Origins of a Fable

Neil Buchanan writes in Dorf On Law Blog HERE

“Bastard Keynesianism Today”

“The British did not imagine that Adam Smith's fable about the invisible hand could ever be taken so seriously. They (like Keynes) saw the fundamental flaws in even the most sophisticated markets, and they offered a withering critique of the idea that government's role is merely to let rational private actors engage in self-interested action.”

Comment
Buchanan is writing about the Keynesian – Friedman approach to monetary and fiscal policy and I refer you to the whole article in the link above.

My interest was in the paragraph quoted. Depends of course where and when you look.

Certainly in the 1930s there was a stronger reserve among Cambridge, England, economists to what had become 19th-century ‘classical’ economics about the market (Mill, Manchester School, The Economist, and their stories about ‘laissez-faire) and early misattributions to Adam Smith, than was common among Chicago economists, whose enthusiasm for harmonious markets was quite explicit in house.

Interestingly, Samuelson remarked, in a sceptical tone, about the oral tradition at Chicago in the 1930s (he graduated there in 1935 – and moved to Cambridge, Mass. for his post-graduate degrees), that such ideas as the ‘invisible hand’ doctrine had limited explanatory power, especially after “two centuries of experience and thought”. (See: Samuelson’s Economics, 1st edition 1948, page 36 and 12th edition, 1985, page 41.)

Unfortunately, Cambridge, Mass. conquered Cambridge, England, on these matters with the fading of Keynesianism under the triumph of Monetarism from the 70s. Meanwhile, and afterwards, the invisible hand myth conquered the profession with the ruthless energy of the barbarian invasions of Rome in the 5th century.

Left Split Modern Rightwing from Adam Smith

Devilstower writes in the Daily Kos, HERE:

An obviously leftish rant against the right, entitled: “The President and Private Pay”, which includes this paragraph:

“In the past, people were able to distinguish between capitalism and chaos, and understood that government intervention in the markets was needed when the organizing principle of the markets was sent askew. The idea that the market is inviolable and all-knowing didn't really start with Adam Smith. It's more a product of the Ronald Reagan-Ayn Rand fusion of the 80s -- the one that drove "hands off" legislation leading to the S&L meltdown. That was the source of inspiration for stripping away the protection that had kept the market sane since the last time these guys got their way.”

Comment
I make no claims for or against the political contents of Devilstower’s piece. The politics of another country are not my concern. The key sentence for me is:

“The idea that the market is inviolable and all-knowing didn't really start with Adam Smith. It's more a product of the Ronald Reagan-Ayn Rand fusion of the 80s -- the one that drove "hands off" legislation leading to the S&L meltdown.”

At last, a recognition that the linking of Adam Smith to post-1950s mainstream economics was and remains a false attribution and is a step forward in re-asserting Adam Smith’s legacy.

So close is the identification of Adam Smith to Ayn Rand’s (among other modern ideologues) has led to immense confusion, even ensnaring Greenspan, who like so many leading commentators on these issues, linked the Adam Smith invented by Friedman, Arrow, and other Nobel prize-winners, to general laissez-faire policies with which there is little textual support in Wealth Of Nations or Moral Sentiments.

Of course, the Left also misread Adam Smith as some sort of social democrat on the basis of selective quotations from his polemics against mercantile political economy, still prevalent in the 21st century, as it was during the 15th-18th centuries.

But small steps by one side or the other add up, slowly and gradually, to rectifying these errors, and are to be welcomed no matter from which place on the political spectrum they come from.

A Classic Spoiled by Mysticism

‘Chief’ posted (18 January) on Tragedy of the Commons (HERE):

the text of the near brilliant, but slightly flawed, short outline of the powers of markets, identified by Leonard Read’s essay “I, Pencil”, as a process of disconnected coordination, without planning, central directions, or anything other than human beings acting, reacting, and pro-acting, to opportunities signalled by prices, rumours, and probabilities.

Chief, however, tops his post with a short paragraph by Milton Friedman, complete with his mystical allusions to the metaphor of an ‘invisible hand’, which detracts from the ordinariness of human endeavour, as if markets contain pure and innocent spirits, sometimes attributed to the will of a living Deity.

Friedman’s introduction spoils the softer power of Read’s ‘I, Pencil’, leaving it trapped in what Adam Smith had called ‘Surprise and Wonder’ but well short of ‘Admiration’, which comes from knowledge, the final step of human understanding (See Adam Smith, posthumous, ‘The Principles which lead and direct Philosophical Enquiries; illustrated by the History of Astronomy, [1744-58: 1795], in Essays on Philosophical Subjects, pp 5-129; 1980, Liberty Press).

‘Savages’ claimed their lives were ruled by invisible beings in everything they could not understand. Philosophers, wrote Smith, uncover the ‘connecting’ and ‘invisible links’ of events and, as a result, science marches on.

Milton Friedman and Leonard E. Read, both of whom made outstanding contributions in their writings, in this matter, however, both of them unintentionally led their readers away from understanding towards mysticism, only a step of two away from what Smith called ‘pusillanimous paganism’.

They became responsible in part for an unscientific sediment in political economy which wraps the ordinariness of human markets that are perfectly understandable within economics and without invisible body parts.

Markets operate without the mumbo jumbo of divine purpose (an unholy notion, I would have thought, linking the honest man from Galilee with the global market economy), and without the widespread populist belief in, not the simple literary metaphor used by Adam Smith for another purpose (see Lost Legacy passim), and without actual ‘invisible hands’, as if they really exist in the world in general and in markets in particular.

You can (and should) read Leonard Read’s ‘I, Pencil’ HERE:

Leonard E. Read (1898-1983) founded FEE in 1946 and served as its president until his death.

"I, Pencil," his most famous essay, was first published in the December 1958 issue of The Freeman. Although a few of the manufacturing details and place names have changed over the past forty years, the principles are unchanged.

'I, Pencil' reported that his ‘official name is "Mongol 482." My many ingredients are assembled, fabricated, and finished by Eberhard Faber Pencil Company’