'Joe Stiglitz Slaps the Invisible Hand'

Tyler Durden quote Joseph Stiglitz in City Index (‘The next way to trade’)
HERE

“Joe Stiglitz Slaps The Invisible Hand”

"The theories that said that markets work perfectly were all based on very simplistic models of perfect competition and perfect information. My own work we show that the reason that when there is asymmetric information, the reason that the invisible hand often seemed invisible, was that it wasn't there. And I don't think today anybody would claim that the pursuit of self-interest by bankers, which is sometimes called greed [don't tell the screenplay writer for Wall Street] has led to the wellbeing of all of society. And yet this was the central notion taught in almost every graduate school in the country."

Comment
At last the myth of the ‘invisible hand’ is under challenge from a much wider range of sources than Lost Legacy, which since 2005 has been ploughing a lonely furrow.

The consequences of the invention of the modern role for the metaphor on ‘an invisible hand’ were not trivial.

As thousands of graduate economists acted on the belief of the
beneficial role of ‘an invisible hand’, no mater what the motives of the individuals – from a false sense of altruism through to pride in their greed – modern economists taught that it was all for the good of the community.

Pollution, protectionism, graft, fraud or exploitation of children are not necessary processes for a commercial society to thrive. It does matter when wrong ideas are invented and falsely justified by linking them to the name of Adam Smith who taught quite the opposite.

Self-Interest and Copyright

William Patry writes the Blog, Moral Panics and Copyright Wars (‘a blog about copyright discourse’) which is about his book of the same name, published by Oxford University Press’ HERE:

“Adam Smith and the invisible hand of copyright” (22 August):

“Adam Smith’s theory was that “individuals were led in the pursuit of their own self-interest by an invisible hand to pursue the nation’s interest, but also that this pursuit of self-interest was a far more reliable way to ensure that the public interest would be served than any alternative,” especially government intervention. Joseph Stiglitz, however, rejoined that “the invisible hand often seemed invisible because it was not there.” (Page 98). John Maynard Keynes also rejected this view:

It is not a correct deduction from the Principles of Economics that
enlightened self-interest always operates in the public interest. Nor is
it true that self-interest generally is enlightened; more often individuals
acting separately to promote their own ends are too ignorant or too
weak to attain even these. (See pages 98-100 of the book).”

Comment
Copyright is the 'price' exacted by authors (and publishers) for potentially acting in the public interest (creating and publishing works which the public purchases from the publishers, a small portion of which goes to the authors).

Whether individual products are really in the public interest are separate issues – the bulk of books do not sell out their first printing; do not make a profit; often do not cover their costs; and sometimes do not cover their author’s advances (though some, such as David Hume’s, 1739-40 Treatise, ‘which dropped from the press stillborn’, but become a major contribution of philosophy and are still in print in the 21st century).

No alternative system of mobilising the efforts of authors, covering the financial risks of the publishers and, in the wider sense, serving the public interest, has been devised so far.

Besides setting the rules of copyright in laws, the state has a minimal role in deciding what may be written and published by laws on defamation, libel, plagiarism, inappropriate language and subject, the administration of which is subject to a legal process, not the executive (in non-totalitarian societies).

Where I may disagree with William is the above repetition of errors about Adam Smith’s views on self-interest, such as the false characterisation that Smith asserted: “individuals were led in the pursuit of their own self-interest by an invisible hand to pursue the nation’s interest”.

This was a specific, not a general, assertion by Adam Smith in a single instance in his 900-page, Wealth Of Nations (Book IV) in the case of some, but not all, merchants investing locally and in aggregate thereby increasing the annual output of “necessaries, conveniences, and amusements of life”.

This was occasioned by some, but not all, merchants being risk-averse about investing in foreign trade, as he states quite clearly in chapter ii, of Book IV. Their ‘risk-aversion’ led them to do so, which Smith capped with a well-know 17th-18th century metaphor of “an invisible hand” to give a more “striking” representation of the link between their risk-aversion and a nation’s interest. (Metaphors are not real!).

It was not a universal rule, though it has been made into one by modern economists, few of whom ever read Wealth Of Nations, and is passed around by repetition since the mid-1940s.

The idea that Smith’s understanding of self-interest led him to assert the easily refutable notion that a mystical entity intervenes in the economy to lead self-interest individuals to benefit the national interest is a insult to his scholarship.

He never said such a thing.

Indeed, in Books I and II of Wealth Of Nations he gives over 60 examples of self-interested actions in which individuals act in a manner contrary to the national (even local) interest.

Consider his suspicious opinions of the behaviours (many of which he documented) throughout Wealth Of Nations, including in Book IV, before and after the single instance of his use of the metaphor of “an invisible hand”, of “merchants and manufacturers”, “legislators” and those who influenced them, and national governments, and then explain these widespread behaviours, based on the self-interests of the individuals concerned, with the alleged statement attributed to Adam Smith that, somehow, individuals end up achieving something manifestly at odds with what they actually achieve.

Smith’s ideas about self-interest were not “nuanced”; they were starkly clear and did not include the attribution modern economists give to him. I concur with Keynes and Stiglitz in their quoted assessments.

Update:

William writes that he was quoting Stiglitz on Adam Smith's reference to the invisible hand.

That is not as clear the way the Blog is written, but I accept that William is innocent and Stiglitz is the guilty party.

Either way, the assertion that Smith wrote the ideas I criticise in my post remains an error of attribution by modern economists.

An Economist Talks Sense

Matthew Benjamin writes at Blomberg.com HERE:

“Stiglitz Enabled Obama With Nobel Ideas to Scorn Them (Update 1)”

“Adam Smith’s invisible hand -- the idea that free markets lead to efficiency as if guided by unseen forces -- is invisible, at least in part, because it is not there,” Stiglitz wrote in a 2002 article in The Guardian newspaper.
The idea implies that there’s an important role for government to play in the economy, he wrote.”

Comment
Well, Stiglitz is on the right track, almost. The invisible hand is not there at all. It’s a mystification of the economic processes of commercial markets in general and state-capitalist markets in particular.

The allocation of resources, production transformations into products and services that are sold in markets, and government expenditures and waste are all explainable without imaginary, invisible body parts, which belong to superstition, mumbo jumbo, and represent the absence of science.

So, good old Stiglitz, I say (for once), and may the readers of Blomberg.com take note.