Saturday, January 31, 2015


Asad Zaman posts on WEA Pedagogy Blog HERE
“Failures of the Invisible Hand”
The introduction of an economics textbook by Manikiw quotes Adam Smith regarding the invisible hand and deduces the following claims:
1. Participants in market economies are motivated by self-interest. (SI)
2. Decentralized market economies work very well, and maximize the welfare of society as a whole. (FM: free markets)
3. The reason for excellent functioning of decentralized market economies is that all participants are motivated by self-interest. This self-interest works better than love and kindness in terms of promoting social welfare. (GG: greed is good)
4. The principles listed above were summarized in the concept of the “Invisible Hand” by Adam Smith. (AS)
Manikiw writes that these ideas remain central to modern economics. Our paper on “Failures of the Invisible Hand” shows that all four of these claims are wrong. Some years ago, I was naive enough to think that a refutation of key claims of a central text would at least arouse debate. But I have long since learned that challenges to the core ideologies are simply not to be discussed. THe paper is rejected by many journals with superficial comments not engaging with or disputing the claims.
Another small sign that the discussion about Adam Smith’s use of the “invisible-hand” metaphor is slowly attracting attention and Lost Legacy is not entirely alone in questioning the current widespread consensus in mainstream economics that it refers to, variously, markets, self-interested “greed” miraculously, or at least mysteriously, co-ordinating the billion/trillions of decisions by producers and consumers which mediates supply and demand to bring about the public good and etceteras.
While I do not agree with everything that the authors, Rafi Amir-ud-Din and Asad Zaman, say in support of their contentions in “Failures of the ‘Invisible Hand’” (15 July, 2013) , I do applaud their efforts and I am pleased they have posted it on the Social Science Research Network, which has a large pool of economists either subscribing their own papers (thus recording and dating their scholarly priorities; sometimes important to faculty recruitment boards) and is useful for reading the papers of others in their broad fields of work.

Hence my congratulations to Rafi Amir-ud-Din and Asad Zaman. I shall possibly comment on their paper later (though I am intensely busy just now).

Friday, January 30, 2015


‘The Offering’ by Grace McCleen in Laura Battle’s review posted in the Financial Times, (23 January) HERE
Every so often the treetops surged as if stroked by some invisible hand, the fields kept on rolling and surging; they jostled and shimmered and gave way to each other, hill after hill, rising and falling like swells in the sea, and in the endlessness of it all — in the grasses, in the dizzy activity of butterflies..”.
Michael Kearney (Dept of Anthropology, University of Calfornia, Riverside) writes in Annual Review of Anthropology Vol. 15, (1986), pp. 331-361
“From the Invisible Hand to Visible Feet: Anthropological Studies of Migration and Development”
“Invisible Hand Anticipates Events – Australian Dollar Slide Has Purpose”
“Aussie Dollar. The Australian dollar’s slide, confirmed by copper, has been discounting not only a rising probability of lower commodity prices but also an unexpected rate cut months in advance. This all means trouble ahead. Let the die hard bulls and bears debate the merits of their static forecasts and follow the message of the market. The trend, leverage, and time/cycle define the message of…
[[ This is a content summary only. Visit my website for full links, other content, and more! ]]”
More nonsense from someone selling something from the 'come on':
Opening with the “invisible-hand” shows its like in a country fair and a three-card trick.
The Next item is proof that only the gullible would be interested:
“Preacher Has Visitation From God! Explains Why Most Christians Will Not Be Saved!”.
The is  like in the old ditty that a “man with money meets a man with experience; the man with experience ends up with the money and the man with the money ends up with exeperience”.  

If the “invisible hand anticipates events” it must be conscious in some sense … please, give us a break!

Thursday, January 29, 2015


Helenic Shipping News (28 Jan) HERE 
“The Best Indicator That Oil Prices Will Rise — Quickly” 
“No matter what the “experts” say, no one really knows whether oil prices are going higher or lower over the next year. But the invisible hand of the market is definitely making a guess that looks very bullish for energy companies and investors.”
This typical commercial bulletin from “expert market watchers”, of which there are many making a living from dressing up their claims to their expensive expertise in modern jargon waffle that baffles their paying subscribers.
First the blindingly obvious: “no one really knows whether oil prices are going higher or lower over the next year.”  True! 
“But the invisible hand of the market is definitely making a guess that looks very bullish for energy companies and investors.” False!
Next the associated Jargon waffle: “contango”, in contrast to “backwardation”, supported by trends in “oil futures”. 
Well you need expertise to help you and, fortunately, you can benefit from  “a brand-new investigative report on this significant investment topic and the company helping fuel its boom”…
But what about “the invisible hand of the market” that supposedly “is definitely making a guess”? Well nothing more is said about it!
Just as well because it doesn’t exist. Markets operate through visible prices, not “invisible hands”. If future contract prices appear to be a rising trend this has nothing to do with anything invisible - the rising prices of futures contracts reports that their rising visible prices are driven by market players apparent belief that prices will continue rise; if visible prices of futures contracts are falling then market players believe oil prices in future will fall. 
Current and would-be players are making guesses as to what will happen in the near and distant future. Their bets reflect their sentiments, not their specialised, insider’s special knowledge.

