Monday, July 17, 2017

NEWS OF NEW BOOK ON ADAM SMITH BY GAVIN KENNEDY

© 2017
An Authentic Account of Adam Smith
Gavin Kennedy

To be published by Palgrave-Macmillan, 1st September, 2017

This book is a textual criticism of modern ideas about the work of Adam Smith that offers a new perspective on many of his famous contributions to economic thought. Adam Smith is often hailed as a leading figure in the development of economic theories, but modern presentations of his works do not reflect Smith’s actual ideas or influence during his lifetime.
       Provides an informed survey of the existing corpus of Smithian studies, as well as a number of suggested original lines of further debate.
Though not written as a biography, it often draws on details of Smith's life in order to illustrate an authentic version of his works and the ideas that informed them
Makes extensive use of primary sources on Smith.

Gavin Kennedy believes that Smith’s name and legacy were often appropriated or made into myths in the 19th and 20th centuries, with many misconceptions persisting today. Offering new analysis of works on rhetoric, moral sentiments, jurisprudence, the invisible hand, The Wealth of Nations, and Smith’s very private views on religion, the book gives a new perspective on this important canonical thinker.

© 2017

Saturday, July 15, 2017

A TIMELY REMINDER THAT MARKETS CAN BE ENSLAVING OR LIBERATING

From an OP-ED in The News & Observer HERE
"Free markets, when idolized, demand sacrifice"
An idolatry is growing in the land and it could destroy our health. Idolatry is the worship of earthly things as though they were gods. In our case, the idol is the human idea of the sanctity of private markets. Evidence of this idolatry abounds in statements and images: “the invisible hand of the market”, “the magic of the market”, “the market is a bull”, “the market is nervous” or “exuberant” or “relieved.” Well-funded market missionaries use mass media, advertising, think tanks and, now, full-blown university programs to evangelize, to share their “faith in the market” and exhort us all to believe. The market’s high priests, the business news commentators, explain to us what the market is saying. We hang on their words because we are told that our well-being depends on it. This gleaming golden calf is compelling indeed.
But the “free” market is not a god to be worshipped. It is a tool which uses the supply-demand dynamic to allocate resources. It can be a useful tool. It has been used to accelerate economic growth and expand certain freedoms for many people. But it is only a tool. It must be harnessed and used in conjunction with other tools for the common good. Just as we need more than a power saw to build a house, we need more than private markets to uplift and strengthen our communities. Other essential tools include volunteerism, philanthropy, churches and other non-profits and democratic government. All are important. All involve human beings, so no tool is perfect. Yet, we are asked to believe that the market can do no wrong, that it is practically a sin to use the tool of our democratic government to regulate the market and provide health care for our community.”
[Read more here: http://www.newsobserver.com/opinion/op-ed/article161416873.html#storylink=cpy]
COMMENT

A contribution to balancing the exuberance of many public economists (including Milton Freidman, etc) when they idolise the “Market”, and their critics who denounce “Markets” as if they are the “Enemy”.

Friday, July 14, 2017

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

1
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…
2
Norma Cohen posts HERE
https://www.ft.com/content/c5aa195c-67a6-11e7-8526-7b38dcaef614
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
3
Susan Kirwin posts on Cision HERE
http://www.newswire.ca/news-releases/headwinds-are-keeping-inflation-tame-but-only-temporarily-cibc-634242193.html
"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."
COMMENT
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.

