Adam Smith on Government Roles

By Dr Bharat Jhunjhunwala writing (22 November) in Organiser (HERE):

“Economy Watch - In defence of regulation of markets”

“This veneration of free markets was first propounded by famous economist Adam Smith about 200 years ago. He said that competition in a free market establishes public good as if an invisible hand was guiding the businessmen. There was no need to separately worry about public good. His logic was like this. Competition in the market pushes the businesses to produce goods at a lowest cost. This leads to cheap goods being made available to the people. For example, I had brought an electronic calculator from United States for my father in 1973 for 100 dollars or about Rs 1,000 at that time. Today, a much better calculator is available for Rs 50 because of the improvements brought about by competition. The slum-dwellers today have the pleasure of watching the TV and drinking cold water from the refrigerator because of the steep reduction in the price of these goods. Thus Adam Smith suggested that the government must not interfere in the market.”

Comment
Question to Dr Bharat Jhunjhunwala:

Exactly where does Adam Smith makes the statement: “that competition in a free market establishes public good as if an invisible hand was guiding the businessmen. There was no need to separately worry about public good?”

This is a paraphrase at best and a distortion of Adam Smith.

He never used the words “as if and invisible hand was guiding businessmen”. The addition of “as if” to his use of the metaphor of an invisible hand is fairly common among those who have not read Wealth Of Nations in general and the single paragraph in Book IV (chapter 2, paragraph 9: page 456) in which he uses the metaphor of ‘”an invisible hand”.

He most certainly never linked the metaphor to “competition” (which he discussed in Books I and II). He expressed reservations about leaving all decisions to “merchants and manufacturers” and such personages as bankers and their clients, especially where this “might endanger the security of the whole society” (WN II.ii.94: 324).

Nor did Adam Smith suggest such an extreme view “that the government must not interfere in the market”.

He saw a role for government, or public agencies, in stamping cloth and conducting assay tests on precious metals, to ensure that they been inspected for quality, that it should manage the currency and coinage, run the post office and general supervise markets and contract-making through an independent judiciary, and provide wholly or in part a national education system – and make a start on dealing on palliative care with “obnoxious diseases” like leprosy. All this, plus “facilitating commerce” by public works.

"Centrality" Exchanges in an Invisible Hand Debate

Brad Delong has composed a selection of pieces on Adam Smith and the invisible hand controversy (including some interesting comments), of which Lost Legacy has contributed its two-pence worth these past 4 years (and health permitting and other circumstances, I shall continue to do so for the foreseeable near future).

You can find the collage HERE:

Presently, I am composing a response to the excellently argued paper from Daniel Klein and Brandon Lucas on the “centrality” of Smith’s only references to the invisible hand metaphor in Moral Sentiments and Wealth Of Nations and its position in the ‘dead centre’ of both books. You should read Daniel Klein and Brandon Lucas’s paper HERE – and in Brad Delong’s excellent Blog:

Nov 01, 2009
Was the Invisible Hand "Central" to Smith?
Daniel Klein, Professor of Economics at George Mason University and Editor of Econ Journal Watch, asks:
What probably would you put on the truth of a broad hypothesis of deliberate centrality?

Here's more background on the question:

In a Word or Two, Placed in the Middle: The Invisible Hand in Smith’s Tomes, by Daniel B. Klein and Brandon Lucas: Abstract: The meaning and significance of Smith’s expression “led by an invisible hand” has been long debated, and especially lately. We speak to the large debate only in fine, by focusing on the conjecture, first hinted at by Peter Minowitz, that Smith deliberately placed his central idea, as represented by the phrase “led by an invisible hand,” at the physical center of his masterworks. We bring supportive evidence and argumentation to the conjecture. The four most significant points developed are as follows: (1) The expression “led by an invisible hand” occurs pretty much dead center of the 1st and 2nd editions of Wealth of Nations, and of the final edition of the volumes containing Theory of Moral Sentiments. (2) The expression in WN drifted only a bit from the center, only about 5 percent from the center in the final edition (and even less if the index is excluded). (3) The rhetoric lectures show that Smith not only was conscious of deliberate placement of potent words at the center, but thought it significant enough to remark on to his pupils, noting that Thucydides “often expresses all that he labours so much in a word or two, sometimes placed in the middle of the narration.” (4) There numerous and rich ways in which centrality and middle-ness hold special and positive significance in Smith’s thought. In conjunction with larger considerations, these points may be helpful in assessing the significance of Smith’s famous phrase.

Here's a figure showing centrality through the 7 editions of each work.

This is an attempt to rescue the invisible hand from critics who argue that the invisible hand idea that is attributed to Smith was not a central part of his writing (e.g. see Gavin Kennedy).
In answer to the question, it doesn't seem very likely to me that this was intentional.
________________________________________
Note: If you are unfamiliar with the debate over the invisible hand, here is Gavin Kennedy:
...Lost Legacy has never been slow in criticizing the ‘Chicago Adam Smith’, a person with ideas that are far from the ideas of the Adam Smith born in Kirkcaldy in 1723.

George Stigler’s boast that “Adam Smith is alive and well and lives in Chicago” (1976) reflects to invention of the Adam Smith of the “invisible hand” (a mere metaphor for Adam Smith whose single use of it in Wealth Of Nations referred to the unintended consequences of the risk-avoidance of some, but not all merchants ... who preferred the home trade), and had nothing to do, at least in Adam Smith’s mind, with how markets worked, ... or how the price system worked.
The belief that the “invisible hand” was a significant ‘idea’, ‘concept’, ‘theory’, or ‘paradigm’ was wholly invented in the 1950s by neo-classical economists on the back of general equilibrium mathematics ... and in support of a worthy criticism of Cold War, Soviet central planning. It is now taught in every economics 101 class as if it had historical validity, mainly by people who have never bothered to read Wealth Of Nations. ...

Update: See " Yet Another Note on Adam Smith's "Invisible Hand": What It Is and What It Is Not" by Brad Delong.
Posted by Mark Thoma on Sunday, November 1, 2009 at 10:54 AM in Economics, History of Thought Tweet This Permalink TrackBack (0) Comments (19)

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RW said...

Kennedy's account makes sense and is consistent with Cold War historical patterns as well; e.g., Congress adding the words, 'under God,' to the Pledge of Allegiance in 1954 to better contrast our system with the godless commies (and satisfy the then rather powerful Knights of Columbus and their allies).
Reply Nov 01, 2009 at 12:35 PM

Dennis Ashendorf said...
Dr. Thuma,
You agree with Kennedy? You consider Klein's "statistical" argument unpersuasive?

Reply Nov 01, 2009 at 01:11 PM
Tom Hickey said...
Who cares what Adam Smith "thought" or "intended." We'll never know. His use of the term may give the concepts and explanations derived from it (for Smith did not do so) some authority. But if orthodox economics is dependent on arguments from authority for its underpinnings, we are all in big trouble.
The question is, what testable hypotheses can be derived from the concept further fleshed out by subsequent economists. That is to say, can it be shown empirically that there are "natural forces" that incline markets to equilibrium. If these forces are "natural," then how do markets fail (and they do). Is the exogenous shock explanation a testable hypothesis, or a simply an assumption necessary to make the contraption work at the margin?

Reply Nov 01, 2009 at 01:59 PM
Richard H. Serlin said...
Places like George Mason and Chicago are really seeming like echo chambers. Are there people at those departments who aren't willing to use weak, deceptive, or downright embarrassing measures to defend the dogma? Is there any attempt to hire people with other views and training?

Reply Nov 01, 2009 at 03:20 PM

Fred C. Dobbs said...
'Hypotheses non fingo', as somebody
said, well before Adam Smith.
Reply Nov 01, 2009 at 03:34 PM

john wycliffe said...
I'm sorry.

If we can't agree on what Smith meant by "the invisible hand," how can anyone even suggest that it was a central feature of his thinking?
Seems to me a central feature would be something that gets rather more attention, doesn't it?
Or have I shown myself to be woefully ignorant? If so, please to explain?
Reply Nov 01, 2009 at 05:14 PM

Tom Hickey said...
@ Fred C. Dobbs
Watch your language, buddy. Just kidding.

It was Newton who said this, and it is well known that Smith was "impressed" with Newton's work. It is quite possible that Smith modeled his thinking to some degree on Newton (this is controversial), Certainly, the idea of natural forces in economics bears a relation to the physical sciences that had been so influential in this period. This influence may have persisted and may continue to persist in orthodox economic thought. For example, the notion of a "representative agent" that goes proxy for all consumers is an attempt to achieve the kind of elemental reduction of the hard sciences.

On the principle of hypotheses non fingo, it is unnecessary to account for assumptions like natural forces in terms of causes. Asking why is not needed because showing how is sufficient. Gravity doesn't have to explained in terms of causes. It works as an explanation of planetary motion, filling in the Copernican view.
However, there is a great difference here between natural forces like gravity (which elicited the hypotheses non fingo response from Smith in the first place), which result in predictions that can be tested empirically, the assumptions of orthodox economics that do not. It's not a matter of why here, the how is in question, since the economic models haven't exactly produced anywhere near the same engineering results. At this point, why is a legitimate question, and "because Adam Smith said so," isn't adequate justification.

Proponents of orthodox economics would object that experiments cannot be designed to test hypotheses in economics as they can in the physical sciences. But that still leaves them to explain how the what the hypotheses are good for if they can't actually predict and often apparently don't work. Steve Keen does a pretty good job showing this in Debunking Economics.

Orthodox economics sees to be in a position similar to psychology when B. F. Skinner dominated the field. No one got hired and certainly not promoted without toeing the line. Until Abraham Maslow came along and revolutionized the field.
My sense is that Abba Lerner's functional finance could be the Copernican Revolution in economics. The people using it as the basis for modern monetary theory are showing how this provides a coherent explanation independent of "natural forces" and one that can be corroborated through social engineering (full employment with price stability) if the political understanding and will can be found. Plus, it puts and end to a lot of the quasi-religious myths.

Reply Nov 01, 2009 at 05:35 PM
Tom Hickey said...
Ooops — (which elicited the hypotheses non fingo response from "Smith" in the first place) should have been "Newton."
Reply Nov 01, 2009 at 05:39 PM

wjd123 said...
Adam Smith was a moral philosopher and not a physicist. I doubt he would recognize the economic presuppositions of neo-classicist today much less approved of them.
Their underlying presuppositions about the nature of economic man and efficient markets is, in my opinion, turning American capitalism into a particular virulent strand of capitalism that it would be hard for moral philosophers to justify much less recognize.

It's my impression, from what little I know of Smith, that these neo-classicists, have presumed, quite illegitimately, on Smith's writings about the needs of the butcher, the baker, and the candle stick maker to turn them into an unseen force guiding markets.

How convenient for them, but it doesn't square with the Smith who advocated regulations and certainly not with any claim of theirs that Smith thought the invisible hand was a necessary evil. If someone can quote a specific statement by Smith on the invisible hand, justifying it without reliance on presumptions, I'm listening.

I'm not an economists but assertions based on weak suppositions don't belong in economic text books. It's more the sort of thing from which historical fiction is fashioned.

I think neo-classical economists are using historical fiction to turn American capitalism into a particular virulent strand of capitalism with Adam Smith wouldn't recognize.
I mention this because of a certain sentiment I hear more and more today that I particularly loath: the presumption that those in positions of power will naturally use their position to maximize their self interests. It's most egregious when it's used to justify the multimillion dollar salaries of CEOs.

I loath this logic because it appears to be an attempt by those in positions of responsibility to absolve themselves of any personal responsibility for their actions: "It's the governments fault for not stopping us before we killed again." And then the appeal, "If you were in our shoes you would have done the same" as though what they are doing is natural. Both appeals fit nicely with the presuppositions of neo-classical economists about self interested economic man where economic man is a self interested sot.

I think of this latter appeal as an attempt to democratize the behavior of these CEOs because the "you" isn't an appeal to their peers who are among the top earners in our society even before exercising their stock options but an appeal to the guy on the street, Main Street, struggling to make ends meet.

The guy in the streets has enough trouble without having these fat cats trying to get into his or her head. The guy in the street isn't in their shoes and to suggest that if he were he or she too would stuff their bank accounts by back dating their stock options or getting their quarterly reports to look good by hock or crook, is insulting.

I believe that the more wealth you have the looser your attachment to society. In this respect the filthy rich are not much different than the desperate poor. The desperate poor can't afford the norms of society and the filthy rich can't be bothered with them. It's a natural fit for the wealthy when being scrutinized by society for their irresponsibility to point to others who are in a position to act irresponsibly and present it as the way of world.

There is, however, an ethical difference between the desperate poor and the filthy rich in that the ethical "ought" implies "can". So ethically the poor person's "can't afford" offers some mitigation against the accusations of irresponsible behavior by society whereas the rich person's "can't be bothered" doesn't. (Also, there is nothing keeping the poor from having a sub-set of unofficial norms which they can keep since they are the most in need of protection. For protection the wealthy hire lawyers.)

The above justifications by those in positions of power acting irresponsible along with every other rationalization that can be thought up to excuse their behavior can be found in the financial media. It's a cornucopia of apologetics for anti-social behavior.

The idea that in the capitalistic society of the neo-classical economist it's only naturally that we learn to walk and talk like their capitalists may be a growing truism with horrible consequences for society yet to be imagined even after the financial crisis, or possibly because of it.

I would hate to live in a society where the strongest motivation for the butcher to keep his thumb off his scales is the fear of the law. Fear of the law is for people who haven't internalized the idea of the good. Fear of the law is for those who need a government to blame for their lack of responsibility; it's for those looking for a way to rationalize their behavior. Therefore, the constant refrain heard from those walking away with millions or abusing their powers is, "I haven't done anything illegal."

When I was a kid in grade school--a long time ago when taxes on the top earners were 90%--a well respected neighborhood dentist came in to talk to my class about his profession. The one thing I remember him telling us about dentistry was "It will keep food on the table and a roof over your head." That was sufficent, there was no talk about "cavier dreams."
I suspect it would have been sufficient for Adam Smith butcher. I dare to hope that it is sufficient for the man or woman in the streets today dispite the best efforts of neo-classical economist to get into their heads with their particular virulent strand of capitalism.
Reply Nov 01, 2009 at 11:53 PM

anon/portly said...
Okay, Daniel Klein is obviously a nut, but the question of how central to Smith the "invisible hand" concept was, or at the least the things Smith was using it to describe, is an interesting question.
"By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention."

I think this brings up several questions. How "many" other cases - a few, lots? What would some of those other cases be? Is the concept of "promot[ing] an end which was [unintended]" a big part of Smith's analysis, or not?

