Saturday, October 18, 2014

LOONY TUNES No. 103

1
Llewellyn King (lking@kingpublishing.com) is executive producer and host of “White House Chronicle” on PBS posts: HERE Adam Smith’s “invisible hand,” describing the efficient operation of markets, has morphed into a something else: an invisible hand in my pocket and yours.
2
Charles Gaba posts (24 Sept) on ACASign ups.net
HERE 
"Obamacare = Socialism!" Claims Given the Finger by Invisible Hand of the Free Market, Part 11Source: Forbes, 09/23/14: State Farm, Blue Cross Partner To Sell Obamacare Policies:  Mark N.
This one comes to us from that bastion of Socialist-Communist-Pinko thinking known as…Forbes.com:"
3
Reihan Salam (18 October)  (From SLATE) HERE 
Comment: Amazon is what the American economy needs”
We've all heard of Adam Smith's "invisible hand" that guides the free market. The invisible foot is the invisible hand's brutish older brother. It is the force that sees to it that capital gets reallocated from firms that aren't doing their jobs to firms that are by putting the former out of business.”
4
Bryant McGill, best-selling author, speaker and activist in the fields of self-development, personal freedom and human rights, posts HERE 

“There is an invisible hand at work in the making of beautiful lives.”


Monday, October 13, 2014

DAVID HENDERSON ON PIKETTY: POVERTY MORE IMPORTANT THAN INEQUALITY

David Henderson on Piketty
David Henderson is posting extracts from his review of Thomas Pikcetty’s block buster book: “Captial in the 21st century”, Bellknap, Harvard.
1: “My long review of Thomas Piketty's Capital in Twenty-First Century is finally out. It is titled "An Unintended Case for More Capitalism." Unlike many free-market critics of Piketty's book, I find his big-picture statistical analysis somewhat compelling, although like the other critics I see some serious problems with it. But even if his analysis is correct, I still find it much less important than he does, and I find his policy proposals appalling. Beyond his big-picture analysis and policy proposals, he discusses many issues: Social Security, the history of tax policy in the United States and France, global warming policy, immigration, and many others. On some of these, his analysis is good. On others, it is weak or outright wrong. Sometimes he gets his history wrong, and in important ways. Finally, he has a bad habit of questioning the motives of those with whom he disagrees.
Start with the big picture. "It is long past the time," he writes in the Introduction, "when we should have put the question of inequality back at the center of economic analysis and begun asking questions first raised in the nineteenth century." The center? Really? But if we put inequality at the center, we can easily miss the tremendous growth in well-being for a huge percentage of people in the world and for almost everyone in the United States and Western Europe. Much later in the book, Piketty shows that he is aware of those improved conditions, writing:
Nevertheless, according to official indices, the average per capita purchasing power in Britain and France in 1800 was about one-tenth what it was in 2010. In other words, with 20 to 30 times the average income in 1800, a person would probably have lived no better than with 2 or 3 times the average income today. With 5-10 times the average income in 1800, one would have been in a situation somewhere between the minimum and average wage today.
In his own way, he is pointing out, albeit less dramatically, what University of California, Berkeley economist Brad DeLong noted in a study aptly titled "Cornucopia." In that well-argued and documented paper, DeLong examines the 20th century and shows that the price of almost every item we buy--if stated in hours of labor required to earn enough to pay for it--has fallen to a fraction of its cost in 1900. Moreover, that reduction in cost understates the improvement in well-being because many crucial items that we buy today did not exist in 1900. Antibiotics, for example, are a 20th century invention. Their price in 1900 was effectively infinite.