Friday, July 07, 2017

ADAM SMITH'S TORRID YEARS AT BALLIOL COLLEGE

Eamonn Butler, Director of the Adam Smith Society, London, posts (7 July): on the Adam Smith Institute Blog HERE https://www.adamsmith.org/blog/universities-incentives
“Universites and Incentives”
Eamonn uses the case of Adam Smith’s somewhat disappointing experiences of his four years at Balliol College as a Snell Exhibitioner (1740-1744) to illustrate the close negative linkage between performance and reward.
If people receive their income irrespective of their performance there will be slacking off in their performance, and even a complete evasion of any performance at all.
The latter consequence is used by Eamonn Butler to illustrate the appalling treatment by Balliol College of Adam Smith, which at that time had lost any pretentions to be “one of the most distinguished centres of learning in the world”.  It took a long time for Balliol to re-deserve that accolade, which today it truly deserves.
The Snell Exhibition was worth £40 a year, which at the time was a lot of money, (day labourers at the time earned less than half that per year), out of which he paid for his subsistence, for college services and his fees. The small remainder was for his own use. Moreover, Balliol’s general financial position was a cause for concern among the faculty and, while they treated the Snell Exhibitioners poorly, they valued their fees highly.
Smith reacted to the absence of tutorial support negatively. Balliol’s so-called ‘lectures’ were a total and disgraceful sham, which Smith details in his surviving correspondence. There were two sessions of prayers a day and two sham, non-lectures, a week, in which if faculty attended they said nothing at all, or told a student to read aloud from a textbook.
Smith spent two years arranging to leave Balliol on compassionate leave for him to return to Kirkcaldy to comfort his widowed mother during the 1745-46 Jacobite rebellion. (Smith’s politics were Hanovarian and not Jacobite). Eventually Smith and Balliol College came to an agreement - he could return on leave, as long as Balliol continued to receive his annual £40 Exhibition.
Smith arrived in Kirkcaldy and consulted his official Guardians as to his future. Eventually, an agreement was reached that young Smith would deliver a series of public lectures in Edinburgh on Rhetoric and, later also on Jurisprudence, from which he earned £100 a year, a princely sum indeed, similar to a university professor’s salary. From this public demonstrations of his academic abilities (ignored at Balliol) he was appointed a Professor at Glasgow, and the rest, as they say, is history.
One other important biographical fact. Adam Smith, as a junior Exhibitioner, never had access to “everything that the great Baliiol library” contained within it walls. Admission was confined to graduates only, and Smith never graduated from Oxford. Decades later, somewhat cynically, Oxford University “graduated” the, by then, world-famous Adam Smith with the degree they withheld from him while he was there as a student.
We can see what the Balliol faculty missed while Smith was among them because a long Essay that he researched and compiled alone at Balliol was kept by him in his bedroom cabinet all his life, and he ordered his Literary Executors to publish it after his death, which they did and it is available today as:  “The Principles which Lead and Direct Philosophical Enquiries; Illustrated by the History of Astronomy” (1795) [Oxford University Press, 1980]

This essay shows what Balliol Faculty missed by their appalling treatment of Adam Smith.
(Disclosure: I am  Fellow of the Adam Smith Society)

How To Ruin a Good Piece on the History of Economic Thought

Following an informative account of the gradual realisation by early writers on how prices changed from vaying patterns of the supply of goods and the demand for them, illustrated by both John Locke (1691) and Sir James Steuart (‘An Inquiry into Principles of Political Economy’ (1761), Halder Ali Sindhu posts (7 July) in the Daily Pakistan HERE
“Careem’s peak pricing and John Locke’s philosophy"
“Later, Adam Smith dealt extensively with the topic in his 1776 epic work, “The Wealth of Nations.” Smith, often referred to as the father of economics, explained the concept of supply and demand as an “invisible hand” that naturally guides the economy.
COMMENT
Adam Smith did no such thing. 
Halder Ali Sindhu would know just how wrong this statement is if he had read Wealth of Nations, or had read even the single paragraph in which Smith mentioned the ‘invisible hand’ in WN: IV.ii.9 p 456).
That paragraph had next to nothing to do with supply and demand. It was about a merchant who was self-motivated to avoid foreign trade in favour of investing his capital in domestic trade. The consequence of his domestic investment was to serve his intentions to trade profitably.
There were other consequences noted by Smith. In serving his self-motivated intentions to invest locally he was ‘led by an invisible hand’ to also unintentionally benefit the public good.
How? 
By the simple obvious fact that his self motivated actions also added to gross domestic investment, irrespective of his self-motivated actions, but which public consequences were also a public benefit.
The simultaneous consequences of his actions was that his invested capital added to domestic aggregate gross domestic investment, which was a public benefit.
Now this conclusion of Adam Smith was so obvious to his early readers that NONE of them commented upon it, until the 1870s when a few did, and hardly any others up to 1948, when Paul Samuelson, later a Nobel Prize winner, published what became his runaway best-seller Econ 101 textbook, Economics (McGraw-Hill). After 5 million sales and 18 editions it transformed the innocent metaphor of ‘an invisible hand’ into the now infamous mysterious, miraculous, power allegedly at work in the world’s economies.

Halder Ali Sindhu innoncently passes Samuelson’s monumental error on in his article, but then thousands of others also do the same daily - even hourly - in the world’s media, and, sadly, in our supposed senior academic professional journals.

