A GOOD POST SPOILED
Opinion: 2008's financial crisis – market or government failure?
“The article starts by citing Alan Greenspan’s assumption before the financial crisis, that the invisible hand would work its magic on the lending market, as an example of market failure. To many others, economists included, this line of thought is the conventional one. Perhaps Adam Smith’s invisible hand had in fact failed the market by succumbing to the greed that drives it.
There are no ads available in this section (opinion) for this position (fixed-big-ad-top-asset1).
However, there is a caveat to this line of thinking and it is the fact that in order to blame the financial crisis on a “model” based upon free-market economics, there must first be a presupposed condition that the market at the time was indeed a free one. In other words, was the 2008 banking industry operating in a free-market at all? To answer this, we need to first consider the organization of our current banking system.”
The one error driving Franco Buha’s thinking in this article, which otherwise gives a sensible account of the institutional economic factors causing the banking crisis at the time, is the usual mistake of dragging the myth of Adam Smith’s metaphor of ‘an invisible hand’ into the preface to his argument.
There is no ‘invisible hand’ working away in modern markets. That is a modern misunderstanding of Smith’s use of his now (in)famous metaphor. There never was ‘magic’ involved in Smith’s single reference in Wealth of Nations to ‘an invisible hand’.
The source of that modern error goes back to Paul Samuelson, a brilliant mathematician but poor reader of the history of economic thought, whose widely read undergraduate Economics texbook (5 million sales from the 1st edition in 1948 to the last edition in 2010) misled the entire economics discipline - with some brave exceptions - into his ‘selfish’ assessment of Adam Smith’s use of a meta[phor.
One suggested proof of Samuelson’s error is shown in Franco Buha’s article - the author menions the ‘inviible hand’ as above and then does not refer to it again in his otherwise excellent account of the 2008 bust up. The latter bit - the bulk of his article on the 2008 financial crisis - is well worth reading because it is clearly written, persuasive, and highly plausible.