Wednesday, June 29, 2016

WHAT IS INVISIBLE ABOUT MARKET PRICES?

Scuffy posts (28 June) on MINYANVILLE HERE 
“Technically Speaking: As Expected, Central Bank Rescue
What Do They Know?”
“While I am not surprised by global Central Banker's rush to action, it is important to keep things in perspective. Take a look at the chart below (THE CHART IS HYPER-COMPLICATED!)
The highlighted blue circles are what I want you to focus on.
Since the end of QE3 in October of 2014, the markets have made little real progress despite a marked pickup in price volatility. Almost like clockwork, as the markets approach short-term "oversold" conditions the market reverses course and rises back to "overbought" levels before the next decline. Tick. Tock.
Against a backdrop of weakening fundamentals and economic data, the markets have drifted from one Central Bank action to the next. As shown above, the drop last summer of -12.2% spurred Fed members to assure markets there was no rush to hike interest rates. The "relief rally" that ensued drove markets higher by 13.1% only to be tripped up by the rate hike Bullard said the Fed was in no rush to do.
The tightening of monetary accommodation, and threats of four more in 2016, led to a rebalancing of risk at the beginning of 2016 and a decline of -14.4%. That decline spurred the Fed in February to coordinate with the ECB and BOE to coordinate monetary support, combined with the coming ECB's monetary "bazooka" in March that drove markets higher by 17.1%.
Despite the increased size of advances and declines, each rally and decline remain confined within the continuing range of October 2014 lows and the May 2015 highs.
Here is the point. It took previous declines in excess of 10% before global Central Banks took action to support prices. Following the "Brexit," it only took a -6.2% decline before Central Banks went to work.
The "invisible hand" of Central Bank interventions has been clearly evident since the end of QE3. With global interest running at, or below, the zero bound, there are few policy tools available to support already anemic economic growth.
The question that should be asked is "what do they know that we don't?"
COMMENT
A most complicated account of what central bankers and financial specialists did when the Brexit vote became news.
The ‘give-away’ story line, wel gives it sway:
The "invisible hand" of Central Bank interventions has been clearly evident since the end of QE3.’
Er, so what happened to the useless punch line about the machinations of the obligaotry ‘invisible hand’?

The nonsense of ‘invisible hands’ talk is exposed. They know what financial experts did and what they affected. Markets work by visible prices and cannot work without them.
[See also: David Stockman’s ‘Contra CornerHERE ]

Tuesday, June 28, 2016

IF MARKET SOCIETIES ARE FAILURES, TRY LIVING IN NON-MARKET SOCIETIES

Hal O’Leary posts (15 May) on the Intelligencer (Wheeling News Register) HERE 
Harold G. "Hal" O'Leary of Wheeling has been prominent in the arts community for many years. He was the founder of Oglebay Institute's Towngate Theatre. In 2008 he was inducted into the Wheeling Hall of Fame.
“Success in Capitalism Can Be Failure in Humanity”            
Having set out with this article to show that capitalism does not work, I found, after delving further into the writings of Adam Smith and Milton Friedman, that indeed it does work. I must admit that there is little doubt that in terms of efficiency in the allocation of resources and in the creation of societal as well as personal wealth, there is no system that can match capitalism. As Adam Smith writes in "The Wealth of Nations":
"As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, 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. Nor is it always the worse for the society that it was no part of it. 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. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.”

