Economics did not become ‘a hard science’; its proponents confused ‘hard science’ with economic models that were bereft of the presence of human being

TO BE NOTED: From Adam Smith's Lost Legacy:

"Ethical Crisis - What Crisis?

MURRAY WHYTE write in Toronto Star (The Star.com HERE)

‘Closed due to the recession’

“U of T's Lind, whose central field of study is economic ethics, points out that this is a relatively new quandary. Until the industrial revolution, ethics and economics were a unified field. Adam Smith, who described the advent of market economics as being guided by "an invisible hand," is often misconstrued as the early progenitor of the Milton Friedman-spawned, market-knows-all Chicago School. "But really, he was making a moral argument, because to him, there was no distinction."
As the 20th century dawned and economics turned away from the philosophical and more toward hard math, the separation grew. "The field of ethics went into crisis just as economics turned to mathematics," Lind says. "Economics became a hard science, whereas ethics became a confusion."

Comment
From where do they get these muddled ideas? Economics as a subject did not exist in the 18th century, certainly not as Adam Smith wrote about what was called ‘police’ (ensuring subsistence for a society).

Political economy was a title coming into vogue when Smith wrote Wealth Of Nations, which lasted a century until the 1870s when mathematical analysis began to appear. That title too declined in the 20th century.

Smith wrote about ‘commercial society’ and market, but did not mention The Metaphor of an ‘invisible hand’ in his analysis of how markets functioned (Books I and II of Wealth Of Nations). He certainly never said ‘the advent of market economics as being guided by "an invisible hand" ’.

It is, however, true that The Metaphor is ‘often misconstrued as the early progenitor of the Milton Friedman-spawned, market-knows-all Chicago School’.

Indeed, the modern myth of The Metaphor was virtually invented by ‘Chicago’ in the environs of 59th street (see Oscar Lange, 1946 and Paul Samuelson, 1948) and has become universally misconstrued as ‘markets always produce socially beneficial outcomes’, despite the presence of monopolistic practices, protectionist policies, tariffs and non-tariff barriers, pollution, and other negative externalities.

Economics didn’t turn ‘to mathematics’; scholars calling themselves economists ‘turned to mathematics’. Economics did not become ‘a hard science’; its proponents confused ‘hard science’ with economic models that were bereft of the presence of human beings.

And ‘ethics’ did not become ‘a confusion’ – the basic ideas of ethics (partly summarized by Adam Smith in his Moral Sentiments) remain valid.

The absence of people in mathematical modeling of the kind dependent on 19th-century calculus eliminates ethics from the equations. People are given objectives that lead to determinate solutions; the ‘solutions’ have little operational value.

I am not sure that ethics is in ‘crisis’; people without ethics are in crisis. The ‘U of T[oronto]’ should be teaching its students to think about the differences in the tone of this article and the reality of the dead-end where economics has come to rest.

posted by Gavin Kennedy at 12:46 PM"

that they apparently believe that their economies are ‘free markets’ is astonishing

TO BE NOTED: From Adam Smith's Lost Legacy:

"Myths of Free Markets

Erik Kirschbaum writes in Cota 1061 HERE:

“German ‘cash for clunkers’ shows free market perils”

“THE INVISIBLE HAND
Scottish economist Adam Smith coined the term “the invisible hand” in the 18th century to describe the positive effects of the free market on individuals.
Yet the worst economic downturn since the Great Depression has led governments around the world to re-evaluate that belief in the “invisible hand” and to prop up sagging economies.”

Comment
In an otherwise reasonably sensible piece, Erik Kirschbaum, writes this nonsense about Adam Smith and the metaphor of ‘an invisible hand’.

Adam Smith did not ‘coin the term “the invisible hand”. The metaphor was well-known in the 18th century and widely used in literature, and had been known since classical times (Greece and Rome). It was used by Shakespeare (in Macbeth: ‘thy bloody and invisible hand’), and Defoe used in twice (Moll Flanders and Colonel Jack). Even Voltaire, among others. used it.

Adam Smith most certainly did not use the metaphor ‘to describe the positive effects of the free market on individuals’, which he discussed in detail in Books I and II of Wealth Of Nations (he only used in once, and not in reference to markets; it was about risk and uncertainty, Book IV of Wealth Of Nations).

Modern economists who ‘believe’ in the myth of the invisible hand have been misled by leading US economists (in Chicago in the 1930s; Oscar Lange (146); Paul Samuelson, 1948); Milton Friedman (serially from the 1950s); and hundreds of thousands of graduates from academe influenced by the scores of graduates who ‘believed’ what their tutors told them (without them, or their tutors ever reading Wealth Of nations for themselves.

That governments came to believe the myth of ‘an invisible hand’ is the fault of prestigious modern economists (including Nobel Prize winners) advising them.

