Research Project to Challenge Modern Economists on Their Invisible Hand Explanations

I returned to more serious research today for my larger project on the invisible hand. This work has gone slowly up to now because, as I have mentioned, I am waiting for Warren Samuel’s paper to be published (now set for later this year in a collection edited by Jeffrey Young and is to be published by Cambridge University Press). I considered it prudent not to go too far ahead in case Warren’s promising treatment made my own redundant, or, in the unlikely event that Warren was off target in some fundamental way, my own paper may have required considerable re-work.

Research develops its own pace, sometimes like walking through treacle into dead-ends, tinged with boredom, and at other times flies along under an exciting momentum from the pieces falling into place, opening new insights, re-constructed ideas, and closing the gaps in understanding.

Having dealt with Adam Smith’s meaning of “an invisible hand” in two papers for the Econ Journal Watch (May and September), I am now working more intensely on phase 2, so to speak, (and have been since 2008) which analyses how and why the invisible hand metaphor was taken up, mainly in the middle decades of the 20th century, by modern economists, in part to make an ideological case for markets (sometimes tinged with theological claims and assertions) over the challenges from both creeping state capitalism and Soviet-style central planning. The other part, included genuine enthusiasm among economists from the 30s to the 70s from their pursuing lines of research into general equilibrium theory.

The problem, which I have been focussed on since my preliminary work from 2003, for my book, Adam Smith’s Lost Legacy (2005), is why modern main-stream economists embedded their theories of “invisible hand” in capitalist markets and, simultaneously, attributed to Adam Smith the role of progenitor of their work.

I have been unable to read into Smith’s works anything remotely like these modern attributions – the fact that they do not qualify for such roles on the basis of what he wrote remains, for me, in stark contrast to what senior colleagues in the discipline claim to have found.

This next project is my attempt to answer this dichotomy from what distinguished economists assert they have read in Moral Sentiments and Wealth Of Nations (and his essay on the History of Astronomy) by coming at the problem from the other direction:

What exactly do modern economists claim for their “invisible hand”, where did these views originate (Chicago, MIT, LSE, and so on, and what evidence is there for such a role in their models of modern economies (general equilibrium, growth theories, welfare economics, business cycles, and recent history)?

I shall report from the research front occasionally on Lost Legacy and share my progress with readers.

Chicago is a Long Way From Kirkcaldy

Simoleon Sense HERE contains this erroneous gem:

“The Profile Of Robert Shiller, Mr. Bubble” (via Yale Alumni Magazine)

They argue that flaws and excess are inherent to a market economy — and that they are not minor. “The economics of the textbooks seeks to minimize as much as possible departures from pure economic motivation and from rationality,” Akerlof and Shiller write. “Our book marks a break with this tradition. In our view economic theory should be derived not from the minimal deviations from the system of Adam Smith but rather from the deviations that actually do occur and can be observed.”

Comment
The problem with this gem is to which “system of Adam Smith” is Simeon Sense referring?

Is it the invented system of “pure economic motivation and from rationality”, otherwise known as the “Chicago Adam Smith” of post-1950s US academe, Nobel Prize winners and all, or is it the system of the Adam Smith born in Kirkcaldy, Fife, Scotland in 1723, as outlined in his "Moral Sentiments" (1759) and his “Wealth Of Nations" (1776)?

Next Major Project: modern use of the invisible hand

Background:

I have completed my response to Daniel Klein’s (“In Adam Smith’s Invisible Hands: comment on Gavin Kennedy” HERE: response to my article: “Adam Smith and the Invisible Hand” (HERE): My final response will be published next week in Econ Journal Watch (September 2009) HERE:

It is now time to move on to my next project (larger in scope and more ambitious): To consider the role played by the use of the invisible hand metaphor by modern economists. Yes, I shall name, though probably not shame, them.

My main charge against them collectively, is that they wrongly attribute their allusion to the invisible hand by name to Adam Smith – because the modern (post-1930s) (miss)use (miss)associates the metaphor with their quite different meanings – and they imply and, in many cases they directly claim, that Smith have said things about markets that he never did. I shall also offer an alternative explanation for the ubiquity of the invisible hand in modern discourse.

I suspect, somewhat cheekily, that many modern economists have never read Wealth Of Nations, nor do they realise how limited was Smith’s use of the popular 18th-century metaphor (once only in Wealth Of Nations, 1776, once only in Moral Sentiments, 1759, and once only in his short, posthumous essay on the History of Astronomy (1744-58), no one of which was connected conceptually to the others.

