Matthew Hennessey’s Very Enjoyable “Visible Hand”

In his endlessly excellent 1981 book The Economy In Mind, the late, great Warren Brookes told the story of an economist clearing customs at JFK Airport in the malaise-ridden, late 1970s. The official who took the economist’s passport asked him his profession, and upon receiving a reply questioned allowing him back into the country given the immense damage economists had done over the decades in the U.S., and around the world.

Brookes’s book, one of the all-time greats on economic policy, came to mind while reading Matthew Hennessey’s very enjoyable and very real (in so many way’s he’s telling his own story) new addition to the economics discussion: Visible Hand: A Wealth of Notions on the Miracle of the Market. While the Wall Street Journal’s deputy op-ed editor has written a book about economics, he’s clear in the opening sentence that “I’m not an economist.” Amen to that! If there’s a critique of Hennessey’s opener it would be that it was perhaps too sheepish. The view here is that he mistakenly left out “proudly” after word one of his book. 

Really, who would brag about having spent years and enormous sums of money in pursuit of a doctoral understanding of human action, and more realistically, common sense? Hennessey seemingly acknowledges his lack of an economics credential as a way of placating the self-serious “gatekeepers of the vast edifice of economic knowledge” who “tend not to look kindly on the opinions of the uncredentialed,” but the joke’s on the credentialed who laughably claim an ability to “model” human action with charts, graphs, and equations. The view here is that in time, the obnoxious and unreliable conceit that is GDP will be a laugh line.

After which, let’s please keep in mind just a few of the near-monolithic beliefs of those with PhDs next to their names. Economists almost unanimously think economic growth causes inflation, even though growth is always and everywhere a consequence of investment that by its very name pushes prices down. Economists believe reductions in government spending (whereby Nancy Pelosi and Mitch McConnell have reduced spending power) actually shrink growth. On the matter of the 1930s when the only closed economy was the world economy (much like today, and always) such that money and credit flowed with relentless force to wherever in the world they were treated best, economists literally believe that a “tight” Federal Reserve was the cause of the ‘30s contraction. And then as economists had to have a story for why the U.S. economy eventually rebounded from relative weakness (by global standards, our 1930s were boom times), a profession that makes astrology serious by comparison happened on the horrifyingly obtuse consensus that the maiming, killing, and wealth destruction that was World War II had an upside: it lifted the U.S. out of the Depression.

For all of the reasons mentioned above, and thousands more, your reviewer (a writer of economics opinion pieces and books on the subject) is thoroughly insulted when referred to as an “economist.” Those who say it are quickly corrected.

The simple truth is that Brookes wasn’t an economist. Neither was Henry Hazlitt, even though readers would understand economics much better (Hennessey adds that Hazlitt didn’t even finish college) than most fallacy-stalked PhDs after a read of Hazlitt’s Economics In One Lesson. The late Robert Bartley, the Journal’s longtime editorial page editor page editor, wrote another of the all-time great economics books (The Seven Fat Years, my review here) despite lacking a credential, not to mention the excellent books on the subject by one of Hennessey’s legendary deputy editorial page editor predecessors at the Journal, the wonderful and sadly recently departed George Melloan. Melloan too wasn’t an economist. My reviews of his last three books are here, here, and here.

Which is a long-winded way of saying that Hennessey needn’t apologize. Or preface anything. The best understanding of economics has historically come care of those who weren’t or aren’t economists, and if they are economists, their ability to convey understanding arguably has everything to do with their possessing common sense, and none to do with what they learned on campus. Hennessey will be the latest to infuse with common sense a subject polluted by those who lack it, but who possess education in abundance.

Hennessey is no doubt correct in his expressed suspicion that “people are afraid of economics, or confused or intimidated by it,” just as he acknowledges he once was. Which leads to an obvious question: what opened Hennessey’s mind to a subject that had long intimidated him? The answer is human action, and it was his own. As he puts it, “I woke up one day and realized that all I’d been doing my whole life was acting like an economist; responding to incentives, weighing trade-offs, making decisions at the margin, and calculating the utility of everything from investing in my education to helping myself to a second scoop of strawberry ice cream.” Hennessey’s book explains economics through the rational (or irrational) individual in us all, and does so happily and properly free of charts, graphs, and any “whiff of math”; the latter another factor in the author’s own avoidance of a science that is anything but dismal for those who understand it. Hennessey obviously does.

