Myths About Adam Smith's Famous Hands

John Reiniers, a columnist who lives in Spring Hill, Florida, writes, in Hernando Today (on-line edition), a trenchant piece (here) titled, “Insurance Expectations Out of Hand”, which includes this sorry nonsense about Adam Smith’s use of the metaphor of ‘an invisible hand’, and as bad, applies it to ‘open frictionless markets’, which he never did in Wealth Of Nations (nor anywhere else in anything he wrote publicly or in privately):

“Adam Smith, legendary Scotch economist from the 1700s, was onto something when he observed in his monumental "The Wealth of Nations" that if people could make personal economic decisions with less governmental regulation, it would, "as if by some invisible hand," benefit all of us by creating open frictionless markets.”

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Worse, John alters Smith’s wording from ‘are led by an invisible hand’ to a completely fictitious ‘as if by some invisible hand’.

In point of fact, Smith was not talking about markets at all. His reference in Wealth Of Nations (IV.ii.9: p 456) was to the risk aversion of merchants to sending their capital abroad which causes them to prefer to invest locally where they could keep an eye on it. Having explained this clearly and comprehensively, he mentioned them being led by (NOT ‘as if by’) ‘an invisible hand’ in his tail off sentence.

The metaphor was redundant as an explanation because he had already explained what caused it. And because it was not striking enough to his readers at the time, nor to anyone else for well over a hundred years, nobody did mention it. That came later in the 20th century when Chicago-trained neoclassical economists began to introduce it into their presentations on neoclassical markets.

And that is the problem. Columnists like John Reiniers are not expected to know the differences between their image of the ‘legendary Scotch economist’ and the facts, but what of modern economists from the world’s top universities? A five-minute consultation with Wealth Of Nations would correct their error. How many will undertake that difficult task? Precious few.

The invisible hand has emerged in the lexicon of neoclassical market equilibrium theory in an attempt to give a mystical endorsement to the paradigm. It is applied everywhere, in all its versions. My desk each day is littered with pieces from the world’s print media (there must be many more in the electronic and voice media) extolling the mythical virtues of “Adam Smith’s invisible hand”, as if using his appropriate revered name endorses neoclassical theory, and the politics that often goes with its exponenents.

I do not despair for Smith’s legacy. Scholars can only plug away. I am encouraged occasionally by signs that some economists are waking up to the facts about Smith’s Legacy, including the myths about the invisible hand. I am doing my bit, too (this Blog for one thing, my book 'Adam Smith’s Lost Legacy’ from Palgrave, 2005) and now my latest effort.

Last night, I sent off to the conference organisers of the 34th History of Economics Society Conference, which is meeting in George Mason University, Fairfax, Virginia in June, my paper: ‘Adam Smith’s Invisible Hands: from metaphor to myth’, for delivery on 10 June (noon). This is based on Chapter 13 of my new book on Adam Smith to be published in 2008 by Palgrave in its Great Thinkers in Economics series.

Meanwhile, I shall continue to repudiate myths about Adam Smith and his legacy wherever I come across them.