To date, I have collected some preliminary research materials on the modern usage of the invisible hand (some of which go well beyond its use as a metaphor; some authors believe that there is an actual entity of ‘an invisible hand’ operating in markets, some of them attributing the entity to the invisible God.

Until now, I have waited before embarking on my own assessments for Warren Samuels, a distinguished Smithian scholar, to publish his considered analysis of the modern uses to which the invisible hand metaphor has been put. His 2008 article: Adam Smith’s Invisible Hand, in The Street Porter and the Philosopher: conversations in analytical egalitarianism, edited by S. J. Peart and D. M. Levy. Ann Arbor: Michigan University Press, was the initial article I awaited, but I was advised that another article by Warren Samuels, is to be published in Jeffrey Young’s, (editor), forthcoming Elgar Companion to Adam Smith, Cheltenham: Elgar Publishing, in October 2009.

From private conversations, I understand this is a formidable piece of work and out of respect for Warren's work, I have held back to see to what degree his analysis of modern usage conforms to mine. I understand that he may also reply directly also to my Econ Journal Watch paper.

Where does this take us? Well, my hypothesis for the new project tests my assertions from time to time, that the invisible hand metaphor is a relatively modern adaptation of the 18th-century metaphor purporting to show the presence of an invisible hand in modern market capitalism, seen almost daily in the world media, and more importantly, as asserted in refereed journal articles and authoritative pronouncements in academic texts.

If its usage was confined purely to popular media, it could safely be ignored, but when Nobel Prize Winners and respected authorities from our discipline elaborate on the modern theory of ‘the invisible hand’, we need to separate ideology from analysis. The robust criticism I occasionally encounter of my counter-thesis suggests an investment in emotional subjectivism on the part of some economists.

Any help readers offer to me during this research project will be graciously accepted.

I have been tracing the early beginnings of the discipline’s interest in applying the metaphor to modern economies, starting with late 19th-century economists, some of whom were identified by Daniel Klein and others in correspondence with myself. I am particularly interested in early 20th-century exponents from Chicago University in the 1930s and thereafter.

For example, from Paul Samuelson (Economics, 1948: p 36) I noted that he reported, somewhat critically, on the oral tradition at Chicago which included ideas about the invisible hand operating in market economies. Among the first reference to this use of the invisible hand, I was directed to Oscar Lange’s article in The Review of Economic Studies (vol 13, 1945-46, p 19-32). Lange was at Chicago during the 1930s (as was Samuelson).

In his 1946 article Oscar Lange writes:

“The market has, therefore, been compared (by Adam Smith and others) to that of an invisible hand which produces out of the autonomous decisions of many separate units” (p 26).

What did he mean “by Adam Smith and others”? Who were the “others”?
Any information would be welcome from readers, including references, sources, and biographies. Though retired, I have access to a good library at a University and can probably follow up even vague references or books titles.

Thank you in anticipation of any help received.

A Confusion of Identities

In the Daily Klos Blog, Patrice Ayme writes HERE:

“SMITH OUGHT TO HAVE LEARNED MORE THAN FRENCH:

Adam Smith, having apparently confused his mastery of French with a mastery of economics, grabbed the word "laissez faire" from the French self christened "Economistes", and thought that this "invisible hand" had solved house management, for the better. Adam Smith did not invent the theory of the "invisible hand", either, it was written down before Smith was born (by Mandeville who subtitled his famous Fable of the Bees, with: "Private Vices Public Benefits" – this striking formulation pretty much extols the naivety of it all).

Well, "laissez faire" and invisibility of manipulators do not provide necessarily with the best housemanagement. Every country that has established a government insured health care system has long known that.”

Comment
Patrice appears not to know that Adam Smith never used the phrase ‘laissez-faire’ at all in anything he wrote, so it seems strange that Patrice thinks he ‘grabbed’ it from French economistes (I think he means the Physiocrats).

Patrice is correct, however, though not in the way he thinks: Adam Smith did not ‘invent the theory of the invisible hand’ – he never had such a theory in anything he wrote.

For Smith it was a metaphor, not a 'theory', and its modern notion was invented by modern economists in Chicago in the 1930 and popularised from the 1940s. Its modern meanings had nothing to do with Adam Smith.

I am not clear how Bernard Mandeville gets into this story.

The rest of Patrice’s article is a long rant about health care ... I gave up reading it.

Is this a Correct Use of a Quotation?

Steven Malanga in City Journal writes (19 July) about “New Jersey’s Ruin - The state’s leaders seem determined to drive it off a cliff”.