And it begins with the first chapter. Hennessey is so very correct in beginning a discussion of economics with substantial time spent on another non-economist: Adam Smith. Some reading this will say such a view is a statement of the obvious, but it’s really not. To this day even those with a free-market bent will make silly assertions about how capitalism and other undeniably good things began with Smith’s The Wealth of Nations. In saying this, they unwittingly advertise how they did not read this most brilliant of books. That is so because to read The Wealth of Nations is to see that Smith was writing about the capitalist economy, not proposing the adoption of one.

As Hennessey puts it, “Adam Smith didn’t invent free market any more than Thomas Jefferson invented representative democracy.” In truth, Smith “illuminated the darkness.” Smith “took the world as it was,” and it was increasingly capitalist, only for the Scotsman to reflect “it back to himself.” He “wrote the plain truth about how humans live, work, play, and interact with each other.” This is so important. Again, capitalism didn’t emerge from Smith’s book essentially going “viral” at a time when books were prohibitively expensive; rather The Wealth of Nations was “closer to journalism.” Yes! Production and exchange were already happening, including an ever-widening division of labor that enabled huge leaps in individual specialization, and by extension, productivity. Smith understood what was taking place, and wrote about it in a way that reads today like it was written yesterday. In short, whatever economic subject you’re debating or concerned about today was almost certainly addressed by Smith in the 18^th century. Hennessey has clearly read The Wealth of Nations, and he’s thankfully clarifying the order of things. Capitalism first, then the brilliant Adam Smith.

Hennessey also points out in a book with a title derived from Smith’s title and the “invisible hand” within, how little the latter plays into the book. He writes that Smith mentions the “invisible hand” once, but only once. This is notable to the author simply because “the invisible hand has evolved into a shorthand for free market economics.” The bet here for why one line has come to define this most important of books has once again to do with the basic truth that most who reference The Wealth of Nations have never made the proper choice to fully read the greatest book on economics ever written.

Choice looms large in Hennessey’s explanation of economics. He cites his junior high coach and science teacher “Mr. Seaver” as the person who stamped this truth in his head early on. Mr. Seaver stenciled on the wall between the ceiling and the lockers that “Life is not determined by what you want. Life is determined by the choices you make.” Amen. We all make constant choices all day and every day, and because we do, we’re all micro-economists.

Thinking about all this in terms of Adam Smith once again, there’s another crucial line in The Wealth of Nations that gets much less attention than the “invisible hand,” but that your reviewer would argue is much more important. What’s fascinating about the line is that it’s quietly inserted at the end of a paragraph in a very thick book. On page 370 of my copy Smith writes that “the sole use of money is to circulate consumable goods.”

The wager here is that Smith didn’t spend too much time expanding on the crucial sentence simply because it wasn’t crucial in the 18^th century. Money was so obviously a measure back then. And nothing else. Really, what else could it be, or was it? Hennessey shines on this subject. He writes that a “hard-to-arrange ‘double coincidence’ makes barter an inefficient basis for an economy.” So very true. Producers wanted to exchange their surplus, but in simple terms the butcher didn’t always desire the baker’s bread. No problem. Currency, which Hennessey describes as a “stable and recognized medium of exchange,” and most importantly “a form of money that everyone agrees on,” logically entered the picture. That’s it. That’s all money is. An agreement about value among producers that facilitates exchange among producers.

It’s a further reminder of why money is abundant where production is abundant, and also why it’s scarce where production is scarce. Smith knew this intuitively, and Hennessey seems to share the intuition. The measure that is money lacks any purpose absent production. That it does is yet another indictment of the credentialed class who for too long have associated money creation, an increase in so-called “money supply,” or the “gunning of money supply” with economic growth; that, or the staving off of contraction. What a laugh. By that measure, the Fed merely needs to open up a branch in East St. Louis to turn the eternally wrecked symbol of economic decline into a gleaming metropolis. To be clear, money is always, always, always a consequence of production as opposed to an instigator. Which brings up some questions of Hennessey, disagreements with him, or both? It’s hard to say.

