5000 years”.
Apparently “David” considered it “impolite” for me to refer him informally as “David” in my letter without me first being introduced, like in Victorian days of formal polite rectitude (Jane Austin, et al). Surely, a somewhat “bourgeois” stance for a self-proclaimed militant anarchist to be upset about! I have known many anarchists “communist”, Left and Right, and Libertarian, and I never met one so antagonistic on a personal level.
However, I tried to continue our non-discussion to no avail. Several of his colleagues responded, with doses of troll-like vitriol.   Maybe nowadays I live too sheltered a social life.
Well, I am not easily upset by ad hominen debating styles and I carried on reviewing David’s “Debt: the first 5000 years”, starting HERE 
In particular my reference to his critique of Smith’s sentence, and his interpretations of the recent anthropological evidence which David Graeber drew upon.
I suggested he had misunderstood Smith’s 18th century expressions when set against his own many multiple 20th century readings by anthropology scholars (most of it accessible on the Internet from his ipad). 
My critique summarised Smith’s views as “200 Thousand Years of Exchange” in human societies to account for distinctive inter-human behaviours over a period long before David Graeber’s “5 Thousand Years of Debt”, roughly only from human history since the invention of debt denominated coinage, ignoring c.195 thousand years before then. Yet crude examples of reciprocal co-operation among animals occurred, and still occurs today (see Robin Dunbar. 2004. “Grooming, Gossip and the Evolution of Language”, Faber & Faber, paperback).
Setting Smith’s statement in WN (1776), was made when anthropology was in its infancy with very few studies, or what passed for such, much of it shrouded in travelers’ brief visits, imaginations, myths, and theology, the latter based on the ideas of a tribe of Bronze Age nomads wandering around the deserts of Arabia from the 8th century BCE.
Adam Smith submitted one idea that has been confirmed by modern anthropology, specifically in his reference to “exchange”.  He was not referring exclusively to market bargaining.
David Graeber, like many others in his field, read Smith’s “exchange” as “trade” in markets between cognates and dismissed Smith as being absolutely wrong about what happens according to surviving examples of cultures before pre-markets and the invention of money from some 5,000 years ago. 
He also does not have time for “Truck” or “Barter” in surviving examples of what anthropologists study closely. Yet much of the behaviours they describe and analyse are “exchange” behaviours which certainly are compatible with Smiths’ use of the term!
Look more closely at anthropology's fieldwork, and notice that much of it shows the domination of cultural forms of behaviovur , such as reciprocity, gift giving, inter- and intra-tribal exchange of obligations, mutual toleration, regular exchanges in material and behavioural tributes to ‘superior’ families inter and intra  in tribal peace-offerings and much else, which are abundant examples of human exchange behaviours.   
Even truck and barter, exclude a necessity for monetary involvement, and remain a wide-spread exchange behaviour across all human societies now and throughout all of history, including that misnamed long period known incorrectly as “pre-history”. Archaeologists demonstrate that fact at every 'dig' all over the world and they are still widespread today, albeit informally in our highly monetised economies, even among children, who do not have access to their parents money. 
“Truck” was a common word used in 18-19th centuries for where goods and services were exchanged (in both directions), commonly in the form of reward in kind exchange for labour services. You have probably heard the lines in the folk-song: “16 tons and what d’ya get,
another day older and deeper in debt.
So Peter don’t you call me ‘cos I can’t go,
I owe my soul to the Company Store”. 
Paying wages in kind i.e., Trucking, was made illegal in the 1820 in the UK because of rampant fraud by employers. Clearly it continues in parts of the world in the form of slavery and was well known in feudal times.  
The long history of truck and barter testifies to their enduring existence in largely market economies.  Have you never swapped comics with a school friend? Or  with adult friends and relatives bartering on special social occasions (examples like baby-sitting circles, car pooling, and kid's parties)?
More relevant for discussions with our anthropologist friends, can anybody demonstrate that “trucking” in the forms of the exchange of mutual behaviours by exchanging goods, private obligations and services, conforming with cultural habits, reciprocal loyalties, and obedience to tribal norms, exchange behaviours according cultural norms in return for peaceful relations, and are these not commonly found in abundance in field studies reported in the literature?
Emile Zola in his novel “Germinal” refers to the hatred of a local grocer for his use of access to females in exchange for sex to “pay” in kind (they had no money for their grocery debts during a bitter strike of their men folk against their employers. The wives rioted too against the hated grocer and castrated him.  The army intervened later and violently out down the men's violence.
Moving on to exchange in the form of Barter – the direct exploited exchange of goods for goods, such as when European visitors exchanged whisky for furs, etc., with North American natives for decades.
Similar bartered exchanges occurred in 18th century voyages to the Pacific as described by Captain Cook, Bligh, Vancouver and others in their Logs, when for example, exchanging iron for breadfruit plants, (see Bligh’s "Log of the Bounty" and my “Bligh the Man and his Mutinies”, 1987, Duckworth). A reader described to me the unofficial bartered exchanges between some of the seamen and Tahitian natives for sexual access to their wives as a “screw for a nail”, which introduced venereal disease to the island.
Modern households barter for the exchange of all kinds of goods, even forming informal barter clubs to avoid cash transactions and build personal relationships. 
Again, barter is an exchange transaction with a long history before money was invented. Evidence of exchange is abundantly available across vast distances between
human communities in such  as the Stone age ax trade in Britain, minerals such as Obsidian across the Mediterranean Sea and across Europe, other minerals in North America where inter tribal violence was common and money was unknown.
Smith was right when he used exchange terms known to his 18th Century readers, such as "Truck and Barter", and Graeber is wrong when he emphatically dismisses Smith’s use of exchange claims and so are those of his colleagues who deny exchange as a fundamental human behaviour in all societies in Smith’s now famous sentence in Wealth Of Nations.  He also presents market exchanges completely within the neo-classical economics paradigm, which he presents as the same as Smith's even though his classical economics was different from modern economists in many respects. David Graeber ignores Adam Smith’s writings on the derivation of language by exchange (see his “Lectures on Rhetoric and Belles Lettres”, 1762 and in his essay on the origin of human language, 1761, and as a supplement published in his Theory of Moral Sentiments, 3rd Edition).
I respectfully suggest that Professor David Graeber, Phd (Yale) get out more and read more widely in economics, especially in Adam Smith's Works, perhaps, and study a little closer the significance of his colleagues anthropology and field work. 