I don't think it's too crazy to see similarities between the merchants who Smith views as promoting the ends of society via risk-avoidance (as Gavin Kennedy notes) and profit-maximization (as Gavin Kennedy omits to note), and the well-known profit-maximizing merchants of this passage:

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest."
Would this be a candidate for one of those "many other cases," or not?
You might think I am merely attempting to make a point but there's no use my denying it: I consider this to be a devastating, final 'proof' of my assertions.
http://adamsmithslostlegacy.com/2009/04/invisible-hands-explain-nothing.html
Reply Nov 02, 2009 at 12:58 AM

reason said...
I'm with Tom Hickey on this. Who cares.
Reply Nov 02, 2009 at 01:49 AM

Fred C. Dobbs said...
Injecting 'the invisible hand' into the consideration of economics. Is that not a way to insert religion into the discussion, perhaps to suggest that the end really is near, as the 'invisible handwriting is on the wall'?
Reply Nov 02, 2009 at 02:26 AM

kharris said...
The problem with claiming a sparsely employed expression in Smith's writing to be central to the thought behind the writing is at least two-fold. First is that (OK, I know there will be objections, but stay with me) Smith is a very good writer. I'm not saying he is the sort of writer that today's reader can't put down, but neither is Shakespeare for a great many modern readers. Look at the sensation Smith caused in his own day. He managed to grab the attention of thinkers in his own time, and won praise in the process.

If a great writer had meant - as Smith suggested Thucydides did - to feature a particular idea by placing it carefully in the middle of the essay, wouldn't he have done so in a way that caused readers in his own age to notice? Kennedy's point is that "invisible hand" became a fad nearly 200 years after it was first shown to the world. If it were central to Smith's thinking, given that he is a good writer (more Herodotus than Thucydides, to my thinking), then wouldn't he have been able to make the expression a fad in his own time? If it did not become a sensation after the first edition, wouldn't he have made the sort of changes that would have given it greater prominence?

The second "fold" of the problem is that the claim of centrality based on location looks like special pleading aimed at push-back. If location is the only claim one can put forward for Smith's own intentions regarding the centrality of "invisible hand" thinking (thanks to Tom H, for inserting the "intentionalist fallacy" into the discussion), then the claim is a thin one. Do we know, for instance, that no other expressions were used in a roughly central position in the text - expressions that have not been adopted to make claims about Smith that are otherwise hard to support - but not elsewhere? If "invisible hand" is not unique in its Thucydidian locational qualities, then the argument for intent is weakened. I don't intend to do a search for every 2-to-5 word phrase in the middle 10% of the book to find out, but isn't it somewhat incumbent on Klein and Lucas to substantiate their argument with more than just Smith's fondness for a writing trick from Thucydides?
Reply Nov 02, 2009 at 05:32 AM

Barkley Rosser said...
"Invisible hand" was a general trope of the British
Englightenment. Smith was the first to apply it to
economics, although he did so in a way not consistent
with the current textbook interpretation.
It looks like it first appeared in a letter in 1712
from Robert Cotes to Isaac Newton in connection with
Newton's theory of gravity. Bodies are drawn towards
each other "as if by an invisible hand."
Reply Nov 02, 2009 at 06:52 AM

Barkley Rosser said...
I have just seen it noted that the phrase "invisible hand" appears in Shakespeare's "Macbeth," although in a much different usage. Pretty clear that the theory of gravity is closer to the concerns of Adam Smith than as means of undoing the mortal coil.

Reply Nov 02, 2009 at 07:03 AM
anne said...
http://shakespeare.mit.edu/macbeth/macbeth.3.2.html
1605
The Tragedy of Macbeth
By William Shakespeare
Act III. Scene II.
The palace.
Enter LADY MACBETH and a Servant
LADY MACBETH
Is Banquo gone from court?
Servant
Ay, madam, but returns again to-night.
LADY MACBETH
Say to the king, I would attend his leisure
For a few words.
Servant
Madam, I will.
Exit
LADY MACBETH
Nought's had, all's spent,
Where our desire is got without content:
'Tis safer to be that which we destroy
Than by destruction dwell in doubtful joy.
Enter MACBETH
How now, my lord! why do you keep alone,
Of sorriest fancies your companions making,
Using those thoughts which should indeed have died
With them they think on? Things without all remedy
Should be without regard: what's done is done.
MACBETH
We have scotch'd the snake, not kill'd it:
She'll close and be herself, whilst our poor malice
Remains in danger of her former tooth.
But let the frame of things disjoint, both the
worlds suffer,
Ere we will eat our meal in fear and sleep
In the affliction of these terrible dreams
That shake us nightly: better be with the dead,
Whom we, to gain our peace, have sent to peace,
Than on the torture of the mind to lie
In restless ecstasy. Duncan is in his grave;
After life's fitful fever he sleeps well;
Treason has done his worst: nor steel, nor poison,
Malice domestic, foreign levy, nothing,
Can touch him further.
LADY MACBETH
Come on;
Gentle my lord, sleek o'er your rugged looks;
Be bright and jovial among your guests to-night.
MACBETH
So shall I, love; and so, I pray, be you:
Let your remembrance apply to Banquo;
Present him eminence, both with eye and tongue:
Unsafe the while, that we
Must lave our honours in these flattering streams,
And make our faces vizards to our hearts,
Disguising what they are.
LADY MACBETH
You must leave this.
MACBETH
O, full of scorpions is my mind, dear wife!
Thou know'st that Banquo, and his Fleance, lives.
LADY MACBETH
But in them nature's copy's not eterne.
MACBETH
There's comfort yet; they are assailable;
Then be thou jocund: ere the bat hath flown
His cloister'd flight, ere to black Hecate's summons
The shard-borne beetle with his drowsy hums
Hath rung night's yawning peal, there shall be done
A deed of dreadful note.
LADY MACBETH
What's to be done?
MACBETH
Be innocent of the knowledge, dearest chuck,
Till thou applaud the deed. Come, seeling night,
Scarf up the tender eye of pitiful day;
And with thy bloody and invisible hand
Cancel and tear to pieces that great bond
Which keeps me pale! Light thickens; and the crow
Makes wing to the rooky wood:
Good things of day begin to droop and drowse;
While night's black agents to their preys do rouse.
Thou marvell'st at my words: but hold thee still;
Things bad begun make strong themselves by ill.
So, prithee, go with me.
Exeunt
Reply Nov 02, 2009 at 08:34 AM
Barkley Rosser said...
Thanks, anne. Figured you might come through on this one. Exeunt, indeed, :-).
Reply Nov 02, 2009 at 10:13 AM

Harold said...
Doesn't "the invisible hand" really refer to a belief that Providence (in the form of ever-improving Progress) had directed (non-Darwinian) evolution in such a way as to assure that "the best" always came out on top, an outlook prominent during the period of British late nineteenth-century imperialism.
Herbert Spencer's libertarian "political philosophy" (otherwise known as the "police state" theory of government, which holds that government's role should be limited to protecting private property, dates from this era.
Reply Nov 02, 2009 at 12:45 PM

Barkley Rosser said...
Harold,
Not in Newton or Smith, who way predate all that Victorian evolution...

A New Slant on Adam Smith's Use of the Invisible Hand Metaphor

A New Slant on Adam Smith: must be read HERE

“In a Word or Two, Placed in the Middle: The Invisible Hand in Smith’s Tomes
by Daniel B. Klein and Brandon Lucas"

"Abstract: The meaning and significance of Smith’s expression “led by an invisible hand” has been long debated, and especially lately. We speak to the large debate only in fine, by focusing on the conjecture, first hinted at by Peter Minowitz, that Smith deliberately placed his central idea, as represented by the phrase “led by an invisible hand,” at the physical center of his masterworks. We bring supportive evidence and argumentation to the conjecture. The four most significant points developed are as follows: (1) The expression “led by an invisible hand” occurs pretty much dead center of the 1st and 2nd editions of Wealth of Nations, and of the final edition of the volumes containing Theory of Moral Sentiments. (2) The expression in WN drifted only a bit from the center, only about 5 percent from the center in the final edition (and even less if the index is excluded). (3) The rhetoric lectures show that Smith not only was conscious of deliberate placement of potent words at the center, but thought it significant enough to remark on to his pupils, noting that Thucydides “often expresses all that he labours so much in a word or two, sometimes placed in the middle of the narration.” (4) There numerous and rich ways in which centrality and middle-ness hold special and positive significance in Smith’s thought. In conjunction with larger considerations, these points may be helpful in assessing the significance of Smith’s famous phrase."

Comment
Readers will know that Daniel Klein and I have been engaged in civilised debate in the pages of Econ Journal Watch (May and Sept) HERE, HERE and HERE
on the significance of Adam Smith’s use of the metaphor of “an invisible hand”.

Daniel has prepared a most interesting paper, which he believes supports, at least indirectly, his mainstream interpretation of the major significance of Smith’s use of the famous metaphor and its modern associations across the discipline. It is an original and careful piece of work and I hope many readers promote the link to it on their own Blogs.

I have read through the paper quickly and can commend it to you. It is worth reading. I shall review the arguments on Lost Legacy when I have studied it more carefully.

Almost Right But Not Quite

Rev. Dr. Marilyn Sewell writes on “Economics and Religion” HERE:

“A word about the ancient god of the free market system, Adam Smith. When Smith is quoted regarding the "invisible hand" of the market, what is conveniently forgotten is his assumptions about the conditions necessary to make free markets work. Smith assumed that we would operate on a small scale and so would know the character of the people we trade with. He assumed that our financial dealings would exist in the context of our values. Instead, Smith's writing is used to justify the mad pursuit of shareholder profit, which is held to be holy and untouchable.”

Comment
Smith was not an “ancient god of the free-market system”.

He regarded primitive belief in gods as “pusillanimous superstition” (his History of Astronomy, 1744-58; published posthumously in 1795 on his direct instructions just before he died in 1790).

He did not have a theory of the “invisible hand of the market”.

The rest of the paragraph as a statement of his broad views is acceptable:

“Smith's writing is used to justify the mad pursuit of shareholder profit, which is held to be holy and untouchable.”

Modern interpretations, and not a few inventions too, of Smith’s views are almost wholly wrong. Dr Marilyn Sewell, a minister of the Christian religion, is excused. I presume she wrote the above in good faith.

A Little Mystery To Be Solved

Ben Hyde writes in “Ascription is an Anathema to any Enthusiasm” Blog (HERE) in:

“The Perverse and Invisible Hand”

““I have recently started reading Albert Hirschman’s 1991 book “The Rhetoric of Reaction: Perversity, Futility, Jeopardy.” I’m only 20 pages into it so no telling where it’s going. But so far, it has totally blown me away. The book is an outline of three styles of rhetoric that are commonly used by reactionaries, i.e. those who would react against progress. These are generic arguments good in most any situation. Introducing free speech, extending the franchise, ramping up public education, rearranging the kitchen? You name it these rhetorical devices stand ready and willing.

He labels the first of these “perversity.” Here in while [sic] reactionary pretends supports the goal he then goes on to explain that efforts toward that end are certain to backfire. Efforts to improve health care? Such efforts will decrease health care! Universal schooling? Such efforts will lead to wide spread idiocy. Do-gooders make things worse. The audacity of this argument is breath taking. But look at the record! How that French Revolution turn out?

Hirschman points out that observers of the French Revolution quickly deployed this argument. Even before the it all went to hell in a hand basket. Edmund Burke in particular used this perverse argument, and later when it things got ugly he got a lot of credit for being so insightful. So did Burke invent this technique? Hirschman argues that no, Burke was mimicking newly popular argument with a similar structure that had recently arisen in the circles he ran in. I.e. the hypothesis of Adam Smith. Aka, the Invisible Hand. This takes my breath away!

The invisible hand is a perverse argument. But in this case bad actions (individual greed, personal vices, and self interest) have the unintended consequence of creating a vibrant national economy. It’s as if God in his infinite wisdom had sus’d out how to turn his flock of sinners into something constructive. Smith might have given credit to divine providence but choose to give the credit to more amorphous but still spirtual invisible hand. Many of Smith’s readers saw right thru that. Particularly all those commercial actors looking to get the church off their case.”

Comment
I haven’t yet read Hirschman’s little volume, “The Rhetoric of Reaction: Perversity, Futility, Jeopardy”, (it’s now on order from Amazon for £13), so I cannot fully dissect what Ben Hyde is asserting.

He seems to be reporting that “Burke was mimicking newly popular argument with a similar structure that had recently arisen in the circles he ran in. I.e. the hypothesis of Adam Smith. Aka, the Invisible Hand.”

I find this intriguing to say the least. Had the “invisible hand” argument really “recently” arose “in the circles he [Burke] ran in”? If so, this is a discovery of momentous importance in the history of economic thought! More to the point: how did I miss it?

Or is it an idea of Hirschman’s that Burke used a rhetorical device to make his case against the French Revolution that was similar in construction to that device which Adam Smith used in the case of “an invisible hand”, with a side assumption on the part of Hirschman that Burke ‘ran in” the “circles” where they discussed Adam Smith’s metaphor of “an invisible hand”?

For this to be true, Hirschman must either have documentary evidence that Smith’s metaphor was widely discussed in the late 18th century (for which I have not found any trace so far) or he must assume that it should have been widely circulated because the metaphor was widely discussed in the late 20th century! Either basis for Hirschman’s argument is in itself a preposterous proposition.

Or, lastly, is it something that Ben Hyde drew from his reading of the first 20 pages of Hirschman’s book? Until I receive the book I cannot comment or sort out who was the author of what part of Ben’s post.

Excellent Writing But Still Mythical

Atanu Dey writes a highly readable and lively piece on “Why education matters” HERE

“I am sure that there is no secret cabal of powerful people with evil glints in their eyes plotting to keep Indians illiterate. But individual behavior motivated by private incentives - micro behavior - have consequences at the social level - macro outcomes - that are not intended by individuals. The most famous example of this is Adam Smith's "invisible hand" - the market mechanism that grinds out the socially beneficial outcome even though an individual is only interested in his or her own welfare. So also, there could be what we can call the "invisible fist" of the government which can pummel the life out of a society even though no single government official is doing anything more than making his or her life comfortable.”

Comment
Atanu Dey writes well and complains that 33 per cent of Indian adults are illiterate. An alarming statistic for any country and doubly so for the world’s largest democracy.

His clever construction of the possible reason why government action fails to address the illiteracy problem by drawing a parallel with the invented notion of an “invisible hand” in the economy, wrongly attributed to Adam Smith by modern economists is well stated. But good writing is still vulnerable to the evidence.