He writes halfway through Visible Hand that “Messing with the price mechanism is always a bad idea.” No objections there on what is settled science as it were. Prices are the way that a market economy organizes itself, and Hennessey surely wouldn’t disagree with that either. But it’s hard to separate all this from the Wall Street Journal editorial page’s stance at the end of 2018 that the Fed had gone too far with its latest quarter-point increase in the Fed funds rate. A subsequent reversal of the hike similarly cheered the editorialists, of which Hennessey is one. About all this, the deeply held view of your reviewer (this opinion is routinely covered in op-eds, along with a book that the aforementioned Melloan reviewed for the Journal here) is that the Fed’s influence over the economy is vastly overstated. It’s just not that important. But that’s not the view at the Journal’s editorial page, and since it isn’t, why does it cheer or criticize explicit attempts by the Fed to mess with the price mechanism? Why, when lockdowns in March of 2020 had rendered the price of increasingly unavailable credit abnormally high, did the same editorial page call for massive federal loan programs that were yet another explicit rejection of the “price mechanism,” and that arguably subsidized the errant lockdowns that brought about tight credit to begin with? To be clear, the markets were exposing the lockdowns as thoroughly mindless, yet even conservatives were calling for the federal government to set up lending programs to essentially step on the market’s message.

From there, and as he moved on to monetary policy, Hennessey’s common-sense description of the why behind stable money led to some odd conclusions in his discussion of inflation. The conclusions were odd because the logical corollary to currency being “a form of money that everyone agrees on” is that all money flows signal the movement of goods and services. Again, all trade at its core is barter; money the “stable and recognized medium of exchange” that ensures production for production. Nothing out-of-bounds there. If producers weren’t desirous of getting equal production for their own, they wouldn’t have happened on stable measures of value as the most circulated money forms. Investors are no different. They desire returns in credible, stable money simply because they don’t want their capital commitments eviscerated by inflation. Inflation is a policy choice, and it’s an obvious tax. One senses Hennessey would likely nod along to that’s been written in this paragraph.

Which was why some of Hennessey’s later assertions were puzzling. He lightly contends that inflation “rewards borrowers” for it stiffing lenders, but the threat of inflation by its very name is a tax on lending and borrowing, and for obvious reasons. Why loan “dollars” that might exchange for much fewer goods and services in the future? The question explains why there’s no reward for borrowers when governments devalue. Inflation quite simply rewards no one. It can only harm simply because money flows yet again signal goods and services flows.

It raises the question why Hennessey would assert two pages later that “During wartime, borrowing and money printing can be a matter of national survival.” The bet here is that the author didn’t mean what he wrote. Economic growth is most essential during wartime so that troops can be paid, and armaments can be paid for. Investment is what powers economic growth, but if the warring government is devaluing the currency, that same government is by its very name deterring the investment necessary for growth. And then there are those offering up their services or their armaments for war efforts. Why would they provide tangible work and war materials for money exchangeable for less and less than they’re providing? It’s a long or short way of saying that the horrors of devaluation would be most apparent during war. If “national survival” is the goal, don’t devalue.

One page later, Hennessey writes that “Most economists would agree, however, that a little inflation is necessary to ‘grease the wheels’ of an economy, to keep the whole unwieldy train moving forward.” No. If we ignore that devaluation is a tax on the investment that moves an economy forward as is, we can’t ignore that people are the economy. Broken down to the individual, no individual’s economic outlook is improved by the devaluation of the money earned for work, which means no economy is improved. The wager here is that while Hennessey is thankfully not an economist, he’s part of a world where economists are everywhere. And consumption-focused economists believe a little inflation is necessary to keep people buying. They’re incorrect. Completely. Consumption is the easy part. None of us need to be encouraged to do what feels good. Hennessey is clear about this truth throughout Visible Hand. He rightly repeats with great regularity that life is defined by trade-offs and choices that frequently involve whether to consume or not to consume. Assuming we choose to save, we can hardly harm the economy, and we can’t for the same reasons that devaluations don’t help the economy. Individuals are logically harmed by devaluation, and they’re logically elevated by the choice to save. Inflation is a savings deterrent, which means economists (including the world’s biggest employer of economists: the Fed) are wholly incorrect in their belief that “a little inflation is necessary.”

It should be added here that Hennessey knows well the economy-boosting genius of savings; savings that are discouraged by inflation, given his parents’ courageous decision in their fifties to buy a bar in Morristown, NJ. They financed the purchase of and operation of what eventually became a great success with bank loans, but much more notably through passing around the hat as it were among friends and relatives. Without access to the savings of others, Hennessey’s parents couldn’t have made the money necessary to put three kids through Notre Dame (we won’t hold that against the author and his family….!), nor the money necessary for Hennessey to first pursue his passion for acting.