Saturday, February 22, 2014

Common Mistake About Adam Smith on Self-Interest

 Andrew C. Ravkin reports (21 February) on a “Free Market” conference in Washington, DC, attended by the Dalai Lama.
“The Marxist Dalai Lama Visits a Washington Shrine to Free Markets”
The Dalai Lama, who has said, “Deep inside, as far as social economic theory is concerned, I am a Marxist,” spent Thursday morning speaking on two panels at a Washington shrine to free markets and limited government — at the American Enterprise Institute.
The Wall Street Journal summarized an initial discussion of happiness in a free-market economy, including this description of the Dalai Lama’s view of how self interest can benefit society over all:
“We are selfish. It’s very important for our survival,” he said. “But that selfish should be wise-selfish rather than foolish-selfish.”
Compassion and taking care of others are necessary qualities for people to be happy. “The truest form of self-interest is taking care of other people,” he said.”
The Dali Lama has some interesting views on self-interest. I think they need some qualification more along the views of Adam Smith on self-interest, which are quite different from those scholars who seem to think that Smith took an extreme view of how it was supposed to work in market economies. 
The idea that people seeking their self-interest should behave like self-centred egoists is certainly not an idea remotely kin Smith’s. 
He expressed his view in the famous “butcher, brewer and baker” example (WN I.ii.2: 26-27) that the customer should “address” the self-love of the seller and not their own.  In constructing the element of a bargain by both sides should attempt to mediate the self-interests with the self-interests of the other person. 
This did not mean that they simply gave in. This was a process of bargaining. Each party would follow the admonition of bargaining, which is not about simply giving in. 
Smithian bargaining is about finding a conditional proposition effectively in the form of:  “IF you give me this that I want, THEN I shall give you this that you want”.
The bargainers arrive at the mutually acceptable conditional proposition through conversation, covered in Smith’s “Theory of Moral Sentiments” (1759), by modifying their demands on each other. 
If they don’t proceed in this manner they deadlock, often in anger or at least in frustration.   This is not uncommon among bargainers, including professional negotiators, politicians and diplomats. 
Adam Smith uncovered part of the solution to the bargaining problem through conversation (“every man becomes a merchant”) in 1759 (TMS) and the complete solution in the conditional proposition (‘If Then’) in 1776 (WN). This explains why modern versions of “self-interest’ are misleading. “Self-interest” is not about “selfishness”!
[I re-discovered, so the speak, Smith’s format of the conditional proposition (IF-THEN) in 1972 after completing an MSc thesis based on observing 15 months of live union and management’s productivity negotiations at Shell Haven refinery.  This active interest continued for 40 years as a Consultant Negotiator and produced several books on negotiation, such as the “Everything is Negotiable”, “Kennedy on Negotiation” and “The Negotiating Edge”, etc. See Amazon books – all titles are now out of print hence I have no “selfish” self-interest in your purchases!]

