Wednesday, June 28, 2017

INTERESTING BUT PARTLY FLAWED HYPOTHESIS

RAHUK MATTHAN  posts (28 June) on LIVE MINT HERE
http://www.livemint.com/Opinion/oqXSrwt7z9jXRM7D5g1DoI/The-future-of-ownership.html
“The future of ownership
India has the unique opportunity to stand at the very forefront of the future of mobility
Ownership is central to modern economic theory. Adam Smith saw property as the means for providing for physical needs—both at the level of the individual and society. He believed that if ever there was a dissonance between private ownership of property and the interests of society as a whole, the “invisible hand” would correct the imbalance. As a result, the ownership of property is not only central to our existence, in many ways, it represents the aspirational goals of our lives. It has become the basis on which we measure our success—in terms of where we live, the property we own, the clothes we wear and the cars we drive.”
Comment
Interesting speculation by Rahuk Mattan. I am not so sure of his background-thesis that personal property is a relatively recent socially accepted phenomenon. Even in primitive tribal societies the notion of our exclusively owned hunting grounds were apparently observed, along with capital punishment for other tribes intruding upon them (See Vancouver’s accounts of his 18th-century voyages to the North-west coast and islands off North-west America).
This paragraph in Rahuk Matthan's otherwise interesting article caught my attention:
“Adam Smith saw property as the means for providing for physical needs—both at the level of the individual and society. He believed that if ever there was a dissonance between private ownership of property and the interests of society as a whole, the “invisible hand” would correct the imbalance.”
On what authority did Rahuk Mattan compose this paragraph? It certainly does not come from anything Adam Smith wrote, either about private property or about his singular us of the invisible hand metaphor, which was on a different subject altogether.

This invented error spoils what is otherwise an interesting hypothesis about the future of the private ownership of automobiles, especially in the technical age of driverless vehicles and ‘Uber' services.

Tuesday, June 27, 2017

ADAM SMITH'S UNIQUE REFERENCE TO THE BARGAINER'S CONDITIONAL PROPOSITION

Morgan Liddick posts (27 June) in The News Virginian HERE
OPINION: Pay for My Own Train Ticket? Perish the thought?
“Wherein lies the problem with much of modern America: we all want the best, fastest, most convenient everything – and we want someone else to pay for it.
A capitalist economy works efficiently to determine what people really want, as opposed to what they say they want. As Adam Smith explained, free markets do so by following the principle ”give me what I ask, and I will give you what you desire.” Simple, elegant, functional and ultimately fair, this exchange cares not one whit about the age, race, sex, status, occupation, connections or politics of either party.
On the other hand, government interference in markets has perverse effects: it introduces inefficiency, noise and friction, distorting economic signals and making it harder to determine true values and costs. “
COMMENT
Morgan Liddick deserves a prize for his utilising a most neglected idea enunciated by Adam Smith, but largrly ignored by modern economists, specifcally Smith’s pioneering assessment of the roles of ‘truck, barter and exchange’ in the opening chapters of the Wealth of Nations; specifically (WN I.ii.1-5. pp 25-30).
However, notwithstanding his reference to Adam Smith’s insights, I am not convinced that he has properly understood to what Smith referred.
Long after the “propensity to truck, barter, and exchange one thing for another was utilsed uniquely by human beings in the deep pre-history of our species, it was applied across the species in all of the modes of associated with human history. Even the Bible opens with the breach of bargaining faith by Adam and Eve in the Eden Garden.
In short, exchange behaviours are not unique to a “capitalist economy’, nor specifically only to markets.  Smith notes that the “exchange propensity” functioned long before ‘capitalism’ (a word first used in 1833). Exchange was “one of those original principle of human nature” and a “necessary consequence of the faculties of reason and speech” that are unique to our species (WN I.ii.1-2 p. 25).
The notion that a “capitalist economy works efficiently to determine what people really want, as opposed to what they say they want” is pure fantasy. That capitalism can be more efficient than non-capitalist and pre-capitalist economies is broadly true; that they are always faltless is less certain. And anyway, long before capitalism, people bargained with each other in exchange transactions, using what Smith described as persuasion by speech to: 
‘interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this, Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is this manner that we obtain from one another the greater part of the good offfices that we stand in need of.” (WN I.ii.2. p 26)
This is the clearist statement of the negotiator’s conditional proposition (IF-THEN) that I have found in my 40-year academic career teaching negotiation skills internationally.
Morgan Liddick’s version is somewhat different:” ”give me what I ask, and I will give you what you desire.” He also limits it to a unique feature of capitalism when in fact the bargainer’s conditional proposition is as old as human history.
Free markets do not, and arguably never have, operated in the real world. Smith understood this and indeed makes many references to the behaviour of ‘merchants and manufacturers’, who in his day, (and still in ours), colluded with each other and with governments to introduce the very same ‘peverse effects” that he deprecates, such as tariff charges and outright prohibitions on foreign imports, and regulatory controls to reduce competition.
In short, there are no “free markets” and arguably there never has been. In fact, “merchants and manufacturers” individually and through their trade associations have been the authors of much of the restrctive legislation that governments have enforced on their behalf.
However, I applaud Morgan Liddick’s relatively unique reference to the conditional proposition as explified by Adam Smith in 1776. Readers who want to find out more about exchange conditionality can read about it in my recently re-issued paper-back: 
Kennedy on Negotiation
(1998; paperback 2016)

