Robert Viennaeu's Thoughts on Economics

I've been a big fan of Robert's since stumbling upon him a couple of years ago.  He has taken up economics as a hobby and with gusto.  He has reached many of the same conclusions about economics as I have, but he still believes in it as a science that has something meaningful to say.

Today's post is a good one, and it has its own link to a piece by Gavin Kennedy, somebody who has studied Adam Smith extensively and reached a very different conclusion about what Smith actually meant by his Invisible Hand.  This quote from a paper by Getty Lustila comes from Kennedy's latest post:

For Smith, all human beings are naturally ‘in-tune’ with one another through the faculty of sympathy; which, acting as a mirror for others, allows us to take part in their suffering and joy. The ability to sympathize with our fellows is not a virtue (in the traditional sense). Instead, the faculty of sympathy is a constitutive part of human agency: devoid of sympathy, we are not human.

And that's neoliberalism's aim: dehumanization.

"Efficiency" Is Tyranny; Scale Is Violence

These are a couple of thoughts that occurred to me as a result of my discussion with an economist friend on Tuesday. 

My friend's premise, with which I disagreed, was that society prefers a small number of producers that make a particular good because that is the most efficient outcome.  I argued that his conclusion assumed a definition of "efficiency" that simply did not have to be.  If we were to define efficiency differently and construct a different set of rules to enforce that new definition (i.e., reconfigure the accounting rules, tax laws, etc. that enforce the current definition of efficiency), then the outcome could be different; i.e., society would prefer several small producers over one or two.

That didn't set well with him.  He insisted that "this was physics," that economies of scale command industry consolidation into one or two firms.

I had to disagree again, and that's when the fun really began.  Having worked at both monopolists (Intel) and startups, I know that most of the vaunted economies of scale arise from the fact that large firms demand-- and get-- much lower prices from their vendors.  They likewise get much more favorable financing terms from banks and other financial institutions.  Because large firms tend to have much lower input costs, they have a better cost structure than their competition, who falls farther and farther behind.

Desparate to make a point that could not be countered, he trotted out the division of labor and Adam Smith's pin factory, arguing that in many industries there is a minimum capital expense required just to get started, and that the widget maker who made a million widgets a year has a cost per widget that is a lot lower than a widget maker who uses the same size factory to make just one widget.  Again, I disagreed, noting that it is accounting rules and tax laws regarding depreciation and amortization that drive his conclusion, not any law of nature. 

So he called me irrational, at which point I took him a bit deeper into Adam Smith's body of work to identify a major weakness of modern economics, which is that it assumes that humans make economic decisions purely in monetary terms.  Even Adam Smith recognized that was not the case, as his Invisible Hand was the manifestation of society's "moral sentiments," the set of rules that makes every citizen consider how his actions will be perceived by the rest of society.  And behavioral economists, leveraging off of recent advances in cognitive science, have confirmed Smith's fundamental insights.    As a result, I argued that modern economics is complete hogwash.  The saying in corporate America is "if it can't be measured, it doesn't exist." and economists refuse to measure anything other than money.

I then turned his economies of scale argument on its head, noting that the returns to scale a large firm receives can be viewed as a tax on the rest of the industry.  The vendor has its own success metrics, including profit margins that it will have to support by charging the large firm's competitors substantially more.

We quickly agreed to disagree and moved onto friendlier topics, but I have not been able to stop thinking about our conversation. 

One thought is that efficiency, as currently understood, is tyranny.  Economic efficiency is a prerequisite to maintaining the illusion of perpetual exponential growth.  It is always and everywhere the enemy of competition and self-determination.

Another thought is that scale is violence, at least in economic terms.  Too Big To Fail is a clear manifestation of this violence.

Neoliberalism's Maiming of Smith's "Invisible Hand"

Charles Hugh Smith has become one of my favorite bloggers because his essays (it seems wrong to call them simply "posts") are very thoughtful and distinctly human.  Today, I ran across this essay from a few days ago, in which he states Adam Smith's Invisible Hand aphorism, thusly:

The key mechanism of Adam Smith's capitalism is a self-interest which manifests itself systemically as The Invisible Hand. It's a concept that offers a wealth of self-satisfaction: by pursuing our most selfish interests, the whole of society benefits.

While this is certainly the dominant narrative of what the Invisible Hand aphorism means, it bears little resemblance to what Adam Smith actually said in the full context of when he said it.

By the twentieth century Adam Smith was largely forgotten and rarely discussed.  He and his legacy had been eclipsed by economists like Ricardo and Pigou.

In their pursuit of a new, revitalized form of classical liberalism, the founders of neoliberalism resurrected Adam Smith and claimed his legacy as one of their guiding lights.  Walter Lippmann was first to do this in 1937 in The Good Society.  Henry Simons followed suit in the 1940s with a series of essays that were collected and published in 1947 as his Economic Policy for a Free Society.  Simons appears to have been the first to directly invoke Smith's Invisible Hand aphorism, but he did so very loosely and, arguably, faithfully.

While it is not clear when the current narrative of the Invisible Hand was created, its greatest and most ardent peddler was Milton Friedman.   Friedman was much more than an academic, he was a very public and articulate personality that once had his own television show and wrote several books.

Margaret Thatcher bought what Friedman was selling, and proudly proclaimed "there is no society."

Adam Smith would have been shocked and appalled by Thatcher's statement.  After all, before The Wealth of Nations, he had written his Theory of Moral Sentiments, which was all about the ethical standards and codes of conduct that bound a society together, and it was in the Theory of Moral Sentiments that he first made reference to the Invisible Hand. 

Indeed, Smith's Invisible Hand was the social code that bound individuals together into something greater than the sum of its parts-- society-- and guided their conduct towards the common good.  In Smith's time, the individual truly was the engine that fueled the economy.  While there were limited liability corporations at the time, they were creatures of the sovereign that lived and died at its whim.  The vast majority of business was conducted by human beings who were fully liable under the law and personally accountable under the social code for everything they did in business as well as in their personal lives.  Given the fact that businesses run by individuals were already fully accountable to and guided by their position as a member of society, there was no need to impose further restraints on trade.

In his 1930 The Political Element in the Development of Economic Theory, Gunnar Myrdal referred to Smith's notion of a society unified and guided by a harmony of interests as a "communistic fiction," noting that it was "implicit in most writings on economics" and a staple of economic liberalism.   In this sense, as noted by Hannah Arendt in The Human Condition, classical liberals like Smith, Ricardo and J.S. Mill created communism by essentially asserting that promoting the common good was the goal of laissez-faire.  

When it proved that laissez-faire did not, in many cases, promote the common good, it was natural for somebody like Karl Marx to reject the individualism of laissez-faire as the fiction and embrace the communistic fiction as reality.

Where Marx excised the "individualistic fiction" of classical liberalism, the founders of neoliberalism excised the communistic fiction.  To their minds, the true failure of classical liberalism was including the communistic fiction in their economics and then mistaking that fiction as the goal of economic policy.  To the founders of neoliberalism, laissez-faire was the goal, whatever its consequences to society.

Smith's Invisible Hand aphorism proved very malleable because it is stated as an identity: individuals pursuing their own selfish interests automatically promote the common good.  It was a simle step for somebody like Milton Friedman, whose economic "theory" is itself merely an identity (the quantity theory of money), to provide the addendum "so don't worry about the common good because it happens automatically."

The fact remains, though, that Adam Smith believed that the common good of society, not self-interest, was the goal, and that the Invisible Hand exercised by common "moral sentiments" of individuals within the society would guide them toward that goal.  In Adam Smith's Invisible Hand, as in nature, the individual and society are inseparable.