Wednesday, September 28, 2016

Adam Smith versus the invented 'adam smith'

Its not often that I read a piece with which I disagree across the board and also find something with which I do agree. 
As usual the source of my disagreement is a mixture of the writer’s education in Economics 101, where rotten myths about Adam Smith (1723-90) are implanted in innocent students’ minds that is based on a mythical ‘adam smith’ who never existed - yes, the one whom George Stigler assured his audience ‘was alive and well and living in Chicago”. The gullible believed him and preached the gospel according to the phoney ‘adam smith’ and their innocent audiences across the world in Econ 1 classes, then repeated the phoney mantra, including Nobel Prize winners.
“MIT scholar, Sandy Pentland posts (27 September) HERE 
“Big Data Is About People”
“Rational Behaviour Is Overrated”
“Pentland, says he often begins his talks discussing the “invisible hand” theory of economist Adam Smith, something familiar to most first year economic students. Smith claims that our economy and society is shaped by rational individuals competing for their own interests.
COMMENT
Disagree!
Adam Smith never had a theory of the “invisible hand”. For Smith it was a metaphor, which rhetorical metaphors he discussed in his “Lectures on Rhetoric and Belles Lettres’ (1762; 1983). For Metaphors there is an “allusion” said Smith (not a theory or an identity) between two ‘objects’.
Nor did he say anything about an economy ‘shaped by “rational individuals”, certainly not to any degree now common, since the economists writing in the 19th and 20th centuries assumed rationality and created mathematical models, as if people were strictly rational in a scientific sense. Once these fantasies became mathematicalsed, economics became locked into models of behaviour that portayed economic relations as if they were susceptible to rationality like in the physics sciences.
“That’s really the basis of democracy and markets, and this is how we run our world,” says Pentland. “It’s also social science a la 1680. We actually know we’re not fully rational but more importantly we’re not independent, and we’re not always greedy.”
COMMENT
Agreed!.
“The independence one is the big one,” he continues. “We actually talk to each other. That’s where you get bubbles and fads. That’s what culture is, it’s people agreeing on things together.”
“People’s opinions are more of a function of the people they interact with than they are of the stuff between your ears. We’re more social creatures than we are independent creatures.”
That means ideas, trends and beliefs spread through “friendship networks” argues Pentland.
“If you look at what people look at online, they look at the same things and they talk about the same things as the people they spend time with physically.”
“The thing that I’ve learned is we are neither ‘hive mind’ nor rational individuals.”
COMMENT

Agreed!

Friday, September 23, 2016

LOONY TUNES no. 174

1
Rohit Varma posts (22 September) on Business Line in The Hindu HERE
Technology enhances human relationships
“And, that was a wrap! Fifty-three speakers, 35 topics, and one didactic event! It’s great to be a part of such an incredible global event, where you have all the ‘social media gurus’ under one roof. This year’s global theme was The Invisible Hand: Hidden Forces of Technology (and How We Can Harness it for Good), and the Social Media Week’s events were held in the bustling city of Mumbai. What a week!”
2
On CougarBoard (22 September) HERE
Ummmmm....the "invisible hand" ceases to be “invisible"...'
once the government steps in and starts mandating a $15 hourly wage.”
3
Dong Dengxin, Director of the Financial Securities Institute at Wuhan University of Science and Technology posts(22 September) on Global Times HERE
“New rules for IPOs are a cure for market dysfunction”
“To put the market on the right track requires necessary macroeconomic fine-tuning. Otherwise, the capital market is likely to further distort social resource allocation and consequently detract from balanced regional economic development. The invisible hand of the market is inherently flawed and should therefore be accompanied by the visible hand of the government that serves to powerfully rectify the defects. This is part of the basic understanding of economics. As such, the new policy that puts companies registered in the laggard regions on top of the waiting list for market flotation helps rectify this capital market dysfunction.” 
4
Nick Cohen posts (22 September) in The Spectator HERE
“This could be the end of the Labour party”
It has no way forward even as a credible opposition so long as it follows Corbyn's vicious, vacuous creed. …
… “Elsewhere, Corbyn’s supporters explain away the terrible opinion polls by saying that they are the bitter fruits of a Tory conspiracy. Not stopping there, they go on to see the invisible hand of MI5 raised against them everywhere from Twitter to the BBC.

