The £20 note, Invisible Hands and Universal Affluence

Dr Peter Heslam, Director of Transforming Business, University of Cambridge, contributes a guest editorial to The Adam Smith Institute’s Blog, Europe’s most popular economics Blog. It is a cut above some of the other comments on the £20 note and Adam Smith.

I have reproduced it in its entirety because of its unique quality (acknowledgements to my friends over the ASI for their hoped for indulgence on this occasion for any copyright violations, whom I also hope will take this as my plea for forgiveness in place of my asking for prior permission!).

“Universal Affluence by Dr Peter Heslam

Before long, many of us will be sitting on the face of Adam Smith.

Mervyn King, the Governor of the Bank of England, recently announced that the new £20 note, to be released next spring, will carry an image of the Scottish philosopher and inventor of economics.

It is not clear whether Chancellor Gordon Brown, a Smith enthusiast who is proud to share with him the same birthplace (Kirkcaldy), had anything to do with the decision.

None the less, it is a remarkable move, given the way Smith’s ideas are often associated with precisely what is wrong with the global economy – its relentless and unethical pursuit of the free market, to the detriment of humanity.

But perhaps if the truth were known, we need not be so surprised. Smith argued that the economy could only function in the interests of all if it was held in check both by the state and by morality. He insisted, in fact, that the economy cannot thrive apart from a culture infused with virtue.

Smith was also the first serious thinker to suggest that global poverty could be solved. The solution was not charity, philanthropy, state power or any other top-down or paternalist strategy. Instead it was the freedom of the individual to pursue their own economic self interest. Only this was capable, led as it was by the ‘invisible hand’ of providence, to unleash the human creativity that was necessary for economic prosperity.

Smith went further – the very aim of human society should be ‘universal affluence’ through the creation of wealth. This would put the economy at the service of human beings, rather than visa versa, liberating them from the prison of poverty and scarcity that inevitably accompanied the subsistence model that had dominated human history.

It was not, therefore, the Make Poverty History campaign of 2005 that first gripped the public’s imagination that something could be done about global poverty. It was Smith’s book The Wealth of Nations of 1776, and this at a time when most people, even in the West, were poor.

Smith’s hand may now be invisible, but in order to address contemporary global poverty, the ideas it expressed are worth revisiting. The new £20 note in our back pockets will be a reminder to do so. It will thereby act in more ways for the good of humanity than in its spending power alone.

Dr Peter Heslam is Director of Transforming Business, University of Cambridge

Now read the original at: http://www.adamsmith.org/blog/ Better still, bookmark ASI for a daily dose of good sense in economics, globalisation and (often) on practical politics.

Comment
While I accept that literary expositions of complex ideas read better if ‘poetic license’ is permitted and done well, as it is by Dr Peter Heslam, I feel obliged to make cautionary comments on misleading aspects of his presentation, which in many other contexts lead to incorrect, in the sense of non-Smithian, notions.

‘Smith argued that the economy could only function in the interests of all if it was held in check both by the state and by morality.’

The policy implications of an economy ‘held in check both by the state and by morality’ concede too much to ideas that embrace an anti-market ethos. Markets are well understood (since Cantillon, Smith and Turgot) and do not have an intent that requires ‘to be held in check’.

People in markets – an inescapable necessity, because no market operates without people on both sides of its transactions – may require to be ‘held in check’ because self-interests are not always, nor predominantly, benign if allowed unlimited free reign (laiisez-faire, a notion that Smith did not endorse), and the main instruments for being ‘held in check’ are ‘regulations’, which a moment’s thought convince us they are sometimes beneficial and as often detrimental to society’s best interests. State regulations can be an obstacle to the beneficial working of markets, and so can the people in markets exerting their private interests in monopolies, protectionism and cartels, including cartels of labour, and through their fraudulent actions, including breaches of contracted promises.

The main beneficial instrument of the State, thereby, is a system of independent justice, about which Smith laid great emphasis in The Theory of Moral Sentiments. He also followed Montesquieu (1748) on the benefits of the separation of powers between the Executive, the Legislature and Judiciary. For justice to operate beneficially it, and its judges and court officials, must be independent of the State, and all the people within the State, including all of its officials bar none, must be, in matters of justice, subordinate to the judiciary and the law.

That an economy cannot ‘thrive apart from a culture infused with virtue’ is absolutely correct. In fact, the ‘culture of virtue’ is more important than a necessity for partners in market transactions to enjoy ‘any mutual love or affection’, or even to be ‘bound in gratitude’ to each other.

Societies may remain cohesive when they are bound ‘by a mercenary exchange of good offices according to an agreed valuation’ (TMS II.ii.3.2.: p 86) and when they are founded on the virtues, of which justice is the most important. This remains true for those people in the long chains of transactions further, and furthest, away from any two parties immediately engaged in an act of ‘truck, barter, and exchange’ (WN I.ii.1: p 25). Of course, mutual love or affection’ is not precluded; it is welcome where it happens, but it is not necessary for markets to function.

‘[G]lobal poverty could be solved’ through ‘the freedom of the individual to pursue their own economic self interest. Only this was capable, led as it was by the ‘invisible hand’ of providence, to unleash the human creativity that was necessary for economic prosperity.’

That misinterprets Smith’s lone metaphor of ‘an invisible hand’ (read carefully Wealth of Nations, IV.ii.pp 452-72). Self-interest is not always or necessarily benign to society’s best interests; where it is then the results are beneficial; where it isn’t then the results are lower levels of opulence, lower net productive investment, widespread corruption of the virtues, and, in extremis, social breakdown (as in Africa and parts of Asia).

Smith waxes long and eloquently on the failure of people in markets and above them in the State to behave in society’s best interests (‘the vile rulers of mankind’), though on occasion, despite their intentions, it happens that sometimes their greed and vanities cause outcomes that ensure their self-destruction and the means to redress their awesome damage. Europe suffered a thousand years of stagnation after the fall of Rome and the tyranny of feudalism.

Smith used ‘an’ invisible hand as a metaphor once only in Wealth of Nations (IV.ii.9: p 456) and once only in Moral Sentiments (IV.1.10: p 184). It has been turned into a ‘theory’, an ‘explanation’, a ‘magic’ force, to the endless confusion of modern readers. It was one of his references to the possible unintended consequences of motivations, but it was never an endorsement of the false notion that these consequences were always benign. Asserting the certainty of a benign quality to all decisions made by people in or out of markets (note here that Smith did not use the metaphor in reference to markets on either occasion) opens a flank to the critics of markets who can point to what everybody can see, namely that people in markets (as in governments) often pursue selfish self-interests to the detriment of those they purport to serve, and claim that this fact undermines Smith’s theory of markets. It does not, of course; it undermines false attributions about markets.

In this context, I have no ideas what is meant by: ‘Smith’s hand may now be invisible’, though I concur with ‘in order to address contemporary global poverty, the ideas [he] expressed are worth revisiting.’

The new £20 note conveys the ‘division of labour’ as Smith’s ‘big idea and that is far more significant than ‘providential’ notions about a metaphor that confuses the clarity of his text in the hands of those looking for ‘invisible’ messages about what he meant, a view of Smith that transmutes the richness of its legacy into the sterile purities of neoclassical economics. There is a world of difference between the ‘Chicago’ Adam Smith and the Adam Smith from Kirkcaldy.