Routledge,  London and New York

Sunday, June 25, 2017

TODAY'S INVISIBLE HANDS

1
On Language Change: The Invisible Hand In Language HERE
2
Asha Speckman posts (25 June) on Business Live
HERE
Market may drive Reserve Bank 'back to basics'
Central banks are often unpopular, but they hold the line”
Chris Stals, the man at the centre of South Africa's deepest political and economic crisis in modern history, has warned of the "invisible hand" that could force an errant government back to basic economic market principles. …
… Stals said he appreciated the need for the current government to intervene in the economy and market system (given the political past) but "even with very substantial interventions for good political and social reasons, never forget the principles of a market economy ... the invisible hand is going to work. If you apply restrictive measures in the economy, it's going to affect demand and supply.”
COMMENT

Yes, such restrictive measures will work through changing VISIBLE prices, not by a so-called invisible hand!

Saturday, June 24, 2017

WILL WE SEE HIS LIKE AGAIN?

The Guardian posts (23 June) an obituary of Donald Winch, the celebrated and much appreciated intelllectual economist and historian in HERE
Donald Winch obituary
Historian of economics keen to examine theories in their original contexts
In his book, Adam Smith’s Politics, Donald Winch showed that the Scottish political economist was far from being an advocate of unrestricted laissez-faire.
The market fundamentalism that has swept the Anglo-American world in recent decades likes to claim the 18th-century Scottish political economist, Adam Smith, as its intellectual godfather. But as Donald Winch, who has died aged 82, demonstrated, in his 1978 book Adam Smith’s Politics and in subsequent writings, this appropriation of Smith’s name misrepresents his purposes and his achievement.
As Winch showed, far from recommending unrestricted laissez-faire, Smith’s book The Wealth of Nations analysed the potentially damaging effects of market relations on civic virtue, emphasising the “mental mutilation” that factory labour can inflict, and even musing on the politically educative effects of a citizen militia. Smith was not endorsing an unrestrained individualism: rather, he was, along with figures such as his close friend and fellow philosopher David Hume, exploring the character of “commercial society” as part of a wider inquiry into the nature of law and government in modern states.
Winch’s account of Smith’s larger intellectual project was typical of the scrupulous scholarship that made him one of the world’s leading historians of political economy. Having been educated as an economist, Winch never lost his mastery of even the most technical aspects of economic theory. But he combined this with a subtle form of intellectual history that returned such theories to the thick texture of assumption and debate in which they were originally formed.
COMMENT
In respect for The Guardian’s copyrights and its request for others not to reproduce its material, therefore, I shall not copy its obituary in full. It is well worth your while to read it by following the link above.
Donald Winch had an extraordinary degree of influence on scholars for his writings on Adam Smith, notably, his Adam Smith’s Politics,  (1978) which I read after I read Wealth of Nations for the first time. I also heard him speak many years later at a History of Economics seminar and had a short conversation with him. 
Donald Winch had a quiet way of speaking. Of particular note, he did not endorse the modern habit of asserting that Adam Smith advocated laissez-faire. I entirely agreed with Donald Winch on that subject - I regularly mention on Lost Legacy (yesterday, in fact!) my disappointment at how some (most?) modern economists and sloppy journalists continue to insist on laissez-faire being associated with Adam Smith’s political economy.
There is a disconnect between the original source that advocated laissez-fare for themselves - market traders - in the late 17th century and their heirs and successors as large factory employers of labour in the 19th century. They also cried ‘laissez-faire’ against regulations requiring safety measures for high-speed machinery to protect employees (mainly women and very young children). The employers and their paid spokes-people demanded laissez-faire for themselves.

Sadly, Donald Winch is now gone. As we say in Scotland: Will we ever see his like again?