About the idea that “a little inflation is necessary,” it speaks to the book’s sheepish quality. At review’s beginning it’s noted how Hennessey begins the book. It’s worth restating that “proudly” would have been the proper word after the book’s first, but it’s probably useful to add that the Hennessey’s admission perhaps altered how ideas were presented. Put another way, Visible Hand reads at times like Hennessey doesn’t want to offend the credentialed. That’s too bad simply because Hennessey’s math, chart and equation-free explanations of choice well exceed how the credentialed explain economics. Hennessey’s presumed deference to snooty economists caused him to write things that at times didn’t sound like him.

Indeed, while he’s clear that borrowers and savers are in a sense two sides of the same coin, he writes early on of “debt-fueled consumption.” Sure, but no one lends with an eye on getting stiffed despite the droolings of economists and pundits about “predatory lenders.” Which means that “debt-fueled consumption” is by its very name mirrored by loan-attracting production. It’s not mentioned in the book, but economists are also prone to say that China has prospered through “export-led growth,” which is another one of those mindless fallacies that fills the minds of PhDs. More realistically, all export is an expression of a desire to import. Anyone who doubts this need only visit China, only to see with their own eyes the torrid love affair the Chinese people are having with all things American. Their production has mirrored massive demand for goods and services. As for Chinese saving, even the latter is an expression of a desire to consume whereby by near-term consumptive ability is shifted to others with an eye on greater consumption in the future.

On the subject of labor, Hennessey writes that its price is “determined by supply and demand.” No economist and no pundit would disagree with what Hennessey contends, but it obscures more than it reveals. When you think about it, supply and demand really don’t matter much on the subject of wages. Figure that labor is scarce in Flint, but abundant in Palo Alto. Why is the pay so high where labor is most abundant? Investment. It’s copious in Palo Alto but near non-existent in Flint. Investment is the true determinant of the price of labor.

What about education? This rates discussion because Hennessey talks about his Aunt Sally’s disdain for a capitalist society that rewards professional baseball players exponentially more than teachers. Sally’s view is that teachers do much more important work than individuals who merely entertain. Hennessey doesn’t agree, only to speculate that teacher pay may be different because “A teacher creates economic value” that “materializes only in the long term,” not to mention that the value “is almost impossible to trace back to its source.” My take is one that people are reluctant to acknowledge: teachers are properly paid. Hennessey’s life and the lives of his parents support this truth. There’s no evidence that his parents took business courses in college, but they ultimately built a very successful small business. In Hennessey’s case, while he took Economics 101 as a 28-year old freshman (he jettisoned his acting dream on September 12, 2001), one guesses that he learned more from Adam Smith and other non-economists than he did from credentialed professors. As for America’s billionaires who largely got that way by (in the words of Hennessey) satisfying “a market need so urgent or so consequential that society basically started throwing money at them in gratitude,” their billions are a testament to how overrated education is. By Hennessey’s own description, billionaires discover needs and a future that couldn’t be taught simply because of it could, there would be nothing to discover.

Back to the many areas of agreement, Hennessey writes that “you can’t have both your allowance and a comic book.” This read as one of my favorite lines in the book. Some will ask why a statement of the obvious read so well. It did because within the Austrian School, there’s a growing consensus that banks, in lending out the money on deposit, oversee a “money multiplier” effect. In other words, $100 deposited at bank A is loaned out to the tune of $90, the $90 is then deposited at Bank B and loaned out to the tune of $79, and on and on and on. It’s staggering that such a ludicrous belief system could pollute such a generally wise school of thought, but neo-Austrians deeply believe money deposited in banks is multiplied on the way to losing seemingly all value. Back to reality, “you can’t have both your allowance and a comic book.” Get it? Applied to lending, if you hand your unconsumed funds over to a bank, you forfeit use of them; as in you can’t have your interest rate on cash saved plus spending money, nor can your banked $100 multiply into hundreds of dollars overnight. Money saved is a choice that transfers the savings to another set of hands. For readers who doubt this, please get five friends together only for friend #1 to lend the $100 to friend #2, who then lends to #3, and on and on. There’s still only $100 at the table. Banks aren’t magical. The money multiplier is a myth that vandalizes reason, and embarrasses the Austrian School.

