Wave goodbye to the invisible hand

Why are so few economists real millionaires? (Wave goodbye to the invisible hand, September 17.)

Steve - I have followed a lot of your work over the years and have realised that you are a very smart dude (one PhD to another).
Unfortunately you are probably too intelligent for a lot of your critics and they just can't understand where you are coming from.
Keep up the good fight - it's a joke how much the neo-classical crowd can get in wrong yet their beliefs & policies still govern our economic/political world (Wave goodbye to the invisible hand, September 17).

Hi Steve
Consider shopping centre industry that I have studied for 20 years. Winner takes all vs balanced.
1. Current asset bubble;
2. Signal where floor price (rent) is above equilibrium (S & D curves), more supply gets added to given market;
3. Centres get bigger;
4. Businesses outside centres including “landlord’s business” i.e. smaller property owners close down as asset is duplicated and triplicated;
5. To keep monsters alive, and propping up “valuations”, there is a “leasing machinery” designed to keep jamming newly capitalised businesses into (new business capital, to be depleted of capital through disproportionate rents) centres and keep justifying “business model” on steroids;
6. On top of it, many tricks to keep “dream” alive eg. longer trading hours adds more “supply” on to give market, without physical construction, but the “model” of trading longer hours allows bigger centres to gain market share against smaller centres;
7. By working longer hours to cover rent, operators do not see their families to pay rent (cannot afford penalty wages). Their capital is “entrapped” into bad system;
8. There are onerous fitout and defit works to supposedly comply with leases through related companies i.e. third line forcing; etc.
In end more fossil fuel is used by an aging population to get to fewer bigger centres.
So far it has blown up $65.0 billion in shareholders’ funds, plus resorted to seek more capital from shareholders, plus now issued corporate bonds ranking shareholders second.
The behaviour has not changed; another correction is immanent. Here is an industry trying too hard rather than allowing natural forces of S & D and “demand driven” demand, to drive supply.
That is because the “supply” is justified by related entities who also profit from dumping more “supply” on to the given market. Show me the winner?

Steve, I agree with your conclusions but must add that it is quite unnecessary to use mathematics to debunk the supposed connection between economic self-interest and social benefit (Wave goodbye to the invisible hand, September 17). Rather than the somewhat remote abstraction inherent in mathematics, all you need to understand is the psychology of individuals and the dynamics of groups. A knowledge of history helps a lot too.
As for the so-called free-market rationalists who seem to dominate the profession,these are the same intellectual giants who:
- couldnt forecast the GFC,
- told us that private debt
didn't matter (except that it
was central to the GFC!)
- informed us that the free
market had produced the Great
Moderation (except that it
was soon followed by a gut-
churning plunge off the
economic cliff!)
- reckoned that current account
deficits don't matter (except
that they are a key issue in
many of the Eurozone's problem
countries!)
- tell us that foreign
investment is good for
Australia no matter how many
of our national assets are
foreign-owned (while failing
to observe that three
decades of massive foreign in-
flows have not even looked
like yielding us one current
account surplus!)
Bill Edwards

Hi Steve,
What we have now is crony capitalism and not free market economics (Wave goodbye to the invisible hand, September 17).
Free market is a philosophy and not something one can write well with charts and graphs. The reason is core to the argument of the 'invisible hand', which you seem to have missed consistently for the last few years you have been writing about economics. No one can actually predict how businesses pan out and how forces that shape demand and supply reach an equilibrium. Free market is required to achieve this equilibrium at all times.
The imbalance we see today is due to the regulatory capture by the banking system and political entities which has slowed innovation and led to mal-investments. If the underwriting laws were not relaxed by the above vested interests, we would have seen criminal prosecutions against the wreckers of free market, at a stage where it would not have resulted saving them under the pretence of "too big to fail". Another factor of imbalance is the lack of equity held by financial institutions and executive compensation which is based on the thin sliver of equity deployed and not on the total capital deployed along with debt. After doing that "Mr Keen' see the "invisible hand' becoming 'visible'.

There is no such thing as capitalism/free market/invisible hand any more. Too much of regulation has made capitalism redundant and consequently 17th century Adam Smith's theory is not relevant now (Wave goodbye to the invisible hand, September 17).

As you correctly point out, the invisible hand is a metaphor (Wave goodbye to the invisible hand, September 17). Your debunking of the mathematical assumptions behind the neoclassical definition of "profit maximising" does not affect the relevance or importance of the metaphor.
To truly wave goodbye to the invisible hand you will need to provide a verbal critique that shows how individuals are harmed by other people offering them goods and services that they want enough to exchange for money.

One of the difficulties is that people take economics as a precise science that can be calculated and the components of the visible hand can be defined ( Wave goodbye to the invisible hand, September 17). That is not reality.
Smooth curves (demand or supply, margial cost or marginal revenue) do not or at best rarely exist. All you can ever do is approximate them round the vagaries of running a business, constrained as it is by so many unchallengable monoply cost factors.
The invisble hand was developed to create a shorthand for these vagaries that are often difficult to describe. The positive aspect of the invisible hand is to create a paradigm. It portrays market competition that in turn helps drive costs down, through innovation, use of technology and responding to the market in ways monopolies can never do.
As summer comes along and power shortages occur on hot days, thank the monopoly system in play that have created the environment in which we live.