Moreover, that they apparently believe that their economies are ‘free markets’ is astonishing, given that even a casual look at modern markets in economies with Big Governments would show they were as un-free as commercial markets were in Smith’s day, not just internaly, but also externally through tariff protection.

posted by Gavin Kennedy at 6:10 AM"

In these circumstances I feel permitted to use the term 'risk aversion' as being the cause of the merchants' conduct

TO BE NOTED: From Adam Smith's Lost Legacy:

"Thought for the Day 2

‘Security, therefore, is the first and the principal object of prudence. It is averse to expose our health, our fortune, our rank, or reputation, to any sort of hazard. It is rather cautious than enterprising, and more anxious to preserve the advantages which we already possess, than forward to prompt us to the acquisition of still greater advantages. The methods of improving our fortune, which it principally recommends to us, are those which expose to no loss or hazard; real knowledge and skill in our trade or profession, assiduity and industry in the exercise of it, frugality, and even some degree of parsimony, in all our expences.'
(TMS VI.i.6: 213)

Comment
I have made many references to the use by Adam Smith of the metaphor of ‘an invisible hand’ in Wealth Of Nations (1776) and I thought it relevant to quote the above passage from Smith’s Moral Sentiments [1759, ed 6. 1790].

He discusses security and specifically mentions how security is ‘averse’ to exposing ourselves and ‘our health, our fortune, our rank, or reputation to ‘any sort of hazard’.

I was recently criticised by a academically respected referee for using the more modern term, ‘risk averse’, to describe the motivation for why some (but not all) merchants, discussed by Smith in Chapter IV (ii.9: 456) of Wealth Of Nations, preferred to trade and invest locally rather than take the risks of trading or investing abroad, particularly in the American colonies.

The referee considered ‘risk-averse’ as being about the utility functions of players in modern game theory and not applicable to the merchants that Smith identified in his famous ‘invisible-hand’ paragraph.

Despite my reservations, I accepted the referee’s assertion, not being able to lay my hands of the relevant quotation at the moment I needed it. But I found it this morning while looking for something else.

I consider Smith’s comments on the ‘prudence’ of ‘security’ and ‘aversion’ excuse my original mentions of ‘risk aversion’ as the direct cause of these merchants investing locally and thereby, on the arithmetical law that the whole number is the sum of its individual parts, the behaviour of these merchants, which unintentionally made domestic national output and employment larger in total than it otherwise would be, completely explain what motivated them to do so.

The outcome was brought about, and is eminently explained by the causes identified by Adam Smith before he used The Metaphor of 'an invisible hand', thus making The Metaphor redundant as an explantion, and with its redundancy ,all the subsequent chatter that The Metaphor itself was an explanation are shown to be wrong.

The modern myths of invisible and disembodied hands, including the 'Hand of God' and other mysteries, were not part of Adam Smith's original explanation for the phenomenon, the merchant's 'risk-aversion' ('he intends only his own security' (WN IV.ii.9: 456).

The real mystery, in my mind, is why so many respectable and senior fellow economists can read the same passage from Wealth Of Nations and endorse the modern myth.

In these circumstances I feel permitted to use the term 'risk aversion' as being the cause of the merchants' conduct, without implying any connections to elements of modern games theory.

So not only are there no invisible hands guiding or preserving ‘the biosphere’; there ain’t one guiding or preserving markets either.

From Adam Smith's Lost Legacy:

"A Scientist Rejects Belief in Invisible Hands

Simon A. Levin writes on the Essential Talks (Docs) Blog HERE:

Simon A. Levin is the George M. Moffett Professor of Biology and director of the Center for BioComplexity at Princeton University, where he founded the Princeton Environmental Institute.

"Ecosystems and Socioeconomic Systems as Complex Adaptive Systems"

“Yet while we may believe in the “invisible hand” that according to 18th-century economist Adam Smith steers our markets, we can’t leave the environment up to fate, Levin says: “There is no invisible hand that guides or preserves the biosphere.”

Comment
Simon should know that Adam Smith said no such thing. His use of the metaphor of an invisible hand was not about how markets work (as outlined in Books I and II of Wealth Of Nations – where the metaphor is never mentioned).

He used the metaphor in Book IV of Wealth Of Nations, not about it ‘steering markets’; in fact, not about markets at all.

His single use of the metaphor was in relation to the consequences of the risk-avoidance of some merchants impelling them to invest their capital locally and not to take the greater risks of sending it abroad to such as the British colonies in North America.

Check it out in Book IV, chapter ii: ‘Of restraints upon the importation from foreign countries of such Goods as can be produced at Home’, pp 452-72.

Smith’s only reference to ‘an invisible hand’ is on page 456, after his full explanation of the merchant’s motivation, ‘he intends only his own security’, add the unintended consequences that as a result domestic output and employment are increased (the whole is the sum of its parts).

So not only are there no invisible hands guiding or preserving ‘the biosphere’; there ain’t one guiding or preserving markets either. That’s a modern myth invented in the 1950s by modern economists and believed now by many more who have not read the entire chapter ii in Book IV of Wealth Of Nations.

