Thursday, January 29, 2015


Helenic Shipping News (28 Jan) HERE 
“The Best Indicator That Oil Prices Will Rise — Quickly” 
“No matter what the “experts” say, no one really knows whether oil prices are going higher or lower over the next year. But the invisible hand of the market is definitely making a guess that looks very bullish for energy companies and investors.”
This typical commercial bulletin from “expert market watchers”, of which there are many making a living from dressing up their claims to their expensive expertise in modern jargon waffle that baffles their paying subscribers.
First the blindingly obvious: “no one really knows whether oil prices are going higher or lower over the next year.”  True! 
“But the invisible hand of the market is definitely making a guess that looks very bullish for energy companies and investors.” False!
Next the associated Jargon waffle: “contango”, in contrast to “backwardation”, supported by trends in “oil futures”. 
Well you need expertise to help you and, fortunately, you can benefit from  “a brand-new investigative report on this significant investment topic and the company helping fuel its boom”…
But what about “the invisible hand of the market” that supposedly “is definitely making a guess”? Well nothing more is said about it!
Just as well because it doesn’t exist. Markets operate through visible prices, not “invisible hands”. If future contract prices appear to be a rising trend this has nothing to do with anything invisible - the rising prices of futures contracts reports that their rising visible prices are driven by market players apparent belief that prices will continue rise; if visible prices of futures contracts are falling then market players believe oil prices in future will fall. 
Current and would-be players are making guesses as to what will happen in the near and distant future. Their bets reflect their sentiments, not their specialised, insider’s special knowledge.

As we say in Scotland, the future price game is a "bogey", much like horse-racing (the latter of which industry also has its share of people selling their “insider” knowledge…).

Wednesday, January 28, 2015


long-standing Asian correspondent sent to me the details of a new paper published on the Social Science Research Network (SSRN) that builds on recent scholarly criticism (besides my own) of the majority popular interpretation placed on Adam Smith’s use of the “Invisible-Hand” Metaphor”.  
This new paper is by Michael Emmet Brady, of California State University (Jan 24, 2015), aligns neatly with my own efforts since 2005, and takes an aspect of them to a new, higher, level: “Adam Smith, the Wealth of Nations, and the “invisible Hand: a metaphor for Ambiguity-Uncertainty Aversion of Decision Makers”.
The Abstract is reproduced below and the full paper may be found via SSRN below:
Adam Smith, the Wealth of Nations, and the 'Invisible Hand': A Metaphor for Ambiguity-Uncertainty Aversion by Decision Makers
California State University - Department of Operations Management

January 24, 2015
Smith’s use of the “Invisible Hand,” as pointed out by Gavin Kennedy, is a metaphor provided for the great percentage of readers of the Wealth of Nations whom Smith realized would not be able to grasp the nature of his argument, which was about the ambiguity-uncertainty aversion of the majority of 18th century English business men. Gavin Kennedy has pointed out that the term,” Invisible Hand,” had nothing to do with Laissez Faire, free markets, free trade, Natural liberty, etc., for Adam Smith. Smith’s argument is an application of his very advanced decision theory that regarded the standard mathematical laws of the probability calculus as a special case that had only limited applicability in the real world. In general, applications of the mathematical laws of the probability calculus required a complete information set that was rarely satisfied. Smith realized that probability, nevertheless, had to be taken into account. Smith advocated an interval valued approach to the use of probability under conditions of uncertainty/ambiguity. 

Smith made great use of the concept of uncertainty. Uncertainty for Smith dealt with the quality of the information base upon which the probabilities were being calculated. Smith generally defined risk in the Wealth of Nations as an inexact and/or indeterminate estimate not based on the mathematical laws of the probability calculus. Risk could be calculated exactly only in conditions where there was a very high quality of evidence over which there were no conflicts and/or disputes of assessment regarding the relevancy of the data. 

Smith’s major conclusion in Part IV of the Wealth of Nations is that businessmen are ambiguity and/or uncertainty averse. The quality of the information, data, or knowledge upon which the probabilities, which would be interval estimates, is a second factor that is completely independent of the probability estimates themselves. Only in a limiting case, where the evidence is great, stable, and invariant over time, as in the case of deciding to become a shoemaker, would the probability estimates be point estimates. 