Friday, February 21, 2014


Historians of economic thought divide schools of thought, past and present, into ‘Classical’ and ‘Neoclassical’ economics. Sometimes I am also wont to use too broad a brush and spin all variations of ‘neoclassical’ into the catch-all of ‘modern’ 
The eminent economist, James Ahiakpor, described by others as the ‘”Last Classical Economist” demurs, but is happy to accept a label of being a ‘Classical’ economist, but not necessarily the last one, because such definitive labels cover various sub-schools, depending on different shades of thought that underlines the distinctive qualities ascribed to them across numerous generations of overlapping ‘Classical” and ‘Neoclassical’ thinkers.
Professor James Ahiakpor remarks that “J.M. Keynes used that term [Classical] almost as a slur. That is why several upholders of the classical tradition, including Dennis Robertson and Ralph Hawtrey, shied away from it.  But I embrace that label with pride”.
Of the ‘Neoclassical’ school he refers to its own evolution and distinguishes seven sub-schools within it:
(1) Neoclassical Keynesianism, (2) Post Keynesians, (3) New Keynesians, (4) Monetarism, (5) New Classicals, (6) Real Business Cycle Theorists, and (7) Austrians. Remarking that “I leave out the Marxists.
These avoidable errors are prevalent when practitioners disregard what their predecessors’ actually wrote and distort, often by sheer invention (of which Paul Samuelson on Adam Smith was a classic example, as discussed regularly on Lost Legacy).
Together they outline an evolutionary view of the history of economic thought, which sounds more credible than past economists being patronised by whatever a recent generation says to put down their predecessor’s ideas which they believe are due for a reckoning by their ‘modern’ ideas.
Kuhn’s ideas of “paradigm” shifts might apply here and that is the fascination of the History of Economic Thought.
I am not surprised that so much of the history of economic thought is entangled in not distinguishing the so-called separate schools of its practitioners when account is taken of common misrepresentations after they passed away. 
Thomas Humphrey began this thread on the Blog of the Societies for the History of Economics (SHOE@YORKU.CAand I recommend that readers consult its regular posts  from its various daily contributions from authorities of accurate insights to the evolution of the thinking embedded in past ideas.
Others contributors are from the overly protective schools of those of recent thinking by true believers in what temporarily passes for the so-called truths of those suffering from the delusion that they are absolutely right (Hubris?) and their predecessors’ were absolutely wrong sarcastically. On occasion they  “bless them”, metaphorically, and comfort them for their tragic ignorance with pathetic quips to their students and readers.

