Friday, August 21, 2015


The Chinese Stock Market Crash is it because of "The Invisible Hand"
“A former hedge fund manager, MBA prof & expert witness on investments” writes HERE
The short answer is that the invisible hand not only caused the stock market crash, but that, when the market is working properly, the invisible hand causes EVERY crash... along with every change in stock market prices.  The basic thesis of the invisible hand, as coined by Adam Smith, is that markets of all kinds (stocks, groceries, energy) further the common good by incentivizing people to deliver goods and services that society wants.  Assuming the market is operating rationally, the hand has caused this crash by pulling capital out of the market, having determined that the future goods and services sold by companies in this market will not have the profits previously expected (although there is also the possibility that investments elsewhere have become more desirable).
The “invisible hand” was never a thesis “coined” by Adam Smith. 
Long before Adam Smith was born the “invisible hand” was used regularly in the 17th century - and before then too. It was used by Smith ONLY three times - twice without reference to markets and the third time as a metaphor for domestic capital investment arithmetically adding to what we now call GNP. 

Markets do not operate “rationally”. They are operated by human beings and like governments, also operated by human beings, they make many mistakes and misjudgements, including by people who quite “rationallly” act for selfish purposes closer to failure and often criminality than to the benefit of other people. The future ifsnot “determined”, nor known, and people in futures markets are no better than gamblers making guesses, much like tipsters in the horse racing business, usually with other people's money.


Blogger Unknown said...

Hi Gavin, I think the comment of the hedge fund manager about the invisible hand is partly true, but partly untrue. It is true that it is natural for capital to be withdrawn from non-profitable endeavours. Smith explains this in Book 4, Chap 7, from paragraphs 172-174. But it is untrue because his whole premise assumes a 'profit-maximizing market' or an absurd market dominated by merchants or speculators, which Smith explains right after, in paragraphs 175-183. But instead of mercantile companies monopolizing the 'colony trade', it is big investors that monopolize the 'stock trade' nowadays. This fallacy is in the statement "having determined that the future goods..sold by companies in this market will not have the profits..expected, which usually is due to their not being as desired by society as expected". This if false because everyone always desires iPhones and things made in China to some degree. Just count the items in your house that have 'made in China' labelled on them. Can a person honestly say that it would be ok for those items to vanish? Thus, the crash was caused not by the 'invisible hand', but by the 'selfish hand' arising from nature's deception of utility, which Smith discussed in the Theory of Moral Sentiments Part 4. Crashes will happen as long as utility is the goal of economics or the science of budgeting or resource allocation. If the invisible hand were in full force, then stock trading would be banned or so heavily regulated in the first place, since it endangers the capital of society by game, which is unnatural: "In the language of Change Alley the buyer is called the bull and the seller the bear, and as the bulls or bears predominate, stocks rise or fall. This practice of buying stocks by time is prohibited by the government, and accordingly, though they should not deliver up the stocks they have engaged for, the law gives no redress. There is no natural reason why £1000 in the stocks should not be delivered, or the delivery of it enforced, as well as £1000 worth of goods; but after the South Sea Scheme this was thought upon as an expedient to prevent such practices, though it proved ineffectual. In the same manner, all laws against gaming never hinder it.." (Lectures, of Stock-Jobbing)

3:39 am  

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