As we say in Scotland, the future price game is a "bogey", much like horse-racing (the latter of which industry also has its share of people selling their “insider” knowledge…).

Wednesday, January 28, 2015


long-standing Asian correspondent sent to me the details of a new paper published on the Social Science Research Network (SSRN) that builds on recent scholarly criticism (besides my own) of the majority popular interpretation placed on Adam Smith’s use of the “Invisible-Hand” Metaphor”.  
This new paper is by Michael Emmet Brady, of California State University (Jan 24, 2015), aligns neatly with my own efforts since 2005, and takes an aspect of them to a new, higher, level: “Adam Smith, the Wealth of Nations, and the “invisible Hand: a metaphor for Ambiguity-Uncertainty Aversion of Decision Makers”.
The Abstract is reproduced below and the full paper may be found via SSRN below:
Adam Smith, the Wealth of Nations, and the 'Invisible Hand': A Metaphor for Ambiguity-Uncertainty Aversion by Decision Makers
California State University - Department of Operations Management

January 24, 2015
Smith’s use of the “Invisible Hand,” as pointed out by Gavin Kennedy, is a metaphor provided for the great percentage of readers of the Wealth of Nations whom Smith realized would not be able to grasp the nature of his argument, which was about the ambiguity-uncertainty aversion of the majority of 18th century English business men. Gavin Kennedy has pointed out that the term,” Invisible Hand,” had nothing to do with Laissez Faire, free markets, free trade, Natural liberty, etc., for Adam Smith. Smith’s argument is an application of his very advanced decision theory that regarded the standard mathematical laws of the probability calculus as a special case that had only limited applicability in the real world. In general, applications of the mathematical laws of the probability calculus required a complete information set that was rarely satisfied. Smith realized that probability, nevertheless, had to be taken into account. Smith advocated an interval valued approach to the use of probability under conditions of uncertainty/ambiguity. 

Smith made great use of the concept of uncertainty. Uncertainty for Smith dealt with the quality of the information base upon which the probabilities were being calculated. Smith generally defined risk in the Wealth of Nations as an inexact and/or indeterminate estimate not based on the mathematical laws of the probability calculus. Risk could be calculated exactly only in conditions where there was a very high quality of evidence over which there were no conflicts and/or disputes of assessment regarding the relevancy of the data. 

Smith’s major conclusion in Part IV of the Wealth of Nations is that businessmen are ambiguity and/or uncertainty averse. The quality of the information, data, or knowledge upon which the probabilities, which would be interval estimates, is a second factor that is completely independent of the probability estimates themselves. Only in a limiting case, where the evidence is great, stable, and invariant over time, as in the case of deciding to become a shoemaker, would the probability estimates be point estimates. 

Smith completely rejects the ethics and decision theory of Jeremy Bentham, as well as all approaches built on it, such as the Subjectivist ( SEU-Subjective Expected Utility) approaches of Frank Ramsey, Bruno de Finetti, L J Savage , Milton Friedman .and modern Bayesians, such as Patrick Suppes.

Number of Pages in PDF File: 25
Keywords: ambiguity/uncertainty aversion, Ellsberg Paradox, weight of the evidence, J M Keynes, Adam Smith, Invisible hand
JEL Classification: B10, B12, B20, B22
The full paper may be downloaded from SSRN via 
The Social Science Research Network is a wonderful (free) resource which all serious economics students and research practitioners should bookmark and make use of when papers in their areas of interest are posted.  They may also upload their own papers for others to read and to establish a record of their own original work for others to consult.

I shall comment on Michael Emmett Brady’s paper shortly and also publish my comments on SSRN.