Tuesday, February 18, 2014


Bill Dagnon posts to Mailbag on Baraboo New Republic HERE

“Research proves minimum wage theorists wrong”
“Last week on TV a reporter interviewed a journalist about the effects of raising the minimum wage. The journalist said, according to market theory if the wage were raised demand would lessen for the higher-priced labor and workers would lose their jobs. Next the reporter interviewed a professional economist who stated that numerous studies show that raising the minimum wage has little effect on employment.
This example shows the difference between economic theory and actual economic outcomes.
The origin of economic theory is usually attributed to Adam Smith who wrote “The Wealth of Nations” in 1776. He stated, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
This idea of self-interest was combined with the idea of an invisible hand. In theory, an invisible hand leads those who pursue their own rational self-interest in the market, through competition, to also promote what is best for the general public.
Apart from the exaggeration using the famous ‘Butcher, Brewers, and Bakers” on self-interest paragraph (WN I.ii.2: 26-7), the next paragraph is also grossly exaggerated and quite wrong. There is nothing about “rational self interest in the market, through competition” which also "promote[s] what is best for the general public”.
The “invisible hand” metaphor “describes in a more striking and interesting manner its object” (Smith’s Lectures On Rhetoric and Belles Lettres”, 1762), to the hidden private motives of a person that leads him to act in a specific manner.
 Smith only gave only two direct examples, once each in Moral Sentiments” (1759) and “Wealth Of Nations” (1776), of this metaphor, plus one other that describes its use in pagan superstition about the Roman God, Jupiter and his so-called “invisible hand” that fired visible lightning bolts at enemies of Rome, (History Of Astronomy, 1744-58).  None of then mentioned “markets”, “competition” nor “rationality”.