Thursday, September 22, 2016

LOONY TUNES no 173

1
TImothy Boyle post (19 September) in The Age HERE
“Top Clubs Find Inner Champion
Hawthorn, Sydney and Geelong have generated a kind of microcosmic alternative to the social principle of Adam Smith's "invisible hand", in which he argued the whole of society would benefit if individuals focused on their own success. The "invisible hand" in football is a social atmosphere, a program of shared behaviours and attitudes enforced by teammates in order to lift individuals into their best form.”
2
 unagidon, a contributing editor to Commonweal posts (10 September) in Commonweal
The idea that poor management should inevitably lead to poor performance is based at least in part on things like Adam Smith's theology of the "Invisible Hand".  Poor management should lead to increases in price and should lead to a decrease in the quality of the product.  Sooner or later, competitors will emerge that will be more efficient both in cost and quality, and they will knock the inefficient company out of the market. The likelihood that this will happen represents a risk for the person running a business.  This risk is what drives them to be efficient. Amen.
In fact, Smith's whole theory, insofar as this kind of risk is a driver of the whole thing, was already falling apart when he was alive and writing in the 18th century with the rise of the joint stock company (which today we simply refer to as the corporation).  The creation of the corporation led to the separation of ownership from control.  In the early days of the corporations, back before corporations became "persons", they were envisioned as a means to protect an individual from personal risk.  With a corporation, only the corporation took on risk and only its assets were on the line in the case of a failure.  It seems rather strange to look at now, because while it limited personal risk, it also transferred risk outside of itself by limiting the assets that an aggrieved debtor could obtain if the corporation collapsed. (One wonders if the Life of Trump would have been radically different with his bankruptcies if his personal assets had been available for investors to recover from).
3
Morgan Y. Liu posts on Twitter picked up in Huffington Post HERE
Democracy is a hard sell to those who see only the two alternatives of despotism and chaos. It requires believing that beneficial politics and economy can be the result mostly of self-organization - a third alternative to strict control and total bedlam.
Maybe, though, this third way shouldn’t be so hard to believe. Many phenomena in the natural world work because of self-organization: from the formation of molecules, to the crystallization of each unique snowflake, to the “schooling” of fish, to the function of anthills. Complex wholes can be built on components, each operating simply and without central coordination. The whole can function as more than the sum of its parts. This principle appears to be quite prevalent across nature, according to the interdisciplinary field of complexity science. Among them are biologists, physicists, chemists, engineers, and social scientists, who see that interesting phenomena occur at that critical edge between order and chaos. Doesn’t that sound like where democracy operates?
Even if complexity science applies to politics, democracy is still a hard sell. To the many in the world with no concept of political order without direct central control, democracy’s bottom-up logic makes no sense. The claims of western democracy boosters seem as magical as the market’s “Invisible Hand” (Adam Smith) or the “Mystery of Capital” (Hernando de Soto). The real global debate today is over which model leads to better societies: the all-controlling despot or the self-organizing democracy. Both sides have much work to do in convincing the other.
Follow Morgan Y. Liu on Twitter: www.twitter.com/morganistan1
4
Subodh Vermal posts (22 September) in The Times of India HERE

Experts have described these extreme rainfall events as the invisible hand of climate change revealing its dangerous impact”.

Monday, September 19, 2016

ALL PEOPLE ARE NOT MORALLY SOUND

Christine Lagarde, IMF Managing Director , IMF, speaks (16 Swptember) at the International Bar Association Conference, Washington, DC HERE 
“Mending the Trust Divide”
“I started my intervention by appealing to Aristotle’s ancient wisdom. Let me close by appealing to the wisdom of a founding father of modern day economics – Adam Smith.
To many of us, Adam Smith is perhaps best known for terms such as “self-interest”, “laissez-faire” and the famous “invisible hand.” Yet for Smith, the classical discipline of economics was always a branch of moral philosophy. Indeed, for him, the market would only work effectively if it was underpinned by trust: the baker that is featured in the Wealth of Nations would only be able to sell his goods if he or she was trusted.
In his Theory of Moral Sentiments, published in 1790, Smith elaborated on the importance of trust and good citizenry.
As noted by Smith: “Concern for our own happiness recommends to us the virtue of prudence: concern for that of other people, the virtues of justice and beneficence…the one restrains us from hurting, the other prompts us to promote happiness.”[6th edition: VI.III.54).
These two great thinkers – Aristotle and Smith – millennia apart, cherished and upheld the value of good citizenry. This is no coincidence. Good citizenry is critical for nurturing trust. And that is the glue that holds economic systems, and ultimately societies, together.”
COMMENT

Except that there has always been participants in the market and government, and in all systems of society under all social systems, both theological and secular, the presence of morally corrupt people in all ranks. Including, sad to say, occasionaly in the IMF.