Saturday, July 01, 2017

FROM ACORNS BIG TREES CAN GROW

Asad Zaman posts (29 June) on WEA Pedagogy Blog HERE
Adam Smith & the Invisible Hand
"In response to a comment by David Chester regarding Adam Smith and the Invisible Hand, I am reproducing the section in the paper which deals with this issue. This answers his question about how what is attributed to Adam Smith differs from what he actually said.
[Excerpt from the paper: Failures of the Invisible Hand]
Section 6: Recent Vintage of the Invisible Hand
The main goal of this section is to show that the modern interpretation of the IH is relatively recent. The idea that Mankiw (together with other modern economists) attributes to Smith is not actually present in Smith’s writings. In fact, modern writers borrow the authority of Adam Smith to provide weight to a very dubious idea of recent coinage.
We first note that modern interpretation of the “IH” is radically different from any interpretation of this concept that existed before the second half of the twentieth century. There is a growing body of literature (e.g., Grampp, 2000; Minowitz, 2004) which insists that the metaphor used by Smith was never meant to be anything more than a metaphor, and that the meanings inferred from Smith’s idea of IH by the modern economists support only their own interpretation of economic policies. Kennedy (2009) shows that three leading modern economists laud the IH as the “profoundest” and “most influential” contribution of Adam Smith. Nonetheless, their interpretation of the term and its significance is not supported either by Adam Smith or by readers of Adam Smith until the late nineteenth century."
The above is from a paper availale from SSRN HERE
Amir-ud-Din, Rafi and Zaman, Asad, Failures of the 'Invisible Hand' (July 15, 2013). Forum for Social Economics, Vol. 45, Iss. 1, 2016. Available at SSRN: https://ssrn.com/abstract=2293940 or http://dx.doi.org/10.2139/ssrn.2293940
SEE ALSO: REFERENCES:
Ashraf, N., Camerer, C. F., & Loewenstein, G. (2005). Adam Smith, behavioral economist.
Journal of Economic Perspectives, 19, 131–145
Blaug, M. (2007). The fundamental theorems of modern welfare economics, historically contemplated. History of Political Economy, 39, 185–207
Grampp, W. D. (2000). What did Smith mean by the invisible hand? Journal of Political
Economy, 108, 441–465
Kennedy, G. (2009). Adam Smith and the invisible hand: From metaphor to myth. Econ Journal Watch, 6, 239–263
Minowitz, P. (2004). Adam smith’s invisible hands. Econ Journal Watch, 1, 381–412

Rothschild, E. (1994). Adam Smith and the invisible hand. The American Economic Review, 84, 319–322
COMMENT
The truth, albeit slowly, is emerging about the modern misinterpretation of Adam Smith's use of the metaphor of an invisible hand. At present, that truth is confined to the sidelines of economic discourse but what begins there can spread towards the core.
I am encouraged. Follow the link and spread the news ...

Friday, June 30, 2017

MERCHANTS CAN BENEFIT SOCIETY BY THEIR MOTIVATED ACTIONS AND ALSO MAY HAVE THE OPPOSITE EFFECT.

Thomas Nowak posts 29 June on Euractiv HERE
Can the invisible hand guide us towards a decarbonised energy system?”
“This is not a new idea: The Scottish economist and philosopher Adam Smith (1723-1790) used the term “invisible hand” to describe the connection between individual action and the common good. Striving to maximise the individual good would automatically benefit society he argued and it would achieve the common good even better than had this been the individual’s goal in the first place. This effect would be achieved automatically through the price mechanism facilitating trade and market exchange.
The invisible hand theory is at the basis of Europe’s neoclassical, market-based economies. It is therefore no surprise that it (maybe invisibly) guides policymakers when they defend their refusal to select the means to an end, be it in the areas of innovation, efficiency or renewables. “We do not pick winners” or “legislation must be technology neutral” is a phrase often used. It assumes that policy makers do not need to take these decisions, because the market mechanism based on prices and rational decision making leads to a better result. Rational choice by the individual will help society to achieve its goals.
This would be very elegant if it worked. What is typically forgotten is that Adam Smith was a moral philosopher too and his theory included one important side condition: human virtue. A responsible individual would include the side effects of its action into the rationale of his decision making. If decision making is solely based on the price as carrier of information, the invisible hand must fail in maximising the common good whenever the price does not tell the truth.
This is the case for our energy system: The price mechanism does not work – the invisible hand is broken. Prices for many energy sources do not reflect the cost of environmental and social impacts of their use. …
…Policy makers are the doctors of the system. Applying the medicine suggested here will not only fixe the invisible hand, but will also allow much higher ambition levels and thus accelerate the energy transition, even possibly on time to limit global warming.”
COMMENT
Adam Smith did not use the metaphor of an “invisible Hand” as a ‘term’ (whatever that means). He used the “invisible hand” as a metaphor. To understand his views on the role of metaphors: see Adam Smith’s “Lectures on Rhetoric and Belles Lettres”, delivered in 1748 in Edinburgh as public lectures for fees from his audiences, and later at the University of Glasgow from 1751 to 1763. The lectures are available from Oxford University Press. Absent a knowledge of Adam Smith on metaphors disqualifies modern authors from writing about his meaning of “an invisible hand”.
Thomas Nowak writes:
Striving to maximise the individual good would automatically benefit society he argued and it would achieve the common good even better than had this been the individual’s goal in the first place. This effect would be achieved automatically through the price mechanism facilitating trade and market exchange.”
He is muddled rather than correct. Adam Smith made many assertions that individual merchants also acted intentionally to maximise their “own” interests with detrimental consequences for the common good, such as, to take one example mentioned several times by Smith, when they lobbied governments to impose tariffs on imports or to ban them outright, thus enabling said merchants to reduce competition and thereby raise their prices.
If Thomas read Adam Smith carefully he would refrain from making such generalisations as he does in his article. The error lies in the writings of modern economists, and their readers, nor in anything written by Adam Smith.