DEIRDRE MCCLOSKEY posts (16 June) on “Bleeding-Heart  Libertarians” HERE
McCloskey is one of the most original thinkers in the history of political economy writing today, in my view.  Her writing is one of the reasons why I am a softer libertarian and not one of those “harder”, rightwing, sort of Libertarians who hate the very existence of states, nor or those leftwing, hard haters of markets. (A pox on both of your houses, Sir!)
I strongly recommend that you take the time to read her contribution on “Factual Free-Market Fairness” and consider her arguments and some of the 140 comments her thoughts provoked on the “Bleeding Heart Libertarian’s Blog”.
[Note: her essay is part of a symposium on John Tomasi's "Free Market Fairness". For an introduction to the symposium, HERE  for a list of all posts in the symposium, HERE ]
Deirdre writes: “To a discussion by political philosophers a mere fact woman like me, an economic historian trained in the 1960s as a transportation economist, has really only one thing to contribute.  It is, to slightly modify Cromwell’s imprecation to the Scottish Presbyterians in 1650, “I beseech you, in the bowels of Christ, think it possible that you may be [factually] mistaken.” 
[GK: Cromwell was an English Protestant; later the Scottish Presbyterians spit into fundamentalist Covenanters" and traditional "Presbyterians"; Smith was a member of the latter majority grouping.] 
"Factually.  I realize that Kant laid it down that what humans are factually like, or what their history factually was, is forbidden to play a part in ethical reflection.  We are supposed to be looking for principles that any Rational Creature would adhere to, whether a six-headed being in outer space or the man on the Clapham omnibus.  As an economist I can see the charm in assuming a character Max U, or Rational R, and then proceeding.  And I know that most social psychologists (I except among the younger generation Jonathan Haidt, for example, or, Mike Csíkszentmiháyli of my generation, or Jerome Bruner of an earlier generation) find it charming to believe that ethics starts with their own earliest experiments.  Such models and experiments are a lot simpler than reflecting in addition on art and literature and philosophy since the Rig Veda and the Epic of Gilgamesh.  But the modern cleverness after Hobbes and then Kant and Bentham and now with the fierce modernists of freakonomics and hedonic measurement seems less relevant to human experience—which is after all why we would want an ethical theory in the first place—than the virtue-talk of the ages.  We can’t, and shouldn’t, stop being humans, who were once children, and will die, and who reason and love and hope in human ways.  As Will Wilkinson puts it, if hammered into reflective equilibrium with the help of clever thought experiments and modeling assumptions” of the political philosophers since Hobbes, we nonetheless, and even (Will observes) in the very rules of our reflections, “are also going to be, to a very large extent, creatures of our environment.”  Kant’s decision to omit anthropology (which he in fact taught every Saturday in term) was a human and rhetorical choice, not written in the starry heavens.
So: I’m from economics and history, and I’m here to help you.  In the factual background assumed in the elegant contributions here by Elizabeth Anderson and Samuel Freeman there’s a very particular story (less so in Richard Arneson and not at all in Wilkinson), embodied since the late nineteenth century in what Tomasi calls High Liberalism.  The High-Liberal political philosophers such as Anderson and Freeman and Dworkin and Nussbaum rely, against Kant, on a factual story which they take to be so obvious as to not require defense.  I claim that on the contrary their master narrative is mistaken, as anthropology or economics or history.  You can hear versions of it every night on MSNBC (you can hear other mistaken master narratives on Fox News, so understand I am not recommending that)
The story is, in a few brief mottos to stand for a rich intellectual tradition since the 1880s:  Modern life is complicated, and so we need government to regulate.  Government can do so well, and will not be regularly corrupted.  Since markets fail very frequently the government should step in to fix them.  Without a big government ee cannot do certain noble things (Hoover Dam, the Interstates, NASA).  Antitrust works.  Businesses will exploit workers if government regulation and union contracts do not intervene.  Unions got us the 40-hour week.  Poor people are better off chiefly because of big government and unions.  The USA was never laissez faire.  Internal improvements were a good idea, and governmental from the start.  Profit is not a good guide.  Consumers are usually misled.  Advertising is bad.
Thus Anderson: ”Externalities, asymmetrical information, and other collective action problems are . . . pervasive in economic life.  Countless ways of conducting business reap gains for some while imposing unjust costs on others.  Create a cartel.  Stuff rat feces in sausages.”  Thus Freeman: “It is a truism to say that in order to achieve the benefits of an efficient market economy (increasing productivity, greater economic output, increasing productive capital, etc.), the basic rules of property, contract, and exchange must be structured [by government] to realize efficient market relations.”
No.  The master narrative of High Liberalism is mistaken factually.  Externalities do not imply that a government can do better.  Publicity does better than inspectors in restraining the alleged desire of businesspeople to poison their customers.  Efficiency is not the chief merit of a market economy: innovation is.  Rules arose in merchant courts and Quaker fixed prices long before governments started enforcing them.
I know such replies will be met with indignation.  But think it possible you may be mistaken, and that merely because an historical or economic premise is embedded in front page stories in the New York Times does not make them sound as social science.  It seems to me that a political philosophy based on fairy tales about what happened in history or what humans are like is going to be less than useless.  It is going to be mischievous.
How do I know that my narrative is better than yours?  The experiments of the 20th century told me so.  It would have been hard to know the wisdom of Friedrich Hayek or Milton Friedman or Matt Ridley or Deirdre McCloskey in August of 1914, before the experiments in large government were well begun.  But anyone who after the 20th century still thinks that thoroughgoing socialism, nationalism, imperialism, mobilization, central planning, regulation, zoning, price controls, tax policy, labor unions, business cartels, government spending, intrusive policing, adventurism in foreign policy, faith in entangling religion and politics, or most of the other thoroughgoing 19th-century proposals for governmental action are still neat, harmless ideas for improving our lives is not paying attention.
In the 19th and 20th centuries ordinary Europeans were hurt, not helped, by their colonial empires.  Economic growth in Russia was slowed, not accelerated, by Soviet central planning.  American Progressive regulation and its European anticipations protected monopolies of transportation like railways and protected monopolies of retailing like High-Street shops and protected monopolies of professional services like medicine, not the consumers.  “Protective” legislation in the United States and “family-wage” legislation in Europe subordinated women.  State-armed psychiatrists in America jailed homosexuals, and in Russia jailed democrats.  Some of the New Deal prevented rather than aided America’s recovery from the Great Depression.
Unions raised wages for plumbers and auto workers but reduced wages for the non-unionized.  Minimum wages protected union jobs but made the poor unemployable.  Building codes sometimes kept buildings from falling or burning down but always gave steady work to well-connected carpenters and electricians and made housing more expensive for the poor.  Zoning and planning permission has protected rich landlords rather than helping the poor.  Rent control makes the poor and the mentally ill unhousable, because no one will build inexpensive housing when it is forced by law to be expensive.  The sane and the already-rich get the rent-controlled apartments and the fancy townhouses in once-poor neighborhoods.
Regulation of electricity hurt householders by raising electricity costs, as did the ban on nuclear power.  The Securities Exchange Commission did not help small investors.  Federal deposit insurance made banks careless with depositors’ money.  The conservation movement in the Western U. S. enriched ranchers who used federal lands for grazing and enriched lumber companies who used federal lands for clear cutting.  American and other attempts at prohibiting trade in recreational drugs resulted in higher drug consumption and the destruction of inner cities and the incarcerations of millions of young men.  Governments have outlawed needle exchanges and condom advertising, and denied the existence of AIDS.
Germany’s economic Lebensraum was obtained in the end by the private arts of peace, not by the public arts of war.  The lasting East Asian Co-prosperity Sphere was built by Japanese men in business suits, not in dive bombers.  Europe recovered after its two 20th-century civil wars mainly through its own efforts of labor and investment, not mainly through government-to-government charity such as Herbert Hoover’s Commission or George Marshall’s Plan.  Government-to-government foreign aid to the Third World has enriched tyrants, not helped the poor.
The importation of socialism into the Third World, even in the relatively non-violent form of Congress-Party Fabian-Gandhism, unintentionally stifled growth, enriched large industrialists, and kept the people poor.  Malthusian theories hatched in the West were put into practice by India and especially China, resulting in millions of missing girls.  The capitalist-sponsored Green Revolution of dwarf hybrids was opposed by green politicians the world around, but has made places like India self-sufficient in grains.  State power in many parts of sub-Saharan Africa has been used to tax the majority of farmers in aid of the president’s cousins and a minority of urban bureaucrats.  State power in many parts of Latin America has prevented land reform and sponsored disappearances.  State ownership of oil in Nigeria and Mexico and Iraq was used to support the party in power, benefiting the people not at all.  Arab men have been kept poor, not bettered, by using state power to deny education and driver’s licenses to Arab women.  The seizure of governments by the clergy has corrupted religions and ruined economies.  The seizure of governments by the military has corrupted armies and ruined economies.
Industrial policy, from Japan to France, has propped up failing industries such as agriculture and small-scale retailing, instead of choosing winners.  Regulation of dismissal has led to high unemployment in Germany and Denmark, and especially in Spain and South Africa.  In the 1960s the public-housing high-rises in the West inspired by Le Courbusier condemned the poor in Rome and Paris and Chicago to holding pens.  In the 1970s, the full-scale socialism of the East ruined the environment.  In the 2000s, the “millennial collectivists,” Red, Green, or Communitarian, oppose a globalization that helps the poor but threatens trade union officials, crony capitalists, and the careers of people in Western non-governmental organizations.
Yes, I know, you want to reject all these factual findings because they are “right-wing” or “libertarian.”  All I ask you to do is, once in a while, consider.  Don’t believe everything you read in the papers."
You can read more by Deirdre McCloskey in her major studies of the emergence of and early acceptance of the new bourgeois social class in the age of commerce: "The Bourgeois Virtues: ethics in the age of commerce", University of Chicago Press, 2007, and Bourgeois Dignity: why economics can't explain the modern world", University of Chicago Press, 2010.
They will open your minds ...