Sunday, June 18, 2017

THERE IS NO ACTUAL INVISIBLE HAND! SMITH FAVOURED NATURAL LIBERTY FOR ALL

Andy West is a sports, culture and politics writer originally from the UK and now living in Barcelona, posts (18 June) on MALAY MAILONLINE HERE
"EU overcomes the invisible hand’s paralysis
The main significance of this development is that it was very much a political victory rather than a case of consumers benefitting from the supposed “invisible hand” of the marketplace.
That famous phrase, coined by the hugely influential 18th century Scottish economist Adam Smith, claims that inefficiencies or inequalities within a free and open market will always be ironed out.
If something is wrong with the system, according to the theory, it will quickly be put right by a producer who would benefit both himself and purchasers by providing a better deal.
The idea that the market “looks after itself” has inspired generations of laissez-faire policies, with champions of the free market believing the chief task of government is to encourage open commerce by staying well out of the way.
It’s a nice idea and largely it works: if a biscuit manufacturer, for example, is charging 10 units of currency for its biscuits but a competitor can take advantage of new technology by reducing the price to eight units without reducing the quality, they will do so and will consequently gain more customers, who will also benefit from paying the lower price. Everyone wins.
The world of commerce often follows this path, meaning that products become better and cheaper for consumers as years go by. Unfortunately, however, it doesn’t always work so cleanly because no market is truly free, open or efficient. …
… The main significance of this development is that it was very much a political victory rather than a case of consumers benefitting from the supposed “invisible hand” of the marketplace.
That famous phrase, coined by the hugely influential 18th century Scottish economist Adam Smith, claims that inefficiencies or inequalities within a free and open market will always be ironed out.
If something is wrong with the system, according to the theory, it will quickly be put right by a producer who would benefit both himself and purchasers by providing a better deal.
The idea that the market “looks after itself” has inspired generations of laissez-faire policies, with champions of the free market believing the chief task of government is to encourage open commerce by staying well out of the way.
It’s a nice idea and largely it works: if a biscuit manufacturer, for example, is charging 10 units of currency for its biscuits but a competitor can take advantage of new technology by reducing the price to eight units without reducing the quality, they will do so and will consequently gain more customers, who will also benefit from paying the lower price. Everyone wins…
….The world of commerce often follows this path, meaning that products become better and cheaper for consumers as years go by. Unfortunately, however, it doesn’t always work so cleanly because no market is truly free, open or efficient.”
COMMENT
Andy West is misled and thereby misleads..
“That famous phrase, coined by the hugely influential 18th century Scottish economist Adam Smith, claims that inefficiencies or inequalities within a free and open market will always be ironed out.”
Adam Smith did not “coin” the “invisible hand”. He used a fairly common 16th-18th century, mainly, theological notion of God’s “invisible hand”, metaphorically to make a simple point, specifically that a merchant unwillinging to trade with foriegn businesses of unknown probity, who is thereby personally motivated to invest instead in his domestic economy, makes profits for himself (personal gain) and thereby and unintentionally also benefits the domestic economy from which other citizens also benefit.

Andy describes a general assertion that “Adam Smith, claims that inefficiencies or inequalities within a free and open market will always be  ironed out.”   Smith made no such assertion, nor was it consequential. Andy is  mistaken.

There is no “invisible hand of the market”. Andy follows with pure propaganda:
The idea that the market “looks after itself” has inspired generations of laissez-faire policies, with champions of the free market believing the chief task of government is to encourage open commerce by staying well out of the way.”
“Laissez-faire” is often attributed to Adam Smith, though he NEVER used the two words in his Works or Corrrespondence. Indeed, they were and are one-sided assertions about leaving business leaders alone to run their affairs without legislative or labour force “interferance”. The one-sided nature of laissez-faire was illlustrated in the 19th century political disputes that dominated UK Parliamentary debates. (employment of women and infants unprotected in dangerous machine environments; 14 hours of work a day; Factory Acts in “dark, satanic mills”, etc.). 

Smith advocated “Natural liberty for all, not just for Mill Owners. 

Friday, June 16, 2017

ANNOUNCEMENT: NEW BOOK IS WITH THE PUBLISHER, MR PALGRAVE

I have completed the text of my new book, "AN AUTHENTIC ACCOUNT OF ADAM SMITH' (Palgrave, forthcoming) and it is with the publisher.
Regular blogging will commence forthwith.
Gavin

PROFESSOR OF ECONOMICS SHOULD CHECK THE FACTS

Vijay K. Marthur, Emeritus professor of economics, Cleveland State University, posts (15 June) on Huff Post HERE
Invisible Hands of Conservative Wealthy are Guiding Economic Policy”
Before Adam Smith wrote his most well-read book, The Wealth of Nations, he wrote The Theory of Moral Sentiments in 1759. In the latter book he argued that man (referring to a person) has the ability to make moral judgments even though he is naturally guided by self-interest. In their economic history book, Professors Robert Ekelund, Jr. and Robert Herbert argue that according to Adam Smith, “…moral judgments are typically made by holding self-interest in abeyance and putting oneself in the position of a third person.”
Adam Smith was an ardent advocate of property rights, division of labor and invisible hand of competitive market forces. For him these institutional arrangements, guided by self-interest, would create self-regulating forces to bring about robust economic growth and improved wellbeing of the society. Smith’s invisible hand proposition did not support the doctrine of merchant capitalists from 16th to 18th century Europe, called Mecantilists who, in alliance with the monarchy, were primarily interested in the accumulation of their wealth. Smith also promoted free trade and saw it as a vehicle for expanding markets. Ekelund and Herbert state that Smith was concerned about accumulation of wealth and its influence in a civil society. …“Adam Smith’s invisible hand proposition works in a competitive market, therefore he abhorred monopoly power.”
COMMENT
Professor Vijay K. Marthur uses modern scholars’ statements to amend Adam Smith’s use of a metaphor of ‘an invisible hand’ to mean something quite different from what Smith intended. Be clear, this habit is often used in modern scholarship and arrives at ideas quite different from Adam Smith’s.
There is no mention of “competitive forces” in relation to Smith’s metaphoric use of ‘an invisible hand’. Vijay Marthur’s assertion of “Adam Smith’s invisible hand proposition” had nothing to do with, and did not mention, “a competitive market” nor “monopoly power”.