Ah, yes, "an invisible hand" that works its magic in a manner unrecognized. He further remarks:
"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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."
However, in the same book, Smith acknowledges that some problems may be found in his system. He states, for example:
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."
He speaks also of the need of the "master" to suppress the wages of his laborers as much as possible, making laborers nothing more than commodities.
While Adam Smith may make such admissions of problems with the unfortunate realities that must ensue from his system, I could find nothing in Milton Friedman that would support them. Friedman's position is clearly stated thus:
"So that the record of history is absolutely crystal clear. That there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.
Comment
Adam Smith did not ‘invent’ capitalism. He described what he observed around him and showed how commercial society had evolved over hundreds of years in Europe. In fact, he had never heard of, or used, or invented the word ‘capitalism’; a word first used in 1854 by Thackeray the 19th-century novelist (The Newcomes).
Smith defined wealth as the produciton material goods, not the accumulations of money, gold or precious metals. The world of the religious Saints was a very poor one for most ordinary people; they preached against sin but not much was or could be done about raising the daily income from the equivalent of $3 a day for millennia. Life times were short for most people - reaching aged 30+ was unusual for most generations - and poverty was the norm for almost everybody, as was disease, discomforts and early child mortality. 
Harold G. "Hal" O’Leary dismisses concerns about living on the equivalent of $3 a day or less - perhaps he should try it sometime. His quoting of the views of religious sages whose message was of a ‘better life to come’ in a heaven. What nobody had seen or could see is an empty option. I am sure that raising daily per capita incomes is not one of his goals in life but for the millions of people living before 1800 and those trying to live on £3 a day had/'have no choice but to endure their privation and misery. Neither was there a great deal of humanity in the conduct of people in those sixty millennia before 1800,  when per capita incomes equivalent rose slowly in excess of over £350+ a day , and rising markedy for the last three centuries. He misses the point about commercial market societies. Of course, he has the choice to leave the rich portion of the world that the lives in and find what real poverty means.

Co-operation is the norm, not the exception in post 1800 societies. Read Adam Smith closely; he linked co-operation intimately to commercial societies. Read what he had to say about the manufacture of the common labourer’s coat and count how many people had to willingly co-operate to produce it - no slavery involved! (Wealth of Nations, book 1).

QUICK BITS no. 18

Malcolm Harris posts (28 June) on New Republic HERE discusses a book by Katrine Marçal, a Swedish newspaper columnist, ‘Who Cooked Adam Smith’s Dinner’ (Pegasus Books).
“Mom’s Invisible Hand: What men got wrong about the economy.”
“In the mid-eighteenth century, Scottish philosopher Adam Smith told a story about markets and goods and people, one that has become the dominant narrative about human nature, as well as the structuring principle for our daily interactions. Society is made up of self-interested individuals, he argued, and through markets these individuals make collective life possible. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner,” Smith says in The Wealth of Nations, “but from their regard to their own interest.”
Comment
I am not qualified to comment on Marcal’s book as I have not yet read it. I remember reading reviews of it when it was published and I also remember answering the question she asked with the observation that Smith’s cousin, Jean, acted as housekeeper in the Smith household from when he was a student in Glasgow, then as a professor - during the latter time his mother and cousin lived in Adam’s allocated house in Professor’s Close on the Glasgow University campus - and we should note they lived together during much of the rest of his (and their) life times until they all died.
Adam’s university salary, and his earnings as a Custom’s Commissioner, and his book royalties, and his assorted inherited monies, were managed by his mother and cousin, and provided the middle-class living standard shared by all three of them (and later with a young male relative who became his heir).
The ‘butcher, brewer, and baker’ reference was to the typical market stalls and shops frequented in Kirkcaldy (at his mother’s house), in Edinburgh (in various rented properties) and during his several visits to London to visit his publisher or to be consulted by various London Governments , including the Cabinet and the Prime Minister, during which he stayed in various rented properties in the Suffolk Road area (near harding Cross), replete with street markets (likewise on his visit to France). It was in such street markets that he formed his impressions of market behaviours. It may be relevant that many of the stall-holders and owners were women.
His relationship with his mother was very close throughout his life.
Adam’s dinners were prepared by paid house servants or by his cousin.
Katrine Marçal’s question addresses a modern agenda in a swiftly changing environment. I know of several domestic situations among my immediate family and friends where the mother goes out to high-paid professional jobs and her male partner stays at home and is employed domestically, looking after the children.