2 In Piketty's view, if someone's share of wealth stays constant, he cannot be better off, even if wealth has increased.

Yesterday I highlighted the opening of my lengthy published review of Thomas Piketty's Capital in the Twenty-First Century. Here's the next episode.
In my view, a steady increase in well-being for the vast majority of the world's inhabitants, as well as the policies necessary to achieve that, are what should be central to economic analysis. But Piketty chooses to put inequality front and center, and so be it. He states his conclusion up front:

When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income.
The reasoning is fairly straightforward: Assume that someone who owns capital earns an average annual real return of 5 percent and that the rate of growth of the economy is 3 percent. If the owner of capital can live on 1 percentage point of the annual return, his wealth will grow at 4 percent per year, which is higher than the economy's growth rate. We need only one more assumption: that the capital owner has only one son or daughter who, in turn, will live on that 1 percentage point per year. QED
.
In short, Piketty's conclusion follows logically, but only if we include assumptions about the number of heirs and their spending discipline. But if, for example, each wealthy person has three heirs who dissipate the wealth, those heirs will leave little to their heirs. So, based on just Piketty's skimpy assumptions, his claim does not follow logically. He, unfortunately, starts out by overstating his case. He could be right empirically, though, and he presents evidence for the growing share of income earned by owners of capital, much of which they inherited.
We are still left with the question: "So what?" Imagine--as Piketty has convinced me seems at least plausible--that the share of income going to owners of capital could rise over time, which means that the share of income going to labor would fall. Would that mean that laborers are worse off? Not at all. In fact, they are likely to be better off. Unfortunately, many people who read the book, especially those who are not economists, could easily miss this point for two reasons: (1) Piketty's emphasis on income shares rather than on real income; and (2) his misleading language. We would expect an emphasis on shares rather than real income from someone who believes that inequality of wealth and income, rather than improvements in standards of living, is "at the center of economic analysis."
What compounds the misleading impression is Piketty's misleading language. For example, in discussing his country, France, he writes, "Probate records also enable us to observe that the decrease in the upper decile's share of national wealth in the twentieth century benefited the middle 40 percent of the population exclusively." But as he well knows, French wealth per capita grew enormously in the 20th century, and so the decline in share of the wealthiest does not imply an absolute decline in wealth. Moreover, even if the wealthiest French people had lost wealth in absolute terms, the higher share of the people below them is not sufficient evidence that the wealthiest group's decline benefited the middle 40 percent. The middle 40 percent could have done better simply because of their own savings and investments.
Piketty's misleading explanation of the French case above is not an isolated weakness. Throughout the book, he writes as if he thinks that wealth is zero-sum and, thus, that increases in various groups' wealth must come at the expense of others. Writing about early 19th-century France, for example, he refers to a "transfer of 10 percent of national income to capital." But a look at his Figure 6.1, on which he bases this claim, shows no such transfer. All it shows is that the share of income going to capital rose. Similarly, in discussing the United States in the late 20th century, he calls an increase in the income share of the top 10 percent an "internal transfer between social groups." Never mind that on the very same page, he admits that income for the bottom 90 percent slowly grew over that same period.
Or consider Piketty's statement about the United States and France: "And the poorer half of the population are as poor today as they were in the past, with barely 5 percent of total wealth, just as in 1910." That is nonsense. If the poor have the same percentage of wealth as they had in 1910, they are much richer because wealth is much greater, as Piketty well knows. Here, he has gone beyond misleading language into actual error.”

Comment
I have my copy of Piketty’s book om my desk but I have not finished it yet.

However, from the start it clashes with my own considered views, summed in my insistence that poverty is a more important problem than inequality, as I have expressed several times on Lost Legacy. 
I have debated with David Henderson on Lost Legacy on the “invisible hand” metaphor, HERE  (29 November, 2005) so we do not see eye-to-eye on that subject at least, and perhaps others, but his review of Pikett’s book is spot on.
Inequality cennot be “solved” by a magic bullet, acts of government, political wishful thinking, “occupations”, or revolutions of any kind. It is an historical feature of all human societies since our much fewer ancestors left the forest and taht life will return in short-order if the good intentions of good people become twisted by those who have always emerged after whatever economic processes are destroyed.
Nowhere in all of human history have societies, prior to the 18th century in North Western Europe and prior to what emerged in North America in the 19th century, and continues today in the 20th and 21st centuries has inequality been abolished by design (Marx’s solution). 
The real undesigned transformation are now spreading across large population swathes in the fomerly “undeveloped” rest of the world, and we can seen rising per capita incomes up and down the income scales. 
There is a long ways to go, yet. And the desperately poor of the world know it. That’s why some of the desperately poor make hazardous and risky journeys in attempts to get into the ranks of the poor in what they regard as the rich countries. 
It is ironic that poor people in the poorest part of the world regard the poverty of the rich countries as infinitely better than their own poverty, even though the rise in per capita incomes and access to technologies, in recent and continuing decades, where they live or came from, are rising for the first time since humanity spontaneously started on that road less that 500 years ago - and with long ways to go yet.
Of course, for the humanitarian concerned people in the world, the pace of change is too slow. They want action to hurry-it up. A worthy goal, indeed. I share their aspirations and admire their self-sacrificing enthusiasm but I only worry that in trying to get what they wish for, they don’t bring the whole house down with them.