On the matter of small businesses, Hennessey thankfully doesn’t beat readers on the head over the alleged nobility of small. The latter increasingly captivates members of the Right, including the “common good” conservatives whom Hennessey also rightly dismisses. In Hennessey’s words, “don’t fall into the trap of thinking that small businesses are good and decent while big businesses are bad and mean.” If we’re honest, big businesses enable the rise of small businesses as any shopping mall or strip mall location reveals with ease. The big, widely known “anchor tenants” are the lure for shoppers who are then exposed to all manner of smaller businesses that logically cluster around the big. Translated more clearly, it doesn’t hurt sales for a small, very local business to be located near an Apple Store.

My favorite passage of all was from Chapter Three on “Motivations.” In writing about restaurants, it’s plain from his parents’ bar/restaurant that Hennessey knows well of what he speaks on the matter. He writes that, “A restaurant that buys too much fresh produce and hamburger meat runs the risk of getting stuck with a bunch of spoiled food in its refrigerators if for some reason nobody shows up on Saturday night.” He goes on to write that restaurants “live on a knife-edge much of the time” given the uncertainty of too much or too little inventory. It’s obviously crucial to not overstock given the perishable nature of food, but “what if instead of an empty restaurant, a bus pulls up Saturday night filled with four hungry softball teams who just finished a daylong tournament.” Readers get where this is going. Hennessey’s discussion meant a great deal to me simply because it spoke loudly to the tragedy of the lockdowns, and a government with no skin in the game making pronouncements about a virus that made carrying inventory in restaurants (and businesses more broadly) very much of a risk factor.

About inventory, let’s take this further given the popular view among “economists” that inflation is a problem right now. The view here is that the neo-inflationists on the Right (they’re “neo” simply because they were largely silent when the dollar fell substantially more against foreign currencies and oil under George W. Bush than it has under Joe Biden) are mistaking high prices for inflation. There’s a difference. Consider restaurants yet again. Every time governments panic about the coronavirus and its variants, the risk of holding inventory soars. Based on that, is it any wonder that prices are higher right now? Inventory costs in restaurants and businesses are logically much greater given major uncertainty about what local, state and national politicians will do on any given day.

Looked at globally, “supply chains” aren’t some tangible object as much as they’re billions of workers and businesses engaged in trillions of interlocking business arrangements around the world. Hennessey alludes to the immensely complicated (and miraculous) nature of global trade in his very excellent passages about Leonard Reed’s “I, Pencil.” Ok, but in the spring of 2020 nailbiting politicians around the world locked down a great deal of economic activity overnight; thus eviscerating economic arrangements arrived at over many decades. Yet economists think we’re experiencing “inflation” right now? More realistically, the low prices that prevailed pre-lockdown were born of remarkable global symmetry among producers, not to mention much greater confidence among businesses as to proper inventory levels; inventory levels that can be rendered wildly incorrect overnight by politicians who think it’s their job to protect us from a virus.

What’s important here is that as mentioned previously, there’s a big difference between rising prices and inflation. The latter is a consequence of currency devaluation. The former can emerge from changing consumer tastes, a shortage, wrecked global commercial cooperation, and yes, soaring inventory costs to reflect the risk of taking on inventory given a growing role for politicians in how businesses are operated. About these drivers of higher prices, it cannot be stressed enough that a rising price for hamburger meat plainly signals a falling price for other market goods. Why is the previous statement true? The answer lies in Hennessey’s quip that “you can’t have both your allowance and a comic book.” You see, if you’re spending more on scarce comic books, you logically have fewer dollars for other pursuits. In short, the Right’s odd inflation obsession speaks to a misunderstanding of what inflation is, an inability to distinguish between rising prices and inflation, and a spoiled child’s inability to see how challenging it’s been and will be for producers in the real-world to revive the trillions of commercial arrangements that existed before politicians panicked.

Inflation is a brutal thing. Of that there’s no doubt. How disappointing then to see the Right misunderstand it in pursuit of cheap political points. All of which speaks to why Hennessey’s book is so useful. While he reads at times as too deferential to economists, ultimately his common-sense descriptions of how things work discredit the musings of credentialed individuals long on IQ, but pathetically short in terms of common sense. Matthew Hennessey thinks about economics the right way, which is why readers will enjoy Visible Hand.