LOONY TUNES 145

1
Tom Orlik posts (27 June) HERE 
No, Graft Isn't Good for Growth
“The case for graft, as it were, is superficially plausible. Like a light-fingered version of Adam Smith’s invisible hand, thieving officials have an incentive to spur economic activity.
2
Lawrence Davidson Posts (27 June) on MWV News HERE 
What the House Speaker apparently wants to do is resurrect the so-called Gilded Age. That was the period of American history following the Civil War when the economy grew rapidly but in an unregulated fashion. If you will, the “Gilded Age” economy operated apart from the rule of law, unless of course you believe in the ideologically posited “laws” of capitalism and the mystical notion of Adam Smith’s “invisible hand” guiding the marketplace.
Louis van der Merwe (South Africa) an “IRR Policy Fellow, educator, scenario-based strategist and capacity-builder” posts (28 June) HERE on Biz News: 
Lessons from Singapore? Wisdom of invisible markets – Social transformation at work”
It’s known as the ‘invisible economy’ that no one is really talking about, but it’s keeping a large part of South Africa afloat.
A great irony for South African policy-makers that prefer a philosophy of centralised decision-making and control is that these invisible markets in South Africa already represent a very substantial part of the South Africa economy. They exist in plain sight, for all who care to see them. All of them populated by successful African entrepreneurs and start-ups. These markets have already transformed a significant portion of the economy with quintessentially African products and services.
Adam Smith’s seminal ideas in his now famous protest against monopoly capital “Wealth of Nations” published in 1776 is summarised as follows; If an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it. The core of Adam Smith’s thesis is, that man’s natural tendency towards self-interest results in prosperity for all without much effort from government. This mechanism became known as ‘the invisible hand’. All of these so-called invisible free enterprise initiatives are based on Adam Smith’s model for economic wealth creation and the invisible hand in it.”
Comment

Louis van der Merwe’s conclusion - whatever one thinks of its premiss - that all voluntary transactions result in “prosperity for all without much effort from government” is a bit too cavalier. Drug pushers and drug users engage in voluntary transactions which do not add to prosperity - except perhaps for criminals and expenditures by law enfrocement agencies oaid for by taxation of other consumers.

HUMAN NATURE IS NOT PLAIN SELFISHNESS

George Monbiot posts on HERE 
We’re Not as Selfish as Economists Think We Are. Here’s the Proof.
Do you find yourself thrashing against the tide of human indifference and selfishness? Are you oppressed by the sense that while you care, others don’t? That, because of humankind’s callousness, civilisation and the rest of life on Earth are basically stuffed? If so, you are not alone. But neither are you right.
A study by the Common Cause Foundation, due to be published next month, reveals two transformative findings. The first is that a large majority of the 1,000 people they surveyed – 74% – identifies more strongly with unselfish values than with selfish values. This means that they are more interested in helpfulness, honesty, forgiveness and justice than in money, fame, status and power. The second is that a similar majority – 78% – believes others to be more selfish than they really are. In other words, we have made a terrible mistake about other people’s minds.”
Whatever happened to trust?

The revelation that humanity’s dominant characteristic is, er, humanity will come as no surprise to those who have followed recent developments in behavioural and social sciences. People, these findings suggest, are basically and inherently nice.
Comment
Monbiot's article is worth reading. It addresses an issue commonly discussed among economists - though I am not sure that the consensus gets it quite right, amidst the general confusion about "invisible hands" and all that.
As part of my recovery programme I walk each day, pushing a walker' trolly. Unfortunately, I also tend to fall over in the street. Without fail, on the last three occasions when I have fallen, complete strangers quickly appear and help me to get up and see that I am alright and can continue home. On no occasion have passers by crossed over and ignored my plight. It must count for something that this is the case in my experience. 

David Wilson on 'The Invisible hand is Dead! Long Live the Invisible hand!