Thursday, October 09, 2014

THIS IS WHAT IDEOLOGICAL ECONOMISTS HAVE DONE TO THE CASE FOR MARKETS WHERE POSSIBLE

Geoff Huston, Chief Scientist at ‘Asia Pacific Network Information Centre’, posts on the complications
 of leaving a threatened over-congestion of cable streaming (such as from multiple-NETFLIX  type
 services) the market to sort out, instead of the State regulators HERE
20141008_internet_regulation_section_706_vs_title_ii/
“The topic of network neutrality and the issue of video streamers is causing considerable industry angst.
 Video content apparently stresses out the capacity of access networks in many areas, and while it is the
 actuality of traffic congestion, or the threat of traffic congestion, it's a situation that has attracted
considerable public comment (John Oliver's satirical commentary is perhaps the best example, although
 in this case I'm not entirely sure it was satire!). This is a matter that affects consumers not only in the
United States, but following in the footsteps of Netflix's global expansion we've see a similar debate about
 the positions of content and carriage providers in various European countries and South America. When
 we pump very large quantities of streaming video across an access network then many access providers
 are tempted to see this as an opportunity rather than a problem, and look for ways to extract a premium
 revenue stream from what many consumers appear to regard as a premium service. …”
To which he adds his APNIC punch line:
“But doing little other than hoping that Adam Smith's invisible hand will solve all of this through the actions of competitive suppliers to an open market is probably just wishful thinking.
Comment
Now we see what a ‘fine mess’ modern economists’ got us into, with their believing in myths of invisible-handed
fairies at the bottom of the garden, and worse, persuading the public to believe in them too. This is a cheap shot
for high-rent seeking government advisors to dismiss economists from influence.
Follow the link to see how Geoff Huston makes his (long) case on behalf of APNIC.

Sunday, October 05, 2014

ANOTHER AUTHOR DISMISSES THE INVISIBLE HAND MYTH

Michael Hirsh, national editor for Politico Magazine HERE 
Madrick argues that U.S. policymakers remain in the grip of a set of debunked, but somehow still dominant, ideas that are preventing real progress. Among them: Say’s Law, an antiquated early 19th century concept that implies that government deficit spending never works because it crowds out private spending. Policy-makers, especially on the right, also remain paralyzed by a fear of nonexistent inflation if the Fed lowers rates or government spends too much, as well as deference to an “invisible hand” that conservatives believe governs the markets but which even Adam Smith (the phrase’s inventor) didn’t really believe in.

Comment
Always a pleasure to see opinion formers like Michael Hirsh on the right track as far as knowlege of the real Adam Smith, born in Kirkcaldy in 1723, is concerned. This contrasts with an entirely mythical Adam Smith born somewhere in the USA in the 20th century.
Some say it was George Stigler’s bold one-liner in 1976 at a conference in Edinburgh, of all places, celebrating the bi-centenary of Wealth Of Nations, announcing to audience that Adam Smith was “alive and well in Chicago” that started the joke.
 Others say it was Paul Samuelson at MIT in 1948, who carelessly commented on an “Adam Smith” impostor whose reputation originated in US academe sometime in the 1930s among students who were not paying sufficient attention to their lecturers (Samuelson was an undergraduate at Chicago in the 1930s).

I say the myth began from among Cambridge (England) Academics in the late 19th century, who melded ‘laissez-faire’ and the ‘invisible hand’ and nursed the mythical Adam Smith to life much like Dracula and which quickly brain-washed US academe from the 1960s and the rest of the world into belief in fantasies, much like the 'blind' crowd cheering the naked Emperor for his clothes.

