Saturday, October 9, 2010

The "Invisible Hand" is Risk Aversion

The myth of the Invisible Hand as a part or justification of market theory has become pervasive.  It is used incorrectly to justify self serving conduct as productive of social good and to paint all governmental regulation, without respect to the need to protect rights and maintain a level competitive playing field, as antithetical to a free competitive market.  In fact as Gavin Kennedy, who is a contemporary expert on Adam Smith, has succinctly said, "Smith never wrote anything about ‘how the invisible or hidden hand of the market operated in a competitive market through the pursuit of self-interest to allocate resources in society's best interest’."  His blog, Adam Smith's Lost Legacy, is well worth reading and this is a list of his blog posts on the Invisible Hand.

The economist, Maxine Udall, ended her recent post, "The (Crippled) Invisible Hand", on the Invisible Hand myth with the above link to Gavin Kennedy.  She very compactly lays out how the myth of the Invisible hand over the last 30 to 40 years has actually crippled the Invisible Hand.  The "Invisible Hand" is mentioned only once in Adam Smith's "The Wealth of Nations".  Gavin Kennedy has written on how the "Invisible Hand" is a metaphor.  Maxine Udall correctly identifies the metaphor as risk aversion. 

Just as I have written on the use of proper risk management by banks and the regulatory process in Canada and the failure and refusal of banks and the regulatory process in the United States to use proper risk management, Maxine Udall has identified the lack of risk aversion promulgated by a mythical competitive market driven by unfettered self-interest a prime mover in the current widening of income inequality and abuse of the public interest by a privileged few who are allowed to engage in risky behavior and keep the profits when they succeed and dump the losses on the public when they go to far:  "A crippled risk-averse invisible hand is not the only reason for the concentration of wealth and power in the financial sector, but it is one of the reasons and an important one. That's why a no-strings, no-pain bailout of the same wonderful guys who gave us the most recent crisis was such a mistake. It amputates the invisible hand of risk aversion. With no down side, they're pretty much free to deliver more of the same. The only solution to this particular aspect of finance is wiser, more risk averse investors; wiser, more risk averse shareholders; and wiser, more risk averse management."

 The unknowing perpetuation of myth is too easily harnessed by those who would purposefully promote illusion of freedom in the fancy dressing of "politically correct" and, consequently, demanded interpretations of historical texts and concepts long debated in a truly free society.  Add over 80% of the money controlled by 1% of the people and you can easily understand why some political candidates and public media mouth pieces are so richly underwritten and lobbyists abound wherever the people's representatives might speak out and take action.

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