Smith completely rejects the ethics and decision theory of Jeremy Bentham, as well as all approaches built on it, such as the Subjectivist ( SEU-Subjective Expected Utility) approaches of Frank Ramsey, Bruno de Finetti, L J Savage , Milton Friedman .and modern Bayesians, such as Patrick Suppes.

Number of Pages in PDF File: 25
Keywords: ambiguity/uncertainty aversion, Ellsberg Paradox, weight of the evidence, J M Keynes, Adam Smith, Invisible hand
JEL Classification: B10, B12, B20, B22
The full paper may be downloaded from SSRN via 
The Social Science Research Network is a wonderful (free) resource which all serious economics students and research practitioners should bookmark and make use of when papers in their areas of interest are posted.  They may also upload their own papers for others to read and to establish a record of their own original work for others to consult.

I shall comment on Michael Emmett Brady’s paper shortly and also publish my comments on SSRN.

Sunday, January 25, 2015


A very welcome post on the "Thought du Jour" Blog (24 Jan), which I have reproduced below because of its importance and significance for Lost Legacy readers. Follow the link below and bookmark (as I have).
Its author, Larry Willmore, does not go so far as I have over the past 5 years (next month) but the issues he raises are well on the way towards my own. I am yet to hear the podcast but I shall later today. 
I know the contributors: Marianne Johnson, who collaborated with the late (and great) Warren Samuels in preparing his massive research project on the use of the "invisible hand" in modern economics: "Erasing the Invisible Hand: essays on an illusive and misused conception economics", 2011, Cambridge UP.  Also Eamonn Butler, Director of the Adam Smith Institute, London (of which I am a Fellow) and Polly Toynbee (Guardian columnist and leftish-of-centre social commentator).
Thought du jour (semi-daily posts, related largely to economics and government policy) HERE
Adam Smith’s ‘invisible hand’
What, exactly, is the “invisible hand”, a phrase attributed to Adam Smith? Is it a sound economic principle or a myth propagated by the misreading of Smith? All this continues to attract controversy. If you are interested, I recommend a lucid, 12-minute podcast on the topic. You can access it without charge, courtesy of  The Guardian newspaper, at the link below.
When we asked you to nominate some intellectual cliches for this series earlier this year, Adam Smith’s “invisible hand” cropped up repeatedly ….
In the third episode of The Big Ideas, Benjamen Walker discusses the meaning and uses of Smith’s concept with philosopher John Gray, academic Marianne Johnson, economist Eamonn Butler and Guardian columnist Polly Toynbee. ….
As we mention in the podcast, Smith himself only used the phrase “invisible hand” sparingly. ….
Benjamin Walker,The Big Ideas podcast: Adam Smith’s ‘invisible hand’“, The Guardian Comment is Free podcast, 6 October 2011.
Smith did use the term ‘invisible hand’ quite sparingly. It appears only once in each of three published works, for a grand total of three times.
In The History of Astronomy (written before 1758, but published in 1811), Smith writes that there is no need to resort to the supernatural, to “the invisible hand of Jupiter”, to explain natural phenomena:
Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters. [Emphasis added.]
The phrase appears a second time in The Theory of Moral Sentiments (1759), in paragraph 10 of the first and only chapter of part IV:
The rich … consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. [Emphasis added.]
His third and last use of the phrase is in book IV, chapter 2, paragraph 9 of The Wealth of Nations (1776):

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. [Emphasis added.]

Saturday, January 24, 2015


Ronnie Elhaj n Perth Now (24 January) HERE 
‘Why Perth property market for units will ‘set its own pace’

“House sales are also experiencing mixed signals and property analysts are being cautious given the “volatility” of the market, with contradictory elements at play.
Nicheliving director of sales, marketing and acquisitions Ronnie Elhaj believes the “invisible
 hand” will direct the market.
“In other words, the market will manage itself and adjust accordingly,” he said.
“I like to listen to what the word on the street is because it provides me a decent insight into current consumer sentiment.”
The above is evidence that the metaphor “invisible-hand” is used as a mere space-filler in modern speech. It means nothing of substance other than to give speakers and listeners the pretence that they are knowledgeable about the mysteries of ecoomics.
The above quoted piece carries two contradictory ideas:
1 “the “invisible hand” will direct the market;
2 “In other words, the market will manage itself”.
Now which is it? Ronnie Elhaj does not elucidate.