For an academic analysis of the sad tale see my “The Invisible Hand Phenomenon” essay in a new book, soon to be published in: “Propriety and Prosperity: New Studies on the Philosophy of Adam Smith”ed. Leslie Marsh, Palgrave-Macmillan,  2014).

Wednesday, October 01, 2014

A BLOG POST WITH NO HOME

A Blog Post With No Home
I found his extract on my desktop with no accompanying details, plus my, much longer original comments.  I post them today to clear space on my desktop, but they may be interesting to some readers.
Anonymous
“And if made policy, it is no longer simply unethical, but uneconomical as well, because of the fear, uncertainty, and even exuberance that arises among market actors, leading to misallocation of resources into unprofitable lines of production.
The questions are irrevocably linked. Even natural, inalienable rights—ethical concepts—are, for our purposes, best understood as constructs devised to protect the economic interests (the pursuit, use, and extension of life, liberty, and property) of individuals. They exist to help us avoid, and ultimately, resolve what are really economically motivated disputes.
Comment
As a “Soft” libertarian I find some interesting ideas present in this extract  as well as some dubious ones too; both require some careful revision. (presumably, referring to the whole article, now lost). 
The main issue for “soft libertarians”, including I believe, the ever pragmatic Adam Smith, is whether the “Clenched Fist and the General Welfare is a “symmetry” between “Adam Smith’s about self-interest unintentionally channeled into market organization”.  The “symmetry” is rather forced because Adam Smith did not say or imply that “self interest” is solely confined to “market organisation”.  Far from it. He applied it philosophically to “markets” and as a fundamental characteristic of humans because its existence pre-dates “market organisation”, and moreover, governments have operated in one form or another ever since property evolved many millennia ago, with a galaxies’ worth of unintended consequences.
All states had a duty to protect property from both the poor, as Smith mentioned in Wealth Of Nations, and also, and more frequently, from rival, rich men in violently disputed ownership of said properties and in attempts to exercise or overthrow rights related to primogeniture cultures. This latter source of disputed ownership within states is demonstrated across history. 
Coercion versus General Welfare, dramatised as a metaphoric clenched fist, is a loaded assumption.  Self-interest is not a passive moral force. Putting it such as: “The invisible hand, however, is open. It is able to do more, and better, than the clenched fist, without stifling progress in other areas” is to idealise self-interest as a morally neutral phenomena.  Smith identifies in Wealth Of Nations in Books I, II and III over 60 instances where self-interest consistently worked against the self-interests of the communities in which they occured.
We can surmise what would happen in societies without basic codes of conduct in human societies enforced by a justice system?  Consider, as a thought experiment, the hard-libertarian utopian vision of an economy without a state, and each person with having guns - the theory that ‘good guys with guns’ would protect individuals from ‘bad guys with guns’.  How would they know which was which? 
Autocratic states have been tried and by most standards failed.  The road to curbing autocratic power was not designed and applied. Fuedal kings did not let go of their absolute powers, enforced by armed bodies of men.  Some fell to violent revolutions and civil wars, others to invasions by other absolute powers.  In one case the Barons who ruled by the grace of the King’s pleasure, persuaded the king to introduce, albeit limited by the standards of absolutism, to curb his absolutist behaviours, if only slghtly at first.  But over a few centuries those modest relaxations of absolutism had unintended consequences that gradually widened the rights of those closest to him, and slowly, the rights of those below the Barons and the kIng, until they became entrenched rights of white male citizens too - females, black and Asian slaves rights came several centuries later - very recently in fact.
I refer, of course, to King John and the Runnymede compromise.  Whatever atrocities against human rights continued, once begun in the 13th century in England, the changes slowly widened as if unstoppable, like snow melting in the weakely flittering sunshine of liberty. 

To describe the world today as if government in the countries with the highest per capita incomes is synonimous with ‘oppresive corecion’ is pure hyperbole.  Oppressive coercion is more a characteristic of the world’s poorest countries.