Sunday, February 16, 2014

Loony Tune no. 92

Ken Pomeroy posts (12 February) on KenProm Blog
GK: Until recently I attended many Football (soccer) matches both home and away at my local team, Hearts stadium in Edinburgh and occasionally at away matches.
I have no idea how the metaphor “invisible hand” applies to ‘home-team advantage.  It is not secret nor remotely “invisible”.
Home teams always have a larger crowd of spectators than the visitors (about 10-1 for most matches to about 2/3rds to 1/3 rd for major contests).
Crowds make competing noise levels possible – the home crowd is usually noisier and that has a clear effect on the home team’s performance  both when it is winning and, crucially, when it is struggling.
That is why it’s an example of a Loony Tune.

Saturday, February 15, 2014

From My Notebook no. 21

Henry Thomas Buckle, 1867. ‘History of Civilisation in England’. Longman’s Green.
‘Wealth Of Nations in Parliament’, 1783, p 214.
“No great truth which has once been found has ever afterwards been lost; nor have any important discoveries yet been made which has not eventually carried everything before it”.
But if an earlier “great truth” did lay undiscovered or accidently destroyed in fire, say, there is no way Buckle’s assertion can show it was discovered earlier.
I copied this down when reading Buckle and forgot about it until this afternoon when looking among my notes for something else, as you do.