Markets work by visible prices, not by invisible hands, which metaphorically describes how the self-motivated actions by merchants, who invest their capital in their local economy, automatically and inescapably adds to domestic aggregate output and to aggregate employment, which is a public benefit. That’s all.

Thursday, June 29, 2017

MARK SKOUSEN AND ADAM SMITH

Mark Skousen’s book is offered on Google Alerts: “The Big Three in Economics: Adam Smith, Karl Marx and John Maynard Keynes” HERE
The Blurb tells us that:
History comes alive in this fascinating story of opposing views that continue to play a fundamental role in today's politics and economics. "The Big Three in Economics" traces the turbulent lives and battle of ideas of the three most influential economists in world history: Adam Smith, representing laissez faire; Karl Marx, reflecting the radical socialist model; and John Maynard Keynes, symbolizing big government and the welfare state. Each view has had a significant influence on shaping the modern world, and the book traces the development of each philosophy through the eyes of its creator. In the twenty-first century, Adam Smith's "invisible hand" model has gained the upper hand, and capitalism appears to have won the battle of ideas over socialism and interventionism. But author Mark Skousen shows that, even in the era of globalization and privatization, Keynesian and Marxian ideas continue to play a significant role in economic policy.
COMMENT
How serious this book is I am not sure.
Adam Smith never advocated nor discussed ‘laissez-faire’. If anything he was supicious of one-sided declamations that are inherent in the French merchant’s plea for laissez-faire (‘Leave us alone’) from French ministerial state officials managing the behaviour of said merchants at recognised official market places across 18th century France. Incidentally  such town and village market places still abound across France and are still tightly regulated in my experience.
Adam Smith has been attributed with ‘laissez-faire’ by lazy (pun) academcs who ascribe to laissez-faire meanings it does not have.
Laissez-faire is not about equal liberty for employees to decide/influence their wage-levels. The only choice an employee had in Smith’s time to improve their wages was to accept the ‘going rate’ or leave without a job. There was no question of collective bargaining or of collectively refusing to supply their labour at the unilaterally employer-determined ‘going rate’, including lowering existing wage rates. The law was on the side of employers in these disputes, including conviction to be followed by transportation to Australia and such like. Hence, employers and their spokespeople, including to their shame, bought and paid for academics.
In a case regarding employer resistace to reducing the hours of work per day by two hours, the academic tried to make his paid for ‘expert’ advice show that the entire profits of the firm were made in those last two hours! Laissez-faire indeed!
Adam Smith advocated ‘natural liberty’ for all, not laissez-faire only for the rich and powerful.
As for the sentence: “Adam Smith's "invisible hand" model has gained the upper hand.”  This is a total misreading of Adam Smith’s use of the metaphor of “an invisible hand”, of which I regularly cover on Lost Legacy. It was never a “model” for Adam Smith. It was a metaphoric expression. How metaphors work is covered in Adam Smith’s “Lectures on Rhetoric and Belles Lettres”, one of Smith’s less read, even “unread” books. Mark Skousen should read it soon if not now.