STATES AND MARKETS ARE BOTH NEEDED

Henry Moore (“Hank”), a 23-year old libertarian blogger hailing from Montana, is the proprietor of The Libertarian Liquidationist. He is interested in politics and history and libertarianism since picking up Dr. Ron Paul's “The Revolution and End the Fed in 2009”, and in blogging since late 2011.  [The following is his entry for the Thorpe-Freeman Blog Contest, originally published at Notes on Liberty on May 22nd 2013, and The Libertarian Liquidationist on January 8th 2014]. Henry Moore posts on Liberty.Me HERE http://thelibertarianliquidationist.liberty.me/2014/07/04/the-ham-fist-of-the-state-or-the-invisible-hand-of-the-market/
“Ham-Fisted Coercion and Incompetence versus the Invisible Hand of Self-Interest”
A Tale of Two Hands
“I came across Gary Galles’ recent article in The Freeman about Leonard Read’s analogy of government coercion as a clenched fist, “ the Clenched Fist and the General Welfare.” I see a symmetry between this analogy and Adam Smith’s about self-interest unintentionally channeled into market organization, one that is so familiar to free market proponents and detractors alike that it is a common metaphor: the invisible hand.
Government coercion and market organization. Two very important concepts for any libertarian to master. Which one better provides for the general welfare? Smith and Read would contend the latter. The reasons for this are contained in the analogies. As Read and Galles point out, not much good can come from a clenched fist. Only violence and incompetence. It can punch. It can pound. That’s about it. What better description of government? Likewise, as Smith notes, the usefulness of markets is that they do better than government many of the noble things government tries to do, thereby rendering it redundant, if not unnecessary, in those areas. The all-too obvious fist of government regulations and mandates is no match for a more efficient, less obvious hand: self-interest."
Comment
The above Blog Post is almost pure ideology, devoid of contact with the real world.  It sweeps to one side the “violence and incompetence” of “punching and pounding” when used by mercantile-motivated self-interests enforcing trade-embargoes and prohibitions on behalf of dominant market-players, as happened when Europeans invaded foreign countries in the then undeveloped world from the 14th century.  The first things built by traders in distant lands were armed fortifications to protect the invaders from local harassment.  In these events the States played a role corrupted and influenced be local domestic market enterprises (East India Company, for example, with free shares and cash for legislators and politicians).
Modern markets also play their role in these grubby affairs and, for various reasons, do it “better than governments” on their own account, by “replacing open government collusions” to achieve “many of the IGNOBLE things that mercantile-influenced governments did in the past on behalf of their domestic businesses, often for a consideration, like Monarchist Honours and trinkets, as valued socially by the likes of ”Aldermen’s wives” over what Smith called their shuffles for “place”. In commercial matters, much of government legislation and diplomatic activities are directly related, not always openly, in favour of what today we call “big business” - Prime Ministers leading “trade missions” to China, for example.
The “clenched fist” of government coercion, however, is quite hyperbolic, especially nearer the top, and is more subtle and softer for holds all the occasional good it achieves, and downplays the great expense at which such good comes about, blaming its own inadequacies on the failings of “free” markets. The so-called invisible hand, for which there are multiple definitions, however, is mythical and does not exist. Supposedly, it is able to do more, and better, than the clenched fist, without stifling progress in other areas.
I agree that “what is unethical for an individual is also unethical for a group of individuals.” Outside the fantasies of perfect competition, universal morality is noble, but inconsistent with either market or state behaviours.
Adam Smith wrote his “Theory of Moral Sentiments” not because moral sentiments were shared and operated universally - they were’nt and didn’t.  He set the standards by which moral behaviour might be judged. Those standards evolved in practise though not universally in societies prior to the 18th century. The daily and life-time contests between moral and non-moral sentiments continue from his days to ours.  Nothing I have read on these questions has changed much up the 21st century, except that the richness of the tapistery of moral choices and their incidence is now probably more evident to us from our familiarity and direct experience of human behaviours, rather than from reading about them through the fog of previous times.
Self-interested behaviours are not a universal panacea for our mixed economies. Pure markets on their own or pure states in sole command are nowhere possible, nor experienced since before the classical period. Exchange has always existed among humans - it predates the earliest markets right back to human speciation from the common ancestors of the Apes. 