David S. Wilson posts on EVONOMICS HERE
David Wilson  is SUNY Distinguished Professor of Biology and Anthropology at Binghamton University and Arne Næss Chair in Global Justice and the Environment at the University of Oslo. 
The Invisible Hand is Dead! Long Live the Invisible Hand! It's time to rethink the foundational economic metaphor
In olden days, the death of a king and accession of his successor was announced by the proclamation “The King is Dead! Long Live the King!” I’m here to announce the death and successor to the concept of the Invisible Hand.
As everyone ought to know, the Invisible Hand was Adam Smith’s metaphor for the idea that an economy can run itself without anyone having the interest of the economy in mind. He invoked the metaphor only three times in his voluminous writing, so it does not stand for the full corpus of his thought, but it achieved King-like status with the advent of neoclassical economics, Homo economicus, and all that.
That King richly deserved to die but killing him was not easy. I would like to think that two blows finally did the trick. The first blow was the disastrous outcome of that King’s rule. If you are still in denial after the 2008 economic collapse, the current disintegration of the European Union will bring you to your senses.
The second blow was the collapse of the theoretical edifice that propped up the old King and its replacement by a new edifice based on a combination of evolutionary theory and complexity theory. From the perspective of the new edifice, the idea that the unregulated pursuit of lower-level self-interest robustly benefits the higher-level common good is absurd. The old King was a grotesque emperor without clothes. End of story. Let’s bury him and get on with it.”
You might think that the old King should be replaced by no King. After all, the metaphor of the invisible hand did not loom very large in Smith’s thought; why should it loom large in ours? It turns out, however, that a robust concept of the invisible hand does emerge from evolutionary and complexity theory, so there is a new King to coronate.
The key to identifying the legitimate concept of the Invisible Hand is to focus on its two central claims: 1) A society functions well; and 2) Members of the society do not necessarily have its welfare in mind. Are there any non-human societies that satisfy these two claims? Many do not. A difficult lesson to learn about nature is that many animal societies are despotic in human terms. These are “life’s a bitch and then you die” societies that persist for millions of years without any invisible hand to save the day.
But some animal societies do satisfy the first claim, such as the fabled bees, ants and termites. Multi-cellular organisms can also be viewed as well-working societies of lower-level units such as organs, cells, and genes. Whenever a non-human society satisfies the first claim of the invisible hand metaphor, then the second claim is satisfied as well, because bees, cells, and genes don’t even have minds in the human sense of the word.
Comment
I find this essay most interesting. It addresses an area of science with which I am much concerned in my long campaign against the pseudo-science of much of modern economics, of which Lost Legacy has focussed on since 2005. Specifically the awful confusion caused by the ill-founded and fallacious belief in respect of Adam Smith’s use of the metaphor of an invisible hand, which incidentally, David Wilson, correectly notes, in its modern re-incarnation, has nothing at all to do with Adam Smith. {Paul Samuelson has a lot to posthumously apologise for!).
Moreover, modern economics falsely assumes the mantle of being scientific because its precepts are representated by the modern applications of mathematics to an essentially non-mathematical irregularity. People, wrote Adam Smith, are not like wooden pieces on a chess board moved by a player’s hand. They each have a principle of motion of their own:
The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it.” 
The ‘man of system’ “seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder (Theory of Moral Sentiments, VI.ii.2.17: pp 233-4). 

I recomend readers to follow the link to David Wilson’s post. I have not commented on his arguments on this occasion from his assertions because I would like to read more before I do. I am also hesitant in brining into the subject anthing that rescues to so-called ‘invisible hand’ in a new guise.

Monday, June 27, 2016

LOONY TUNES no. 144

1
William Pesek posts in Barron’s HERE
“Why Xi Refuses to Let China’s Zombies Die”
China’s stealth stimulus and debt-for-equity swaps will delay tough action needed to tackle overcapacity.
In other words, the invisible hand of the state is playing an increasing role in an economy Xi claims to be turning over to the private sector and market forces, deadening China’s animal spirits.
Comment
From the fantasy “invisiblle hand” of ‘supply and demand’, ‘the price system’, ‘the market’, ‘unexpected consequences’, and much else, William Pesek gives us the ‘invisible hand’ of the state. Paul Samuelson (1948) has a lot to answer for …
2
Kelly L. Smith is vice president of strategic partners for the Bluegrass Institute, a free-market think tank. HERE 
Ky. cities must not follow Austin on ousting Uber
Its clear that Austin wants to play at being the “invisible hand” of commerce and pick winners and losers. But if you’re the creative, artsy type and want to see real free-market innovation, skip Austin and head to Grand Rapids, Mich., where the power of the marketplace on the art scene is unleashed annually via the privately sponsored ArtPrize. The entire city for more than two weeks each year becomes an interactive art gallery with the largest publicly attended exhibit on the globe. You can even use Uber to hop from one exhibit to the next.
[Read more HERE
3
Jonathan Cummings posts (26 June) on HAARETZ HERE 
Revealed: How Israel really got hold of airport plans ahead of Entebbe raid” [1976]