Wharever happened to the legendary “fact checkers” that used to be employed in newspapers, let alone by university professors grading student essays orreading articles by colleagues?

ETHICS OF ATTRIBUTING FALSE IDEAS TO ADAM SMITH

WILLIAMS-M4 posts (14 June) in  Business Ethics HERE
This argues that instead of accounting for a living wage it would serve third world countries better if developed countries removed trade barriers and relaxed immigration restrictions. This improvement, according to Adam Smith, would come from the  the concept of the invisible hand mentioned in our book. “Each person’s individual and private pursuit of wealth results in the most beneficial overall organization and distribution of economic resources.” -Shaw. If developed countries allow this, you noticed reaped benefits on both sides and, given time, a decrease in the number of sweatshops in third world countries. First though, developed countries must allow third world countries to progress through developmental struggles so they can acquire capital and technology.”
COMMENT
It is not ethical to attribute an alleged inaccurate and untrue quotation to a named person which is in fact a complete fabrication.
Adam Smith NEVER said or wrote what is attributed to him by Williams-M4 above:
This improvement, according to Adam Smith, would come from the  the concept of the invisible hand mentioned in our book. “Each person’s individual and private pursuit of wealth results in the most beneficial overall organization and distribution of economic resources.” 
The words “invisible hand’” when used by Adam Smith (only once in Wealth of Nations (1776) and in all of its 5 editions to 1789) were a metaphor not a “concept”, nor were they a general statement as asserted by “Williams-M4” in a publication, laughingly called in this context: “Business Ethics”!
There is nothing ethical in purveying direct untruths, especially when easily verifiable, by consulting Adam Smith’s Works.

Shame on those reponsible for ‘Business Ethics’…

Wednesday, June 14, 2017

THERE IS NO INVISIBLE HAND

Rebecca Baird-Member (13 June) asks on Commercial Observer HERE
“Does Broadway Have Too Many Vacant Storefronts?”
“Empty storefronts can sap the vitality from a neighborhood if they are not reoccupied quickly,” Brewer said in a statement accompanying the survey. “The normal ‘invisible hand’ of capitalism—old businesses closing and new ones quickly replacing them—too often doesn’t seem to work in Manhattan. Almost every neighborhood seems to have a storefront that’s been vacant for years.”
COMMENT
Oh Dear! There is no “invisible hand of capitalism” … There is no natural, nor ordained, certainty that as “old businesses” close, “new ones” will “quickly”, or even slowly, replace them.

Which planet does Rebecca live on?  Samuelson’s ‘La, La Land’?
Zoning is political. Taxes are also set politically in such markets.  Empty shops warn-off potential renters. 

Thursday, June 08, 2017

ON METAPHORS AND SCIENTIFIC LAWS

From QUORA (https://www.quora.com) by Rob Weir, Lifelong Student of Economics:
“In the same sense that Kepler’s laws of planetary motion were unscientific. Kepler described observed patterns, but were unable to derive or justify his laws. His was more of an aesthetic, even a mystical explanation than a scientific one. It was not only until Newton came along that the mechanism — gravity — was explicated. (And then we waited for Einstein to explain gravity.)
In a similar way Smith’s “invisible hand” is a non-mechanistic explanation, one that is descriptive, that fits observation, but is not derived or justified from more fundamental laws. It was for later economists, e.g., Menger, Mises, Hayek, even Samuelson, to explain the “why” behind this insight.”
My Response:
Smith used the “invisible hand as a literary metaphor. As such it was never a scientific law. The ‘invisible hand’ was largely, but not exclusively, used in theology throughout the 16th and 17th centuries.
In Smith’s case in Wealth of Nations, he observed that a ‘risk-averse’ merchant by investing his capital in the domestic economy for private gain, also and consequently added to aggregate domestic investment which was a public gain.
All the rest of the assertions about the IH being a scientific law are in error, largely invented by the gentlemen mentioned by Bob Weir, especially Paul Samuelson. Smith gave many examples of merchants pursuing their own interests whose actions were detrimental to the public good, not beneficial. For example, lobbying for tariffs and outright import prohibitions.

