Invisible Hand as a Metaphor

“James” writes in “Bubble Meter” HERE

“Adam Smith's "invisible hand" in context”

“Princeton University economics professor Alan Blinder puts Adam Smith's concept of the "invisible hand" in context:

When economists first heard Gekko's now-famous dictum, "Greed is good," they thought it a crude expression of Adam Smith's "Invisible Hand"—which is one of history's great ideas. But in Smith's vision, greed is socially beneficial only when properly harnessed and channeled. The necessary conditions include, among other things: appropriate incentives (for risk taking, etc.), effective competition, safeguards against exploitation of what economists call "asymmetric information" (as when a deceitful seller unloads junk on an unsuspecting buyer), regulators to enforce the rules and keep participants honest, and—when relevant—protection of taxpayers against pilferage or malfeasance by others. When these conditions fail to hold, greed is not good.”

[“James”]:
“Greed is a natural human vice, just like aggression. As much as we may try, we cannot get rid of them because they are part of human nature. But just as sport channels aggression into productive use, free enterprise does the same for greed. Free enterprise is only productive when its goal is to benefit consumers. When it becomes acceptable to screw consumers (or taxpayers) in the quest for wealth, the benefit is entirely lost.

Greed is not good. It is the productive work and investment we do as a result of our greed that is good.”

Comment
A muddle, I am sorry to have to say. Blinder’s point is discussed in a reader’s comment in an earlier post this week.

Adam Smith had no time for espousers of “greed” in their books (such as Bernard Mandeville, 1734, whose ideas he called “licentious” in Moral Sentiments (TMS VII.ii.iv.6-14).

It’s a bit like that modern combination that starts of asserting the cliché of their being only two motives for human action, “fear” and “greed”, and then proceeds to elaborate on some silly “theory” or other. I recently refereed a proposed book applying this to defence economics (my earlier specialty before the fall of communism) and found it projects a prejudicial imperative onto its author’s conclusions.

“Adam Smith's "Invisible Hand"—which is one of history's great ideas” is actually a recent invention among modern economists. It certainly is one of our discipline’s “great” re-defined and heavily promoted metaphors.

Smith’s point was not that “greed is socially beneficial” (please give us a direct quotation from Adam Smith showing that he ever made this absurd assertion!).

What he argued – once only – was that when some, but clearly not all, merchant traders were concerned about risks to their capital (remember, in the 18th century, the alternative to safety and prudence in one’s investments was utter ruin and its associated severe, and perhaps life-threatening, deprivation) they preferred to invest locally rather than invest their capital in riskier foreign ventures.

The greater the number of merchants who invested locally as individuals, the greater would be annual national investment and the greater the consequential national output and employment (always a concern of Smith’s for lifting working people out of their unemployed deprivation), because it’s an arithmetic law that the whole is the sum of its parts. Yes, that’s all it is.

He added, to describe the process by which individuals seeking the most profitable investment of their capital (prudence, not greed!) and to explain the arithmetic consequences to his readers, most of whom were not political economists, that individuals who behaved in this manner were led by “an invisible hand”.

This was not original to Adam Smith . It was never Adam Smith's invisible hand".

It was a popular literary metaphor, widely used by theologians in their sermons (Augustine), political writers in their weighty tomes, playwrights (Shakespeare in Macbeth), fiction authors (Daniel Defoe in Moll Flanders), philosophers (Voltaire) and classical writers from Greece and Rome. The metaphor was easily recognizable among literate readers of Wealth Of Nations.

I have a list of nearly 50 separate uses of the invisible hand metaphor, most of them probably known to Adam Smith, plus scores of other authors using the metaphor in other contexts up to the 20th century.

Smith taught his students that a metaphor should be used to give “due strength of expression” in “a more striking and interesting manner” (see Adam Smith’s “Lectures on Rhetoric and Belles Lettres”, 29 November 1762, Oxford University press, 1983, p 29).