The Corruption Over Time of Metaphors

 John Sparkman posts in Daily Racing Form “Invisible Hand of the Market” HERE
“The father of modern economics, Adam Smith, introduced the metaphor of the invisible hand of the market in his seminal book “The Wealth of Nations” in 1776. Smith’s metaphor for what he conceived as a natural, self-regulating function of a free market is readily visible in the accompanying table detailing the sharp decline in the number of Thoroughbred stallions and mares in North America over the last 20 years and the accompanying fluctuations in stud fees over the most recent decade.
Metaphors are one of our most useful literary inventions, but they tend to become corrupted over time, and whether the changes visible in stud fees are due to factors that can be described as purely “the market” perhaps depends on one’s definition of the market. The marketplace for Thoroughbred stallion seasons of 2014 is governed by Smith’s invisible hand, for sure, but it also is highly dependent on the invisible – to the public – hands of veterinarians sheathed in rubber gloves. …
Adam Smith’s invisible hand of the marketplace works best when it is indeed invisible. A 12 percent increase in stud fees in one year makes the self-regulating properties of the market all too visible for comfort.”
An interesting export of economics into the breeding horses, but it is one that is founded on a false premise. Adam Smith did not conceive of his use of the “invisible hand” metaphor as his “metaphor for what he conceived as a natural, self-regulating function of a free market”.
A more careful reading of the passage in Wealth Of Nations (WN IV.iii. 9 p 456) show it referred to the merchant’s “insecurity” of sending his capital abroad because of his perceived risks in doing so.  His perceptions were of course invisible to onlookers. 
Metaphors “describe in a more striking and interesting manner” their “object” as defined by Adam Smith in his “Lectures on Rhetoric and Belles Lettres”, p 29, 1762-3, and in the Oxford English Dictionary, vol III. 1983.
Adam Smith made no references to the market in the "invisible-hand" paragraph in WN– that is a 20th century invention – but he did identify the stated metaphor’s object three times in the quoted chapter (p 452), including in the “invisible-hand” paragraph (p 456).
In contrast to John Sparkman’s assertion that “Adam Smith’s invisible hand of the marketplace works best when it is indeed invisible”, Smith was quite clear that markets work through highly visible PRICES.  Indeed they would not work at all without VISIBLE prices!
Think about it.  There is no role for an "invisible hand" in enabling markets to work, but there often is to metaphorically :
"describe in a more striking and interesting manner" the often limited intentions of human motives in acting as they do.  Interestingly, Adam Smith  also understood this in his highly insightful reference to the "unintended consequences" of human actions, some of which actions are disappointing to those acting with their beneficial intentions.