Prof. Gavin Kennedy, Emeritus Professor.

Wednesday, June 07, 2017

SELF INTEREST IS NOT SELFISHNESS

Shahid Mohmand posts (7 June) in The International News HERE 
‘Greed” and the Invisible Hand’
Adam Smith’s ‘The Wealth of Nations’ (WON) was published in 1776, the year the US gained independence. Before that, Smith was a diminutive professor of moral philosophy at the University of Edinburgh. But this book propelled him to a kind of stardom from which there has been no retreat, even centuries after his death. Today, Smith is known as the father of economics and his book is viewed as the bible of economics.
Although the book and its contents were quiet a revelation at that time, there is one concept that still stands out: the ‘invisible hand’ and it is working. Many tie this invisible hand to the moral decay that besets today’s capitalism. Is this true? Let’s contemplate.
The first misnomer that one encounters is linking the invisible hand concept to WON. In fact, the concept first appears in ‘Theory of Moral Sentiments’, a book as important as the former but lesser known. This book was all about the importance of moral criteria like compassion and empathy for the working of a society and the economy. The invisible hand makes an appearance and it reads as follows:
“[The rich] consume little more than the poor and in spite of their natural selfishness and rapacity…they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life ...”
In WON, Smith contends that:
“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…”
and
“Every individual... neither intends to promote the public interest nor knows how much he is promoting it... 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”.
There are a few noticeable aspects of these paragraphs. One, it’s the greed and selfishness of individuals that indirectly promotes a better society through the invisible hand. Second, it is unintentional. Third, Smith first mentioned this concept in theory of moral sentiments, which cannot be just a coincidence. He tied the working of the invisible hand and laissez faire capitalism to morality. He did not envision the wealth of nations accruing separately from the moral foundations of a society. In fact, that development had to complement it.
But what if it is not unintentional – without any moral compunction – and the pursuit of self-interest actually leads to less enviable outcomes for the economy and society? History is full of conquerors, for example, who laid waste to cities just to satiate their greed for more land. Surely, one person’s self-interest and greed turns out to be bad for other people. And that is so because they are not grounded in morality.
In our times – since the last quarter of the 20th century and after – there has been a precipitous rise in the kind of greed that has no moral grounding. Ask yourself, what forced millions of people to throng the streets a few years ago in the main street vs Wall Street stand-off? It was the crass thuggery of the financial elite. Their ‘financial engineering’ (utilising peoples’ money) led to the disaster that is the great recession, which caused millions to lose their jobs without them having any role in this debacle. As they suffer, this elite along with its stratospheric incomes and privileges remains untouched, non-repentant and unblemished.
Whether it is the 1987 stock market crash or the fall of two financial investment firms that heralded a horrendous period of economic misery of the last decade, it is the insatiable greed of a few that has put millions in misery. Read reports on the recession, watch movies like Big Short, or analyse how financial firms tried to cheat people by manipulating interest rates (the LIBOR scandal), and it could be easily discerned that pursuit of self-interest has taken a rather treacherous turn.
The financial industry is but one example of how the pursuit of destructive self-interest is now a threat to capitalism that has delivered so much for humanity over time. But there could no bigger fallacy than to tie it to Smith’s idea of the invisible hand, which never stood aloof from the good of society. If he were alive today, he would have been despondent and aghast to realise that his idea has been tied to the kind of destructive greed that is running amok.
How greed came to be accepted as part of economic activity is another story, worth another column. For now, we need to recognise that modern capitalism’s sorry predicament reflects the system’s failure to check the galloping greed. But this was not always so. Historically, if we just go by numbers, the bounties that capitalism’s working have wrought are innumerable and have benefitted humanity tremendously. From printing press to the steam engine and to the social media of today, capitalism’s imprint is formidable.
One of the most widely circulated graphs that is doing rounds in the social media nowadays is the enormous decline in absolute poverty world over since 1800, which would not have been possible if it were not for economies adhering to the capitalist mode of functioning.
Today’s challenge for capitalism, though, is that the system that benefitted everybody over time has more or less become dysfunctional. Concentration of wealth has assumed worrying proportions with little signs of the system addressing this fault. Another shock to the system by this unfettered greed – like the one in 2008 – would effectively end capitalism’s reign. Smith and his concepts can hardly be blamed for this state of affairs.
[shahid.mohmand@ gmail.com @ShahidMohmand79]
 COMMENT
Shaid Mohmand has written an erudite account of the role of Adam Smith (1723-90) as a moral philosopher and political economist. His essay contains some creditable thinking related to modern times. Unfortunately, it also contains factual errors as well.
Adam Smith was never a professor at Edinburgh University. His sole professorship was entirely at the University of Glasgow, a city about 41 miles west from Edinburgh. “Stardom” did not feature in public llife in the 18th century as it does in the 21st.
His Wealth of Nations (1776; 5th edition 1789) certainly led to a sort of prominance among academics and politicians during his lifetime, supported by his lesser known volume, The Theory of Moral Sentiments (1759; 6th edition, 1790). 
He is much better known today - even world-wide - than he was during his lifetime. Millions today know of an Adam Smith, often for reasons unrecognisable to those who know of the authentic Adam Smith, born in Kirkcaldy, Fife, Scotland in 1723 and who died in Edinburgh in 1790.
Even leading scholars, let alone the general media, equate the modern version of Adam Smith with the “invisible hand”, upon which has been erected a false perspective of a capitalism in which the “invisible hand” plays a major role, and all credited to Smith’s celebrated genius.
Yet some strange facts remain unanwered in these modern versions of Adam Smith and “an invisible hand”:
How is it that while the authentic Adam Smith was alive nobody referred to his metaphoric use of “an invisible hand”, once each in his two books?
Moreover, for 80 years after his death in 1790, none of the leading political economists (Ricardo, Mill, etc) who produced their own major volumes on political economy in the 19th century mentioned Adam Smith’s use of “an invisible hand” metaphor? Contrast this lack of mentions with the fact that of the thousands (tens of thousands?) of books and articles galore on economics published in the 20th and 21st centurtes, very few, if any, fail to mention “Adam Smith’s invisible hand”?
Should we not be cautious about attributing to the Authentic Adam Smith ideas he never had? He did not equate moral turpitude with self-interest. Paul Samuelson was wrong to assert that Smith believed that selfish actions via “an invisible hand” were fundamental to market activities (Samuelson, Economics, 1948). Which in 19 editions were read and believed by millions of undergraduate economists and continue to mislead ever more people today.

