Saturday, November 28, 2015
Dan McCaslin, teaches on religion at Crane School, posts (29 November) on NOOZHAWK (Santa Barbara) HERE
“Now that we are in the Age of the Anthropocene, we can agree with Harari that hyper-belief in capitalism is just another cult: “Capitalism began as an economic theory [and] assumed faith in the future” via Adam Smith’s “invisible hand” – faith in a doctrine of continual material growth. …
… Adam Smith’s capitalist dogma demanding worship at the shrine of “growth,” with a divinely invisible hand hovering overhead, is one of these splintered little beliefs Whitehead discussed in 1925.”
(“Anthropocene: coined by Paul Crutzen and Eugene Stoermer in 2000 to denote the present time interval, in which many geologically significant conditions and processes are profoundly altered by human activities”.)
McCaslin’s writing does not lack erudition. He does, however, lack focus in respect of the significance of Adam Smith’s so-called “invisible hand” (IH).
For Smith the metaphor of “an invisible hand” had nothing like the significance is has gained since his use of it (only twice) over two centuries ago. A phenomenon not unconnected to the fact that so few scholars read his books (all still in print).
The IH has become a parody of Smith’s meaning. Indeed, while Smith was alive and for near on a hundred years after he died in 1790, less than a dozen persons mentioned his use of the IH at all. Before 1948, perhaps a dozen more mentioned it, until Paul Samuelson referred to a false version of the IH in his best selling book of 5-million sales, Economics: an introductory analysis, McGraw-Hill, 1948 and 19 editions to 2010.After Samuelson, a virtual snow storm of imaginative references to false versions of the IH still hits all media outlets and public discourse. Moreover, most such references spread the myth, namely that Adam Smith meant by that selfish motivated market actions that allegedly led to “public benefits” and this myth was somehow “miraculous”, the latter designation a small step to McCaslin’s theological assertions, see:
Gavin Kennedy: Paul Samuelson and the Invention of the modern economics of the Invisible Hand., 2010, vol. 3. History of Economic Ideas, vol xviii).
For my criticism of ideas that Adam Smith remained religious after 1744, see:
Gavin Kennedy: The Hidden Adam Smith in his Alleged Theology. Journal of the History of Economic Thought, 2011, September,vol. 13 (3). pp. 385-402 and
Gavin Kennedy: Adam Smith on Religion. 2014. The Oxford Handbook of Adam Smith, pp. 464- 84. Oxford Uiversity Press.
Gavin Kennedy: “Adam Smith and the Invisible Hand: From Metaphor to Myth” Economic Journal Watch Vol 6, No. 2, 2009.
Wednesday, November 25, 2015
A NON-STORY MADE UP BY PAUL SAMUELSON IS THE SOURCE OF THE MODERN MYTH OF THE 'INVISIBLE HAND"
Jag Bhalla posts (November, 2015) on “big think” HERE
“Does The Story That Most Shapes Our Times Have Plot Holes?”
“Are there key plot holes in a tale that shapes our times?
1. Economics illustrates “the pitfalls of a good story,” says science writer Philip Ball.
2. It is built on a simple story that can discount or hide complicating logic.
3. Here’s Adam Smith’s plot summary: “He who intends only his own gain ... is ... led by an invisible hand ... [and] frequently promotes [the interest] of ... society.”
4. The key “characters” are self-seeking individuals and competitive markets, where prices automatically coordinate good collective outcomes (benign efficient “spontaneous order” = unintended consequence).
5. But what Smith’s invisible hand “frequently promotes,” it can’t guarantee. The other logical possibility is that self-seeking can cause collective harm, intended or not.
6. Plus the “simple story” mischaracterizes competition and prices.
7. Competition can be efficient, or wasteful — see Markets Dumb As Trees.
8. Prices often aren’t “right.” Both sellers and buyers gain (short-term) by ignoring “externalities,” like pollution costs. That complicates voluntary fixes.