Sunday, January 25, 2015


A very welcome post on the "Thought du Jour" Blog (24 Jan), which I have reproduced below because of its importance and significance for Lost Legacy readers. Follow the link below and bookmark (as I have).
Its author, Larry Willmore, does not go so far as I have over the past 5 years (next month) but the issues he raises are well on the way towards my own. I am yet to hear the podcast but I shall later today. 
I know the contributors: Marianne Johnson, who collaborated with the late (and great) Warren Samuels in preparing his massive research project on the use of the "invisible hand" in modern economics: "Erasing the Invisible Hand: essays on an illusive and misused conception economics", 2011, Cambridge UP.  Also Eamonn Butler, Director of the Adam Smith Institute, London (of which I am a Fellow) and Polly Toynbee (Guardian columnist and leftish-of-centre social commentator).
Thought du jour (semi-daily posts, related largely to economics and government policy) HERE
Adam Smith’s ‘invisible hand’
What, exactly, is the “invisible hand”, a phrase attributed to Adam Smith? Is it a sound economic principle or a myth propagated by the misreading of Smith? All this continues to attract controversy. If you are interested, I recommend a lucid, 12-minute podcast on the topic. You can access it without charge, courtesy of  The Guardian newspaper, at the link below.
When we asked you to nominate some intellectual cliches for this series earlier this year, Adam Smith’s “invisible hand” cropped up repeatedly ….
In the third episode of The Big Ideas, Benjamen Walker discusses the meaning and uses of Smith’s concept with philosopher John Gray, academic Marianne Johnson, economist Eamonn Butler and Guardian columnist Polly Toynbee. ….
As we mention in the podcast, Smith himself only used the phrase “invisible hand” sparingly. ….
Benjamin Walker,The Big Ideas podcast: Adam Smith’s ‘invisible hand’“, The Guardian Comment is Free podcast, 6 October 2011.
Smith did use the term ‘invisible hand’ quite sparingly. It appears only once in each of three published works, for a grand total of three times.
In The History of Astronomy (written before 1758, but published in 1811), Smith writes that there is no need to resort to the supernatural, to “the invisible hand of Jupiter”, to explain natural phenomena:
Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters. [Emphasis added.]
The phrase appears a second time in The Theory of Moral Sentiments (1759), in paragraph 10 of the first and only chapter of part IV:
The rich … consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. [Emphasis added.]
His third and last use of the phrase is in book IV, chapter 2, paragraph 9 of The Wealth of Nations (1776):

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. [Emphasis added.]

Saturday, January 24, 2015


Ronnie Elhaj n Perth Now (24 January) HERE 
‘Why Perth property market for units will ‘set its own pace’

“House sales are also experiencing mixed signals and property analysts are being cautious given the “volatility” of the market, with contradictory elements at play.
Nicheliving director of sales, marketing and acquisitions Ronnie Elhaj believes the “invisible
 hand” will direct the market.
“In other words, the market will manage itself and adjust accordingly,” he said.
“I like to listen to what the word on the street is because it provides me a decent insight into current consumer sentiment.”
The above is evidence that the metaphor “invisible-hand” is used as a mere space-filler in modern speech. It means nothing of substance other than to give speakers and listeners the pretence that they are knowledgeable about the mysteries of ecoomics.
The above quoted piece carries two contradictory ideas:
1 “the “invisible hand” will direct the market;
2 “In other words, the market will manage itself”.
Now which is it? Ronnie Elhaj does not elucidate.

Because he can’t.  Neither can any other believer in the mythical invisible hand. 
Market are directed by VISIBLE prices, not INVISIBLE HANDS.

Friday, January 23, 2015


Paul Steger posts on Letters to the editor 23 Jan
“I hope all those who, when gasoline prices were rising to painful levels, blamed it on gouging by the big oil companies, are paying attention. To what do they attribute the steadily falling prices we've seen for months? Is it because the collective charitable actions of those same heartless corporations have combined to give us consumers a generous but temporary reprieve before turning up the screws again?
No, the truth is that neither corporations, nor nations, nor groups of suppliers, such as the increasingly irrelevant OPEC cartel, can prevail against the most important law in economics, that of supply and demand. Watching a free (or nearly free) market apply its "invisible hand" to find the proper price of goods can be an instructive and even fascinating process to watch. How sad that we forget this so quickly.”
Paul Steger, River Falls, Wis.
Given that all prices are VISIBLE what possible role is left for an invisible-hand? 
Is there an entity of some kind in existence that brings supply prices to equal demand prices? If so, how does it work across the billions (trillions?) of price decisions, dispersed across all the potential buy-sell decisions taking place each hour/minute of the day? 
Just who is Paul Steger who knows this but never once in recorded history has anybody showed how such an invisible entity operates, from whence it came from, what exactly it does or what energy sources operate it? Even in theories of general equilibrium there is no mathematical term for an ‘invisible-hand’.

 Paul, it doesn’t exist! Dispersed people observe visible prices and react or don’t react to them. These dispersed people have different views and different personal circumstances and motivations.