Today, states and markets exist everywhere.  Where one or the other dominates there are failings in both of them. That is why the appropriate balance may be best approached by following the pragmatic dictum of “markets where possible, the state where necessary”. 

Saturday, September 27, 2014

DO MODERN ECONOMIC IDEAS REALLY MATTER?

Behind The ‘Invisible Hand’: Why Economic Ideas Still Matter (2)
Paul Frimpong, Ch.E., Chartered Economist and the founder of Young Professional Economists Network (YPEN) and also a fellow of the Bastiat Society –Ghana:

"From the first edition, we saw the development of the ‘invisible hand’ theory by Adam Smith during the 18th century.

“The theory of ‘Invisible Hand’ states that if each consumer is allowed to choose freely what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution and prices that are beneficial to all the individual members of a community, and hence to the community as a whole.”
… Adam Smith in his 1776 book "An Inquiry into the Nature and Causes of the Wealth of Nations" states that:
"…every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it ... 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. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."
Individuals in a free market are expected, as rational beings, [to] maximize their own self-interest, and through a two way or multi-faceted interactions, the exchange of information in the markets enable each participant to be better off than when simply producing for himself / herself.
This means that in a free market, no regulation of any type would be needed to ensure that the mutually beneficial exchange of goods and services took place, since this "invisible hand" would guide market participants to trade in the most mutually beneficial manner.
Behind the ‘invisible hand’
Harvard economist Stephen Marglin argues that while the "invisible hand" is the "most enduring phrase in Smith's entire work", it is "also the most misunderstood."
Economists have taken this passage to be the first step in the cumulative effort of mainstream economics to prove that a competitive economy provides the largest possible economic pie (the so-called first welfare theorem, which demonstrates the Pareto optimality of a competitive regime). But Smith, it is evident from the context, was making a much narrower argument, namely, that the interests of businessmen in the security of their capital would lead them to invest in the domestic economy even at the sacrifice of somewhat higher returns that might be obtainable from foreign investment. …
… Behind the ‘invisible hand’ is just a philosophy and the belief that, perhaps, there are even profound forces that are working against the forces of demand and supply to establish a market efficiency– a ‘visible hand’.”
Comment
Regular readers of Lost Legacy will be familiar with why I consider Paul Frimpong’s general interpretation of Adam Smith’s use of the metaphor of “an invisible hand” is quite unrepresentative of Smith’s meaning.   All Smith said in fact was that a merchant concerned for the security of his capital  if he sent it abroad might instead choose to invest it ocally, which if he did, his action would add to domestic “revenue and employment”. The consequence of doing so was an arithmetic addition to the domestic economy, which he considered generally to be good outcome that was of public benefit to the community. 
The "Invisible hand"  quotation comes from Book IV of the Wealth Of Nations (p 456), which Book IV Smith described as his “violent attack” on the prevailing mercantile political eocnomy of Great Britain.  He said nothing at all about “Individuals in a free market” were “rational beings”, who “maximised their own self-interest”.
True, we can deduce that “markets enable each participant to be better off than when simply producing for himself / herself”, which is true as well as for every system by which people acquire their subsistence from nature in all previous “ages of mankind” from hunter-gathering, shepherding, farming, and exchange in markets because all benefited from the “division of labour” instead than living hermit-like and doing everything for themselves. Man depends on the co-operation of others, and always has, and likely, I venture to suggest, always will for the foreseeable future.
Whatever is meant by the “visible hand”, it does not mean that it is an antonym for the use of the “invisible hand” as a metaphor.  Like all metaphors, the “invisible hand” does not exist as an entity; it simply describes in a “more  striking and interesting manner” its “object” (see Smith ”Lectures on Rhetoric and Belles Lettres”, 1762, p. 29).  Its “object” in this case was the ‘hidden” motive in the merchant’s mind that prompted him to actions that had the intended consequences of making his capital more secure than exporting it facing the risks of sending it abroad.  But actions can also have unintended consequences too. In this case the original motivated actions of security can also add to “domestic revenue and employment”, which Smith regarded as a “public benefit”.
Some actions can have negative consequences too, such as pollution, higher prices, tariff wars and hostilities between countries. Indeed, Smith considered that the mercantile policies prevalent at the time did cause wars, invasions, large spending on wars and regime changes, let alone higher domestic prices, plus the absence of foreign-sourced products (French wines replaced by poorer quality Portuguese varieties). Whatever else it was, it was a long way from “the so-called first welfare theorem", or "Pareto optimality of a competitive regime”.
Stephen Marglin’s quoted observation that the “invisible hand” is the "most enduring phrase in Smith's entire work", is wrong and unintensionally misleading: the “invisible hand” “metaphor” was not “a phrase”, and only endures today because modern economists - in particular Paul Samuelson in 1948 - lazily picked out the phrase and have spread it around the profession since the 1960s, as if it was true. Marglin’s “observations” demonstrate that he does not understand the limited metaphoric purpose behind Smith’s use of it and his explanations are misdirected - it had nothing to do with 18th century theories of perfect competition or product distribution. 
Nor is there a “visible hand” - there are visible prices because no market can work without visible prices.  Markets have never been “perfectly competitive and state regulations are absolutely necessary. For example, Smith mentioned the need for state banking regulations and limits to interest rates, the absolute necessity for mandatory laws of justice, without which society would crumble.
Ideas matter, modern or ancient, except where they are wrong. 