Sam Bowman of the Adam Smith Institute on Scottish Independence

Sam Bowman, Research Director at the Adam Smith Institute (London) published (14 February 2014) a timely contribution to the current debate on Scottish Independence, now moving from the Westminster, Conservative/Liberal Government’s mainly negative campaign to the beginning of a most revealing highly negative bullying phase.  
Mr Obsborne, the UK Chancellor of the Exchequer (Treasurer), visited Edinburgh yesterday to announce tht should we Scots vote ‘Yes’ for Independence on 18 September, then he would block any attempt by Edinburgh’s Parliament to remain in a currency union with the UK. 
He was joined in this abrupt declaration by confirmatory declarations by both the Labour Party and the Liberal Democrats, suggesting some level of inspired collusion, as any two of the UK parties will likely form a formal or informal coalition in the next government elected in 2015.
Of course, this is likely to be just a part of the pre-Referendum bluster , yet to move to the nasty threats stages, aimed at frightening and intimidating Scottish voters.  Currently, polls show a majority who intend to vote ‘No’, with the ‘Yes’ vote very slowly rising from a low 39%.
So why the defiant bullying and regular bloody phase typical of the British Empire’s response to pre-Independence agitations in its former colonies in the 20th century?
The Adam Smith Institute’s Blog published Sam Bowman’s contribution to the debate HERE.
Note: I agree with Sam’s contribution below.  I should also make two other things clear: first, I am a Fellow of the ASI, and second, I made no comments on the article  before I read it this morning.  I re-publish it here for readers, many of whom reside in the USA, and several have asked me recently about Scottish Independence.  As stated many times before on Lost Legacy, I only discuss politics on Lost Legacy when it refers to the country in which I vote, as Sam’s article does.
Sam Bowman, Research Director at the Adam Smith Institute (London) HERE
“Between 1716 and 1844, Scotland had one of the world’s most stable and robust banking systems. It had no central bank, no lender of last resort, and no bank bailouts. When banks did fail, it was shareholders who were liable for paying back depositors, not taxpayers. Scottish GDP per capita was less than half of England’s in 1750; by the end of the era in 1845 it was nearly the same. Now that George Osborne has ruled out a currency union if Scotland votes for independence, the Scots have an opportunity to return to this system more seamlessly than any other place in the world could.
As I said to the press this week, there’s nothing really stopping Scotland from continuing to use the pound unilaterally. (Unless the remaining UK introduced strict foreign exchange controls, which would be absolutely crazy.)
What the Chancellor's announcement actually means is that the Bank of England (BoE) would no longer consider Scottish interests when it determines monetary policy and that illiquid Scottish banks would no longer be able to use the BoE as a Lender of Last Resort.
I’m not sure that the first point really matters at all. Scotland’s five million people can’t have much of an influence over the BoE’s policy for the UK’s 63 million people as it is. And, frankly, I’m not sure the BoE knows what it’s doing well enough for it to matter whether it cares about you or not.
The second point is the interesting bit. George Selgin has pointed to research by the Federal Reserve Bank of Atlanta about the Latin American countries that unilaterally use the dollar. Because these countries – Panama, Ecuador and El Salvador – lack a Lender of Last Resort, their banking systems have had to be far more prudent and cautious than most of their neighbours.
Panama, which has used the US Dollar for one hundred years, is the most useful example because it is a relatively rich and stable country. A recent IMF report said that:
“By not having a central bank, Panama lacks both a traditional lender of last resort and a mechanism to mitigate systemic liquidity shortages. The authorities emphasized that these features had contributed to the strength and resilience of the system, which relies on banks holding high levels of liquidity beyond the prudential requirement of 30 percent of short-term deposits.”
Panama also lacks any bank reserve requirement rules or deposit insurance. Despite or, more likely, because of these factors, the World Economic Forum’s Global Competitiveness Report ranks Panama seventh in the world for the soundness of its banks.
I suspect that there would also be another upside. Following Walter Bagehot, central banks are only supposed to lend to illiquid banks, not insolvent ones. Yet since the start of the Eurozone crisis the ECB has clearly made significant bond purchases to prop up both insolvent banks and insolvent governments. This may have been a lesser evil than letting them collapse altogether, but it’s hard to say that this kind of moral hazard is not present.
So, given that some countries do survive and even flourish without a central bank, how would Scotland do it?
The basic mechanics, I think, would be this: in a hangover from the old free banking period, Scottish banks currently issue their own banknotes. After independence, they could continue issuing their own notes that entitle the bearer to GBP on demand. BoE pounds, in other words, would be the 'base money' that Scottish banks use to back their own private currencies, in the same way gold was used during the last Scottish free banking era.
A banknote from a Scottish bank would be, in effect, a promissory note redeemable on demand in BoE-issued pound sterling. (Scottish notes are already promissory notes, but issuance is closely regulated by the BoE.) Of course, there should be nothing stopping banks from issuing notes redeemable in something else, like US Dollars, gold, Bitcoins, or Tesco Clubcard points. Scottish banks would have to arrange private clearing houses, as they did in the last free banking era, to provide loans to illiquid banks, or they could follow Panama in simply maintaining very high reserves.
No bank would have monopoly privileges: any ‘bank’ could issue notes and it would be up to the market to decide whether to accept them as money or not. As Selgin explains here, banks free to issue their own notes will set their reserve ratios according to people's demand for money, stabilising nominal spending.
With respect to other regulations, I quote Selgin again:
"It is, in any event, desirable that there be no Scottish public authority capable of bailing out insolvent banks and of thereby introducing a moral hazard. Deposit insurance should be resisted for the same reason. Foreign banks should be admitted, by way of branches rather than subsidiaries, and should enjoy the same rights as Scottish banks. (Of course the major "Scottish" banks are themselves no longer really Scottish anyway.) Finally, re-establishing some form of extended liability (though not necessarily unlimited liability) wouldn't be a bad idea."
We take no position on Scottish independence — it is up to Scottish voters to decide. And while a return to free banking in Scotland may seem fanciful, this week’s announcement makes it much more likely. Keeping the pound and treating it as the ‘specie’ on which banks can base their notes would make the transition virtually seamless for the average Scot, while giving them a banking system that is unrivalled anywhere in the world for being stable, open, and free."