Because Adam Smith didn’t write anything about the “invisible hand” being a “market mechanism” that “grinds out the socially beneficial outcome even though an individual is only interested in his or her own welfare” - see numerous posts in Lost Legacy that expose this myth – it was at root a myth created by well-meaning modern economists as part of anti-Soviet planning propaganda during the Cold War (and over enthusiastic mathematicians carried away with their 'proof' of general equilibrium applying to the real world).

Their motives were laudable – Stalin’s Soviet planning was backed by repressive civil violence and threatened to cause World War III (and IV and V, etc.,). But by their apparent endorsement of unrestrained behaviours their own unintended consequences created a mythical monster that self-interest, elided by epigones in selfishness, worked out, Panglossian-like, for the “best of all possible worlds”, covering over a plethora of externalities that damaged the interests of the rest of society (pollution, environmental destruction, monopoly pricing, protectionism, and local wars arising from them.

By associating Adam Smith with the invented myths, they traduced his reputation too. Most economists actually believe that Smith was the author of the myth. He wasn’t.

Yet many climb on the bandwagon that the current recession ‘exposes’ the ‘failures’ of following Adam Smith’s policies, in particular ‘laissez-faire’ (which he never supported – nor mentioned even once), ‘lack of regulation’ (when in fact he specifically advocated the exact opposite where it came to bank policies “which might endanger the whole security of the society”; see WN II.ii.94: 324) and the mythical “invisible hand”, mere metaphor for an entirely different set of circumstances).

Tenuous Links Do Not a Theory Make

Bill Bonner writes in Running Because I Cant Fly Blog HERE:

"Macro for Dummies"

“Later, economists of the Scottish enlightenment, notably Adam Smith and Adam Ferguson elaborated. Smith, like Harding, saw the economy ordered by the invisible hand of God. Ferguson saw markets as a ‘spontaneous order,’ which were the “result of human action, but not the execution of any human design”.

Comment
Adam Smith wrote nothing to suggest he saw the economy “ordered by the invisible hand of God”. Adam Ferguson, a former Chaplain to the famous Scottish Regiment of the Black Watch, may well have harboured such ideas, but Adam Smith didn’t reveal such beliefs, if he held them.

The meaning of the words, “result of human action, but not the execution of any human design”, does not necessarily imply that if it was not the result of “human design” it must have been designed by God; it could as well be the that their “design” was not necessary – it was not “designed” by anybody, or anything, but was the result of unintentional activities, some of which had unforeseen consequences.

Evolution of species shows that few, if any, life forms remained exactly the same from their predecessors over geological time; they change as their environments change, some became extinct, others change their forms, even dramatically from sea- to land animals, and a few changed from quadrupeds to bipeds, as the evolution of humans from Hominines show.

On Adam Smith’s alleged “invisible hand of God” theory, his religious beliefs did change from being a candidate for ordainment as a minister in the Episcopal Church of Scotland up to 1744 (at Oxford, aged 21) to a secular career as a moral philosopher.

I discuss this in my paper, “The Hidden Adam Smith in his Theology”, presented to the History of Economics Society, University of Colorado, Denver, June 2009 (available on request).

A Claim Too Far

Terry Arthur posts on the Adam Smith Institute Blog HERE:

The “invisible hand”, in its modern guise, has been given many invented roles by modern economists since the 1950s, all wrongly attributed to Adam Smith’s single use of the popular, 18th-century metaphor in Book IV of Wealth Of Nations.

For example, it’s been credited wrongly with meaning market forces, supply and demand, the price mechanism, market co-ordination, balancing economies, and ensuring that self-interested actions always result in public benefits.

Terry Arthur takes these exaggerations to new heights:

“It is the result of Adam Smith’s "invisible hand" – the most powerful information system the world has ever seen – bar none...”.

In Smith’s use he explains why some, but clearly not all (British foreign trade was a high proportion of its 18th century annual economy), merchants, from a “concern for their own security’, preferred to avoid the higher risks of foreign trade by investing locally, which, by the arithmetical rule that the whole is the sum of its parts, increased domestic output and employment.

It had nothing to do with Smith’s writing on the above subjects, all covered in Books I and II of Wealth Of Nations without any mention of “an invisible hand”.

Should Terry Arthur wish to source his notion of Adam Smith’s original use of the “invisible hand” he would search “vainly for support of [his] notions” in Wealth Of Nations.

In books I and II, Smith discusses market forces and the coordination role of prices, without mention of an “invisible hand”, and in Book IV, where he mentions (once) “an invisible hand”, he does not discuss market forces or the coordination role of prices.

[Disclosure: I am a Fellow of the Adam Smith Institute]

A Psychologist Invites Modern Economists to His Couch

Jim Taylor, Ph.D. writes in Psychology Today HERE:

“Economics: Economists are Irrational!”

What are free-market economists thinking?

“I recently read an article by the Nobel Prize-winning economist Paul Krugman in which he described the renewed battle between so-called freshwater economists (so named because they are largely based at the University of Chicago and other Midwestern universities) and saltwater economists (based primarily at Princeton, MIT, Berkeley and other coastal universities). The freshwater economists are disciples of Adam Smith and espouse the free-market and rational actor models. The saltwater economists align with John Maynard Keynes and his belief in the need for regulation in financial markets and that people aren't rational actors.
The past 50 years have been dominated by freshwater economists who had a reverential faith in the power of free markets (Smith's "invisible hand") and the rationality of people in their financial decisions. Given what has happened to our economy in the last decade, noted for its multiple bubbles (e.g., Internet, housing, mortgage), it's hard to believe that any of these "efficient market" adherents still have jobs, much less credibility in how the economy actually works.”

Comment
You should read Jim Taylor’s article. It’s a great knock-about piece of popular journalism, much of which I enjoyed, some of which I thought not quite fair in its populism, and on occasion some elements of which he is wrong. This last is not Jim’s fault: he takes the claims of modern economists at face value and responds to them to his light-hearted rant.

Lost Legacy has never been slow in criticizing the ‘Chicago Adam Smith’, a person with ideas that are far from the ideas of the Adam Smith born in Kirkcaldy in 1723.

George Stigler’s boast that “Adam Smith is alive and well and lives in Chicago” (1976) reflects to invention of the Adam Smith of the “invisible hand” (a mere metaphor for Adam Smith whose single use of it in Wealth Of Nations referred to the unintended consequences of the risk-avoidance of some, but not all merchants – foreign trade with Europe, India, and the North American colonies, was a major contributor to the British economy – who preferred the home trade), and had nothing to do, at least in Adam Smith’s mind, with how markets worked, how banks should be regulated (yes, he favoured government regulations in banking!: WN II.ii.94: 324), or how the price system worked.

The belief that the “invisible hand” was a significant ‘idea’, ‘concept’, ‘theory’, or ‘paradigm’ was wholly invented in the 1950s by neo-classical economists on the back of general equilibrium mathematics (which interestingly did not include a term for the “hand”) and in support of a worthy criticism of Cold War, Soviet central planning. It is now taught in every economics 101 class as if it had historical validity, mainly by people who have never bothered to read Wealth Of Nations.

However, Adam Smith did not espouse a vision of ‘perfect competition’, of ‘Homo economicus’, or ‘rational actor models’. On this assertion Jim betrays a lack of appreciation of Adam Smith’s works.

Even when discussing price changes in a market, he spoke of ‘neighbourhood’ markets, not an economy (Book I, Wealth Of Nations). I don’t expect Jim to be familiar with the Kirkcaldy Adam Smith, or with economics generally (his three degrees are in psychology), but he might appreciate a glance through Lost Legacy to see how much he traduces Smith’s reputation by making light of the differences between what he as responsible for (“Theory Of Moral Sentiments”, 1759 and “Wealth Of Nations”, 1776) and what modern epigones invented in his name.

Jim says he “would love to put these economists on the couch and explore what is going on in their heads” (I assume no Freudian motives here!); I would rather that Jim sat in a library and read some Smith and Keynes for himself. As it is, he gives offence to the valid notion that inter-disciplinary familiarity is good for scholarship.

Jim and I can agree that modern “economists” who dominate the profession presently, invented a mathematical world devoid of human beings. Adam Smith, incidentally, a talented mathematical scholar by 18th century standards, is totally innocent of such a charge. Those ‘guilty’ as charged can defend themselves and Jim should direct his ire, undergraduate humour, and psychological "explorations of their heads" to them.

An Unbridled Error

Stephen Fleischman, writer-producer-director of documentaries (see www.amahchewahwah.com, e-mail stevefl@ca.rr.com), writes in the
The Smirking Chimp HERE:

“Hypocrisy Unbridled”

“Going back to Adam Smith, the concept that the "invisible hand" of the free market would keep the capitalist economy in balance has been the conventional wisdom. Capitalism must grow or die. And grow it did. Mergers and acquisitions became the modus operandi as corporate enterprises struggled with their competitors to survive.”

Comment
Stephen Fleischman writes a racy and articulate polemic against the “hypocrisy” of certain ideas about capitalism, as taught him from his long experience in tv news media.

Yes, the “conventional wisdom” may very well be as stated above, but this view has nothing to do with anything Adam Smith wrote. The “conventional belief” was an invented myth by certain economists in the 1950s. Indeed, it is a distortion of the significance of Adam Smith’s single reference to “an invisible hand” in Book IV of his Wealth Of Nations which also discusses markets in Books I and II, without mentioning “an invisible hand”.

This is more than an academic quibble. If you believe that markets are kept in “balance” (whatever that means!) by such an entity then you are in severe danger of complacency when events show that markets are out of “balance”.

Recent events have shown how fragile such beliefs attributed to Adam Smith are with leading personages, such as Alan Greenspan, who included in his very public “mea culpa” a renunciation of his belief in the “invisible hand”, as if Adam Smith had somehow let him down and was responsible for his own self-deception, courtesy, it may be said, of listening too much to Ayn Rand.

An Infamous Misquote

“Hank” writes in Own The Dollar (“Don’t Let the Dollar Own You”) HERE:

“Famous Quotes About Money And Investing From Adam Smith The Father of Capitalism » Stock Quotes Online”

“Who Is Adam Smith? Adam Smith wrote “The Wealth of Nations” which is considered the first modern work of economic theory. The Wealth of Nations discussed that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods needed by society by a so-called “invisible hand”. The invisible hand of the market is the term economists use to describe the self-regulating nature of the marketplace. The invisible hand is created by the combination of our economy’s self-interest, competition, and supply and demand forces, and is capable of allocating resources in society. Adam Smith is widely cited as the father of modern economics and capitalism.”

Comment
Hank writes an "infamous summary" of Adam Smith’s “quotes”

Yes, “the invisible hand” is a “term” used by many modern economists to “describe” the underlined sentence above, but it was never used by Adam Smith to do so.

It is a complete myth that Smith used the metaphor of “an invisible hand” in this manner. He used the metaphor only once in Book IV of Wealth Of Nations and not in a description of “self-regulating markets” , “competition” or “supply and demand forces”, all of which he discussed in Books I and II of his Wealth Of Nations but without mentioning "an invisible hand".

This fact is checkable by those economists who purvey the myth of Smith’s use of the “invisible hand”, should they ever bother to read Wealth Of Nations.

Whether Smith was the founder of “modern economics”, as taught today, is doubtful; even more doubtful, is the proposition that Smith founded “capitalism”, a 19th-century phenomenon and a word first used in English in 1854 (Oxford English Dictionary) by the novelist William M. Thackeray, in his book “The Newcomes” (Smith died in 1790).

“Hank” has some explaining to do. Merely repeating what his tutors told him, or his textbooks claimed, is no substitute for showing exactly where Adam Smith wrote that the “invisible hand” produced “the right amount and variety of goods needed by society”.

From a Multitude of Epigones

Tom Slater writes (19 October) in GreenBeat (HERE)

“Cap and Trade 101: For those who haven’t been following for the last 30 years”

“This approach to regulation applies ye olde economist Adam Smith’s theory of the “invisible hand” (the power of the free market, essentially) to curtail pollution with less human intervention and at a lower cost. As is, California spends close to $500 billion annually regulating businesses’ emissions. The U.S. is trying to avoid this on a national level. But the idea of cap-and-trade can’t be traced all the way back to Smith. Instead, it began with a 1960s-era supercomputer.”

Comment
“Adam Smith’s theory of the “invisible hand” (the power of the free market, essentially)” compromises the rest of Tom Slater’s interesting article.

I am less concerned with the errors in Tom’s attribution to Adam Smith of the myths about the metaphor of the “invisible hand” than I am with the effect of the continual repetition of the attributed myth in all sorts of contexts.

The real culprits for the myth are those modern economists (from the 1950s onwards) who grabbed it from “ye olde economist” and applied it to their theories of general equilibrium in solving a problem – is a market equilibrium theoretically possible? – or who adopted it to give an unnecessary mystical credence to the manifest superiority of markets, under liberty and the rule of law, over the then competing claims of Soviet planned economies and the visibly repressive political structures associated with their operation.

The intentions were perfectly honourable and, I believe acceptable, but markets are well understood and do not need ‘miracles’ of mystical “invisible hands”, which nobody has ever explained how these “invisible hands” work, and often attribute different meanings to them – some say variously that the invisible hand is (a small selection from a larger list):

“supply and demand”,
“the power of free markets”,
“coordination out of autonomous decisions”,
a “theorem at the root of economic liberalism”,
“market competition”,
“the market process at work”,
“market forces”,
“self-interest”,
“competition”,
“consumer satisfaction”,
“maximised profit”,
“free competition”,
“foundation of modern welfare economics”,
“the price system”
“great idea of intellectual history”,
“the purchases or sales of goods or services for money”
“ a force inherent to the market”
“inevitably pilots the economy”

There are honourable doubters too, who assert that the metaphor has been misused by economists, though they are fewer in number than those who have bought into the myth.

Recently, of course, several new voices of dissent emerged in response to the current financial crisis, allegedly caused by adhering to the myth of the invisible hand as a perfectly natural corrector of market variations.

Already, as financial institutions steady their balance sheets, some of these recent “converts” are retracing their steps back to the myth, under the familiar truth that “the markets are self-correcting”.

Markets are strong enough to ‘self-correct’ but that has always been true, without any recourse to “invisible” body parts. It’s not the undoubted resilience of markets that is in dispute; it’s whether the invisible appendage ought to be invoked and attributed to the wholly innocent Adam Smith by a profession that claims to be a harder science than theology.

Another Myth Circulates

Subir Gokarn (19 October) in Business Standard HERE http://www.business-standard.com/india/news/subir-gokarnvalueorganisation/373592/
writes on Oliver Williamson's work and its “great relevance for many contemporary Indian issues”

“Adam Smith is best known for his characterisation of the market economy as an “invisible hand”. Buyers and sellers, each acting in their own interest, lead to a collectively superior outcome in terms of the efficiency of resource utilisation. The efficiency gains that the invisible hand generated were a primary contributor to the “wealth of nations”.