Shahid Mohmand has uncritically bought into the modern myths of Adam Smith’s metaphoric use the invisible hand. T’is a pity. He is a clear writer and almost certainly entirely innocent of the modern deceptions about Adam Smith. His talents would be better used in presenting the authentic Adam Smith from Kirkcaldy in place of the comic book,  Adam Smith from the imagination of Paul Samuelson

Tuesday, June 06, 2017

FROM THE ARCHIVES OF LOST LEGACY 1st JUNE 2009

FROM THE ARCHIVES OF LOST LEGACY 1st JUNE 2009
A reader, HUGO MARSHALL comments today (JUNE 2017 ) on a post of mine on Lost Leacy in June 2009:
“If i were you, I would read anything on/by the major economists both current and from the past. John Maynard Keynes was a fascinating economist and is known for revolutionising macroeconomics after the Great Depression. Other economists include Friedrich Hayek (1899-1992), his book "Road to Serfdom" is particularly interesting, and Milton Friedman, both famous 20th Century Economists who were roughly from the same school of thought. An interesting current economist is Paul Krugman, a current Keynesian who talks a lot about failures of the free market and current issues (Politics, financial markets, free trade). However, if you really want the complete other side of the market, study Karl Marx! His views were that the economy should be utterly controlled by the state and publically owned. I hope this helps. Hugo Maarshall on Adam Smith on State Intervention

HERE WAS MY 2009 REPLY: Adam Smith on State Intervention

My 2009 response: 
I am commenting in the hope of … explaining what Adam Smith actually wrote in Wealth Of Nations (1776) and its difference from what he is alleged to have written, with a view to elucidate the controversy about what to do in the current situation.

In a sense, it was a total free market system, guided by Classical Economics (i.e. Say's Law and Adam Smith). The most prominent economic work of this time frame was Adam Smith's book "The Wealth of Nations" that introduced the theory of "The Invisible Hand." This theory states that the market is governed by an "invisible hand," and less interaction by the government in the market, the better (i.e. laissez faire).”

What Adam Smith actually advised was that the wrong interventions in a commercial market by government should be, first, reversed and secondly those wrong interventions should be avoided, and other interventions of governments should be encouraged. This is not the same thing as being against government intervention as a whole. He wasn’t of the opinion ascribed to him by modern economists since the 18th century. In fact, Adam Smith advised that certain interventions, not in his time undertaken with much consistency by government, should be undertaken as soon as possible.

For example, besides government expenditures on defence against foreign invasions (not defence expenditures to intervene in European dynastic quarrels and wars for trivial ends, including defending loss-making colonies) and on the provision of systems of justice, minimally such as independent judges, jury trials, Habeas Corpus, and the rule of law, not men. 

He suggested what amounted to a substantial public investment in public works, such as roads (Britain’s roads were appalling, right into mid-19th century), public bridges, safe harbours, and canals, as well as public investment in a national educational system through a ‘little school’ in every parish (about 60,000 of them!) to educate all boys between 6 and 14 (at the time the mode was not to educate girls in public schools, only at home), in ‘reading, writing, and account’, with a smattering of geometry and such skills useful for earning a living and be productive.

