Monday, July 25, 2016

LOONY TUNES no. 154

1
Nakey Blakey posts (20 July) HERE 
Sometimes I dream of saving the world; saving everyone from the invisible hand that controls us every day without us knowing it.
2
Alper Ali Riza posts (24 July) on CM Cyprus HERE 
“Beware the Ides of July”
Makarios had been in power for fourteen years and loved to engage in brinkmanship. He naively gambled the fate of Cyprus with his famous letter to the president of Greece accusing ‘the invisible hand of Greece of seeking the elimination of my physical existence’, a pompous way of saying that the Greek government was planning to kill him and overthrow his government.
3
Jayaike Ukoha-Kalus, an economics student of Babcock University, posts (20 July) on PROSHARE (“inteligent investing’) HERE
“In reality, not many people had been getting FX at the pegged exchange rate, as the two hundred and forty (240) year old invisible hand of Adam Smith remains at work over-time to make sure by all means that the market returned to, or reached equilibrium; ensuring that the real incapability of the CBN to provide FX was evident in the parallel market; the monster baby of the CBN.
Comment

Adam Smith had nothing to do with ‘an invisible hand’ working for market equilibrium. That is a myth promoted by Paul Samuelson (1948). I DON’T BLAME JAYAIKE UKOHA-KALUS FOR THE ERROR: THAT RESPONSBILITY BELONGS TO WHOMSOEVER TEACHES THAT NONSENSE ABOUT ADAM SMITH AT BABCOCK UNIVERSITY (and whomsoever taught the same nonsense to the teachers).

Friday, July 22, 2016

LOONY TUNES no. 153

1
Jeff Guo (The Washington Post) in MY PALM BEACH POST (19 JULY) HERE 
“The clearest proof yet that your job is killing you”
“In this case, we can blame (or thank) the invisible hand for doing the dirty work. The more or less random fluctuations in foreign economies provided an opportunity to observe what happens when people suddenly get a lot busier at work. Though this study focused on the Danish manufacturing sector, it covered both blue and white collar workers, so the results seem generalizable enough: Working too hard has health consequences. Our jobs really are killing us.
2
Shane Obata (Rochardson GMP) posts (19 July) on SEE IT Market HERE
Higher Oil Prices Trigger Oil Production Increase”
“An interesting thing happened this week, total oil production rose for just the third time this year. The +0.68% oil production increase was the largest increase since last October. It’s not all that surprising; it’s simple economics. Higher prices begets greater supply.”
“We’ve colloquially referred to this relationship as the “Ws”. Where oil prices will establish firmer upper and lower bounds and will trade within these newly established ranges. Rising oil supply will tilt the balance of the demand/supply dynamic and prices will likely fall in response. We’ve already begun to see this.
It’s the invisible hand at work. In our chart of the week, we’ve plotted U.S. oil rig counts which began to tick higher at the end of May, when crude approached $50/bbl. Over the past six weeks, the rig count has risen 10%.” [GK: My emphasis]
COMMENT
The first paragraph above states a simple experience of markets known for centuries: “Higher prices begets greater supply.” [!!!]
Then the killer obfuscation misusing the nonsensical so-called  “invisible hand”: “It’s the invisible hand at work.” Graciously, we are spared the usual nonsense about it being an idea from Adam Smith.
3
Andrew Quentson posts (  July) on  CNN.LA HERE
“The invisible hand of the market as indicated by the price may keep even dishonest actors in check, but the distortion of balance may lead to mistakes which gradually and slowly incentivizes a brain and capital drain to other blockchains, potentially leading to eventual decay.”
Comment 

Markets work by VISIBLE prices. What possible role is there for “an INVISIBLE hand” metaphor?