9. Two “invisible hand” types exist. Sometimes local incentives combine to generate good group outcomes. Sometimes they undermine group goals. As Charles Darwin saw, these bad invisible hands create spontaneous disorder, which local incentives can’t cure.
10. Parts relate to wholes in two distinct ways. Sometimes we can predict how wholes behave from the properties of their parts. Other times not; it’s more complicated.
11. The field of “complex systems” studies these trickier beasts. That’s an unfortunate name — jet engines are complex but predictable, and two simple parts can generate unpredictable complexity (Wolfram Rule 30).
12. Markets are the most powerful social forces on earth, they shape how billions of people live. Let’s get their whole story straight. We can’t afford to continue ignoring their complicating logic.
For less one-sided stories, and more on efforts to deploy tools and ideas from complex systems, evolution and business, see Evonomics.”
Jag Bhalla is a prolific blogger and I have commented on his (always well written) work on Lost Legacy before.
Here he writes an intelligent sceptcism about Smith’s so called claim for the powers of “an invisible hand”.
Unfortunately Jag’s claim is a false one; Smith did not make a general claim at all. That is a myth created by Paul Samuelson in his 1948 textbook: “Economics: and introductory analysis”, page 36 (McGraw-Hill) where Samuelson created a myth that claimed for Smith the assertion that “selfish” behaviours led to “public benefits”, which by ideological osmosis became a general proposition of what Smith meant by using the now famous metaphor.
In fact, Smith’s statement was somewhat more modest. First he made no mention of “selfishness”; second he gave an example with much more modest pretensions.
Smith discussed a “merchant” who believed that foreigners in international trade were less reliable than domestic merchants and therefore such merchants avoided foreign trade and kept their capital invested domestically where they could keep a closer eye on it and, should they be deceived they, could seek redress in local courts whose probity was more reliable than foreign courts. They also avoided shipping costs and the costs of loading and unloading their cargoes and also the additional worry of what happened to their cargo once it was out of their sight.
Such merchants invested their capital domestically, which Smith noted added to the total domestic investment of all domestic merchants, but crucially their decision to invest locally was made because of their fears of investing abroad.
In short their motivation was what we would call “risk avoidance”. However, their intentional action was to protect their capital, but, as he also noted, the unintentional consequence of their motivated action was that it also added to “domestic revenue and employment”.
Now it was the unintentional consequence which was a “public benefit”.
They did so because their motivation led them intentionally to the action of investing locally. Metaphorically they were led by “an invisible hand” to an action that unintentionally led to a public benefit - specifically in this case of adding to local “GDP” in modern terms.
Now not all motivated actions lead to “public benefits”. There is no rule in Smithian economics that they did so. In fact, anybody actually reading “Wealth of Nations”, with its many examples of “merchants and manufacturers” acting from selfish motives that decidely were not public benefits in Smith’s opinion,could possibly come to the popular modern myths of the “invisible hand” metaphor.
I can only conclude that far fewer than the small number of economists, let alone numerous political idealogues, who believe in Samuelson’s myth that Smith said that “selfish” actions led to public benefits, have actually read Wealth of Nations, or even properly read, Book IV of WN, in which Smith used the “invisible hand”.
As Smith did not assert the ideas Jag Bhalla claims for him, I think Jag should withdraw the charges he makes against Smith in his use of the “invisible hand” metaphor. The errors Jag points out are solely in the imaginations of those many modern economists who simply copied what Samuelson claimed in his best selling introductory textbook.
Remedy: read Adam Smith on Metaphors in Smith, A: "Lectures on Rhetoric and Belles Lettres", (1761-2) 1983. Oxford University Press; and read Wealth Of Nations, (1776), 1976, Vol. 1, Book IV, chapter 2, pp 452-6, OUP).
Tuesday, November 24, 2015
ASK A SILLY QUESTION
Clem Chambers asks (23 November) in Forbes HERE
“Is An Invisible Hand Manipulating The Market?”
“Many market participants are starting to see a not so invisible hand at work in the U.S. markets. The series of miraculous market turnabouts has people getting paranoid that the whole game is a fix.