The invisible poster:

Don said...

In Smith's sense, is the Paradox Of Thrift a result of an invisible hand, only in reverse. By saving, the consumption is decreased.In other words, could the invisible hand result in the Paradox of Output in Smith's example?

Don the libertarian Democrat

2:31 AM

Gavin replied:

Gavin Kennedy said...

Thanks Don
I don't think so. For every 'paradox' there is an explanation (as with the original use s of the metaphor: Jupiter's invisible hand' is the credulous beliefs of Roman citizens; delusional rich landlords it was their confusing the beauties of ownership with the imperative that their labourers/serfs/slaves/retainers had to consumer a sufficient amount of his food in order to survive to work for hum again; in Wealth Of nations the merchants were driven to invest lcoally by their risk-avoidance from the higher risks, despite the higher profits, of foreign trade.

In short, the invisible hand was not mystical, dismebodies or a 'Godly' spirit.

In thrift, the revenue receiver 'saves' some portion to invest in interest earning (productive) lending; the borrower of the saving uses them by spending on productive uses, which generates employment and purchases equipment, buildings, materials, to earn profts, part of which return to the savers.

Whether consumption is 'decreased' is moot; they could spend it; refrain from spending and hide in a box; refrain from spending and lend it for profitable interest earnings. Smith said they would be prodigal if they chose the fiest option; 'crazy' if they chose the second; and 'normal' if they chose the first.

Motivations can be identified and the 'paradox' vanishes, and with it 'invisible hands'

3:16 PM

That is not what Adam Smith wrote. He did not write anything about “as if by an invisible hand”.

From Adam Smith's Lost Legacy:

"Misreading Adam Smith, I hope Accidentally From the Princeton University press Blog, announcing a new economics title HERE:

“Adam Smith, Meet Captain Hook: The Upside of Pirate Greed” by Peter Leeson

“In 1776 Scottish moral philosopher Adam Smith published The Wealth of Nations. In it, he described the famed “invisible hand.” According to Smith, individuals pursuing their self-interests are led, “as if by an invisible hand,” to promote others’ interests as well.

Your grocer, for example, wants to serve his own interest—he wants to make money. But to do so he must serve your interest as well. He must provide you with the highest quality groceries at the lowest possible price or you’ll patronize a competitor that does instead. The grocer doesn’t care about you, of course; he doesn’t even know you. He cares about himself, but in serving himself he serves you too.”

Comment
Peter Leeson, BB&T Professor for the Study of Capitalism at the Mercatus Center at George Mason University and author of the new book, The Invisible Hook: The Hidden Economics of Pirates and he also blogs at The Austrian Economists, is almost right and spoils the accuracy of his interpretation of the grocer’s pursuit of his self-interest in serving her customer’s self-interest, which in turn serves hers.

Yes, we serve our self-interest best in exchange by serving the interests of others.
But, I am not sure of his accuracy of interpretation in his first paragraph:

“According to Smith, individuals pursuing their self-interests are led, “as if by an invisible hand,” to promote others’ interests as well.”

That is not what Adam Smith wrote. He did not write anything about “as if by an invisible hand”. The quotation marks around this statement suggests that Adam Smith wrote those words; he most certainly did not.

There is no ‘as if’ attached to ‘led by an invisible hand’. Peter Leeson has added them and incorrectly wrapped them in quotation marks.

Also the way the sentence is written implies that Adam Smith was making a general statement applying to all individuals in all cases; he wasn’t.

He wrote about a specific set of individuals (some but not all wholesale merchants) whose risk aversion to foreign trade led them to prefer to deploy their capitals in their domestic locality, despite the higher monopoly-driven profits from trading with the British colonies in North America under the protection of the Navigation Acts, enforced by the Royal Navy.

These individual decisions meant domestic annual product was higher than it otherwise would be, and because the whole is the sum of its parts, the domestic economy, and resulting employment and output, were greater than they would otherwise be.

Having explained all this clearly and adequately, Smith summarises his explanation, with the well-known 18th-century literary metaphor of ‘led by an invisible hand’ (WN IV.ii.9: 456), which applied in this one specific case and ‘in this, as in many other cases’, but not all cases, as the over 70 examples he mentions along the way of self-interests not being beneficial to society in Books I, II and III of Wealth of Nations.

In fact, Smith analyses how prices are determined, how markets work, and how the ‘great orders’ go about their business without mentioning ‘an invisible hand’ at all.

Professor Peter Leeson should have written his sentence as:

“According to Smith, SOME individuals pursuing their self-interests are led IN MANY BUT NOT ALL CASES, “by an invisible hand,” to promote others’ interests as well.”

By generalising Smith’s thinking in the manner he did, Professor Leeson repeats the mantra of some ultra-conservative-minded propagandists for State Corporate Capitalism( I AGREE WITH THIS LABEL. ) (which they are perfectly entitled to assert in their own names), but their assertions are their own and have nothing to do with Adam Smith."

The same thing happens with Burke.