ADAM SMITH IS INNOCENT OF THE CHARGE OF CAUSING ECO-COLLAPSE

Richard Smith posts (21 July) in TRUTH-OUT HERE
“How Individualist Economics Are Causing Planetary Eco-Collapse”
Even with respect to the public interest of the economic welfare of society, Smith's thesis that the invisible hand of the market would automatically bring about "universal opulence which extends itself to the lowest ranks of the people" as "a general plenty diffuses itself through all the different ranks of the society" could hardly have been more mistaken. Two-and-a-quarter centuries after Smith wrote, global capitalist development has produced the most obscenely unequal societies in history, with half the world living on less than two dollars a day, billions of people living in desperate poverty, many times more than the entire population of the world in Smith's day, while a tiny global elite, even just a few hundred individuals, concentrate an ever-growing share of the world's wealth, which they lavish on "opulence" on a hitherto unimagined scale. On this breath-taking failure of social scientific prediction alone, Smith's economic theory ought to have been ridiculed and drummed out of the profession long ago, as such a comparable predictive failure would have been in the natural sciences.
With respect to the public interest of broader societal concerns, which today would include the environment, Smith's philosophy of economic individualism as the means to maximize the public interest -- the common good of society -- is not only completely wrongheaded, it's suicidal. And it is completely at odds with the world's scientists and scientific bodies who are crying out for a plan -- a plan to stop global warming, to save the forests, to save the fisheries, to stop ocean acidification, to detoxify the planet, to save the thousands of creatures from extinction, etc. But capitalist economists, even the most humane like Paul Krugman or Joe Stiglitz, are hostile to the idea of economic planning.
Comment
Adam Smith did not cause what Richard Smith accuses him of bringing about. He described the history of the political economy of the states occupying the north-west of Europe up to the mid-18th century. He made no predictions in his weighty tome (except that the newly independent colonies of the USA in 100 years [1870s] would be the most opulent country in the world), in Wealth of Nations (1776-thru to the 6th edition in 1789). His focus was on Europe - indeed, he was somewhat pessimistc that governments of Europe would continue their habits of mercantile political economy by corrupt state-franchised monopolies, hostile tariffs, outright prohibitions and, often, economic warfare, as often slipping into dynastic, physical warfare at great cost in human life, evidenced across Europe (and spilling onto the high seas in distant territories of claimed colonies and their native populations).
Richard Smith ignores history, he predicts the future and is imbued with a typical modern economist's blatant ignorance of what Adam Smith wrote in both Moral Sentiments (1759) and Wealth of Nations (1776). What he calls ‘capitalist economists’ who purvey an economics that has in fact little connection to Smith’s writings. Indeed, ‘capitalism’ was not a word known to Adam Smith (1723-90) and was first used in English in 1854.
Richard writes of “Smith’s thesis” that “the invisible hand of the market “ which would automatically bring about "universal opulence which extends itself to the lowest ranks of the people" as "a general plenty diffuses itself through all the different ranks of the society”. 
This is an absolute untruth about the invisible hand. It is not found in Wealth of Nations purveying the nonsense Richard accuses Smith of when he referred once to 'an invisible hand'. In fact the myth was created in the delusions of modern economists from circa 1870s and widely believed since Paul Samuelson published allegations to that effect in his widely read textbook, Economics, 1948, and in 19 editions to 2010 (5 million sales, plus second-hand copies). Samuelson’s prestige - Nobel prrize and all that - ensured the myth of Adam Smith’s use of the “invisible hand” metaphor is firmly entrenched in 21st century discourse (see my regular column, “Loony Tunes”, on Lost Legacy for derived nonsense about the modern phenomenon.
Adam Smith nowhere said anything about an “invisible hand” of the market, or supply and demand”, that would “automatically “ bring about "universal opulence which extends itself to the lowest ranks of the people” - which is a quote about something different.
On this point, we may note that Richard Smith seems to believe that nothing has changed since Smith wrote in respect of the vast mass of people who lived in dire poverty in the 18th century in north-west Europe and in absolute and worse relative poverty elsewhere in the world. The internet was invented long after Smith died! Living standards for the market economies are incomparably better off than their great, great great, etc., grandparents experienced. Mass migration from today’s poorer countries indicates that millions prefer the risks of migration from their really poor economies to join the ranks of the poorest in the richer (so-called ‘capitalist’) economies across the globe. World poverty is reducing, not increasing - nobody appears desperate to seek to migrate to North Korea or Venezuela and there is no rush of North America’s poorest to leave the US to live in Mexico.
Richard Smith alleges that we live in the most “obscenely unequal societies in history”, etc. Of course, there are wealthy individuals living far above in access to more products than the vast majority of the average citizens in the world’s richest economies. It was obvious too in all previous ages. Smith’s point about the lowly day labourer in his day was incomparably better off than an “African King, the absolute master of the lives and liberties of ten thousand naked savages” (WN.I.i.12. p. 24) is worth considering. That trend has continued but with the added quality that everything has been scaled upwards: there are declining numbers of people in abject poverty on the scale of 18th-century Africa (consider mobile/cell phone-usage today across the planet and across all social classes).
The ‘global elite’ of ‘even just a few hundred individuals’ dramatises Richard’s anger but it is not representative of a unique problem compared with all elites in history. They were always a relatively small number. If his hypothesis is correct and the world is headed to eco-collapse, then the survivor generations will have to repeat the history of our forebears - small groups led by petty Kings or Queens and the rest subject to the whims of the “masters (and mistresses) of the lives and liberties” of their rulers. 