“Adam Smith once wrote that there’s a “great deal of ruin in a nation,” by which he meant that it takes an awful lot of bungling by political leaders to bring down a powerful and prosperous state. Today, New Jersey pols are giving Smith’s thesis quite a test drive. They are steering the Garden State toward ruin at an astonishing pace, and no amount of bad economic news seems capable of deterring them.”

Comment
I am not sure of the situation in New Jersey, which Steven Malanga details in his piece (HERE), but the exchange between Smith and Sir John Sinclair, following the British surrender at Saratoga, involved the following words:

Sir John: ‘If we go on at this rate, the nation must be ruined.’

To which Smith replied: ‘Be assured young friend, that there is a great deal of ruin in a nation’

From Ian Simpson Ross (Smith's definitive biographer), 1995. The Life of Adam Smith, p 32, Oxford University Press; in Correspondence of Sir John Sinclair of Ulbster, i.390-1, and in Correspondence of Adam Smith, Letter no. 221, footnote 3, Liberty Fund, 19.

It may be that Smith was less concerned at the prospect of the government’s defeat by the British colonists in America than Sir John (see Wealth of Nations, IV.vii.c: 64-79: pp 614-26), than the enormous cost of maintaining colonial monopolies that diverted scarce capital away from productive investment, and thereby contributed to slower economic growth, and also distorted capital flows from more rapid growth in the UK in favour of a longer turn around of capital, from once every four years instead off two or three times a year if invested locally.

In this context I am not convinced that Steven Malanga has deployed the quotation from Smith with greater affect.

As for the good folks of New Jersey, whatever happens in the near future, there may be pain, but the losers from corrective changes are not going to give up policies that benefit them as things stand; however, capital flight is feasible for those hurt by the current policies. The current gainers may end up the future losers.

Putting Chicago's 'Adam Smith' (not the one born in Kirkcaldy) to Ill Use

Combine a shallow knowledge of Adam Smith, his moral philosophy and his political economy, with a self-interested response to a perceived world crisis that is recipe for a totalitarian state that may be worse than the perceived problem, though it would create decades – possibly centuries – of sustainable work for, er, architects… unless, of course, it all ends in tears.

John Van Doren (architect) writes a literate Blog, The Sustainable Home, HERE:

So where does he get his image of the way the world works?

“In 1776, Adam Smith made some ground breaking observations about economic behavior and published An Inquiry into the Nature of Causes of the Wealth of Nations. Smith would argue that individuals, working in unfettered freedom for their own self interest, would collectively and via an “invisible hand” provide for the greatest common good. His work would provide the foundation for much of today’s economic theory and would father the concept of the “free market”.

“Adam’s work coincided with the birth our nation, and it is ironic, but not surprising that this Scottish moral philosopher, would become the patron saint of Wall Street. For many, the belief in the invisible hand of an unfettered free market would take on religious overtones and it would become the dominant sub-text in our American political discourse.”

“…However, free markets and their invisible hand are blind to these limits and will continue to grow out of self interest until the invisible hand of the underlying ecosystem adjusts out of its own self interest.”

Comment
Who said that modern economists and their fantasies about Adam Smith are only innocently mistaken? They are responsible for no doubt the well meaning John van Doren who believes his false views about what Adam Smith said (yet John can read Smith’s books for himself – they are available for a few dollars from the likes of Amazon, or for my account of his views, Adam Smith: a moral philosopher and his political economy, it is also available from the same source, er, for a few dollars more).

John gets his ideas about Adam Smith from 20th-century Chicago-trained economists not from Adam Smith’s books.

Chicago teaches his alleged laissez-faire advocacy not from Smith - he never used the words - and similarly, the alleged ‘invisible hand’ was a metaphor that he used only once in Wealth Of Nations to describe the consequences of risk avoidance among merchants contemplating engaging in foreign trade. His sole reference in Book IV of Wealth Of Nations was nowhere near his account of markets in Books I and II. And the religious connotations came from mid-20th century epigones, not Smith.

That John stretches the famous metaphor from it being invisible to it also being ‘blind’ is almost laughable, though sad.

I shall say nothing about John’s remedies for what he sees as unsustainable economics. They are just so, well totalitarian, almost a brief ‘treatment’ that could sell a Hollywood film script (well, he does live in Los Angeles) for a disaster movie, complete with sinister, all powerful government – perhaps a plot for another series of 24?

On the other hand they could be a PR piece for his being hired as an architect to design one of his utopian ‘villages’ to give him a ‘sustainable’ life style.