The Inimitable Tiff

I urge you to read the entire [context of Adam Smith’s much-abused “Invisible hand” quote in “The Wealth of Nations”]. What you will discover is that Smith was writing about how those who deploy capital in pursuit of profits are constrained in where they deploy it by their aversion to losing said capital. Even if there had been a possibility of higher profits by deploying capital outside of their own country, the higher profits entailed higher risks back then, just as higher returns signal higher risk today. Smith describes how (at the time he was writing) returns within a country might be lower than if the same capital were invested outside the country, but this reflected a risk differential. He also noted that within a country, merchants, manufacturers and investors are likely to have better information about critical aspects of other market players, including that glue of commercial enterprise: trustworthiness.

The key feature here is that risk was more easily evaluated within one’s own country than was risk incurred outside of one’s country. …

Smith’s invisible hand was risk aversion.

Now fast forward to the 20th century and imagine a financial sector that has discovered that it can obscure risk. Not only can it obscure it by slicing and dicing it in ways that even they (apparently) don’t understand, it has discovered ways to obscure risk, package and sell it to their clients, and then bet against those same clients that the inevitable collapse will occur. All that they have done has promoted their own self-interest. It has done little to promote the public interest or even, in some cases, their clients’ interests. And as long as taxpayers and their elected officials remain willing and able to rescue imprudent, intermperate investment bankers or as long as those same bankers believe that taxpayers will do so, there is no brake, no “invisible hand” of risk aversion that will prevent recurrences of the same bad, high-risk behavior.

As Maxine Udall calls out, the book from which we drew the “invisible hand” quote in the volume “The Wealth of Nations” is entitled “Of Restraints upon the Importation from Foreign Countries of such Goods as can be Produced at Home”.

(Oh, and apologies to whomever posted this first between Tumblr or Reader. It’s been an open tab so long I forgot the ‘via’ credit.)