It is a valid argument to say that social welfare isn't maximised perfectly by people pursuing their own self-interest in market transactions (Wave goodbye to the invisible hand, September 17).
However what is your alternative?
Perfect competition, etc is very, very rare. The principle however applies.
The whole idea of the invisible hand is that in general people must find mutual benefit in order to profit. That's a true principle and that's all it is. Mathematical measurement of utility is a fallacy to begin with.
What we can take away from the "invisible hand" principle is that you'd expect privately owned resources to be used more efficiently that publicly owned resources. We can also say that profit-seeking businesses have an incentive to serve consumers.
We must be watchful of monopolies and duress however a centrally-planned economy has clearly and decisively proved to be worse for social welfare.
Finally, saying that "crazy free market economists" failed to forecast the GFC is factually untrue. If people are forcibly categorised by such labels you could find people of various schools of economic thought who forecast the GFC.
In saying that, virtually all schools of thought have made mistakes and needed refining and debate.

Understanding economics is essential in our market economy, and we can do it usefully with spending little time on econometric models and with spending little time on tax and budget 101 style discussions
(Wave goodbye to the invisible hand, September 17).
Economics is all about resources development, all kinds, HR mining etc.
If you get the most from your resources HR etc... you have more “stucks and stuffs” of all kind available than you need ... and you do not have to worry about budget and taxes, as it all becomes a piece of cake.
Economics is resources development, the rest is academic.

I think a lot of economists these days get hooked on the mathematical solution to what is actually immeasurable subjective behaviour by market players (Wave goodbye to the invisible hand, September 17). These economists love solving abstract puzzles and producing mathematical or econometric models only capable of remotely echoing real events.
In the real world, markets are trial and error situations where sellers copy each other and gradually improve performance (better efficiency, including the adoption of new technology). Innovators set the pace and get the early profits when price can be above costs until the competitors catch up and increase supply. These short term profits are the incentive to innovate and in no way should we discourage this process by claiming there is damage to social welfare, a very vague term which I doubt anyone could mathematically assert is greater under some system without profit incentives.
Ultimately, whatever the measuring frustrations of the mathematical economists, markets do produce the highest prosperity for all because they comprise many decentralised competitive learning locations where the knowledge problem is best solved and where self interest, despite being politically incorrect, drives competition, efficiency and innovation and therefore is best able to serve the most diverse needs for the most individuals.
There are very few true monopolies where there is no possible competition; most cases are those with excessive entry costs but even these must be watchful of overzealous pricing or the pressure of consumers will lead to their elimination through new technologies or alternative goods provided by ever lurking potential competition.
Yes, there are laws of economics but these concern ordinal relationships, not precise or cardinal measurement. It would be preferable, in my opinion, to avoid handicapping markets and students with high-sounding abstract nonsense.

I agree with Alan Bedkober(17 Sep 2012 3:12 PM), the market forces and innovation as he describes it act in synergy with resources development, actions of the government must concentrate on keeping the market loop alive. Derivatives and other punting systems overkill the market, besides the potential fraud problem.
(Wave goodbye to the invisible hand, September 17).

With so many conflicting views amongst economists, I believe the penny is finally dropping that economics is itself more religion than science and is awash with mathematical formulae that can accurately analyze history but trip over themselves in their relevance to the future. Occasionally, when a economist gets a prediction right, there's much cause for back-slapping but, of course, its contribution to mankind is zip (Wave goodbye to the invisible hand, September 17).

Adam Smith's contention that the self-interested drive for profits leads "as if by an invisible hand" to an outcome that is socially beneficial to all is one of the most potent propositions ever uttered.but he did not know that the 'invisible hand' how to move from the market to the terrorism or the human war (Wave goodbye to the invisible hand, September 19).

From a number of comments I would be surprised if you had not heard of the so called Austrian School of economists who accurately predicted the 2008 debacle (Wave goodbye to the invisible hand, September 19).
For a more thorough investigation of economics please see www.mises.org

You start with A Smith's invisible hand which is a product of individuals' self-interest (Wave goodbye to the invisible hand, October 3). Smith's idea is sound in his time when nature has not been threatened by environment degradation which is the result of human over-consumption and over-production coupled with intensive use of natural resource-demanding technologies. It is unfortunate that Smith's idea has led to the now obsolete quantity theory MV=PQ which ignores the role of nature in the determination of Q. In a moneyless economy (for example Cambodia 1975-1979), Q is not zero and PQ however defined should be MV + aG where aG represents the value of utilised natural and human resources. Big economic development projects have to pay increase attention to their impact on nature nowadays and a new definition of GDP is required.
On microeconomic ground, Smith's idea is too brief and has led to many misunderstanding on the connection between self-interest and social benefit, especially the confusion of firm's profit maximisation and optimisation of social welfare. Surely firm's profit is maximised if P=MR=MC, however optimisation of social welfare needs the distributive efficiency where P equals consumers' marginal valuation of the product. Too much focus on individual firms production and their profit maximisation process while overlooking the distributive efficiency leads to over-focusing on the 'ideal' perfect competition among firms; to ignoring the long-run impact on consumers' valuation of a product and its feedback on producers' decision; and to the conclusion that the slope of the demand curve for the individual firm is the same as the slope of the market demand curve which is true only in the short-run.