Comment
Adam Smith never “characterised” the market economy as “an invisible hand”. Yes, many modern economists have so-characterised Smith in such an attribution, but there is no documentary evidence that he did so.

The documentary evidence of the only three times that he used the invisible hand (in his posthumous Essay On Astronomy, 1795; Theory Of Moral Sentiments, 1759; Wealth of Nations, 1776) shows clearly that he was not referring to the market economy at all.

The first time (History Of Astronomy, 1744-58) refers to the invisible hand of Jupiter, a Roman god, no mention of a market economy; the second time, Moral Sentiments (1759), refers to a rich landlord feeding the “many thousands” he employed from the produce they supplied each harvest (no mention of a markets economy), and the third time, Wealth Of Nations (1776), refers to some, but not all merchants investing their capital locally rather than abroad (no mention of a market economy).

Smith discusses the working of markets in Books I and II of Wealth Of Nations and does not mention “an invisible hand” at all. I would regard this as conclusive: when he does mention the metaphor as an “invisible hand” he does not mention “market economies” and when he mentions market economies, he does not mention an “invisible hand”.

On this basis why is “Adam Smith … best known for his characterisation of the market economy as an “invisible hand”?

The explanation can only be that the belief is a myth, created by modern economists who believed what they were told by their tutors or read in their modern textbooks. None of them, apparently, checked with Adam Smith’s published works. Most still insist, however, in believing the characterisation to be true despite the facts being drawn to their attention.

See my articles on “Adam Smith and the Invisible Hand: from metaphor to myth” HERE; the response by Daniel Klein (HERE) and my reply to Daniel Kelin HERE.

An Early Non-Believer in the Invisible Hand

Thirty-two years ago I reviewed a book for the Times Higher Education Supplement by John Cornwall, 1977, Modern Capitalism: its growth and transformation (Martin Robertson).

It is among my library in France and I looked it up yesterday. In its preface I found this reference to the invisible hand:

"To put the matter somewhat differently, what is downgraded in the pages that follow is the view that economic events are the outcome of some invisible hand guiding an economy through time and space in some predetermined way, with the outcome depending only upon some assumed initial conditions" (Preface, page x).

Comment
Of all the references to the metaphor of "an invisible hand" I have read lately - and believe me I have looked up and read moany more than a few (my notebook is up to page 84) - this is the only one, including a couple of self-proclaimed marxist/radical authors, that specifically rejects the use of the "invisible hand" to account for economic activity.

Some books, mainly published before 1945, of course, do not mention the invisible hand at all, my contention being that the metaphor of the "theory", "concept", "paradigm", of the invisible hand is a modern invention, attributed wrongly to Adam Smith from the post-war years, singly at first in the late 1940s (Lange, Samuelson) and then in a flood-like ubiquity (if I may allowed such a violent expression) from the early 1970s.

Thank goodness for John Cornwall, then of Dalhhousie University, to resist the early torrent of mysticism and present his analysis shorn of a metaphor that has no role in serious economic analysis.

I wonder what happened to John Cornwall.

Spare Us From the Invisible Hand

Patrick Kilbride writes in Chamber Post HERE:

“Free People, Free Minds, Free Markets”

‘In the 18th-century, Adam Smith left us with the indelible image of markets producing desirable social outcomes through the work of an "invisible hand." ’

Comment
In an otherwise neat argument for both liberty and free markets, Patrick Kilbride spoils his case with modern nonsense about Adam Smith and his use of the metaphor of “an invisible hand”.

Smith did not use the metaphor when explaining either how markets work generally (Books I and II, Wealth Of Nations) or how some, but not all, merchant traders preferred to invest locally following their concerns about the higher risks of investing abroad or in shipping (Book IV.ii, Wealth Of Nations).

In fact, a close reading of the only place in Wealth Of Nations where he used the metaphor of an invisible hand, shows that he first explains in detail the circumstances leading some, but not all, merchant traders to behave as they did (paragraphs 1 to 8, chapter 2, Book IV), and only then deploys the metaphor for the consequences of their specific behaviour (“intending their own security”), conforming to the arithmetic rule that the whole (the national annual output of wealth, including local employment) is the sum of its parts – the more merchant traders who are risk averse, despite the high profits from foreign and colonial trade, the greater the total annual wealth, including domestic employment.

Modern economists have invented a whole new meaning to Smith’s singular use of the metaphor, giving it the characteristics of a “law” of markets, though it was never stated as such by Adam Smith.

The modern invented meaning is commonly taught in first year economics courses and textbooks, and such is the effect of it on modern economists, it is extremely difficult to dislodge it – they seldom actually read Wealth Of Nations or even the relevant paragraphs (1 thru 8) and, by relying on a truncated extract from paragraph 9 only, they remain solidly convinced that Adam Smith explicitly stated what their tutors told them he wrote.

This gives succour to hostile critics of markets who throw the “invisible hand” back at them (“invisible fist” or, as seen recently, “invisible middle finger”, and such like). But there is no actual “invisible hand”, it does not exist and never did. The metaphor is just that, a metaphor, and one that was popular in literature, sermons, and poems in the 17th and 18th centuries – I have a list of 59 examples of its uses, besides Smith’s.

Mathematicians called it into being when “proving” that general equilibrium in an imaginary market, loaded with assumptions that removed all semblances of real world economies, was a theoretical possibility (Debreu, Arrow). Others (Samuelson, Freidman) and among them propagandists against Soviet communist planning, used the metaphor to good effect – Stalin needed the gulags to enforce planning, but free markets had an “invisible hand” that did its work without menace.

Editors of Time, Newsweek, Wall Street Journal, Financial Times and assorted media journalists loved the “invisible hand”, Nobel Prize winners sang it praises, and the epigones believed in its miraculous powers with the passionate certainties of Jihadists.

Worse, the invisible hand became an alibi of last resort, flaunted all round as if it existed. When it “failed”, the invisible hand was dumped among wails and the gnashing of teeth in wholesale “confessionals” (Alan Greenspan).

Markets suddenly became naked – they always were naked, but the veil of the invisible hand obscured their nakedness. It never was the answer to everything that could go awry in the normal condition of disequilibrium in all economies, much of it excited to crises by public policy interventions by legislators and those who influenced them.

Smith was right about them and the damage they could inflict – fortunately “there is a lot of ruin” in an economy, as he might have put it in another context...

Jay Richards on Selfishness

Jay W. Richards, author of Money, Greed, and God: Why Capitalism is the Solution and not the Problem (2009), (15 October) writes in The American (the journal of the American Enterprise Institute) HERE:

"Greed Is Not Good, and It’s Not Capitalism"

“The Virtue of Selfishness?

You might think that greed has been bound up with defenses of modern capitalism from the very beginning. You might recall Adam Smith, the father of modern capitalism, who famously wrote, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Ayn Rand and others seemed to extend Smith’s point by treating greed as the basis of a free economy. There are connections here of course; but Smith never argued that greed is good. His view was far different, and far more subtle.

Adam Smith argued that in a rightly ordered market economy, you’re usually better off appealing to someone’s self-love than to their kindness.

First, Smith argued that in a rightly-ordered market economy, you’re usually better off appealing to someone’s self-love than to their kindness. The butcher is more likely to give you meat if it’s a win-win trade—if there’s something in it for him—than if you’re just asking for a handout. This is, or should be, common sense.
Second, Smith knew the difference between self-interest and mere selfishness. Every time you wash your hands or take your vitamins or clock into work on time or look both ways before you cross the street, you’re pursuing your self-interest—but none of these acts is selfish. Indeed, generally speaking, you ought to do these things. Greed, in contrast, is a sort of disordered self-interest. Adam Smith, the moral philosopher, always condemned it as a vice.

Third, Smith never argued that the more selfish we are, the better a market works. His point, rather, is that in a free market, each of us can pursue ends within our narrow sphere of competence and concern—our “self-interest”—and yet an order will emerge that vastly exceeds anyone’s deliberations.

That’s the problem with socialism and all sorts of nanny-state regulatory prescriptions: They don’t fit the human condition.

Finally, and most importantly, Smith argued that capitalism channels greed. He recognized that human beings are not as virtuous as we ought to be. While many of us may live modestly virtuous lives under the right conditions, it is the rare individual who ever achieves heroic virtue. Given that reality, we should want a social order that channels proper self-interest as well as selfishness into socially desirable outcomes. Any system this side of heaven that can’t channel human selfishness is doomed to failure. That’s the genius of the market economy.”

Comment
I have criticised many times on Lost Legacy the cynical author of the Hollywood film script, Wall Street, for putting out the “Greed is Good” nonsense. Such a view had nothing at all to do with Adam Smith, either in Wealth Of Nations or Moral Sentiments.

Jay’s article is almost a perfect riposte to the Gekko libel about capitalism except for a paragraph elsewhere in it:

“In contrast, capitalism is fit for real, fallen human beings. “In spite of their natural selfishness and rapacity,” Smith wrote, business people “are led by an invisible hand ... and thus without intending it, without knowing it, advance the interest of the society.” Notice he says “in spite of.” His point isn’t that the butcher should be selfish, or even that the butcher’s selfishness particularly helps. Rather, he argues that even if the butcher is selfish, he can’t make you buy his meat. He has to offer you meat at a price you’ll willingly buy. He has to look for ways to set up a win-win exchange. Surely that’s good.”

Jay compresses two paragraphs together from Wealth Of Nations to make this unnecessary point about the so-called “invisible hand”. However, the example he makes of the “butcher, brewer, and baker” paragraph (Wealth Of Nations, Book I.ii.2:27) is spot on and worthy of wider circulation.

Regular eaders of Lost Legacy will know that Smith was not referring to all “business people” being “led by an invisible hand”, but only to those in a special case when they preferred the home trade to foreign trade, the trigger for their behaviour being their risk-avoidance regarding foreign trade (Wealth Of Nations, Book IV.ii. paragraphs 1 to 9: 452-56).

However, this corection is for the record only and in no way diminishes the excellent case that Jay Richards makes against the elision of self-interest into selfishness. Bernard Mandeville (1734: Fable of the Bees ) and his modern epigone, Ayn Rand, were absolutely wrong about selfishness. Adam Smith (and Jay Richards) was absolutely right about the anti-commercial sentiments of "selfishness".

A candidate for the October Lost-Legacy Prize?

Identify the Invisible Hand!

Alex Tabarrok writes on the Nobel Prize for Oliver Williamson in an article on the Marginal Revolution Blog HERE “Oliver Williamson and the pin factory”, which is fine but it contains the following paragraph:

“Transaction cost economics is all about applying these ideas in different settings to figure out the best governance structures (marriage, vertical integration etc.) in different circumstances. How does one deal with expensive investments (such as highly individual dies or plant construction) that are specific to a given trade and put the investor at risk yet which increase productivity? Williamson analyzes how firms come to rely on long term contracts or vertical integration or other seemingly non-competitive solutions to enhance market productivity. Early generations of antitrust enforcers often saw these as monopolistic dealings, but scholars such as Williamson helped us understand how these are essential to the workings of the invisible hand.”

Comment
Be clear, I applaud the award to Oliver Williamson, whose books I read as an undergraduate (I bought these outside of the recommended reading list and tried to introduce their ideas into my essays), and, of course, applaud the shared award with Elinor Ostrom.

So deep is the modern association of the workings of markets with the metaphor of the “invisible hand”, that it slips in even in the strangest of circumstances.

How is vertical integration “essential to the workings of the invisible hand”? What “workings”? Where can they be seen? Who has seen them to date? Where did he or she see them? Where did they describe them in a publication? Where in the maths of markets is the term for the “invisible hand”?

I could go on, but won’t.

An Hour in the Life Of a Humble Journeyman

I have a copy of Hector C. Macpherson’s (1899) "Adam Smith", Famous Scots Series, Oliphant Anderson & Ferrier, Edinburgh, in my library in France, which I had cause to look up shortly after I arrived at for a week. I acquired my copy in a second-hand bookshop in Edinburgh in the early 90s for £5.00. There is an interesting inscription on the fly-leaf:

“With Mrs Pollocks’ best wishes. To Willie T. McVittie, Manse Auldgirth. July 1916.” Maybe, “Willie” was of an age for a First World War call-up and Mrs Pollocks thought he needed some good moral guidance?

The Manse, of course, was the Church of Scotland’s local Minister’s house, provided by the Kirk (the phrase, "son of the Manse" was a much used one until recently) and many Manses have been sold at good prices because they generally were subtantially built).

When I wrote (2003-05) my Adam Smith’s Lost Legacy (2005, Palgrave Macmillan), I quoted from Macpherson’s book:

“...Smith’s conception of economic science, including as it did the co-operative and sympathetic side of life, was eminently hopeful and enervating. His view of the industrial order was wide enough to give full play to that subtle psychological chemistry by which egoism is transmuted in altruism. In Smith’s words: ‘In civilised society man stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.’ In such a state, as Smith goes on to show, man can most satisfactorily connect himself with his fellows through the medium of the reciprocity of services – a process which invests self-interest with a social and ethical quality. From this social and ethical germ develops all the higher virtues of civilisation.” (pp. 75-6)

“Hector Macpherson’s (1851-1924) unpretentious little book demonstrates a clearer understanding of Smith’s works than has been exhibited by many distinguished authorities. The sentence: ‘His view of the industrial order was wide enough to give full play to that subtle psychological chemistry by which egoism is transmuted in altruism’ allied to the phrase ‘the reciprocity of services’ cuts through the worthless babble about ‘selfishness’ and its associated ideas of ‘economic man’ (the one with the dismal personality).”

“...Economic science suffers, from what Macpherson called a ‘distracting confusion’, because it ignored how people actually satisfied their wants through reciprocal exchanges in real markets. Smith’s insight is no manifesto to selfishness, nor a triumph of the one-sided pursuit of self-interest (or indeed, a paean to the ‘granite of self-interest)! It is not necessary to wriggle to ‘softer’ interpretations of self-love’ to defend Smith’s insight.” (p. 114)

By the time I was compiling the Lost Legacy manuscript I had forgotten about Macpherson's ieas on the invisible hand and the social harmony that was induced by reciprocation. That particular part of my Lost Legacy concentrates on Smith’s unique assessment of the role of bargaining (corresponding with mine, as I had spent twenty-years observing and teaching bargaining at Business Scools).

I dealt briefly and inadequately at that time with the invisible-hand metaphor in chapter 39 of Lost Legacy, though traces of my eventual considered opinion are clear enough (see: "Adam Smith and the Invisible Hand: from metaphor to myth", 2009 HERE). It was not as important to me at the time in 2005 as it has become; the almost unanimous and serious misinterpretation of the famous "Butcher, Brewer, Baker" passage in Wealth Of Nations (WN I.ii.2: 26-27) was far more important than the invisible hand was to become.