“It hints at Israel as the modern incarnation of the biblical “mighty hand” and “outstretched arm” that rescues Jews, as well as the more sinister image of the invisible hand of Jewish influence over global affairs.”

Saturday, June 25, 2016

LOONY TUNES no. 143

1
Jaap van Dam posts (17 June) on Top 1000 Funds.com
"Long Horizon Investors a Crazy Bunch"
When I went to university, I studied finance. I was taught efficient markets theory, the capital asset pricing model (CAPM) and arbitrage pricing theory (APT). No mention of fundamental investing at all. It was like a religion. Lots of Fama, Ross, Sharpe. And I subscribed to the religion. … Also, efficient market thinking has led us to believe that the market, by its invisible hand, will magically steer corporate management towards creating maximum long-term shareholder wealth, by allocating the capital of the firm in the most productive way possible.”
Comment
Good thinking from Jaap van Dan. There is no invisible hand of the market.
2
LeapRate staff (24 June) on Leap Rate (‘your Forex Industry Source’) HERE
Why the oddsmakers were wrong in predicting the #VoteLeave Brexit victory
When asked once about why shares in his company were lagging, former Telegraph proprietor Conrad Black told analysts: The market is always right.
A fairly honest admission by an embattled CEO, but also very correct. When people have to put real money to work, the invisible hand of the market usually prices things correctly. Usually.
In predicting the outcome of yesterday’s UK Brexit referendum, however, the market wasn’t right at all. In fact it was way off.”
Comment
The 30 million voters who decided the outcome of the referendum were in no way connected in any way to those who bet on the result. There is no ’invisible hand’ of the market, nor is there in betting.
3
F169NNS: HERE 
Brexit is the result of the invisible hand of Trump at work - his hands are so small, they’re invisible.”
4
Ivan Ilan posts on equities.com HERE
Brexit: The Invisible Hand Smacks Global Markets
“Governments and their related bureaucracies have less control today than yesterday on an individual or entity’s pursuit of economic profit – which is a fundamental win for Adam Smith’s formidable invisible hand.”
5
Dr Binoy Kampmark posts on CounterCurrents.org HERE
“The markets got it so wrong,” came one CNN pundit reporting on the various erosions of the European stock market.  Assumptions of the all wise market deity continued to come out, as if the market has body, soul and form. If the Brexit vote should have taught such figures anything, it is that the market is neither divine nor particular democratic in the way it fiddles with its invisible hand.”










Friday, June 24, 2016

ANNOUNCEMENT


After endless weeks in which I have been unwell, my recovery is rapidly taking over, both in daily walks and in household chores. 
One consequence is that I shall be returning to regular blogging and completing my unfinished papers, long-promised to patient readers. As they become available I shall announce them on Lost Legacy.

Thank you to those readers who sent much appreciated messages of encouragement during my enforced absenses.