Sunday, September 18, 2016

INTERESTING FACT ABOUT THE REAL SIGNIFICANCE OF THE DIVISION OF LABOUR

Morgan Kelly and Cormac O Grada post in the September 2016 issue of the Quarterly Journal of Economics HERE
“Adam Smith, Watch Prices, and the Industrial Revolution”  
Abstract
“Although largely absent from modern accounts of the Industrial Revolution, watches were the first mass produced consumer durable, and were Adam Smith’s pre-eminent example of technological progress. In fact, Smith makes the notable claim that watch prices may have fallen by up to 95 per cent over the preceding century; a claim that this paper attempts to evaluate. We look at changes in the reported value of over 3,200 stolen watches from criminal trials in the Old Bailey in London from 1685 to 1810. Before allowing for quality improvements, we find that the real price of watches in nearly all categories falls steadily by 1.3 per cent per year, equivalent to a fall of 75 per cent over a century, showing that sustained innovation in the production of a highly complex artefact had already appeared in one important sector of the British economy by the early eighteenth century.”
COMMENT
(From WN: I.xi.o, p.260):
Effects of the Progress of Improvement upon the real Price of Manufactures
It is the natural effect of improvement, however, to diminish gradually the real price of almost all manufactures. That of the manufacturing workmanship diminishes, perhaps, in all of them without exception. In consequence of better machinery, of greater dexterity, and of a more proper division and distribution of work, all of which are the natural effects ofimprovement, a much smaller quantity of labour becomes requisite for executing any particular piece of work; and though, in consequence of the flourishing circumstances of the society, the real price of labour should rise very considerably, yet the great diminution of the quantity will generally much more than compensate the greatest rise which can happen in the price.
There are, indeed, a few manufactures, in which the necessary rise in the real price of the rude materials will more than compensate all the advantages which improvement can introduce into the execution of the work. In carpenters and joiners work, and in the coarser sort of cabinet work, the necessary rise in the real price of barren timber, in consequenceof the improvement of land, will more than compensate all the advantages which can be derived from the best machinery, the greatest dexterity, and
the most proper division and distribution of work.] But in all cases in which the real price of the rude materials either does not rise at all, or does not rise very much, that of the manufactured commodity sinks very considerably.
This diminution of price has, in the course of the present and preceding century, been most remarkable in those manufactures of which the materials are the coarser metals. A better movement of a watch, than about the middle of the last century could have been bought for twenty pounds, may now perhaps be had for twenty shillings. In the work of cutlers and locksmiths, in all the toys which are made of the coarser metals, and in all those goods which are commonly known by the name of Birmingham and Sheffield ware, there has been, during the same period, a very great reduction of price, though not altogether so great as in watch-work. It has, however, been sufficient to astonish the workmen of every other part of Europe, who in many cases acknowledge that they can produce no work of equal goodness for double, or even for triple the price(WN: I.xi.o, p.260)
This consequence of the increasing output from the division of labour in manufacturing and the constant fall in price per unit of output is by far the most significant aspect of the growth of the commercial organisation of the division of labour. 
It is by far the more important aspect, missed by David Warsh in his counterposing the “pin factory” example, as quoted by Adam Smith word for word from the French Encycopedia in the first book of the Wealth of Nations, with what Warsh describes as the “Invisible Hand” phenomenon in Warsh, D. 2006. Knowledge and the Wealth of Nations: a story of economic discoverey. Norton.

Congratulations to Morgan Kelly and Cormac O Grada for pointing this interesting fact out.

Saturday, September 17, 2016

David Sloan Wilson in EVONOMICS HERE
The Death of the Invisible Hand: Why the Narrow Pursuit of Self Interest Always Fails”
Regulation comes naturally for small human groups but must be constructed for large human groups.
I hope that our economy recovers, but the time has come to declare its guiding metaphor dead. This is the metaphor of the invisible hand, which makes it seem as if the narrow pursuit of self-interest miraculously results in a well-functioning society.
The invisible hand metaphor originates with Adam Smith in The Wealth of Nations(1776).
COMMENT
No it didn’t originate with Adam Smith! The Invisible Hand has a much longer history than Adam Smith use of it. In the 17th century the IH was a religious metaphor for ‘the hand of God’, which continued into the 19th century, and it can still be reported as such through to the 21st century. (Google “invisible hand” and see how often and in what form it is mentioned daily).
Moreover, Adam Smith was credited with a version of the IH metaphor that has become universal for its quite different role today. Paul Samuelson was responsible for this modern secular version becoming so popular in his 1948 textbook, Economics, reporting it as being about how “selfish” actions lead to public benefits. 
After 19 editions of his textbook to 2010, Samuelson’s 5+ million readers innocently spread Samuelson’s original misguided assertion which  became the dominant narrative, despite some attempts by Samuelson (particularly with his co-writer, Nordhouse, to modify his 1948 erroneous assertion in later editions of his famous textbook). 
See my article, in the History of Economic Ideas, “PAUL SAMUELSON AND THE INVENTION OF THE MODERN ECONOMICS OF THE INVISIBLE HAND”.

Friday, September 16, 2016

INVISIBLE HANDS AND ZOMBIES

James Mackintosh posts (15 September) on Wall Sreet Journal HERE
Zombies May Be Prowling The Stock Market”
“Well, yes: Part of the point is to discourage saving and encourage consumption. More coherent critics worry that low rates damage the economy by sustaining companies and banks which ought to be driven out of business in a zombie state, so limiting the recycling of capital back to more deserving, faster-growing companies. The fear is that the creative destruction identified as vital to capitalism by the late Joseph Schumpeter has been put on hold. …
“… Individual investors may not care too much, particularly those who made almost 17% on utilities over the past year. But if the invisible hand of the market is suffering from zombie putrefaction, the economy will be less dynamic than usual.”
COMMENT
Lamenting the non-existence of a “supposed invisible hand”, usually miscredited to Adam Smith, a wholly innocent man, until libelled by Paul Samuelson in 1948, the spin masters have found another culprit , imaginary “zombies”.

Political economy once had claims to be a science….