Fortunately, Richard is wrong - as he is about Adam Smith, a wholly innocent man of Richard’s ignorant charges.

Thursday, July 21, 2016

ANOTHER GREAT ARTICLE IN EVONOMICS

Professor David Sloan Wilson posts (28 January) on EVONOMICS HERE 
“Failed Economics: Tyranny of Mathematics and Enslaved by the Wrong Theory”
“The strange world of modern economics”
Adam Smith (1723-1790) observed that people following their narrow concerns somehow combine to make the economy work well, as if guided by an invisible hand. …
…. When Adam Smith invented the metaphor of the invisible hand, he was saying that human economies are like bodies and beehives in this regard. …
… Smith did not say that people are entirely self-interested. That would come later, from his followers and disciples. He had a sophisticated and nuanced conception of human nature that he described most fully in his book The Theory of Moral Sentiments. According to Smith, people have genuine concern for others in addition to themselves. They have a sense of right and wrong that leads to the establishment of norms enforced by punishment. They are interested in their reputation as much as their monetary income, and so on. Shakespeare would have felt comfortable with Smith’s conception of human nature. People still responded primarily to their local social environment, so the invisible hand metaphor remained apt, but their preferences couldn’t be collapsed into a single generic concept of self-interest.
COMMENT
The exciting ideas currently being posted on EVONOMICS are a pleasure to read and I srongly urge readers of Lost Legacy to follow the link and start re-thinking where we are in economics. 
The ideas I have been trying to articulate since my book, Adam Smith’s Lost Legacy, (Palgrave-Macmillan) was published in 2005 are finally finding indirect re-inforcement in EVONOMICS.
Of course, as seem above they are not yet up to speed on Adam Smith’s use of the “invisible hand” metaphor. For example, he did not ‘invent’ the IH metaphor - it was widely in use from the 17th century,  mainly in a theological context, though also in literature (Shakespeare, for example).
Smith’s use of the IH metaphor was sparing - once in Moral Sentiments (1759) and once in Wealth of Nations (1776). Note that his use was not metaphoric in his History of Astronomy (posthumous, 1795). Note also David Sloan Wilson refers to Smith’s singular use above “as if guided by an invisible hand” which is a simile, and not strictly metaphoric, as defined by Smith in his Lectures on Rhetoric and Belles Lettres.
David Sloan Wilson is correct in his description of Smith’s thoughts in Moral Sentiments, which link well with Smith's treatment in Wealth of Nations of the mutual dependence of each on all others as Smith noted:
In civilised society [men] stand at all times in need of the co-operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons… But man has almost contant occasion for the help of his brethren, and it is vain to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and shew them it is for their own advantage to do for him what he requires of them” (Wealth of Nations, WN I.ii.2. p. 26]
It is in this mutual dependence that human kind cannot be purely rational egoists whatever mathematicians may hve thought. Humans are not purely physical entities subject to the unchanging (Newtonian) laws of gravity, predictable over endless time. The are mutually inter-dependent and each must accommodate to joint decisions in bargaining processes (the subject matter of the immediately following paragraphs in Wealth of Nations, WN I.ii.2. pp. 26-27).

Having spent 35 years researching, studying Smithian bargaining, teaching, consulting, and writing at all levels and in several countries, I am conviced that the homo-economicus model is an absurdity. Associating Adam Smith with such ideas is a gross libel of an innocent moral philosopher. David Sloan, presumbly impressed by the near unanimity of most modern economists on their misinterpretation of Adam Smith, still claims that Smith’s use of the the invisible hand metaphor remains apt. It doesn’t and never was apt. Paul Samuelson misled generations of readers of his Economics (1948 and 19 editions). It is time to lay that myth to rest.
FOLLOW THE LINK AND START READING EVONOMICS REGULARLY!