Macpherson ascribes the invisible hand to the “ability” by which society in modern terms lessens the “individual struggle for existence” (progress to opulence?) in a “constant transformation of the onerous into the gratuitous utilities of life”. Looking at the transformation of the UK throughout the 19th century from Macpherson’s perspective, the spread of opulence was real (though children in Edinburgh slums were photographed shoeless around this time); in the early 19th century, Edinburgh slums were indescribably worse.

Edmund Conway’s Case "Not Proven" (as in the Scottish Verdict)

Edmund Conway’s "50 Economics Ideas You Really Need to Know" published by Quercus at £9.99, arrived yesterday and, as promised in Lost Legacy (29 September), I said I would comment on whether it justified my apprehensions, or not, by simply repeating the claims of modern economists that Adam Smith, allegedly asserted that every individual acting to promote their self interests contributed to the public good (a dubious contention is practice).

Chapter 1. ‘The Invisible Hand’ opens with the ‘Greed is Good’ quote in the film, Wall Street, comparing the impact of Gekko’s line to the “impact” Adam Smith’s “radical idea of the ‘invisible hand’ had when first proposed … in the 18th century.” (p 6) Strange then that Smith’s use of the metaphor on invisible hand passed almost unnoticed in his lifetime, and, indeed, for many decades afterwards, with nary a sign of it having any impact at all until mid-20th century.

By the end of these two paragraphs, I felt sure that Edmund Conway’s book was about to go the way of all lazy modern economists in their swallowing of the invisible hand myth. But, strange to say, “50 economics ideas” seems to have been edited somewhat crudely, or in a hurry, to avoid that fate. Otherwise, I would have to be much firmer with it than I find I need to be.

Edmund sidesteps my scholarly ire neatly by simply equating the metaphor of the invisible hand as “shorthand for the law of supply and demand”, adding that this law “explains the pull and push of these two factors [which] serve to benefit society as a whole”. Undeniably true, supply and demand serves to “benefit society as a whole”. But, of course, the metaphor had nothing to do with the law of supply and demand whatsoever (as analysed by Smith in Books I and II of Wealth Of Nations, without mentioning anything about “invisible hands”).

Edmund notes, inaccurately, that “Smith used the phrase only three times in his 1776 masterpiece” and then accurately quotes from the single instance of his use of the invisible hand metaphor in Wealth Of Nations (Book IV.ii.9: 456). Smith only used the metaphor 3 times in all of his works (over a million words): first once in his Essay on Astronomy [1744-58; published 1795 – he died in 1790] (HOA III.2: 49); then once in Moral Sentiments [1759] (TMS IV.ii.10: 184), and finally once in Wealth Of Nations [1790].

And that’s the lot, for an alleged “radical idea”, which hardly anybody took any notice of until the end of the 19th century, and latterly in the 20th century, particularly after 1950; the supporting evidence for the claim is slim indeed. The metaphor only became “radical” in the minds of its modern re-inventors from seeking to justify their “radical” mathematical models of general equilibrium from only 62 years ago onwards, a long time from the 18th century, and in competition with claims for Soviet/Social Democratic-style planning over Western markets.

Edmund restores his position to some extent in the last three paragraphs of Chapter 1:

“Although the idea of the invisible hand has been hijacked by right-wing politicians in recent decades, it is not a theory that necessarily represents a particular political view … The invisible hand underlines the fact that individuals – rather than governments and administrators – should be able to decide what to produce and consume, but there are important provisos.

Smith was careful to distinguish between self-interest and pure selfish greed. It is in our self interest to have a framework of laws and regulations that protect us, the consumers, from being treated unfairly. This includes property rights, the enforcing of patents and copyrights and laws protecting workers. The invisible hand must be backed up by the rule of law.

This is where Gordon Gekko got it wrong [more correctly, where the Hollywood scriptwriter’s imagination got it wrong]. Someone driven purely by greed might choose to cheat the law in an effort to enrich himself to the detriment of others. Adam Smith would never have approved.”

Concluding assessment: Edmund Conway is about 60 per cent correct. By slightly obfuscating Smith and the invisible hand, in effect he shows that if the modern version of the metaphor was dropped altogether, and the sentences left were based on supply and demand, on markets and on the rule of law, the underlying commercial society that is at the root of our prosperity, plus our liberty and our moral sentiments, would ensure the least worse outcomes of all known (tried and untried) arrangements, including the ones we have just now. If his “50 economics ideas” gets than across he will do all of us (and Adam Smith’s legacy) a considerable favour.

Paul Samuelson's Nuanced Assessment of the Invisible-Hand Doctrine

Following yesterday’s post on Paul Samuelson’s 1948 introduction of the alleged “theory” of Adam Smith about the “invisible hand”, I thought I should bring the debate a bit closer than 62 years ago (as a correspondent, Garry, suggests via email).

Turning to my draft text, I shall quote from Paul Samuelson and William D. Nordhaus’s 12th edition of Economics, published in 1988, or 22 years ago (I did not make notes of the 18th edition in 2008; a new, 19th edition is imminent), because it added little to the debate, but I shall make notes on my next visit to the library).

After quoting the (in)famous paragraph from Wealth Of Nations (WN IV.ii.9: 456), chapter 3 continues:

“The Invisible Hand and Perfect Competition”

“Smith proclaimed the principle of the ‘invisible hand’. It says that every individual, in selfishly pursuing only his or her personal good, is led, as if by an invisible hand, to achieve the best good for all. In this best of all possible worlds, any interference with free competition is certain to be injurious.” (p 41)

A few pages later, Samuelson and Nordhaus add:

“After two centuries of experience and thought, however, we now recognise the scope and realistic limitations of this doctrine”, mentioning the “absence of perfect competition” and “externalities” as contributing to the doctrine’s limitations. (p 46)

Also:

“The invisible hand can also misguide the economy when economic activities spill over outside the market place … This review of the failures of the invisible hand doctrine serves as a prologue …the virtues of the invisible hand must to some extent be discounted. And in such circumstances, the truth of the invisible-hand doctrine may vanish” (p 46)

“Yet we must not forget that the invisible hand can sometimes lead the economy onto the wrong path” (p 47)

These admirable qualifications to the invisible-hand doctrine, originally hinted at by Samuelson in his 1948 introduction of it in his first edition: an “unguarded conclusion has done almost as much harm as good in the past century and a half”, p 36, is followed up at the end of the 12th edition by stepping backwards so to speak to the modern myth, under the heading:

“A Modern Restatement of the Invisible Hand Theory”

“If Adam Smith were alive today, he would probably agree with all of this. Moreover, one ventures the guess, from his biography, that he would probably …say in effect (p 681):

“You think you are helping the economic system by your wll-meaning laws and interferences. You are not. Laissez-faire; let be; hands off. The oil of self interest will keep the economic gears working in almost a miraculous fashion. No sovereign need rule. The market will answer all things.” (p 760)

“Smith never did prove the truth of this. Indeed, until the 1940s, no on yet knew how to prove – or even state properly – the kernal in Adam Smith’s invisible hand doctrine.” ( p 760)

A footnote from Samuelson’s 10th edition (with Peter Temis), 1976:

“In short, Adam Smith, in the famous passage quoted on page 41 [from WN IV.ii.9: 456], had no right to assert that an Invisible Hand successfully channels individuals who selfishly seek their own interest into promoting the “public interest” as these last two words might be defined by a variety of prominent ethical and religious notions of what constitutes the welfare of a nation. Smith has proved nothing of the kind, nor has any economist since 1776” (p 634).

Garry’s point (for which I am grateful) is well taken – and is in my draft manuscript – but I have not included it so far in Lost Legacy because the focus has been rather narrow. The 19 editions of Samuelson’s Economics provide a significant contribution to the spread of the “invisible-hand doctrine” among modern economists, but Samuelson’s contribution is quite nuanced (thankfully, and ackonwledged by me) compared to the epigones who simply repeat what their tutors and textbooks told them.

From the start, Samuelson expressed misgivings about the metaphor and, in the above quotes (among others), he makes explicit that the assumed universality of the invisible-hand doctrine is suspect, partly, I think because he was among the first, if not the first, in the 1940s to state properly what the alleged proposition really meant and to work out its form, without it being solved, except implicitly, in general equilibrium mathematics (heavily restricted in its assumptions).

This makes the fallacies of turning a metaphor into a myth, as happened in modern economics, all the more significant and it makes the constant association of the myth with Adam Smith’s use of a mere metaphor, all the more futile.

A Research Agenda

“Even Adam Smith, the canny Scot whose monumental book, ‘The Wealth Of Nations’(1776), represents the beginning of modern economics or political economy – even he was so thrilled by the recognition of an order in the economic system that he proclaimed the mystical principle of ‘the invisible hand’: that each individual in pursuing his own selfish good was led, as if by an invisible hand, to achieve the best good of all, so that any interference with free competition was almost certain to be injurious. This unguarded conclusion has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their college course in economics.”

(Paul A. Samuelson, Economics: an introductory analysis, 1st edition, p 36, 1948, McGraw-Hill, New York.)

Comment
This paragraph, from one of the world’s most popular textbooks by the distinguished Nobel Laureate, Paul Samuelson, encapsulates the modern myth of the invisible hand, which is often sanctified with the other myth that Adam Smith was its original inspiration.

Samuelson’s warning that the “unguarded conclusion” had already done “as much harm as good” was soon discarded and was as soon forgotten by his colleagues (including by Samuelson himself in the eighteen editions of his textbook, Economics, that followed to 2009).

The metaphor of “an invisible hand” is now ubiquitous in almost all economics textbooks (miss-teaching generations of students), in many articles in peer-reviewed journals, in campus lectures, policy statements, political debates, mainstream media, and among scores of economic Blogs across the global Internet.

My current research is about the making of those myths from their early beginnings in the 20th century up to today’s treatment of the “invisible hand”, its credibility somewhat mixed of late following the global “credit crunch” of 2007-09, and what might be the main causes of its popularity, how it developed into a “Panglossian” error of perception, why it is mythical and why the popular belief that it is related to anything written by Adam Smith endures even when the evidence to the contrary is so strong.

In writing about the history of an idea throughout a period from the 1770s to the 21st century there is a danger that the appeal limits itself to a tiny band of specialist historians, presumably divorced from the interests of modern readers.

Well, that may be the case if my subject was, say, a history of the anachronistic labour theory of value, more suited as a PhD subject. But the essential beauty of a study of the evolution of the metaphor of the “invisible hand”, and its promotion into a major “idea”, “concept”, “theory”, even “paradigm” of economics, is that despite its longevity (much older than Adam Smith’s ambivalent use in the 18th century), the metaphor in its modern forms entered serious discourse and gained its undeserved credibility among academics and policy makers at the highest-level of politicians in the world’s legislatures, who applied its implications in their real “hands off” versus “hands on” treatments of the economies they managed.

In short, from the 1950s onwards, the metaphor of the invisible hand became operational, and not just descriptive, in practice.

How and why did this happen? What have been, and are, the consequences for economic policy and practice? What evidence is there, besides Samuelson’s 1948 warning about it doing “almost as much harm as good”, that any economists over the past 60 years realised the emptiness of the myth? What happened from their belief in Panglossian outcomes from mythical invisible hands to their actual policy recomendations? Does modern capitalism need the invisible hand myth or would it be better off without it?

These and related themes are the central questions to be addressed throughout Lost Legacy.

The Policy Rot Rooted in Modern Economics

John Cassidy writes on: “Rational Irrationality: The Real Reason That Capitalism Is So Crash-Prone” in The New Yorker (5 October). Normxxx comments, parenthetically, on Cassidy’s thoughts in normxxx ruminates...
HERE

NB: [[comments in double-square brackets are normxxx’s]]

“Because financial markets consist of individuals who react to what others are doing, theories of 'free-market economics' are often less illuminating than the Prisoner's Dilemma, an analysis of strategic behavior that game theorists associated with the RAND Corporation developed during the early nineteen-fifties. Much of the work done at RAND was initially applied to the logic of nuclear warfare, but it has proved extremely useful in understanding another 'explosion-prone' arena: Wall Street.

Imagine that you and another armed man have been arrested and charged with jointly carrying out a robbery. The two of you are being held and questioned separately, with no means of communicating. You know that, if you both confess, each of you will get ten years in jail, whereas if you both deny the crime you will be charged only with the lesser offense of gun possession, which carries a sentence of just three years in jail. The best scenario for you is if you confess and your partner doesn't: you'll be rewarded for your betrayal by being released, and he'll get a sentence of fifteen years. The worst scenario, accordingly, is if you keep quiet and he confesses.

What should you do? The optimal joint result would require the two of you to keep quiet, so that you both got a light sentence, amounting to a combined six years of jail time. Any other strategy means more collective jail time. But you know that you're risking the maximum penalty if you keep quiet, because your partner could seize a chance for freedom and betray you. And you know that your partner is bound to be making the same calculation. Hence, the rational strategy, for both of you, is to confess, and serve ten years in jail. In the language of game theory, confessing is a "dominant strategy," even though it leads to a disastrous outcome. [[What you are trying to do is minimize your maximum possible loss.: normxxx]]

The Prisoner's Dilemma is the obverse of Adam Smith's theory of the invisible hand, in which the free market coordinates the behavior of self-seeking individuals to the benefit of all. Each businessman "intends only his own gain," Smith wrote in "The Wealth of Nations", "and he is in this, as in many other cases, led by an invisible hand to promote [[a socially positive: normxxx]] end which was no part of his intention". But in a market environment the individual pursuit of self-interest, however rational, can give way to collective disaster. The invisible hand becomes a clenched fist.”

Comment
Regular readers of Lost Legacy should spot the source of John Cassidy’s understandable error of interpreting Adam Smith’s so-called “theory” of ‘an invisible hand’ in the way that he does.

Cassidy starts innocuously: “the free market coordinates the behavior of self-seeking individuals to the benefit of all” and by quoting a phrase, popular with modern economists since the 1950s who have taught (and believed) it to read, “to promote [[a socially positive: normxxx]] end which was no part of his intention". Modern economists have spread their false conclusion that is caused by the presumed, but not specified context, in which Smith used the metaphor of “an invisible hand” (WN IV.ii.9: 456).

Smith’s point was less general than a “theory” and much more mundane.

Due to the arithmetic rule that the ‘whole is the sum of its parts’, every additional amount of local investment increases the total amount of local investment (a public benefit). It didn’t matter what caused each additional amount of investment because the individual amounts achieved the outcome of higher levels of annual domestic investment, promoting greater annual output of the “necessaries and conveniences of life”, along with higher domestic employment and a contribution of the “progress to opulence”, a not unimportant consequence for poor, unemployed labourers, and matter of general concern for Adam Smith.