There could be a fix in place and it is an easy idea to embrace. After all, interest rates are ‘fixed’ and that’s the biggest market of all.
However, markets can seem to act like a single person because in the end they are a summation of a lot of people and an average person is very like a unique single person.”
Ask a silly question and you get a silly answer. And intelligent people get paid for writing such stuff for intelligent people who pay to read it.
Friday, November 20, 2015
LOONY TUNES NO. 123
Surfer Magazine (9 November) HERE
“It was as if he'd been slapped by a giant invisible hand. The blow didn't come from an angry, omnipotent being.”
Taha Lokhandwala posts on FT Adviser (13 November):
“Troy’s Lyon: Dividends ‘face downwards cycle”
“The invisible hand of the free market is beginning to make its presence felt after being handcuffed to non-market forces for so long.”
Jim Sabin posts (13 November) on Health Care and Organisational Ethics HERE
“So far the invisible hand has been dealing out slaps. Next time - the fist!”
Church of the Invisible Hand HERE is a denomination of Deism. We believe that there may have been a God who created the Universe, but that God does not perform Miracles within that Universe. We believe that the best expression of God's will for us, if God has any will for us, is the set of Natural Laws that govern the Universe, Founded by User:FriarRich.”
Thursday, November 19, 2015
A THOUGHT FOR YESTERDAY AND TODAY
I regularly receive comments from readers, which are always welcome. Most are published, excepting those inviting readers to sex contacts (we were ‘bombed’ a few years back, hence the use of Moderation) and those that are commercial with no connection to the History of Economic Thought.
In this connection I would welcome readers passing on news of new books and articles on Adam Smith and others, which I would feature on Lost Legacy.
A recent reader from 2007 comments on my post of 20 September, 2007: “A Misleading Quotation Exposes the Ignorance of the Quoter”.
I re-post a couple of paragraphs from my original post. They encapsulate my ideas from the early days of “Lost Legacy”. I think they are still relevant.
“Those hunting societies in Europe and the Near East 8,000 to 10,000 years ago, after the last ice-age, that formed small settled societies, developed civil governments among which problems they faced was who lived where in the settlements. This required the invention of the role of private property. Without such a concept they could never have developed shepherding (Adam Smith’s second age of mankind) to solve the elementary problem of who owned which deer, sheep, pigs or cattle, and they would never have gone on to develop agriculture (Adam Smith’s third age of mankind), from which, as they say, the rest is history."
Now there may be some (I’ve certainly met a few) who regret the long run consequences of that fateful decision of individuals to abandon relying on hunting towards the end of the ice-age and starting mankind, unknowingly and unintentionally, to create the recent history of mankind as we know it. There are even some still surviving who would welcome the end of property, though they wish to retain all the appurtenances of civilisation at the same time. I admire their self-sacrifice of the lives of billions of humans, including themselves, who would never have been born if the ragged survivors of the last ice-age had reverted to hunting as many did in the rest of the world and were found in the same state they were in when the descendants of the pastoral and farming tribes found them from the 15th to the 18th century.
I had an additional thought on what happens when humans from different levels of economic and technological development find or are found by others.
These historical events did not justify nor excuse the largely abominable treatment meted out to those our predecessors who found earlier orginal societies and their peoples, including genocide, slavery, racism, social and sexual exploitation.
Should human kind ever begin to explore the Universe, I fear for the prospects of any living kind they come across. Moreover, should any living kind visit Earth, I would not expect any good news to come about as a result of their contacts with our descendants.
Wednesday, November 18, 2015
FISHING AMONG PFOOLS
Peter Foster posts (17 November) on Financial Post HERE
“Nobel Phools George Akerlof and Robert Shiller”
“Akerlof and Shiller claim to have cast-iron proof for their thesis. It’s all Adam Smith’s fault. His concept of the Invisible Hand has led to a “standard economics” that celebrates greed and ignores market manipulation; that preaches that markets are perfect and economic actors purely rational. “If business people behave in the purely selfish and self-serving way that economic theory assumes,” they write, “our free-market system tends to spawn manipulation and deception.