Thursday, September 25, 2014

ON DEMYSTIFYING ADAM SMITH ON THE "INVISIBLE-HAND"

Nathan Goodman posts on “Students for Liberty” HERE
[Students For Liberty has grown into the largest libertarian student organisation in the world, which includes over 800 leaders that support over 1,350 student groups representing over 100,000 students on all inhabited continents.]

The phrase “invisible hand” can easily evoke fanciful imagery of invisible hands magically manipulating the world. So it’s no surprise that many critics of laissez-faire, particularly on the left, misconstrue the concept as a form of magical thinking or religious fundamentalism. For example, Neil Douglas and Terry Wykowski allege that “market fundamentalists imagine that the market magically transforms market participants into moral agents who mitigate self interest through the ‘invisible hand’ as described by Adam Smith.”
But economists don’t argue that markets produce moral outcomes as a result of “magic.” Rather, they argue that the institutions associated with markets produce incentives and those incentives guide self-interested individuals towards socially beneficial actions. As Peter Boettke explains, Adam Smith did not argue “that the pursuit of self-interest will automatically translate into public benefits.”  To the contrary, Boettke points out:
The Wealth of Nations actually has plenty of examples in which the pursuit of self-interest can lead to socially undesirable options.”
[Boetttke quotes Smith’s comments on the poor teaching he expperienced in Oxford (1740-46)  compared to the lively teaching he received in Glasgow (1737-1740)].
“Boettke uses this emphasis on institutions to rephrase Smith’s invisible hand proposition as follows: “Individuals pursuing their own self-interest within an institutional setting of property, contract, and consent will produce an overall order that, although not of their intention, enhances the public good.” Under these conditions, social cooperation emerges that is a result of human action but not of human design.
Comment
This a step forward from the Paul Samuelson's version in his famous textbook, “Economics: an analytical introduction”, 1948, and 20 editions to 2010, McGraw-Hill, which popularised the “Invisible Hand” metaphor used by Adam Smith to assert that  Smith identified “public benefits”  came from “selfish actions, which I regard as absurd, because nobody reading Adam Smith could come to that conclusion. 
Boettke also points out that “The Wealth of Nations actually has plenty of examples in which the pursuit of self-interest leads to socially undesirable options.”  I have regularly tried to quantify this statement by reporting over 60 instances in Wealth Of Nations in Books, I, II, and III where Smith specifies the cases where ‘self-interested’ actions have led to negative outcomes for the public good.  I have added on occasion that the whole of Book IV of WN is, what Smith himself described in a letter to a correspondent, as his “violent” attack against the mistaken ideas of mercantile political economy.  Nobody who reads Book IV could possibly be misled on this point, yet so few senior economists, including Nobel Prize-winners, draw the appropriate conclusion that Smith never, ever, asserted that public benefits depended on the selfish intentions of people in markets.  Public benefits may arise from certain selfish motivated actions ('proud and unfeeling' landlords in one case he gives - in the very long run - but most cases in which motives initiate actions for intended consequences are  in the daily activities of the business of life that have morally neutral unintended consequences.
The longest journey to the truth is travelled in small steps and I am grateful for signs of movement, led by Nathan Goodman quoting the talented Professor Boettek (see his textbook, Living Economics, 2012).
I am not “leftist” on Adam Smith; not am I “rightist” either. I do not buy the “laissez-faire” myth. 