His use of the metaphor of ‘an invisible hand’ (only once in Wealth Of Nations and once in Moral Sentiments, and once in his ‘juvenile student’s essay) certainly achieved his literary intention. Pity that modern economists from the 1950s burdened Smith’s achievement with a wholly invented content – not that they can agree on exactly what he meant by it, as a perusal of modern interpretations soon shows careful readers.

So James takes one step towards understanding Smith’s legacy and two steps back by obfuscating his literary meaning with the burden of the wholly invented charge of explaining why “greed” might be “good” under certain conditions of perfect competition (another modern idea unknown to Adam Smith).

Update:
I received a comment from "James" which since has 'disappeared' after I clicked 'publish';

Here it is:

"Sorry, but no one believes an invisible hand actua... Sorry, but no one believes an invisible hand actually exists. Everyone understands that it is only a metaphor. Your claim that "most campuses teach their students to believe that the metaphor is a real object, that it exists" is just plain wrong. It is not just wrong, it is ridiculously wrong."

Update 2:

James, have you read recent economics 101 textbooks lately, let alone those major ones since the 1970s? Also, scroll through Lost legacy and note the comments I make on references to the 'invisible hand of Adam Smith'.

These are all actual refernces spread across the world and media sources.

Look at the professional, refereed, journals, which with few exceptions pass for publication references to the invisible hand in its many guises.

No doubnt, you can find a few examples that contradict my statement, but they are swept aside by the scores that justofy it.

Gavin

Wrong On Darwin, Right on Adam Smith

'The Age of Empathy' by Dutch psychologist and primatologist, Frans de Waal, using primate tendencies as a model, contends that humans are hard-wired for compassion. In Los Angeles Times by Sara Lippincott, a freelance editor specializing in science. HERE:

“De Waal's principal thesis is that when contemplating our evolutionary heritage, we see ourselves more as natural-born competitors than natural-born empathizers and cooperators. "[U]ntil recently," he writes, "empathy was not taken seriously by science. Even with regards to our own species, it was considered an absurd, laughable topic. . . . " Some of us indeed have tended to think like Social Darwinist Herbert Spencer, who coined the phrase Darwin has been unfairly stuck with: "survival of the fittest." Indeed, some, like Hitler and the American and British eugenicists of the early 20th century, have tended to think that only the fittest ought to survive. But De Waal's readership is probably aware by now that altruism too has been built into the animal kingdom.

Nevertheless, he rightly argues that we modern humans need to recognize and cultivate our fellow feeling, "an innate age-old capacity" that has been naturally selected for -- for the excellent reason that without it we would have gone extinct long ago. "It's not as though we're asking our species to do anything foreign to it by building on the old herd instinct that has kept animal societies together for millions of years," he writes. "Every individual is connected to something larger than itself. . . . The connection is deeply felt and . . . no society can do without it."

De Waal bolsters his case with plentiful anecdotes of sweet-natured primates and contemporary examples of ill-advised human cold-bloodedness (Enron, the response to Hurricane Katrina). Along the way, you learn a lot of interesting primatological arcana, such as that apes can't swim and invariably defecate when excited.

In concluding, De Waal points out that Adam Smith, the alpha male of free marketeers, has consistently been misunderstood. Smith's disciples "leave out an essential part of his thinking, which is far more congenial to the position I have taken throughout this book, namely, that reliance on greed as the driving force of society is bound to undermine its very fabric."

Comment
Frans De Waal is a much respected scientist, often working at the frontier of primate studies and human societies. Hence, when Sara Lippincott attributes to Darwin the following statement:

“Social Darwinist Herbert Spencer, who coined the phrase Darwin has been unfairly stuck with: "survival of the fittest",

I am a loss to explain from where she got her ideas about the origins of the phrase, "survival of the fittest”. I am sure they do not come from Frans De Waal; at least I hope not, because Frans will be familiar with Charles Darwin’s, The Descent of Man and Selection in Relation to Sex’ (1871: John Murray, London) and Darwin uses the phrase, survival of the fittest”, several times.