KNOWLEDGE OF ADAM SMITH'S WORLD IS ALARMINGLY UNKNOWN

Gillian Tett posts HERE  on Huffington Pos
Gillian Tett’s Actions to Achieve Inclusive Capitalism”
“Ask a financier today in the City of London or Wall Street to name the founding father of modern capitalism, and they will probably invoke the words “Adam Smith.” After all, three long centuries ago, Smith laid out a vision of the political economy where the ‘invisible hand’ of supply and demand drove economic growth - and where free enterprise was the driving force for vibrant capitalism.
Comment
Oh, dear! Another, no doubt, well-meaning idealist who knows less than she thinks she knows about Adam Smith. For a start Adam Smith did not know of the word ‘capitalism’. It was first used in English in 1854 by Thackery, a novellist, to describe a financier (in The Newcomes). The economics of business in Smith’s day (he died in 1790) was well short of the capital involved in what came to be known as ‘capitalism’.
Nor did Adam Smith have a “vision of the political economy where the ‘invisible hand’ of supply and demand drove economic growth.”. Smith never referred to ‘an invisible hand’ of ‘supply and demand’. Has Gillian Tett actually read Smith’s Wealth of Nations? I doubt it.
Gillian Tett: “But these days, a certain irony hangs over Smith. In the places where free market capitalism is most frequently venerated - namely Wall Street and the City - many of the core ideas behind Smith’s vision are frequently ignored. And unless these are restored, it will be hard for bankers (or anyone else) to create an effective capitalist system, let alone one that is ‘inclusive’.”
Comment
More meaningless verbiage, posing as an authority, Gillian Tett claims to be talking about.
Markets “work best when prices are transparent to a wide circle of buyers and sellers, be that 18th century butchers or 21st century bankers. They are not 'created' by fiat.
Comment
Butchers, brewers and bakers in Smith’s day were street vendors and customers crowded around market places. Prices were visible (or hearable) as customers bargained with stall holders. Where Smith lived in Edinburgh (1778-90) the entire street up which he walked every work day to where he workd as a Customs Official, was populated by stall holders. Similarly in the Kirkcaldy Street where Smith lived with his mother, he was familiar with street vendors. He also lived by Kirkcaldy harbour, where local fishermen sold their catches to house-wives and small traders, and local estates. Edinburgh, just across the Firth, handled large government loans and finance, as today, usually on a confidential basis. Incidently on his visits to London to see his publisher or ministers of the crown (including the Prime MinIster) he stayed close the Suffolk Street area, which was also full of street vendors. Not so different then? Except in scale.