Smith never mentioned “laissez-faire” once. It is also has a dubious history from the start: the french merchant who uttered the words “laissez nous faire” on behalf of his merchant colleagues, said nothing about laissez-faire for his customers.  Indeed, when mill and mine owners in 19th-century England campaigned for “laissez-faire” they were trying to stop parliament from legislating against the employment of young children in factories with rapidly moving machines that took their limbs off in accidents, and, later, for free-trade in corn to reduce prices so employers could lower wages.  Smith favoured “Natural Liberty” that applied to everybody, not just employers.
Nozik came at the “Invisible hand” controversy with the less perverse idea of “invisible-hand explantions”, related to “unintended consequences”, which Smith also articulated upon. The roots of the Nozik’s ideas are found in 17th-century ideas from Cromwell, onwards through to Adam Ferguson, a contemporary of Smith’s, who wrote: “every step and every movement of the multitude, even in what are termed enlightened ages, are made with equal blindness to the future; and nations stumble upon establishments, which are indeed the result of human action, but not the execution of any human design.”
I have observed before that the Ferguson (Nozik) passage fits neatly with Smith’s on the “invisible hand”.  Both are about the consequences of the actions of people. 
Let me explain.
Smith used the “invisible-hand” as a metaphor from his teachings on metaphors from 1748-62 (see his “Lectures on Rhetoric and Belles Lettres”). He spoke of the motives of the merchant who avoided sending his capital abroad because of his perceived risks from doing so.  His motives (hidden from view to others) “led” him to an action: invest locally.  His action had intended consequences, specifically the security of his capital (he mentions this motive four times).  In so far that his investment safely adds to his profit, his intended consequences are realised.  However, his actions may also have unintended consequences which played no part in his risk-averse motives for his actions, but neverless those actions may also cause unintended consequences.
In the merchant’s case, his actions contribute to “domestic revenue and employment”, raising both for the public benefit. (higher domestic revenue and higher employment).
The merchant did not intend this outcome, but it happened neverthess, though it was not by his “design”.
Similarly in Theory of Moral Sentiments” (TMS IV.1.10: 184-5), the “proud and unfeeling landlord” cares nothing for his labourers (serfs, slaves, tenants or whatever), but he is neverthess motivated to feed them from part of the produce they produce for him from his land. His motives are selfish in the extreme and violent overseers makes sure their master’s wishes are met. The labourers are motivated to work his land by the overseers' violence, but mainly by the need to eat, without which they and their families would starve. Thereby the motives of the landlords and of the labourers coincide in their actions.  Without food the labourers cannot work the fields and without the labourers working the fields, the “unfeeling”  landlord’s “proud” greatness would terminate and everybody would be thrown in starvation
However, their actions have intended consequences (landlords have high living standards and power; the labourers have food for their families).  Smith’s use of the “invisible hand” metaphorically “describes in a more striking and interesting manner” its “object”, namely the hidden motivations of the parties for their resultant actions.  Neither has nor needs to have any views on the unintended consequences of their actions, but nevertheless those actions have unintended consequences, because their actions “advance the interests of society, and afford means to the multiplication of the species” (TMS IV.i.10: 185).
Now I have been explaining all this on Lost Legacy since 2005, so far with moderate results. Both “Leftist” and “Rightist” friends, readers, correspondents, and listeners at seminars on the History of Economic Thought and contemporary scholars have been unimpressed so far, to say the least. But I shall carry on because I am encouraged by small signs that some scholars are moving independently towards loosely similar conclusions.

I regard Peter Boettke as moving slightly in the proper direction, i.e., towards Adam Smith’s perceptions on untended consequences.