For example:

“In an area as large as some of these islands [New Guinea, Borneo, Australia], the competition between tribe and tribe would have been sufficient, under favourable conditions, to have raised man, through the survival of the fittest, to have the inherited effect of habit, to his present high position in the organic scale” (page 157).

Either Frans is momentarily forgetful, or, more likely, Sara she carelessly summarising Frans’ observation on how often Herbert Spenser used the phrase in his arguments as an epigone of Darwin.

By the way, for balance, we should add some fairly respectable people to Hitler’s name, among whom we have Marie Stopes, Emile Zola, Bernard Shaw, H. G. Wells, Woodrow Wilson, Theodore Roosevelt, John Maynard Keynes, Winston Churchill, and Sidney Webb.

The last paragraph, however, is encouraging. Greed had nothing to do with Adam Smith’s theories of how humans interact socially. That notion comes from popular misattribution of “greed” as a philosophy to Smith when it was, in fact, an idea of Bernard Mandeville’s (1724).

A Bible Scholar Bears "False Witness"

Charles Gill writes in Examiner.com HERE:

“Being born again and putting on the new self”

“The modern market based system is based upon greed, as per the words of Adam Smith, the founder of Capitalism and the writer of the Wealth of Nations. He argues that man is by nature greedy, which he views as good. This differs from Shema which says inclinations are neither good nor evil, and that we need God’s help to discern how to apply our inclinations. Adam Smith says greed is good.”

Comment
For the author of an article which is an exegesis of Bible texts, Charles Gill is remarkably sloppy when it comes to reporting on Adam Smith.

I conclude either that Charles has not read Adam Smith’s Theory of Moral Sentiments (1759), in which he describes greed as “pernicious” (referring to Bernard Mandevilles’ doctrine summed as “Private Vices, Pubic Virtue” in Fable of the Bees, 1724), or Wealth Of Nations (1776), which in no way asserts that “greed is good” or, worse, he is making up his account of Adam Smith’s views without any basis whatsoever (Smith never said that “argues that man is by nature greedy”, nor did he view such behaviour “as good”.

If he hasn’t bothered to read Adam Smith for himself his errors are excusable to the extent that his laziness is a personal failing.

If he is simply making up the alleged views of Adam Smith to strengthen his case, then that is not excusable at all; in fact it is condemnable, especially from an author claiming the authority of the Bible for his behaviour in defiance of its Commandment not to bear “false witness”.

Either way, it compromises his call to “on the new self”.

An Innocent Adam Smith Charged Wrongly

Bob Matteson from Bennington posts in the Rutlandherald.com HERE:

“Time to shift away from greed”

“The dramatic juxtaposition of huge governmental bailouts and astronomical private bonuses in great financial institutions has highlighted America's over-reliance on speculative money-making, the more, the better, as the major drive wheel of the American economy. Adam Smith's "hidden hand," the supposed working of private greed for public benefit, is being severely challenged.”

Comment
Sorry, but Bob addresses the wrong person with his criticism.

‘Private greed for public benefit’ is close to its original author’s actual words (which were ‘Private Vice, Public Virtues’) but it wasn’t Adam Smith who penned them. It was Bernard Mandeville in his infamous book (1724), Fable of the Bees'.

Adam Smith regarded Mandeville as ‘licentious’ and his ideas as ‘pernicious’ – see Adam Smith, The Theory of Moral Sentiments, 1759 (TMSVii.4.6: 308).

Adam Smith’s use of the metaphor, ‘an invisible hand’, had nothing to do with ‘greed’ working for ‘public benefit’.

Bob claims that this misattributed notion ‘is being severely challenged’. I should hope so. It was challenged over two-hundred years by Adam Smith, though not I suspect until recently by Bob.

So, not only his Bob accusing an innocent man (Adam Smith) of a heinous offence, he obviously does not know anything about the real perpetrator (Bernard Mandeville) of the original crime. So much for justice, Bennington style!