SAMUEL BOWLES IN ERROR ON ADAM SMITH'S TREATMENT OF HUMAN BARGAINING

Samuel  Bowles, an economist, directs the Behavioral Sciences Program at the Santa Fe Institute, and  recently published The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens (Yale University Press). He posts on Christian Science Monitor HERE 
‘The complex economics of self interest’
That incentives sometimes backfire, as Schelling discovered, is definitely a problem if you are an economist (I am one). Incentives, according to the dismal science, are the foundation of a well ordered society. Adam Smith, considered by many to be the father of economics, said it well: “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 this, he explained in the Wealth of Nations (1776), is not altogether a bad thing: the butcher, the baker, and other economic actors  “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 worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”   
….But Smith must have missed something important. Economic self interest may have put the beef, the beer, and the bread on the table, but it did not get Schelling and his colleagues to show up at the White House for Saturday meetings.. 
Where did the classical economists go wrong? Neither Smith nor the great 19th century economists who followed him made the mistake of thinking that people are in fact entirely selfish. Smith, in his other great book, The Theory of Moral Sentiments, held that “How selfish soever man may be supposed, there are evidently some principles in his nature that interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” John Stuart Mill three quarters of a century after Smith termed the assumption of unmitigated self interest “an arbitrary definition of man.”
….This brings us back to complexity, a way of thinking in which the effects of things are rarely simply additive. Smith’s invisible hand argument had the whole, namely, the dinner on the table, being greater than the sum of its parts, namely, the self-interested motives of those providing the food who, Smith supposed, could not have cared less about the hungry family about to sit down.
Comment
 The problem with Samuel Bowle’s article on Adam Smith is that apparently he is not familar with Adam Smith’s writings on human bargaining behaviours (“not found in any other animal’). Also, as a modern educated economist, he has accepted the post-Samuelson fallacies of the “invisible hand”, and demonstrates that he has completely misunderstood Smith’s statement  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” (Wealth of Nations I.ii.2: pp 26-7). Upon this he builds his contruction of the ”complex economics of self-interest”. T’is a pity, as David Hume would have said.
In a recent essay (Adam Smith on Bargaining, 2016)) I wrote:
“In a little noticed couple of pages in Wealth of Nations, Adam Smith wrote a short account of human speech behaviour, which uniquely differentiates the human species from all other animals. I refer to Smith’s illuminating discussion of the nature and significance of self-interested human bargaining. Smith’s writings on bargaining have been largely ignored by economists, despite Smith’s assertion that bargaining behaviour is a unique characteristic of human behaviour. His outline of the effective bargaining speech-behaviours appeared in summary form in a modest couple of pages near the beginning of Wealth of Nations:
Man, said Smith: “in civilised society … stands at all time in need of the co-operation of great multitudes, while his whole life is scarce sufficient to gain the friendhship of a few persons. … But man has almost constant occasion for the help of his brethren, and it is vain for him 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 that it is for their own advantage to do for him what he requires of them”
Smith succinctly summarises the conditional bargaining proposition:
Whoever offers 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 in this manner that we obtain from one another the far greater part of the good offices that we stand in need of”. The modern format of bargained propositions is clear: “IF you give me this that I want, THEN I shall give you that which you want”.  In brief, bargaining proposals can be made in the form of an IF-THEN proposition (emphasis added). 
He then follows with the oft quoted (but mostly misunderstood passage):
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. We adddress ourselves. not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages”. 
Particularly note how Smith poses this statement. It is other-concerned, not self-concerned! It acknowledges the natural concern of the other party for their own interests by legitimising their “self-love” without mentioning one’s own self-interests or one’s own “necessities” and focusses on “their advantages”. Its aim is to address their self-interests, not to flaunt one’s own.
Others, since the 18th century, including today, (for example, Samuel Bowles!) assert that people are inherently selfish when acting alone, but humankind tends to act in communities of humans (we do not normally live alone). Humans live, work and play in social groups. The propensity in human nature to truck, barter, and exchange is common to all humans and has been so since the very early times of human evolution. This propensity to bargain, argued Smith, involves a minimum of two persons acting in concert (though not necessarily in tune). And, once you go beyond one individual to two, three of more, their transactions involve more than one ego and expression of self-love or self-interest. Human societies are dominated by pair-wise bargaining. 
If self-love solely drove our behaviour, as with all other animals, the propensity to “truck, barter, and exhange” would be of limited value as a bargaining solution, and probably would never have been articulated in the clear form summarised by Smith. Individuals locking horns would never let go and would seldom conclude bargains. Asserting that humans are driven solely by self-love, self-interest or selfishess, ignores the process that intervenes between the clash of passions initiating their interactions (at least two, often incompatible, solutions are proposed initially for each negotiable problem) until one common solution emerges in the form of a joint outcome, should one be found. All people experience self-love or self-interest, but to achieve an outcome agreeable to their selfish self they must modify their own self-love to find an outcome agreeable to the other party too! For be clear, truck, barter, and exchange requires the acceptance by both parties of whatever is finally agreed as their joint solution. Negotiators square the circle by simultaneously sufficiently suppressing their selfish passions (of each wanting all of what they want) as they approach the possibility of agreement. Selfishness is not the driver of joint decisions, nor is it the determinant behaviour of people acting in concert for joint ends. Adam Smith's treatment of the bargaining process was succinct and closer to experience in the real world since human time began.”

I sugges that it is Samuel Bowles who has started from a misunderstaning of Adam Smith and the inter-play of self-interest, which had absolutely nothing to do with self-interst as a motive for “the self-interested motives of those providing the food who, Smith supposed, could not have cared less about the hungry family about to sit down.” Samuel has made a career for himself at the expense of libelling Adam Smith with ‘complexity’, interesting as I find the theory of it. That is not Samuel’s fault. He was taught the false version of Adam Smith as a student; time still for him to correct his tutors' errors.