But what caused the preference for local investment among some, but not all, merchant traders? In the specific case that Smith mentions the metaphor of “an invisible hand” (and, interestingly, this is the only occasion in which he does so in Wealth Of Nations), the motive is a merchant’s sense of the security of his investment.

You see, there are two groups of merchants involved in Smith’s discussion (paragraphs 1 – 9 of chapter 2, Book IV, of Wealth Of Nations, pages 452-456); those that are risk-averse to the extra risks of sending their capital abroad comprising the prices of the goods they sell and goods they buy for the return trips. There are the risks of sea travel, risks from dealing with people of less well-known, or unknown, reputation, risks from dealing with a foreign judicial system if they need to seek legal remedies, and the risks of accidents or piracy.

These risks, compared to dealing locally with people they know, with court systems and magistrates they also know, and the lesser risks of their being in sight of their capital stock and that which they buy in return, are perceived by some merchants to be lower than senind capital abroad.

Provided, says Smith, that the profits from local trade are “not much less, or equal” to foreign trade, taking account of the rate of turnover of their capital – 3 or 4 times annually domestically, compared to 3 or 4 years to return in foreign trade, some merchants preferred to invest locally and, from those that did, they added to domestic capital investment and, unintentionally, contributed to the public benefit.

I think we can agree that Smith’s narrow observation that in these circumstances (and in many others, but not all others!) the metaphor of being “led by an invisible hand” is a striking way of putting it, which is what good metaphors are meant to do (see Adam Smith’s “Lectures in Rhetoric and Belles Lettres”, [1763], 1983, Lecture 6, pp 25-32, esp. p 29). However, the “invisible hand” metaphor is not a “theory” or a “principle”, and the modern transformation of the popular, 18th-century metaphor into a general theory is manifestly a fallacy, and a dangerous one at that, as John Cassidy’s example shows.

The cause of the credit crunch? Unambiguously and without doubt, it was caused by the people who taught and believed the nonsense of an actual “invisible hand” that magically ensured that “the free market coordinates the behavior of self-seeking individuals to the benefit of all” (and all variations to that affect). It most certainly was “ideology”, as John Cassidy says, but it was never anything that Adam Smith asserted, despite hose who used his name as a sort of holy authority for claiming that the “ideology” was worthy of the attention given to it since the 1950s.

What is really worrying is that John Cassidy also reports that:

“Many leading economists still have a vision of the 'invisible hand' satisfying wants, equating costs with benefits, and otherwise 'harmonizing' the interests of the many. In a column that appeared in the Times in May, the Harvard economist Greg Mankiw, a former chairman of the White House Council of Economic Advisers and the author of two leading textbooks, conceded that teachers of freshman economics would now have to 'mention' some issues that were previously relegated to more advanced courses; such issues as the role of financial institutions, the dangers of leverage, and the perils of economic forecasting.

And yet "despite the enormity of recent events, the principles of economics are largely unchanged," Mankiw [[baldly: normxxx]] stated. "Students still need to learn about the gains from trade, supply and demand, the efficiency properties of market outcomes, and so on. These topics will remain the bread-and-butter of introductory courses."

Mankiw was referring to the 'textbook' economics that he and others have been teaching for decades: the economics of Adam Smith and Milton Friedman. In the world of such utopian [sic] [academic, ivory-towered?] economics, the latest crisis of capitalism is always a blip. As memories of September, 2008, fade, many will say that the Great Crunch wasn't so bad, after all, and skip over the vast government intervention that prevented a much, much worse outcome.”

Comment
Professor Mankiw is the author of one of the more popular undergraduate textbooks in North America. Cassidy reports: “teachers of freshman economics would now have to 'mention' some issues that were previously relegated to more advanced courses; such issues as the role of financial institutions, the dangers of leverage, and the perils of economic forecasting.”

This is not re-assuring! The same teachers may mention some aspects of more advanced courses, but as long as they still teach the same old rubbish about the “invisible hand” as a theory allegedly saying that the “self-interested actions of individuals” are led by an “invisible hand” to assure the public benefits, or “harmony”, or “equilibrium”, or even in extreme cases, that individuals acting from “selfishness” do so, then the rot at the centre of modern economics remains.

For as long as the invisible hand myth remains, then Lost Legacy, and similar Blogs, have a role to play in trying to clarify the damage done by the invention of a role for a metaphor to explain the wonder of markets(which phenomena do not need such fantasies, and nor does Adam Smith deserve to be associated with such nonsense). They demean economics, much as the Roman emperor, Caligula (AD 12-41) demeaned Rome by appointing his horse to the office of Consul.

[I have not commented on the Prisoner’s Dilemma issue in John Cassidy’s article in The New Yorker, but shall do so later; it too has some interesting lessons]

A Good Book Ruined by Misunderstanding Adam Smith

Richard Bronk, 1998, Progress and the Invisible Hand, London, Little, Brown and Company:

“For the ‘invisible hand’ of the market is seen to lead to the most efficient satisfaction of the wants of different market participants, and in this sense to maximise the social good, merely by harnessing the selfish desires of individuals to further their own ends.” (p 7)

“The invisible hand is a metaphor for the free market’s ability to spontaneously to reconcile and balance the requirements of competing individuals pursuing their own self-interest is such a way that self-interested behaviour can unintentionally promote the interests of society as a whole.” ( p 92)

“In the years that followed publication of The Wealth Of Nations, the conditions which Smith had stipulated (in particular, the need for perfect competition) – and the implicit moral context which he, as an Enlightenment moral philosopher, which he had assumed – were not as well remembered as his central message of the power of the invisible hand. It was this image which entered Western consciousness and helped to underpin faith in human progress.” (p 95)

“In this limited-efficiency sense, modern economists have succeeded in proving Adam Smith’s first intuition with regard to the invisible hand, that a perfectly free market can ensure that the pursuit of individual self-interest or preference satisfaction, as expressed through the market-exchange mechanism, will increase the benefits of society taken as a whole.” (p 107)

Comment
The above quotations are representative of how Smith’s use of the metaphor on “an invisible hand” has elided from its original use by Smith from a summation in a “striking manner” – which is the role of metaphors – in a case where merchant traders choose between exporting their capital abroad and investing in their locality from considering the risks of each choice and their relative profitability (wholly explained in Book IV of Wealth Of Nations, chapter2, paragraphs 1-9: 456), into a general principle of how markets operate, how supply and demand sets prices, and how society benefits from competition (incidentally covered in Books I and II without any mention of "invisible hands"!)

Richard Bronk pays no attention whatsoever to the stark difference between Adam Smith’s use of the popular, 18th-century metaphor and how modern economists, roughly from the 1940s, transformed its role (from metaphor into a 'concept', a 'principle', and a 'theory') and generalised its effects into general equilibrium theory, both verbal as a 'miracle of markets' and as a mathematical "proof" of the miracle. One consequence of Bronk’s ahistorical treatment of Smith’s role in the transformation, is that he attributes to Smith modern ideas of which he was wholly innocent.

Smith favoured competitive markets over monopolies (he was not opposed to state intervention on principle, where the role was to protect the consumer, e.g., banking regulation; quality of bullion; quality of cloths, and such like). He knew nothing about "perfect competition" - an idea from the inter-war years - and regarded "harmony" as a goal, not a destimation.

Bronk writes “In the years that followed publication of The Wealth Of Nations” - first edition 1776, Smith’s last edition 1790. Even taking the last edition date, practically no interest was taken in Smith’s use of the metaphor at all. Dugald Stewart mentioned the paragraph from Book IV, in a footnote to his Lectures in Political Economy, in 1808 (later re-published in his Collected Works, 9 volumes, 1856), but hardly anybody mentioned the metaphor again until a few mentions in the late 19th century - Malthus, Ricardo, Marx for example, did not focus on it.

For Bronk to assert that Smith’s other ideas “were not as well remembered as his central message of the power of the invisible hand” is breathtaking in its “ahistorical” hyperbole. Practically nothing was said about the “invisible hand”, even in the 1880s, compared to Smith’s alleged views on laissez-faire, his “ alleged labour theory of value”, and his polemics against “tarrifs”, “mercantile political economy”, and his alleged “small government” policies.

Much of this attention dominated accounts of Smith’s economics through to the early 1930s, when the Chicago, oral tradition began to take an interest in the “invisible hand” by applying its mystical powers from risk-averse merchants to markets as a whole (remember that the challenge, such as it was, in the Great Depression began to circulate from a critique of markets compared to the “new”, albeit doomed, central planning in Communist Russia), and, from the late 1940s, the invisible hand, partly transformed into a theory, emerged in print, most famously in Paul Samuelson’s textbook, Economics, (1st edition 1948; still going strong in its 18th edition). The depression was over, but the Cold War was on.

The new, invented invisible hand, began to appear in all textbooks, and slowly at first, then in torrents in journal articles, across the media, into the rhetoric of politicians and "experts", and lastly among the general public.

Bronk wrote post the mathematical “proof” of general equilibrium (Debreu and Arrow) and, from then on, the modern invented role of “invisible hands” has never looked back. Bronk blames the modern “invisible hand”, repeatedly misattributed to Adam Smith, for its “sins, as modern economics popularises it among governments in their trenchant beliefs in unlimited progress.

His book was written as the 1999s were recovering from the 1997-98 recessions (it reads quite up-to-date in the current recession of 2007-09!). I am surprised a new, revised, edition has not been published. If it were, I bet it would not add anything about the causes of the current crisis, nor change anything about the statements attributed to Adam Smith’s culpability in failures of modern macro-management. Indeed, Bronk could quote from similar tales in support of his own that have appeared almost daily in the media, and on many Blogs, blaming the “invisible hand” for its inadequacies as a positive force.

I have no complaints about Bronk’s criticism of modern economic management (or lack of it) – in fact, I enjoyed quite a lot of his analyses (he is good, clear writer). If he disassociated Adam Smith from the modern myth of the “invisible hand”, I would have much to say in Bronk’s favour.

Good Teachers Should Refrain from Teaching the Modern Version of the Invisible Hand in Smith's Name

“My First Day of Class” by David Henderson in The Library of Economics and Liberty HERE

“When I give them my phone number so they can reach me (it ends with 1776), I ask them the significance. Invariably someone answers that it was the pub date of Adam Smith's Wealth of Nations (after the first typical answer that it was the date of the Declaration of Independence.) Then I show them The Wealth of Nations and tell them that many people dismiss it because it's "so 18th century." Then I read to them the famous quote about benevolence of butcher, brewer, and baker:

'It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages'

and the famous quote about the invisible hand:

'by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

Then I read to them Smith's prediction that the 13 colonies would win the war and that they would become the most powerful nation in the world. I still get goose bumps when I read those quotes.”

Comment
David teaches Executive MBAs from in “front of a camera to 3 remote locations: D.C., Norfolk, and Oceana”. He’s “taught since 1975 with 4 years off to work at Cato or in the Reagan Administration, 1 year off for 2 half-year sabbaticals, and 1 year of leave without pay to work on the original Encyclopedia of economics.” He’s not bored teaching the same stuff “over and over” and has been doing it since his “first year at the University of Rochester in the fall of 1975” when he “was 24”.

I read (and you should too) David's regular contributions to Econlog with Arnold Kling and Bryan Caplan HERE

From reading his contributions, I believe David is an intuitive and inspiring teacher. That’s where my problem with the above extract from his post begins. His students will listen to him and, because he is a good teacher, and they respect good teachers, they will go away from class and believe for life what he has taught them.

Since the 1950s that is precisely has been happening all across campuses in North America and Britain, though not in the main from good teachers like David – what they half understand from their lectures they get reinforced in print in their standard textbooks, which mainly present the same misleading idea under the authority, apparently, of Adam Smith.

If they remember nothing much else about Adam Smith, their introduction to the “invisible hand” will probably be among the little they do about how modern markets allegedly work. And every media source they watch, hear or read, will repeat the metaphor of the “invisible hand” whenever the economy is discussed.

Lately, of course, some media sources will assert that the “invisible hand” is no longer working; others will assert that it would be working, “if only…” this or that intervention was or was not made. Each repetition of the metaphor embeds it deeper in their memories. The myth becomes real. There is an “invisible hand”!

Yet, David, and all other teachers, good like he is, or not so good, even those who are bad or positively worse, entrench the myth into a principle of economic theory and it becomes an actual truth, believed with the certainty of a religious precept and twice-blessed because its authority comes from an ancient text that few read, though many have a copy on their book shelves (and even more have the quoted paragraph to hand but who have never opened Wealth Of Nations to read for themselves). That Smith’s book shares the same revered year of 1776, as the Declaration of Independence, gives it an hallowed status too.

Against this tide, what chance has the truth about the making of the metaphor of “an invisible hand” into myth got? My experience of presenting the truth about the “invisible hand” to polite audiences of my fellow economists – including those who distinguish their scholarship with deep understanding of the history of economic thought – has been dire, if not wholly disappointing, with a few heroic, and much appreciated, exceptions. I shall try to do better in future.

However, I suggest to David that he continue to address his Executive MBA class with the same goose-pimple, inducing enthusiasm as always but with an amendment. I suggest that he drops the myth of the invisible hand – which was not Smith’s point (see my: “Adam Smith and the Invisible Hand: from metaphor to myth” HERE and Here
plus Dan Klein’s criticism HERE which is not the same as in its modern guise.

It misleads his audience into believing what is not true, namely that irrespective of what they do, a long as they act from the “self-interest”, it all works out for the ‘best of all possible worlds’, when manifestly it hasn’t and doesn’t (not least because “self-interest” is not always benign towards others).

I praise David for continuing to introduce his class to Smith’s ideas (as long as they are Smith’s ideas) starting with the role of bargaining (the parable of the “butcher, the brewer, and the baker”), and, perhaps, following with Smith’s assertion that “no society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable” (WN 96).

The rest, of course, I leave to David in the confidence that he knows his way round Wealth Of Nations and will use that knowledge to motivate future managers and entrepreneurs to do better than many of their predecessors.

Start With a Myth, End Without an Answer

Mike Farmer writes on “Analogies to America's 2009 recession” (28 September), on Bonzai (a Libertarian Blog) HERE:

“The 1929 crash exposed in addition the naviety [sic] and ignorance of bankers, businessmen, Wall Street experts and academic economists high and low; it showed they did not understand the sytem [sic] they had been so confidantly [sic] manipulating. They had tried to substitute their own well-meaning policies for what Adam Smith called the 'the invisible hand' of the market and they [had sic] wrought disaster. Far from demonstrating, as Keynes and his school later argued -- at the time Keynes failed to predict either the crash or the extent and duration of the Depression -- the dangers of self-regulating economy, the degringolade [sic][?] indicated the opposite: the risks of ill-informed meddling.”

