Excuse Me, Mr Greenspan, but You are in Error

I do not tackle Alan Greenspan’s mistaken ideas, or rather his popular presentation of them, without considerable hesitation. Greenspan knows far more about running a capitalist economy than I do and I have no wish to invite the derision of colleague economists along the lines of ‘what the hell does Kennedy know that Greenspan doesn’t’? But, if I criticise the likes of Dowd in the comment below this one – more an open goal than a challenge – then I should not duck what I would criticise if anybody of lesser stature than Greenspan said the same things about Adam Smith. “Lost Legacy” exists to contest all manifestations of the corruption of Adam Smith’s legacy no matter from whom they emanate.

I quote from Alan Greenspan’s remarks on “Economic flexibility” to the National Association for Business Economics Annual Meeting, Chicago, Illinois (via satellite) on 27 September 2005:

“In one of the more notable coincidences of history, our Declaration of Independence was signed the same year in which Adam Smith published his Wealth of Nations. Smith's prescription of letting markets prevail with minimal governmental interference became the guiding philosophy of American leadership for much of our history.”

Fair enough. The “coincidence” is a fact and that’s all it was, though we know Smith held back publication waiting for news of the military decision to the ‘disturbances’ in the colonies; we also must accept the information from Greenspan that Smith’s prescriptions were followed in the USA (if not in all of the Americas, though Greenspan refers to ‘American leadership’ in much the same way as some refer to “England” when they mean “Britain”).

“With a masterful insight into the workings of the free-market institutions that were then emerging, Smith postulated an "invisible hand" in which competitive behaviour drove an economy's resources toward their fullest and most efficient use. Economic growth and prosperity, he argued, would emerge if governments stood aside and allowed markets to work.”

Oh dear. Smith did not postulate anything about the invisible hand (a metaphor he borrowed from Shakespeare (Macbeth, 3:2: “the bloody and invisible hand” – in which Shakespeare managed to libel the real King Macbeth who was well aware of the benefits to his kingdom of trade) and competitive behaviour. His references – only three in all of his Works - one only in “Wealth of Nations” - did not deal with markets at all and neither did the other two references in the “History of Astronomy” and “Moral Sentiments” (Mr Greenspan’s acolytes can look up the references and show them to their boss if he should doubt it).

It may be that “competitive behaviour drove an economy's resources toward their fullest and most efficient use”, but this had nothing to with visible or invisible hands. It was how markets worked and these were not mysterious, miraculous or amazing at all. Smith, and others before and since, knew about how markets work and did not, and do not, have to resort to pagan superstition to explain them.

“[Keynes] argued that, contrary to the tenets of Smith and his followers, market systems did not always converge to full employment. They often appeared to settle at an equilibrium in which significant segments of the workforce were unable to find jobs. In the place of Smith's laissez-faire approach arose the view that government action was required to restore full employment and to rectify what were seen as other deficiencies of market-driven outcomes.”

Two quick points. Smith wrote nothing about “full employment”, a strange notion in 18th century Britain, as would have been the concept of “equilibrium”, which is an invention of neo-classical economics, much disputed by the “Austrian” economists. Second, Smith did not have a laissez faire approach (words he never used, though he was familiar with them from his meetings with French Physiocrats in Paris in 1765-66). He chose not to use the words laissez faire at all because he did not agree that self-interest always led to benign results, of which the parable of the “Tragedy of the Commons” should surely teach young economists, and caution older ones against such an assumption, and Smith’s many strictures against monopolising and anti-competitive tendencies, should always remind us of his suspicions as to what they got up when relieved of all constraints as implied in a adopting a foolish policy like laissez faire.

Usually, for some strange and unfathomable reason, laissez faire is put into quotation marks and often hyphenated by modern English speaking economists, though not common in the French language as it is written. It is the simple third person tense of a common verb. Is it some kind of quasi-religious symbolising? Also, whatever Keynesian polices were replacing they had nothing to do with Adam Smith’s legacy.

“Whether by intention or by happenstance, many, if not most, governments in recent decades have been relying more and more on the forces of the marketplace and reducing their intervention in market outcomes. We appear to be revisiting Adam Smith's notion that the more flexible an economy, the greater its ability to self-correct after inevitable, often unanticipated disturbances. That greater tendency toward self-correction has made the cyclical stability of the economy less dependent on the actions of macroeconomic policymakers, whose responses often have come too late or have been misguided.”

OK. A fair assessment, sticking to what Smith wrote about. But overall, Smith’s presence in these remarks by Alan Greenspan to attendees at the National Association of Business Economists is somewhat controversial. I do not suppose many of the business economists in the audience recognised the controversy as, no doubt, they were brought up to believe more or less the same caricatures of Smith’s contributions, as reported by Greenspan, whose authority silenced any doubts they may have momentarily entertained if any of them had read “Wealth of Nations” and not just relied on what their professors told them, based on what they had learned, in turn, from their professors.