Wednesday, June 22, 2016

QUICK BITS no 17

S. Subramanian, a professor of economics in India posts 20 June HERE
The Market: In theory, fact, and lore
The "informal" understanding of the theory underlying the market's supposed virtues is to be found in Adam Smith's account of the Invisible Hand of private rationality and self-interest which, it is suggested, leads to a spontaneous order of collective optimality, in which economic allocations are arranged in such a way that an improvement in any one person's welfare can only be achieved at the cost of reducing some other person's welfare. (This outcome has subsequently been characterized as "Pareto efficiency", after the Italian sociologist Vilfredo Pareto.) Private egotism, in this view, will lead to public beneficence.  It has taken years of hard analytical work in the fields of Welfare Economics and General Equilibrium Theory to distil this piece of folk wisdom into something like a set of formal propositions in terms of which the "Invisible Hand" account of the economy could make sense.” 
Comment
 Adam Smith’s ‘account of the Invisible Hand of private rationality and self-interest which, it is suggested, leads to a spontaneous order of collective optimality, in which economic allocations are arranged in such a way that an improvement in any one person's welfare can only be achieved at the cost of reducing some other person's welfare” has nothing to do with Pareto’s welfare theorem. 
Therefore the ‘Invisible Hand’ account of the economy " does not make any sense. Smith and Pareto were talking about quite different things.  Smith was talking about markets as a process; Pareto talked about markets in a sort of end-state, when everything in the process was decided. Apart from this distinction, Pareto’s theorem was unproven empirically. It was an assumed outcome that ignored the actual process by which its assumptions and assertions were somehow brought about. 
Economics went down a dead-end when end-state theories were assumed. The maths of them look elegant but were quite fallacious when claimed to have real world relevance. Nobody every showed or can show that they actually exist in the real world.
the Invisible Hand of private rationality and self-interest which, it is suggested, leads to a spontaneous order of collective optimality” is a myth and disconnected to Adam Smith’s use of a metaphor to describe what happens when the self-interest of merchant motivates him to protect his capital by investing locally rather than risking it abroad. iInvesting locally intentionally adds to “domestic revenue and employment” (WN IV.ii.). 
These actions are intentionally motivated by his fears of risking his capital abroad. But by intentionally acting thus, the merchant’s motivated actions have unintentional consequences. The ‘invisible hand’ is not a force somehow acting in markets; it has nothing to do with ‘supply or demand’, or ‘market forces’. The metaphor of ‘an invisible hand’ describes how self-interest may have unintended benefits that may be public benefits. Equally, the self-interested intentional actions of merchants may, and often do, produce public dis-benefits as when merchants clamour for the imposition of domestic tariffs on foreign competitors (even outright prohibitions) to reduce domestic competition to enable merchants to raise prices.

Theorists like Pareto - and people who quote his First Theorem - even prove it mathematically - led economics up a garden path. Neither do they understand what Adam Smith meant by his use of the ‘invisible hand’ metaphor.

Friday, June 17, 2016

LOONY TUNES, No. 142

1
Srivatsa Krishna post (15 June) in The Indian EXPRESS HERE
‘Reshaped by the invisible hand’
India’s presidential PM, his office, are quietly transforming the economic landscape’
2
Chip Gibbons posts (15 June) on BORDC (Bill of Rights Defence Committee) HERE
 The FBI, acting as the invisible hand of the free market, turned over Frank’s files to lawyers for the developers.’
3
Sarah Kendzior posts (16 June) on Demcracy Lab (‘tracking a world of change’) HERE
Why young Americans Are Giving Up on Capitalism’
‘Capitalism, in other words, holds less appeal in an era when the invisible hand feels like a death grip.”
4
Word Plays discusses Crossword Clues and ranks common anwers. HERE:
‘Metaphor used to describe an unseen force guiding a free market economy
5
Shuli Ren posts (16 June) on Baron’s com HERE 
‘Japan May Intervene When Yen Crosses 105 Threshold’
‘So yes, when yen dips below the 105 threshold, Japan can legitimately claim it is just helping the invisible hand to re-balance faster.’
Comment

What an alibi that nonsense could create for endless intervention in money markets by claiming the bank is correcting, assisting, supporting a mythical invisible hand!