Public expenditure was to be paid for initially from taxation on the richer sectors of the population and their maintenance financed by charging tolls or user-charges of public facilities for the costs of repairs to roads and bridges, plus subscriptions according to potential means to pay for teachers, books, and school prizes, and to pay for palliative care for sufferers from ‘leprosy and other loathsome diseases’. 

Government also should develop the postal service for public use (it was originally set up by government to monitor control of the nation’s territory by regular contact with its farthest reaches), it should provide assay officers to determine hallmarks on gold and silver bullion, and on quality standards of woollen goods, cloths and paper. It should also run an official mint to guarantee the purity of the coinage. He also was in favour of a central bank (the Bank of England) to manage government debt and to introduce necessary regulations to stop drawing and redrawing bills of credit and over-trading, to set maximum interest rates, and the minimum amount denominated on the promissory paper notes issued by private banks.

Altogether, this is a formidable list even for the 18th century, contrary to his modern image of him being against government intervention on some sort of laissez-faire (incidentally, a term Smith never used) principle. What then did Smith consider inappropriate for government intervention?

The list is quite specific and is wrongly interpreted as being directed at all government interventions. Smith’s Wealth Of Nations is not a textbook of economics as we understand it today. It was a critique of the mercantile political economy of British governments from the 16th century, which still dominated public policy making in the 18th century (and in many respects still does so today in various forms).

Legislators and those who influence them are susceptible to all kinds of erroneous ideas about how commercial societies work; fads and fancies are spread with conviction that have no scientific basis, much as the everyday observation that the ‘sun rises in the east and sets in the west’ led people to believe that the sun (and the planets) orbited the earth. Indeed, for millennia it was an article of religious faith, against which those who questioned it were dealt with severely (think of the famous case brought against Galileo).

Among mercantile fallacies were such notions as the balance of trade required to be positive in favour of exports, so that a nation could accumulate stocks of gold and silver (which the King could use to fight wars against neighbours - you can see why kings were easily converted to the nonsense!). 

From this fallacy, policies of protection against imports were developed, supported by tariffs and prohibitions, even though this meant that large numbers of goods cost domestic consumers much more from higher prices (and profits) than importing them would have allowed – you can see why many ‘merchants and manufacturers’ were enthusiastic true believers in this fallacious idea, and still are!

Moreover, the obsession with high bullion stocks led to ‘jealousies of trade’, in which nations adopted hostile stances to neighbours, some of it spilling over into wars, unofficial piracy and destruction of foreign shipping and ports – you can see why the 18th-century military and navy were enthusiastic proponents of ‘national glory’ from heavy investment in war-making!

Smith opposed such government interventions because they held back mutually advantageous trade from which peaceful trading countries could increase the opulence of their peoples. Many of the trade items added to the long lists (which grow ever longer) of protected trade were derived, not from economic principles or national secureity but from the lobbying of legislators and the hiring of influencers (with not a little bribery) on behalf of domestic ‘merchants and manufacturers’, who profited by narrowing the supply and widening the higher-priced market for their goods. 

The richest countries in the world today still engage in such fallacious policies, not just against each other, but also against the poorest countries, for which the richer countries' taxpayers spend small fortunes each year in subsidies, gifts and donations, not to make them richer but the ameliorate their poverty induced by less trade than they could otherwise enjoy.

At the time, Smith observed that certain domestic laws also made matters worse, such as the award of monopolies to the chartered Guilds in towns for the production and processing and selling of scores of goods, and which prohibited outsiders in nearby towns from competing in the markets and fairs of other towns with better goods at lower prices. 

These Acts were supported by the Statute of Apprentices which required ‘skilled’ tradesmen to serve 7-year apprenticeships in the town where they wished to trade, keeping out equally good tradesmen from elsewhere by law. James Watt, an apprenticed instrument-maker was not allowed to ply his trade in Glasgow because he had served his apprenticeship elsewhere (fortunately Adam Smith persuaded the university senate to appoint Watt to the University where he worked for several years and began his researches on steam power, essential for the future industrialisation of the world).

Perhaps the worst example of government intervention were the Acts of Settlement preventing labourers from moving from their home parish to another one in search of work. 

Altogether, Smith considered these government interventions a breach of natural liberty, introduced originally for arguably good reasons (the development of trade in Britain), but through time generating unintended consequences. In fact, they became major obstacles to the development of free trade in goods and work opportunities in Britain, which together would have fostered the emergence and extension of a commercial society and the spread of opulence through to the majority of the very poorest families in society earlier than happened, for which, of course, the poor paid the highest price.

From experience of legislators and those who influenced them – and Smith met and conversed with, and listened to, members of this exclusive club, from opinionated individuals through to Cabinet ministers and Prime ministers – and he did not think highly of their business judgement and acumen. 