Because he can’t.  Neither can any other believer in the mythical invisible hand. 
Market are directed by VISIBLE prices, not INVISIBLE HANDS.

Friday, January 23, 2015


Paul Steger posts on Letters to the editor 23 Jan
“I hope all those who, when gasoline prices were rising to painful levels, blamed it on gouging by the big oil companies, are paying attention. To what do they attribute the steadily falling prices we've seen for months? Is it because the collective charitable actions of those same heartless corporations have combined to give us consumers a generous but temporary reprieve before turning up the screws again?
No, the truth is that neither corporations, nor nations, nor groups of suppliers, such as the increasingly irrelevant OPEC cartel, can prevail against the most important law in economics, that of supply and demand. Watching a free (or nearly free) market apply its "invisible hand" to find the proper price of goods can be an instructive and even fascinating process to watch. How sad that we forget this so quickly.”
Paul Steger, River Falls, Wis.
Given that all prices are VISIBLE what possible role is left for an invisible-hand? 
Is there an entity of some kind in existence that brings supply prices to equal demand prices? If so, how does it work across the billions (trillions?) of price decisions, dispersed across all the potential buy-sell decisions taking place each hour/minute of the day? 
Just who is Paul Steger who knows this but never once in recorded history has anybody showed how such an invisible entity operates, from whence it came from, what exactly it does or what energy sources operate it? Even in theories of general equilibrium there is no mathematical term for an ‘invisible-hand’.

 Paul, it doesn’t exist! Dispersed people observe visible prices and react or don’t react to them. These dispersed people have different views and different personal circumstances and motivations. 

Thursday, January 22, 2015


‘Magpie” posts (22 Jan 2015) a comment on my Lost Legacy Blog entry for 16 January 2007, 8 years earlier! Here is the original post and my comment:
Smith and Others Knew Their Water from their Diamonds”
“It’s always pleasurable to read Adam Smith’s contributions to the history of economics that are presented correctly. Last year I had occasion to correct statements to the effect that Smith ‘discovered’ or asserted ‘first’ the diamond water paradox between the use and exchange values of an economic good. He stated the paradox, of course, in Wealth of Nations but so had several earlier authors before him”. So ‘Hedgefund guy’ in the Mahalonobis Blog is spot on in his comment on a statement in the Wall Street Journal (WSJ), 16 January, 2007:
Diamond-water paradox applied to synthetic diamonds. Doh!”
“From last weekend's WSJ: 
These lab-made diamonds have begun trickling into retailers at prices below those for natural diamonds of similar size and sparkle.
De Beers extols the permanence of natural diamonds and attempts to make them seem special. They're "billions of years in the making," it says on its diamond information Web site, "Adding to the mystery and aura of what make diamonds so sought-after" is the fact that "approximately 250 tons of ore must be mined and processed in order to produce a single, one-carat, polished, gem-quality diamond."

I think these diamond producers don't realize that higher cost doesn't imply higher value. In fact, the paradox of value is also known as the diamond-water paradox, because it notes that although water is on the whole more useful than diamonds, diamonds command a higher price in the market. Adam Smith famously propounded on the paradox in The Wealth of Nations, though heavyweights such as Copernicus, John Locke, John Law and others had previously tried to explain the disparity in value between water and diamonds. 
Marginalism brought about the birth of neoclassical economics and argues that it is not the cost or use-value of a good that determines its price but its marginal utility. Thus the marginal value of a synthetic diamond, like that of a cultured pearl, is unaffected by its provenance. I doubt anyone feels sorry for diamond makers grasping at straws.”
[My Original] Comment
I shall be happier when I see more of this sort of thoughtful comment. Smith’s contribution to economics is strong enough not to require false ascriptions of views that were also presented by others.
Now, I know that scholars know this, but graduate economists, and others who attended Economics 101 (or what I see is called Ec10 at Harvard), often shorten the list of other contributors simply to Smith, stating or implying that the paradox was original to him. Clearly, it wasn’t. In some cases this matters and in others it does not.
To the list of others offered by Hedge fund guy we could add: Plato, Samuel von Pufendorf, Grotius, Harris, Cantillon, and Mandeville, and his own tutor, Francis Hutcheson. Clearly, not a lot of modern commentators on Smith know that. But as clearly, Hedgefund guy does, and so do you now, if you didn’t before.
To which today’s correspondent (Magpie writes):
Frankly, I am not convinced there ever was a "diamond-water paradox", at least in Smith's mind (I'd appreciate it if you could provide references to the other authors who expounded on it). This is the passage where people claim to see a paradox: "The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called 'value in use;' the other, 'value in exchange.' The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water; but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in on Smith and Others Knew Their Water from their Diamonds”.
My Comment today(2015):
I am not sure what ‘Magpie’ is complaining about because his complaint is clearly answered in the original 2007 post and in my original comment.
I could add that their relative value is also related to the timing and circumstances in which a comparison of their values is made. When dying of thirst in a desert, a person desperate for water would hand over a sack-full of diamonds for a drink of water, reversing the ‘paradox of value’.
In my previous day-job lecturing at Edinburgh Business School, I often posed the question to my classes on negotiation: 
“A man with six camels and desperate for water. approached an oasis  and found a man standing by a sign that read: “All the water you can drink, price one camel”. Who had the power?
This usually provoked a lively discussion, into which I tipped further complications, such as the man by the sign wanted a camel to be able to leave the oasis, and then I asked: which one of the men had a rifle? And so on ...