Wednesday, July 20, 2016

QUICK BITS no. 22

1
Peter Isackson posts (15 July) in Fair Observer asks HERE 
Where Have All the Leaders Gone?”
“Nearly everyone perceives global capitalism as a well-organized system of control and no longer as the invisible hand promised by Adam Smith. This translates as a profound skepticism concerning the capacity of political parties to govern.
Comment
Adam Smith “promised” no such thing. He used the metaphor of “an invisible hand” in reference to a merchant who invested locally because of his doubts about the honesty of foreign traders. 
The metaphor of an “invisible hand” has nothing to do with how economies or how the market works. 
It was about how the motives of an individual may cause him/her to an intentional action which also may have unintentional consequences. 
There is no mention of ‘control’ or of ‘global capitalism’ - the word ‘capitalism’ and the phenomenon were unknown until 1854 (Smith died in 1790) -
2
Deepanshu Mohan posts (15 July) in Society HERE
“Economists Need To Stop Telling Us That We’re Selfish”

The soaring instances of racial discrimination, adversities from global climate change, acts of terrorism, frequency in economic crises through speculative stock market crashes, debt, capital flight etc. all seem to bring out a common behavioural aspect that ties most of these recurring phenomena within/across nations today: a reflection of choices made by individuals in actions driven by a motivation to maximise their absolute self-interest while ignoring the consequences of such actions on the well-being of others.”
3

Monday, July 18, 2016

QUICK BITS no. 21

A Reader responds to a 2012 post on Lost Legacy:
“Hello, your blog is very interesting. I understood the Invisible Hand differently though, as the individual exchanges benefitting society since, according to Smith, and exchange only happens when both parts consider it profitable. And the way I see it this benefit would be increased with each related exchange and production step of a good, as the pencil example in Leonard Read's 'I, Pencil' on So Close to Being Nearly Right” (25 February, 2012)
Comment
This came in today (18 July, 2016) in reference to a post I made in February 2012, Scroll through the Lost Legacy archives to read it.
Sven’s understanding of Adam Smith’s use of the metaphor of “an invisible hand” is dfferent from Smith’s. For accuracy, Sven must read Adam Smith’s single use of it in his Wealth of Nations (1776). {WN IV.ii.1-10, pp. 456).
Smith said nothing about the IH consciously ‘beneftting society’. He specifically referred a merchant preferring to invest locally rather than send his capital abroad because he was concerned about the honesty of those he would rely upon in a foreign country, with different laws and a different legal system. 
His self-interest was in the security of his investment. However, by investing locally the merchant unintenionally added his capital to ‘domestic inventment and employment’. His intention was to secure his investment soley to benefit himself, and not to benefit society, but unintentionally by investing locally, he also arithmetically increased domestic investment, which was a public benefit.
This was never a general rule. Many merchants lobbied governments to impose tariffs and outright prohibitions on foreign imports to reduce competition and enable them to raise prices and their profits. Such common activities by mercants were not public benefits. Hence not all exchanges and production were for the general good. That is a misreading of Adam Smith’s use of the invisible hand metaphor.
The sequence is that a merchant was motivated by his insecurity to intentionally invest locally and the invisible hand metaphor referred to that intentional action led him unintentionally to public benefits. His motivated action leads him to the unintentional consquences of his motivated actions (his security). 

The ‘invisible hand’ is not a miraculous nor mysterious force in markets, as believed (even preached) by modern economists, particulary since Paul Samuelson presented the IH incorrectly in his popular textbook since 1948. (Samuelson’s textbook was the course textbook when I was a 1st year undergraduate in 1965; see also my article: Gavin Kennedy, “Paul Samuelson and the Invention of the Modern Economics of rhe Invisible Hand”, History of Economic Ideas», vol. xviii. 2010).