Comment
Relying on “what Adam Smith called the 'the invisible hand' of the market” is unlikely to do much good because the idea of an “invisible hand of the market”, attributed since the 1950s to Adam Smith, is wholly mythical.

There is a libertarian case for criticisng history (both in 1929-41 and 2006-09) but I do not think Bonzai makes that case on this occasion.

Is Edmund Conway Innocent?

Edmund Conway’s "50 Economics Ideas You Really Need to Know" published by Quercus at £9.99,is "well timed".

"Each of the topics – from Adam Smith’s invisible hand through to the more modern “happynomics” – follows the same four-page template, with bite-sized sections, timelines and key quotations pulled out.

Conway, the economics editor of The Daily Telegraph, has clearly done his research and the book is well-referenced given its compact size. It should be essential for anyone keen to make sense of the causes, ramifications and solutions to the current crisis and should be on the desk of everyone working in the City.

Purists may hate it, but then it is worth remembering that it was some of the purer economic theories that got us into this mess."

Comment
I have ordered my copy and will comment again when I have read Conway’s book.

“Purists may hate it, but then it is worth remembering that it was some of the purer economic theories that got us into this mess.”

I agree, but it depends what he interprets as ideas we need to know.

For example, if Conway thinks we need to know about “Adam Smith’s invisible hand” as presented by modern economists along the usual lines of it controlling a process by which self-interests (in the extreme, even ‘selfishness’) are processed into always benefiting the public good, I will make an objection on the “purist” grounds that this is a wholly invented notion by the same modern economists who got us into the mess by turning an 18th-century metaphor into a myth.

Worse, they are unapologetic about what they taught their students since the 1950s that led them to believe the myth that gave comfort to entrepreneurs, politicians, media folk, and hapless employees and consumers, which inevitably had the result that reckless speculation, plus (never forget this) the role of governments and those who influenced them, together caused for the rest of us.

Anyway, let’s await the arrival of the book first, before damning Edmund, who may well be innocent of my premature suspicion.

Adam Smith and Religous Beliefs

Rev. Allen M Baker, Pastor of Christ Community Presbyterian Church in West Hartford, Connecticut, writes in Banner of Truth HERE

“Which will you choose?”

“By the sweat of your face you will eat bread (Genesis 3:19)”

In 1776 Adam Smith, a Scottish economist and Deist, a good friend of David Hume the sceptic, wrote his famous book Inquiry into the Nature and Causes of the Wealth of Nations that has profoundly affected the capitalist system in our world. Smith taught that an 'invisible hand of nature' guides the law of supply and demand and that if left alone will continue the increase in the wealth of nations equitably for all people. Smith failed, however, to heed the words of Genesis 3 concerning the implications of the fall into sin — namely that man is innately selfish and greedy, given to avarice.”

Comment
“Smith taught that an 'invisible hand of nature' guides the law of supply and demand and that if left alone will continue the increase in the wealth of nations equitably for all people.”

News to me, and I am sure it would have been news to Adam Smith. He never taught or wrote anything in the same sentence or paragraph about “the law of supply and demand” (Books I and II) and the “invisible hand of nature” (Book IV) (even the phrase “of nature” on this context is invented).

“the wealth of nations equitably for all people”.

Well, he wrote a book called (short title) the “Wealth Of Nations”, but did not refer in it to “equitably”. Distribution in its modern sense was not a topic in political economy in the 18th century. He said “progress to opulence” was a good thing – employment of labourers was good in the sense that it was better than destitution and the average life-span of 25 years.

Whether Smith failed “to heed the words of Genesis 3 concerning the implications of the fall into sin” is not documented. Being brought up in a Presbyterian household – his mother was very religious – he would know his Bible, but whether he took revealed religion seriously after his early 20s is another matter. It was unlikely that he was a Deist, at least after his mother died. In 18th-century Scotland, to be thought to be an atheist was not socially possible; Deism was also condemned but by the 1770s it was less so.

See my paper: The Hidden Adam Smith in his Alleged Theology”, presented to the History of Economics Annual Conference, University of Colorado, Denver, June 2009. Available from the address at the top of Lost Legacy’s Home Page.

“man is innately selfish and greedy, given to avarice”

“Innately” means it is within man from birth. What a low opinion Rev. Allen M Baker has of mankind. Some people are “selfish and greedy, given to avarice”, but many more are not. If we all were malformed that way we would “enter an assembly of men as [we] enter a den of lions” (Adam Smith, Moral Sentiments, 1759: TMS II.ii.3.4: 86).

It’s Rev. Allen M Baker’s kind of Presbyterianism that drove most Scots from the Church once the “Holy Willies” (as Robert Burns put it) no longer were able to force everybody into conformity with its oppressive doctrines (young Thomas Aitkenhead, a theology(!) student was hanged in Edinburgh in 1697 for so-called blasphemy).

What kind of loveless people were these men?

Adam Smith No Ideologue

Baron Bodissey writes long articles in the “Gates of Vienna” (HERE)and is connected (how, is not clear) to The Fjordman Files HERE the themes of which are too complex, long and not related much to Lost Legacy’s focus on Adam Smith.

“The Scottish philosopher Adam Smith, professor at the University of Glasgow, published his famous The Wealth of Nations in 1776 where he argued in favor of freedom of enterprise. Government should interfere with commerce as little as possible and limit itself to three primary duties: Provide defense against foreign invasion, maintain civil order with courts and police protection, and sponsor certain indispensible public works and institutions that could not make adequate profit for private investors. Smith made the pursuit of self-interest in a competitive market the source of a natural harmony and equilibrium. The “invisible hand” of free competition would gradually lead to increased wealth for all.”

Comment
I take the view that if Baron Bodissey is wrong in both detail and in general about a small paragraph from his long histories of the world, such as Adam Smith’s role in his big-picture spectacular history of everything, I expect the rest of his article may well contain similar errors too.

When Adam Smith wrote Wealth Of Nations he was no longer a professor at a University of Glasgow. He left the university in 1764 to undertake tutorial duties with the Duke of Buccleugh in a tour of Europe (1764-1766, during which he commenced writing his famous book from lectures notes from his professorial stint (1751-64), published in 1980 as Adam Smith’s Lectures On Jurisprudence (1978; Oxford University Press) and possibly from notes of his Edinburgh lectures, 1748-51. Wealth Of Nations took from 1764 to 1776 to write and was published in 1776.

Smith did not write in favour of “enterprise”; he wrote in favour of “commercial society”. The former is a projection of a modern word onto the past; in fact, he displayed throughout Wealth Of Nations strong suspicions about the conduct of “merchants and manufacturers”.

To summarise Smith as saying that “Government should interfere with commerce as little as possible” is another back projection onto the historical facts. It conflates Smith’s “violent attack” on the conduct of political economy in mid-eighteenth century Britain, in the form of “mercantile”, government-sponsored, monopoly privileges granted as favours to special interests, as promoted by individual legislators, and those who influenced them, often associated with bribery and other favours (of which the East India Company was a prominent example), with modern misinterpretations of Smith’s legacy by his epigones.

Smith was not opposed to government-directed activities, and those he specifically advocated were not minor aberrations. Defence was a major expense in the annual budget – the seven-years war with France cost £120 millions – and it remained a major budget item well into the 19th century. The defence sector employed tens of thousands annually, both in the defence establishment (unproductive soldiers and seamen) and in productive defence employees, manufacturing defence supplies for a profit for the defence establishment. Technologies associated with defence, shipping, navigation, charts, overseas exploration and bases, and foreign relations, played a major role in the changing domestic economy and in British international trade.

“civil order with courts and police protection” was an absolutely crucial pre-condition for the development of a domestic commercial society. It was not just an “expense” to be minimised in a sort of 19th-century “watchman state”. Without justice, society would “crumble into atoms” and “a man would enter an assembly of men as he enters a den of lions” (Moral Sentiments II.ii.4: 86). With the growth of commerce, the role of contracts proliferated and was reflected in the administration of law, and the professions of lawyers.

Smith’s observation is inadequately stated as “indispensible public works and institutions that could not make adequate profit for private investors”. This is a major task, the scale of which is hidden in the brevity of Baron Bodissey’s sentence.

The appalling state of roads in 18th-century Britain required the building of thousands of miles of roads; the construction of canals, likewise; and the dredging of the hundreds of harbours around Britain added to a major capital investment in both the building and, crucially, the annual maintenance of this infra-structure on a scale that mocks the dismissive assertion that this policy was one requiring the government to “interfere with commerce as little as possible and limit itself” to a few minor tasks.

Assuming that Smith’s suggestions for government were adopted by an 18th or a 19th-century government, it would have required the substantial commercial activity of scores of commercial firms for the profitable building and maintenance of the infra-structure, spread over many decades.

That the building of these projects could never repay the projectors (Smith’s original point) did not mean that they could not make a profit for building and/or maintaining them if the government funded their erection. How they were to be funded was a matter for the public finances (fight fewer wars?), which does not in any way limit their economic impact given existing relationships between government funding (defence, is classic) and commercial suppliers of the means (infra-structure builders). Most ‘watchman-state’ attributors to Adam Smith miss the point.

[Of course, the notion of the ‘watchman state’ is wrongly attributed to Adam Smith; it was actually invented as an idea by Ferdinand Lassalle, the 19th-century, fire-brand socialist – Adam Smith, once again was innocent).

Baron Bodissey in identifying Smith’s “limited” role for government to “indispensible public works and institutions”, missed out saying anything about “public institutions” (even missing the adjective, “public”, as used by Smith in Wealth Of Nations), which is somewhat sad because the sheer scale of intervention that would have been necessary to put his recommendations into effect hides the extent of the prime role of education he envisaged for a commercial society.

Briefly, to erect a “little school” in every parish would have involved more than 60,000 such schools across the country – though Scotland already had “little schools”, having started on mass education in the 1600s). Add the teachers for such schools to the simple buildings, and book supplies, this was a formidable undertaking – if it had been taken up.

Smith discusses the role of government (Book V, Wealth Of Nations) under the heading of public finance – budget items and taxation. He does not disucss the role of intervention of a legislative kind. He was ferociously critical of much government legislative intervention – the creation of monopolies, protectionism and barriers to trade, jealousies of trade, and wars cause by such, and the imposition of various statutes (Apprentices, Settlement, Guilds, Patents of monopolies, and such like), and colonial policies. This does not mean he did not envisage a regulatory role for government.

Smith advocated certain other roles too. Among these there are his call for government intervention in special cases, even when such regulations are “a manifest violation of that natural liberty”, as the issuance of “promissory notes” for small sums (WN II.ii.84: 324), a small step in 18th-century banking, but one that was bound to expand with the expansion of commercial banking . Smith associated such interventions with the building of party wall to prevent the spread of fire, as common sense, not excluded by ideology.

Baron Bodissey ends his ommision-filled paragraph with “Smith made the pursuit of self-interest in a competitive market the source of a natural harmony and equilibrium. The ‘invisible hand’ of free competition would gradually lead to increased wealth for all.” Lost Legacy readers will recognise the multiple errors in Baron Bodissey’s summary of Smith’s view wrapped in two sentences.

The derivation of “free competition” from the “invisible hand” (or vice versa) uses a redundant metaphor, which explains nothing and, being a metaphor, is not required to do so, and misleads by inferring the actual existence of such a entity (see Lost Legacy passim).

The metaphor of “an invisible hand”, used only once in Wealth Of Nations (Book IV.ii.9: 456) was really about the arithmeticl rule - 'whole is the sum of its parts' – the more merchants who invested locally, in preference to foreign trade because of their aversion to the risks of losing sight of their capital, the larger would be total local investment and employment.

Many merchants continued trading internationally profitably despite the perceived risks. This outcome – larger local investment and employment would result whatever the competitive, or non-competitive, commercial society, ergo, the invisible hand metaphor had nothing to do with competition – it was to do with profitability tempered by risks.

Baron Bodissey links conclusions from modern general equilibrium theory (“free competition would gradually lead to increased wealth for all”) and not from Wealth Of Nations.

“Increased wealth for all” is not contingent on free competition; “increased wealth for all” would be greatly assisted by “free competition" but has not yet been experienced so far, except in tiny pockets for short periods of time. Mercantile distortions on commerce have long been prevalent and despite them, a gradual increase in wealth has been experienced by large proportions of the populations of all commercial societies over long periods (in Britain’s case, since the 16th century).

There are no “invisible hands” guiding commercial societies; there are only the powerful affects of markets, distorted, hampered, and inhibited by the local institutions and habits prevalent in particular societies. Markets work despite obstacles put in their way (ruinous interventions, wars, civil strife, cultural prejudices, politics and religions). Some work more efficiently than others.

Smith observed and understood. He didn’t expect the utopia of free trade to occur, he didn’t perceive that “natural liberty” was an essential pre-condition for the “progress to opulence”. He was not a visionary, nor a ‘man with a mission’. He was a moral philosopher, not ideologue.

William Letwin Recognises a 'literary embellishment'

William Letwin, 1963. p. 225. The Origin of Scientific Economics: English economic thought, 1660-1776. Methuen & Co:

“The invisible hand is introduced as a literary embellishment, an elegant way of summarising an argument already stated, and not, as it has been misrepresented, a dogmatic assertion of ‘natural harmony’ on economic life.”

Comment
Reading my notes for my forthcoming paper on the use made of the popular literary metaphor, the “invisible hand”, by modern economists who are ideologically wedded to their invented notion that the economy is managed by an unknown disembodied entity, with miraculous powers of intervention that sometimes lead participants to unknowingly benefit society, though for which role no term is included in the mathematics of general equilibrium, and its alleged presence in the real world is judged only by outcomes, not processes, I came across the above quotation.

It struck me for two reasons.

First, it is unusual – most modern economists give the metaphor a far greater role in the real world, as if they believe the entity actually exists (some even call it the “hand of God”, for which the supporting literature is quite vast, going back to the 17th century).

Secondly, William Letwin is one of the few examples that I have come across who approaches his discussion of Smith’s use of the metaphor with an erudite and eloquent discussion of the previous eight paragraphs (WN IV.ii.1-8: 452-455) in which he fully explains the process that leads some, but not all, merchant traders to invest locally rather than invest their capital in the foreign trade of consumption or the carrying trade.

It is only after his explanation that he introduces the phrase of the “invisible hand”. Most economists do not mention his explanation or its context (they may be unaware of this, relying on their generalisation of a short quotation, which clearly applies to a specific case in Smith’s example, into a whole economy principle for which it was never intended.

