Using Invisible Hands to Attack Markets

In the Sudbury Star (Ontario), an author warns politicians to:

'Beware promises about gas prices' (HERE):

“Whatever Adam Smith's invisible hand of the marketplace can't fix, federal NDP leader Jack Layton's iron fist of government will give it a shot.

"What's more important -- big oil and gas companies making huge profits or protecting average Canadians who are getting ripped off at the pump?
"Stephen Harper sides with big oil. New Democrats stand up for Canadians."

That's not from Das Kapital, it's just a press release from Nickel Belt NDP candidate Claude Gravelle on his party's promise to regulate gas prices.
And why wouldn't a populist party take such a stand? Gas prices are all the rage so far in an otherwise under-whelming election campaign. Last week, they shot up 13 cents a litre, in part due to speculators and in part due to a shortage of supply caused by a reduction in refining capacity following Hurricane Ike in Texas.
Governments are not going to solve the problems with increasing gas prices. Consumers have more power to affect prices by using vehicles that get better mileage and altering their lifestyles to use less gas.

Given that prices are indeed elastic in an unregulated market, and thus dependent on supply and demand, lower demand means lower prices.
But governments can't do that for us.'

AND:

Tom Sherry writes in Citizen Times, (Asheville, NC) HERE:

‘I used to say, “The free market is a natural system. A strong economy is best served by staying out of its way.” But we no longer live in 1776 when Adam Smith wrote about the “invisible hand” of market economies. Huge financial markets, derivative traders, and massive government spending have changed that.

Letting Fannie Mae and Freddie Mac fail would be like letting a lightning strike burn all of New Mexico in order to hold true to the idealistic notion of preserving “the natural order of things.” Those who hold fast to the idealism of free markets, family values and natural ecosystems will find constant frustration as they long for a world that has passed them by.”

AND:

In Business Report, 17 September, (HERE) we find:

“Profit and social reform are mutually exclusive concepts

“The system has long outgrown the small, village-based enterprises that existed when economist Adam Smith wrote his seminal The Wealth of Nations, where he postulated the existence of an "invisible hand" that moderated supply and demand, prices and profits, to the benefit of all.

Today we live in a world of large, transnational corporations that still function on the principles outlined by Smith. This, simply put, is that businesses compete to supply the demands of the marketplace and they succeed only by providing the right product at the right price.

Bornstein gives examples of "non-profits" changing government policy or mind-sets. But the question remains: has anything changed fundamentally? Have their new ideas merely been assimilated into a system that contradicts the whole idea of non-profits and collectivism?

There is obviously no invisible hand to control the system.

This has resulted in the "absurdity" of overproduction and overcapacity to produce everything from textiles to computer chips. The result is cut-throat and increasingly bitter competition between corporations. Companies are constantly looking for cheaper methods of production.”

FINALLY:

‘bschlog’ writes in Bbbbblllllbbblblodschbg (16 September) HERE:
http://bschlog.wordpress.com/2008/09/16/adam-smith-made-of-fail/
“Adam Smith: made of fail”

“As the subprime mortgage crisis tumbles more and more dominos, it’s becoming clearer that, in fact, corporations need the visible hand of government to keep them from spinning out of control. Free marketeers be damned. The evidence is against them.”

Comment
What do these posts have in common? They have all been sold the myth of the Invisible Hand and labelled Adam Smith.

No doubt replicated all over the place in the midst of the present financial turbulence, ensuring that the chickens are homeward bound to roost.

Correspondents regularly ask me why I bother repudiating the invisible hand as being related to Adam Smith’s authorship, when I am not charged with misunderstanding the metaphor (even by distinguished scholarly colleagues).

Well, modern economists created a stick with which to beat those who doubted the significance of general equilibrium models or who challenged the alleged mystical (even divine) workings of commercial economies that somehow (never explained) ensured it produced the optimum outcome for the public good because, they assert with absolutely no evidence Adam Smith said so.

Now the believers and those who oppose markets on principle (strange, given the universal poor results, both personal and in terms of the public good of these tried and untried alternatives) are using the trumpeted myth of the invisible hand (which had nothing to do with Adam Smith on how markets work) to beat back the defenders of markets as better able to deliver what people want than politicians, single-issue campaigners, and anger-driven reformers.

There are many roles for the state, as Adam Smith acknowledged and which I regularly remind readers of on Lost Legacy. He was not opposed to state intervention in serious emergencies, and example of which you can read in his writings on the free trade in corn and his clear statements in favour of public intervention when corn markets are severely disrupted, often by cack-handed politicaly motivated ‘anti-dearth’ programmes that often initiate the famines they seek to avoid, Book IV, Wealth Of Nations).

In the storm of anti-market hysteria that builds up when events overrun normality we should quietly explain how economies work, how they recover, and what those politicians, who smugly believe that a week is a ‘long time’, are doing to make things worse, unintentionally of course.

All taxpayers’ money that governments mobilise to ‘support’ the economy originate in the commercial sector. If that dies, the economy dies – witness Zimbabwe; witness the release of commercial behaviours in India and China, as the state has pulled back from doing what it is not very good at; and witness how commercial actions of profitable businesses overcome the fall-out from banks in trouble (compare HBOS-Loyds TSB with the dragged-out saga of Northern Rock).

Maybe, economists should concentrate on how markets work and not on mythical nonsense about invisible hands (and that other nonsense of the visible hands of governments).