Moral: values are relative to situations.

'Magpie' responds to my 2007 comments which I also post HERE to save time searching back to 2007:
"Frankly, I am not convinced there ever was a "diamond-water paradox", at least in Smith's mind (I'd appreciate it if you could provide references to the other authors who expounded on it). This is the passage where people claim to see a paradox: "The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called 'value in use;' the other, 'value in exchange.' The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water; but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in on Smith and Others Knew Their Water from their Diamonds"

My Comments:
I think you are making an over-literal approach to Smith's use of a 'paradox of value'. I remember when I was taught on the 'paradox' in my first year economics A-level course at evening school, in 1961, it was treated as a 'paradox' to draw our attention.
In short, the use of the word 'paradox' is purely descriptive in presenting two apparent views that seem to contradict themselves in a purely literary sense, but which on examination are explainable by looking at them differently, such as value in use and exchange. Once explained the paradox removed.
The other authors I mentioned in 2007 I no longer have citations to hand and pressure of work precludes me taking time to identify them (use google).

Tuesday, January 20, 2015


Hans-Werner Sinn, professor of economics and public finance at University of Munich, posts (20 January) in Global Times HERE 
“How classic concepts can lead to flawed decisions -
In some cases, rational behavior yields poor results”
“There is much to criticize in economics nowadays. For example, the profession focuses far too little on political issues and far too much on beating students to death with mathematics. But much current criticism of the profession is based on misunderstanding and ignorance.

Consider Adam Smith's concept of the "invisible hand," which implies that a market equilibrium is efficient if perfect competition prevails and well-defined property rights exist. Contrary to what many critics suppose, mainstream economists do not assume that these ideal conditions are always present. On the contrary, economists tend to use these conditions as a benchmark for analyzing market failures.
Smith could not imply what is suggested as ‘market equilibrium’, ‘Perfect competition’, or ‘ideal condtiions’, because these were unknown concepts in economics while Smith was alive. 
“In this respect, economists are like doctors, who have to know what a healthy body looks like before they can diagnose disease and prescribe treatment.”
Dr Quesnay, a French man of medicine and a contemporary of Smith’s. They had several discussions when they met in France (1764-6) and whom Smith admired. He was sharply criticised by Smith in Wealth of Nations (Book V)  for linking an economy’s healthy state as a pre-condition of it moving a nation opulence.  If that was a necessary pre-condition, Smith observed, then no economy would ever achieve opulence.
Hans-Werner Sinn goes on in his article to describe markets in terms of the entirely modern notion of ‘market failure’, none of which is relevant to Adam Smith: 
Environmental regulation addresses a particularly striking example of market failure. Markets are generally efficient if companies' revenues correctly reflect all the benefits that their output bestows on third parties, while their costs reflect all the harms. In this case, maximizing profit leads to maximizing social welfare.

But if production entails environmental damage for which companies do not pay, incentives are distorted; companies may turn a profit, but they function inefficiently in economic terms. So the state "corrects" firms' incentives by levying fines or issuing bans.”
Professor Hans-Werner Sinn displays a touching faith in the efficiency of modern States correcting the inefficiencies of modern firms.  Governments are often complicit in crony-capitalism when they are ‘captured’ by powerful corporate interests.

Overall a poor post.