Sunday, July 17, 2016

QUICK BITS NO 20


On the limits of the invisible hand
(17 July, 2016 at 13:43 | Posted in Economics
Lars P. Syll posts (16 July) in Economics HERE 
“It might look trivial at first sight, but what Harold Hotelling did show in his classic paper Stability in Competition (1929) was that there are cases when Adam Smith’s invisible hand doesn’t actually produce a social optimum.”
COMMENT
At no time did Adam Smith claim that the “invisible hand” did create a social optimum. The statement not only looks trivial; it is worse than trivial. It is absolutely wrong.
“With the advent of neoclassical economics at the end of the 19th century a large amount of intellectual energy was invested [WASTED] in trying to formalize the stringent conditions of obtaining equilibrium and showing in what way the prices and quantities of free competition constituted some kind of social optimum.
That the equilibrium reached in free competition is an optimum for each individual – given prevailing prices and income distribution – was not, however, seen by some economists as making a very strong case for a free market economy per se. It wasn’t possible to prove that free trade and competition gave a maximum of social utility. The gains made in exchange weren’t a manifestation of a maximum social utility.”
COMMENT
 In pursuit of maxima the economists concerned lost rouch with reality.
Knut Wicksell was one of those who criticized the idea of regarding the gain in utility arising from free competition as an absolute maximum. This market fundamentalist idea of harmony in a free market system didn’t live up to Wicksell’s demand for objectivity in science – and  “the harmony economists, who endeavoured to extend the doctrine so that it might become a defence of the existing distribution of wealth” were judged severely by Wicksell (Lectures 1934 (1901) p. 39).
COMMENT
Good for Wicksell!
When propounders of the new marginalist theory – especially Walras and Pareto – overstepped the strict boundaries of science and used it in ascribing to the market properties it did not possess, Wicksell had to react. To Wicksell (Lectures 1934 (1901) p. 73) it was almost tragic that Walras … imagined that he had found the rigorous proof … merely because he clothed in mathematical formula the very arguments which he considered insufficient when they were expressed in ordinary language.
COMMENT
Walras caught out! Just because “he clothed in mathematical formula the very arguments” that were “insufficient”, let alone nonsense, earned him a salary and helped tp mislead generations of students.
“But what about the Pareto criterion? Wicksell had actually more or less anticipated it in his review (in Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, 1913: 132-51) of Pareto’s Manuel, but didn’t think it really contributed anything useful. It was just the same old doctrine in a new disguise. To Wicksell the market fundamentalist doctrine of the Lausanne School obviously didn’t constitute an advance in economics.”
COMMENT
Agreed.
From a methodological point of view there are also one or two lessons to learn from this history.
Models may help us to explain things by providing us with a frame/instrument for analysing and explaining the real world. However, to do that, there has to be an adequate similarity between model and reality. Otherwise they cannot function as eye openers that widen our cognitive horizon and make it possible to see and detect fundamental forces/ relations/mechanisms operating in the real world. And — most importantly — we always have to scrutinize the assumptions the models build on and so test their plausibility.
Logic, coherence, consistency, simplicity, and deductively is not enough. Without confronting models with the real world, they are nothing but empty thought experiments — and should be treated as such.
Comment

I reproduce the article because it is a rare example of good sense from a modern economist.
It also reminds me of many wasted years studying microeconomics as a student (1965-69)

Saturday, July 16, 2016

QUICK BITS No. 19

Emily Skarbek posts (13 July) on ECONLOG HERE
“Emergence is central to a Hayekian understanding of spontaneous order and properties of the price system. In the market, prices are "of human action, but not of human design" - they emerge from the buying and selling of the many individuals at the micro level, but settle on values that balance the quantity demanded with the supplied of a particular good. Prevailing market prices are reflective of individual decisions, but not necessarily reducible to any particular bid / ask. Moreover, the vast array of prices in an economic system are far too complex and interdependent for anyone to be capable of accurate, detailed future predictions. This idea that in complex systems we are limited to what Hayek called "explanation of principle" or pattern prediction builds from his earlier work concerning the classification system of the mind.”
COMMENT
My problem with this typical explanation of both ‘emerging market prices” and “settled” market prices, as above, is illustrated here:
market, prices are "of human action, but not of human design" - they emerge from the buying and selling by the many individuals at the micro level, but settle on values that balance the quantity demanded with the supplied of a particular good.”
There are billions of market prices ”emerging” at any one moment and, according to Emily Skarbek, as presented above, are representative of how modern economists think - and teach!

Surely at any one moment prices individually are not both ‘emerging’ and ‘settling’ simultaneously! Which also raises questions about simple ‘supply and demand’ diagrams that allegedly illustrate market equlibria. Indeed, is market equilibria a meaningful idea in the real world.