But which business person derives his practices from economic theory?
What Akerlof and Shiller are actually condemning is human nature. Moreover, once we abandon caveat emptor for “Let the government beware for us” we are on a slippery slope towards losing not just choice but freedom. Such concerns are dismissed by claiming that those who warn against the moral hazards involved in government “would also tell us to do away with fire departments, because there would then be no fires since people would be more careful.”
Adam Smith in fact never suggested that markets were, or could be, perfect. He wrote of “the higgling and bargaining of the market, according to that sort of rough equality which, though not exact, is sufficient for carrying on the business of common life.” He was also an avid student of human irrationality which, he noted, was infinitely more dangerous when it came to politics and religion than to shenanigans by tradesmen, of which he was well aware. He pointed out that the market controls such shenanigans, not least by rewarding a reputation for honesty, although the law is needed to protect us from fraudsters. Akerlof and Shiller’s answer to the value of reputation is to claim that it is accumulated so that it can be “mined” to cheat people.”
Peter Foster is the author of “Why We Bite the Invisible Hand” (Pleasance Press, Toronto, 2014), on which I had occasion to comment on Lost Legacy last year, partly favourably - he is an excellent writer - and partly unfavourably - he believes the usual modern nonsense about the “invisible hand”).
Here he Is lambasting George Akerlof and Robert Shiller for taking seriously modern myths of Adam Smith’s use of the metaphor of “an invisible hand”. I have criticised Akerlof and Schiller’s thesis on Lost Legacy and would so again for their portrayial of Smith’s simple metaphor as if it has anything to do with modern (post Pail Samuelson’s 1948-2010) treatment of it as “the invisible hand” of the market.
That error is the kernal of the confusion of modern economics. Peter Foster’s quarrel with the Akerlof and Schiller “phishing" thesis is spot on but Foster shares the same core fallacy of the so-callaed invisible hand supposedly at work in market economies ensuring the common good.
There is no such invisible hand and Smith never claimed that there was. Smith simply observed that if a merchant prefers to avoid foreign trade and intentionally invest locally, he will unintentionally and arithmetically add to “domestic revenue and employment”, i.e., in modern terms, add to GDP, which can be a public benefit. Hardly a startling conclusion! Yet so much is read into such an obvious outcome even by Nobel Prize winners from top universities.
Moreover almost the entire economics profession has bought into Paul Samuelson’s misreading of Adam Smith. The invisible hand is a metaphor for the motivated actions of people may be having unintended outcomes. It was not about a mystical, even miraculous, controlling force at work in market economies.
I would hope that Peter Foster would come to see what Smith meant and where Akerlof and Schiller got it completely wrong.
Wednesday, November 11, 2015
MYTHS OF NEOCLASSICAL ECONOMICS
David Ruccio writes (31 Oct, 2010) in Real World Economics (11 November) HERE
“The metaphor of the invisible hand”
“Take a course in neoclassical economics or listen to a neoclassical economist and you’ll soon learn of the magic of the invisible hand. And you’ll learn that the invisible hand was Adam Smith’s great contribution to moden economic thought. Much of the rest of Smith is discarded or simply ignored.”- (See HERE)
NeoClassical economics is mired in errors; much of it is in a fantasy world that does not exist in reality. People do not behave in the manner of precise mathematical ways. Electrons might behave that way but people are individuals subject to a whole range of motivations and consequential actions.
There is nothing magical, nor miraculous about the metaphor of “an invisible hand”. Human motivated actions have intended consequences and those actions may have unintended consequences, some of which may have beneficial consequences and some which may not be. Some actions lead simultaneously to unintended outcomes (such as an insecure merchants investing locally which adds to "domestic revene and employment" - see Smith’s Wealth of Nations, Book 4) and some to unintended outcomes years, even lifetimes or generations later (see Smith’s Moral Sentiments, Part 4).