He observed that the complexity of the detail in any business decision was formidable at any level beyond the most basic – if demand rises for your products make more of them; if it falls produce something else – and such decision-making was best left to the dispersed individuals involved who profited if they were right and lost if they weren’t, and should not be assumed by any ‘single person [or] no council or senate whatever, and which nowhere [would] be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it’ (WN IV.ii.10: 456). 

It is that passage which exponents of the distorted view that Adam Smith opposed all interventions of governments across the board base their enthusiastic convictions upon, forgetting (or not being aware of – not all ‘expert’ quotation-spreaders read Wealth Of Nations) how specific Smith was about the important and necessary role of well-managed State in providing support for the working of a commercial society, which today is bound to be larger than in the 18th century, though not as large as most modern state sectors have become.

In sum, if  HUGO MARSHALL recognises that there is a role for State interventions in certain specific areas - private enterprise where possible, state interventions only where necessary - we may find agreement in a truly Smithian manner.


GAVIN (5 JUNE 2017)

WORSHIP OF THE INVISIBLE HAND?

NATE FOWLER posts (5 June) on MINN POST HERE 
Congress shouldn't treat health care like an efficient market”
“While we should rightfully worship Adam Smith’s “invisible hand” for all that it has given us, it must be realized that this success does not negate the government’s ability to do good in industries that fail to distribute efficiently and equitably. Just check with the rest of the developed world.”
COMMENT
... “rightly worship the invisible hand”? (!)
Health Care, as practised in the USA, is not “health care” - its a bet that if you need health care you are insured for some proportion of the high medical costs of a lack of care with a degree of access to a remedy.

Meanwhile, there is no “invisible hand" to "worship", whatever that is supposed to mean ...

Monday, June 05, 2017

COSTA COFFEE CULTURE, YES; INVISIBLE HAND, NO

Arturo Pallardó posts (4 June) on “kantox” (‘Tomorrow’s FX Today’) HERE 
“Culture is like an ‘invisible hand’ – it is hard to describe and measure but has an incredibly important influence”.
“I believe culture has a phenomenal impact on performance and organisational health – and to achieve any planned strategy all people have to be aligned. I have described culture as the “invisible hand” – it is hard to describe and measure but has an incredibly important influence.”
COMMENT
Linking the idea of culture to the separate idea of ‘an invisible hand’ is unhelpful and redundant, though as a metaphor the ‘invisible hand’ has merits. Culture is describable - the way an organisation goes about its intended purposes - the ‘invisible hand’ is metaphoric. Giving it purpose is futile. It does not exist separate from its metaphoric meaning.
I pop into the Costa cafe located in the shoppping centre where the local Sainsbury super-market is located when I am taken by the family on occasion and where I push the trolley for safe exercise. Costa’s culture is visiblly operating. My disability is visible and Costa staff react accordingly. They also speedily prepare the coffee without fuss and take it to a table in or outside the shop. The Costa shop is clean and tidy visibly and kept that way unobtrusively.
Nobody has ever seen ‘an invisible hand’! It does not exist. Visible prices exist, as do comfortable coffee-drinking experiences… 
Metaphorically, Adam Smith used the invisible hand metaphor to describe how a risk-averse manufacturer was motivated to use capital to invest in the domestic economy by acquiring capital goods and supplies and by paying wages to domestic labourers. By so acting, the merchant pursues profits and adds to aggregate gross domestic investment and domestic incomes. 
Yes, that was all Smith meant in his metaphoric example. Yes, its that simple!
The domestic merchant or manufacturer is motivated by his own gain make his domestic investment, and is not motivated by the aggregate domestic consequences of his motivated expenditures. 

The consequences of his actions - adding to gross domestic expenditures - were so obvious they were barely worth commentary. That is probably why no political economist after Smith mentioned the ‘invisible hand’ example while Adam Smith was alive nor, astonishingly, did any major political economist from Smith’s time through to Marshall’s colleage, Pigou. Compare with today's abundance of mentions and claims for today's invisible hand ... (following Paul Samuelson's invented assertions of an invented Adam Smith in Samuelson's monumental 1948-2010 textbook, Economics).

Saturday, June 03, 2017

UBIQUITOUS INVISIBLE HANDS no 1

1
“Virtuosity In Business: Invisible Law Guiding The Invisible Hand”
http://poqexozy.ru/juva.pdf
2
3
Invisible Hands: Poems | wibapana.ru. 3 Jan 2011 . Money, metaphor, and the invisible hand. ..
4
oks - Amazon.ca Slapped by the Invisible Hand: The Panic of 2007. Gary B. Gorton. 2010. Oxford: Oxford .
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Invisible Hand: The Marijuana Business | hyciduvu.ru ... Marijuana Business: Roger Warner - Amazon.com