Friday, July 14, 2017

Three Examples of the Misuse of Adam Smith’s Literary Metaphor in Today’s Economic’s Advice

Laura Kreutzer posts (14 July) in Private Equity News HERE
Adam Smith and the Wealth of Limited Partners
The declining returns expected by some investors won't necessarily limit the flow of capital into private equity”
… Back in 1776, Adam Smith published his groundbreaking treatise, The Wealth of Nations, forming the foundation of classical economics and underscoring the importance of market forces, what he refers to as the "invisible hand," in driving supply and demand.
NOTE: May have been lifted from below…
Norma Cohen posts HERE
Beware when independent financial advice is not independent
Choice is futile in opaque markets only understood by specialists, writes Norma Cohen
“The other element of advice of course, is that it assumes that the body receiving it has choices to make. Choice is what Adam Smith described as “the invisible hand” that creates markets. Choice enables rewards to be delivered to producers of the best products at the best prices. Inefficient producers fail, and rightly so. …
…But when markets are so opaque that only specialists understand them, choice becomes meaningless unless accompanied by advice as defined by the Oxford Dictionary. Earlier this week, Nobel Prize-winning economist Angus Deaton, in a paper for the Royal Economic Society, said that the failure of the US healthcare market is akin to that in financial services. “Choice is unproblematic, and little recognition is given to the possibility that people might choose badly,” he wrote. “In such a world, well-informed consumers will drive out deceptive insurance policies, just as consumers will drive out financial advisers whose investment vehicles are designed to profit the advisers, not the investors.” Of course, that is not what happened in either the US or the UK and the results are unfolding rapidly. …
Norma Cohen is the Financial Times’ former demography correspondent and is a PhD candidate at Queen Mary University of London
Susan Kirwin posts on Cision HERE
"Looking ahead, the compensation component should see further pressure, as it captures the lagged impacts of the recent tightening in Canadian labour markets on wage settlements," says Mr. Shenfeld. "In addition to that invisible hand of markets, higher minimum wages in Ontario, BC and Alberta will be kicking into labour costs in the next two years."
Three examples in this morning’s press (courtesy of Google Alerts).
1: “the "invisible hand," in driving supply and demand.”
2 “the invisible hand” that creates markets”.
3 “invisible hand of markets”.
All written by competent economists to be read in journals read by professional players in financial markets.
To what do the writers and their readers credit today’s ubiquitous invisible hand to do its supposed work? 
Three questions:
1 In what way is Adam Smith’s use of ‘an invisible hand’ related to 21st century markets? It was not a metaphor for supply nor demand in Adam Smith’s usage of it. Neither ‘supply’ nor ‘demand’ was mentioned by Smith.
2 Why did nobody, either among Smith’s closest collleagues while he was alive, nor among the major 19th-century political economists after he had died in 1790, mention or discuss the Smith’s use the ‘invisible hand’ in their own major works on political economy, published in the 19th century. They all failed to mention the invisible hand metaphor. Yet all of them commented in detail on Smith’s Wealth of Nations without them mentioning the so-called significance of Smith’s metaphor,  certainly until after the 1890s, when isolated mentions began to appear, without any of them claiming anything special about it.

3 Where did the modern obsession with Smith’s isolated reference to the ‘invisible hand’ appear from? We can date it precisely. Paul Samuelson claimed it was a reference to people’s ‘greed’ that affected their behaviour in markets in his popular textbook on Economics 101 published by McGraw-Hill in 1948. The false notion spread that ‘greed is good’, which was never an idea of Adam Smith.


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