Letwin notes, brilliantly in my view’, that Smith used the metaphor because of the audience to which he address Wealth Of Nations:

“… gentlemen and squires, members of Parliament, busy, not excessively intelligent or devoted, who would take instruction at length only if it were presented in a pleasurable form, perhaps under the guise of sheer pleasure.”

Or, as I often put it, “legislators, and those who influence them”.

Letwin's book is an excellent survey of his chosen subject (students should consult it for material on its theme). It is an excellent read by a literate scholar.

Two Errors on Adam Smith

"dakinikat" writes (19 Sept) “Support your new Alphabet Soup Agency” (HERE):

“Even Adam Smith, creator of the invisible hand and the term laissez-faire economics, realized the need for government regulation of certain markets.”

Comments
Oh, dear!

Two blatant errors, “creator of the invisible hand and the term laissez-faire economics”.

For the “invisible hand” see Lost Legacy (previous post and scores of earlier ones (also read my:

“Adam Smith: a moral philosopher and his political economy”, 2008: Palgave Macmillan).

For “laissez-faire economics”, $1000 if “dakinikat” can show that Adam Smith ever used the words “laissez-faire”.

Yes, Adam Smith identified that there were circumstances when there was a need for “government regulation of certain markets”.

Can “dakinikat” show where in Wealth Of Nations he did so? (Hint: in a business sector very much in the news recently).

The Genesis of the Invisible Hand

Readers will know of my work on identifying the actual meanings that Adam Smith placed on his use of the metaphor of the “invisible hand” and my oft- stated assessment that he used a popular 18th-century metaphor to lighten the work for his readers’ trying to understand the significance of his references to, first, the role of the necessary delusion that drove some of them from their beds each day to hasten the accumulations of their fortunes (Moral Sentiments, 1759) and the role played by the felt insecurities of some, but not all, merchants indecisions about the placing of their capital locally rather than abroad (Wealth Of Nations, 1776).

I have often remarked that the “invisible hand”, deployed by Smith only three times in over the million words he published, was hardly remarked upon by philosophers and political economists for about a hundred years after he died. The origins of the modern surge in interest in the “invisible hand” metaphor can be found roughly from the 1930s (Chicago’s oral tradition), then in a steady stream from the 1940s and into a vast flood from the 1960s, until today it is virtually ubiquitous.

My current research project is to explain this phenomenon, not just for exegetical purposes (interesting as that may be), because the metaphor’s attributed modern meanings, and their imaginative interpretations of the metaphor’s meanings for modern economics (partly ideological), are worthy of study. They explain a lot that is most interesting about recent and contemporary economic history and discourse, and the surprise when their convictions come awry.

One of the joys (and dangers) of research is the tripping over of little diversionary novel and amusing findings which do not appear to be really relevant to the main task. In reporting the “invisible hand” as a popular 17th-18th century literary metaphor, I have tried to downplay the scientific credentials claimed for it by modern economists (though decidedly not by Adam Smith) and this is often dismissed by correspondents and by my critics in conversations.

Well, exploring my notes from earlier research on this subject, I have taken a few moments to extend my characterization of the “invisible hand” as a popular contemporary literary metaphor in Smith’s life-time, to it being a popular literary metaphor from the time between his death in 1790 to (arbitrarily) 1937, or just before modern economists took to noticing it and to incorporating it into their analyses capitalist economies (e.g., General Equilibrium theory).

To sample my assertions, consider the following selection of eleven cases (out of scores) by famous literary authors and their use of the “invisible hand” in their famous works:

1 Frankenstein, or, The modern Prometheus‎ by Mary Wollstonecraft Shelley (1823):

“finished by an invisible hand. In the day, I believe, he worked sometimes for a
neighbouring farmer, because he often went forth, and did not return until ..”.

The Count of Monte Cristo by Alexandre Dumas (1844-45):

'Yes; we have never had the happiness of pressing his hand,' continued Maximilian. ... by an invisible hand - a hand as powerful as that of an enchanter. ...

Through the looking-glass and what Alice found there by Lewis Carroll (1865):

“She said afterwards that she had never seen in all her life such a face as the
King made, when he found himself held in the air by an invisible hand, ...”

Anna Karenina‎ (1873) by Leo Tolstoy:

“sprinkled with flour, that some invisible hand had put outside a baker's shop. Those loaves, the pigeons, and the boys were not of this earth.”

War and Peace‎ by Leo Tolstoy (1889)

The Reigate Puzzle ((1894) by Sir Arthur Conan Doyle:

“been struck from his mouth, as if by some invisible hand,”

The Invisible Man‎ by H. G. Wells (1897):

“still hiding his invisible hand, trying to discreetly slide over to where his glove sits on the table.”

The war of the worlds‎ by H. G. Wells (1898):

“They saw the flashes and the men falling and an invisible hand, as it were, lit the bushes as it hurried towards them through the twilight.”

Guy de Maupassant (1903):

“I distinctly saw the stalk of one of the roses bend close to me, as if an invisible hand had bent it, and then break, as if that hand had picked it!”

Tarzan of the apes‎ by Edgar Rice Burroughs (1914):

“A huge black, standing directly before him, lunged backward as though felled by an invisible hand. Struggling and shrieking, his body, rolling from side to side”

Jacob's Room by Virginia Woolf (1922):

“as if drawn by an invisible hand; when there are distant concussions in the air and phantom horsemen galloping, ceasing; when the horizon swims blue”

Comment
These examples can be added to by scores of others from classical times (Homer, Horace, and Augustine) and from the 16th through to the 18th century.

The main users of the metaphor were theological authors in their sermons and Latin texts (either side of Adam Smith 1723-90).

Food for thought by those enthralled by Adam Smith’s alleged “most important contribution [to] economic thought” (Arrow and Hahn, 1971) and “one of the great ideas of history and one of the most influential” (Tobin, 1992)?

A Wild Goose Chase; Another Disappointment

In another debate elsewhere on the invisible hand in Adam Smith, which I am engaged in lightly, a contributor identified not three uses by Smith of the popular 18th-century metaphor, but four.

That sent me to the library to search out the source of the 4th use. When examined, I find the claim is in History of Political Economy in January 1990, nearly 20 years ago.

I was surprised by the revelation of a fourth invisible hand in Adam Smith that I had missed, but my surprise soon became wonder – how did I miss it? - which, however, was soon dampened when I located and read it. The article, by Syed Ahmad, at the time of the Department of Economics at McMaster University, Hamilton, Canada, boldly titled “Adam Smith’s four invisible hands” (HOPE, 22:1 (137-44).

It discusses the three well-known instances, somewhat inadequately in my view, and achieves the four count by asserting that the reference to ‘an invisible hand’ in Moral Sentiments has two distinct meanings, adding a fourth meaning to the original three. Yes, I agree the claim is close to tentative in the extreme, but, to be fair, if Syed’s reasoning had worked he would have made a major discovery. Unfortunately, it doesn’t and he didn’t.

Syed asserts that the first invisible hand appears in Moral Sentiments in the guise of the “size of the landlord’s stomach” (139). You can read the quotation in full at: TMS IV.ii.10: 184-85. I must ask why does the physical limits of a human stomach – and all other stomachs in nature - need “an invisible hand”?

Syed adds the comment: “Without this limitation ‘all the thousands’ would have perished through his selfishness” (139). But the stomach’s limit is physical, not psychological. Moreover, if the landlords' stomach was without limits, so would every other human’s stomach be without limits too – the problem of starvation would then be exacerbated without limit.

Syed notes correctly that the “selfishness of the landlord is constrained for human survival”, but this has nothing to do with the invisible hand. He also accepts that “it was not man’s prudence or reasonableness or any other mental attitude which prevents catastrophe; it is the physical limitation of his stomach.”

But wait. Syed introduces the ‘second’ invisible hand ‘in the form of the residual selfishness of the landlord”. He notes that the size of the stomach prevents the landlord from ‘eating all the food he has” but “he could still let the rest go to waste” (a view implied by W. D. Grammp (2000. 'What did Adam Smith means by the invisible hand?' Journal of Political Economy, 108: 3, 441-65)in his weird account of the invisible hand). Syed calls this a “positive role” for “selfishness”.

He joins this muddle to Bernard Mandeville’s “Private vices, publick benefits” (“Whilst Luxury/ employ’s a Million of the Poor”). This sidesteps Smith’s concerns with the “thousands whom they employ” on their land producing the acres of food for consumption, before we take up the the issue of the landlord’s consumption of the luxuries supplied by the town’s artisans and producers of foreign imports.

Like the physical limitations of the stomach – an attribute of all humans long before the first landlords appeared from the agricultural ‘revolution’ 8-11,000 years ago – the absolute, inescapable necessity of feeding the labourers (and their families) who prepared the land, sowed the seeds from last season’s harvest, tended the crops (and the farm animals), and harvested and stored the products of the land is fully explainable without an invisible hand metaphor. If the labourers received nothing from a season’s harvest, they would starve and, if it was a general rule across all of society, who would undertake the labourers’ roles in the following spring?

Syed describes the limited stomach’s of the landlords as the first ‘invisible hand’ and the second role of distributing a share of the harvest to the farm labourers, the second invisible hand. Both roles are spurious as examples of an invisible hand explanation. In both examples, the parties to these transactions had no choice but to do what they did; there was no role for an invisible hand to lead them to do what they had to do anyway.

The only meaning that Smith could have meant was the singular role of the landlords in doing what they did as an example of unintentional outcomes, despite their delusions of greatness as the owners of their great estates and the employers of the thousands, who tended their fields and their domestic luxuries, plus, as trade between the country and the town (and foreign towns too) grew, their supply to landlords effective employed the skilled artisans and merchants who supplied luxury items (fine clothes, jewels, gold and silver plate, tapestries, and furniture).

Syed Ahmad did not discover a fourth invisible hand, and the two he elaborated upon in his article were contrived and, therefore, spurious.

Link in Freakonomics to Lost Legacy's Paper on the Invisible hand

In Freakonomics (HERE) they ask:

Is the Invisible Hand …

“… one of Adam Smith’s key theories, a “mildly ironic joke,” or “a popular literary 17th- to 18th-century metaphor with no significance”? Arguing for number three, Gavin Kennedy keeps the debate alive, in a new paper published in Econ Journal Watch.”

Comment
Thank you, Freakonomics for the link.

Read some of the comments as well.

Rama Cont is Wrong, not Adam Smith

In Washington’s Blog HERE: 13 September) it carried a post:

'Leading Financial Modeling Expert: Adam Smith Was Wrong About the "Invisible Hand"'

“One of the leaders of the new science of financial modeling - Rama Cont - points out that Adam Smith was wrong about the "Invisible Hand".

Specifically, investors in financial markets rationally pursuing individual profit can produce outcomes that are bad for almost everyone.

Investors in financial markets rationally pursuing individual profit, then, can produce outcomes that are globally negative. Doesn’t that contradict classical economic theory? “Both theory and empirical facts do tend to show that, on the financial markets, the Invisible Hand does not always lead to welfare-improving general outcomes,” Cont replies.”

Comment
Adam Smith is innocent!

Smith never advanced the theory attributed to him by modern economists, mainly from the 1950s, when the capitalist-state economy of the US faced up to the totalitarian Soviet planned economy. And an invented universal idea of ‘an invisible hand’ (wrongly attributed to Adam Smith) that guided markets to the social benefit of society, irrespective of the motives of individuals, was circulated in his anme.

It is more correct to suggest that investors in financial (or any other markets) markets rationally pursuing individual profit can produce outcomes that are bad for almost everyone.

There is no invisible hand guiding markets to optimum beneficial outcomes.

If modern economists believe their assertion that there is such a mystical force present in all markets, as most of them certainly did until recently, they are entitled to believe so; what they are not entitled to do is associate their belief with Adam Smith, who was wiser, apparently, than most modern economists about the observed likely behaviours of “merchants and manufacturers” - and we have no reason to believe that their modern descendants behave differently when they can get away with it as Smith noticed among their 18th-century predecessors.

Ironically, in rerepenting the consequences of their invented belief, they turned on the wholly innocent Adam Smith to blacken his reputation, while ringing their hands in embarassment.

Smith's reference in Wealth Of Nations to the self-interested and the risk-aversion of some merchants regarding their preference for the domestic British economy, did not apply to all traders in all parts of the economy all of the time.

The belief that he did is the source of the error that led to uninformed assertions that Smith enunciated such a counter-intuitive notion, when the actual text in Wealth Of Nations clearly shows he was not of such a view at all (WN IV.ii. paragraphs 1 to 9: 452-456).

Professor Rama Cont, Columbia University, New York, whose background is in theoretical physics, can verify these statements immediately by reading Wealth Of Nations. If he does so, he will realise that what he thinks contradicts “classical economic theory”, does not do so (at least where Adam Smith of Kirkcaldy is concerned) but it does contradict modern economic theory and its versions of its invisible hand, courtesy of Chicago University from the 1930s, which invented a fictious "Adam Smith" "alive and well" (George Stigler) in 59th Street.

Modern Versions of Invisible Hands Are Not Compatible with Adam Smith's

Robert H. Frank, an economist at Cornell University, finds (New York Times 13 Sept) the
“Flaw in Free Markets: Humans” (HERE)

“Adam Smith’s theory of the invisible hand, which says that market forces harness self-serving behavior for the common good, assumes that markets are competitive, and most markets have in fact become more competitive over time. Today, if an opportunity exists anywhere in the world, information-age entrepreneurs can seize it more quickly than ever.

The invisible hand, however, requires not just strong competition but also two other preconditions. The economic models that spawned Mr. Greenspan’s former optimism simply assume those conditions, despite compelling evidence of their absence.
First, those models assume that rewards depend only on absolute performance, but in the real world, payoffs are often tightly linked to relative performance. When a valuable new piece of information becomes available to the investment community, for example, the lion’s share of the gain goes to whoever trades on it first. For an individual firm like Goldman Sachs, it is thus completely rational to invest millions of dollars in computer systems that can execute stock trades even a few seconds faster than others. But rivals inevitably respond with similar investments. Taken together, these expenditures are wasteful in the same way that military arms races are.

A second problematic assumption of standard economic models is that people are properly attentive to all relevant costs and benefits, even those that are uncertain, or that occur in the distant future. In fact, most people focus on penalties and rewards that are both immediate and certain. Delayed or uncertain payoffs often get short shrift.

Given the conditions under which human nervous systems evolved, these aspects of our behavior are unsurprising. Because immediate threats to survival were pervasive, those who didn’t seize short-term advantage often didn’t survive.

Such nervous systems provide an erratic guidance system for the invisible hand."

Comment
I shall separate the opening quotation with the last sentence because Robert H. Frank has said enough of his linkage to Adam Smith to show a mixture of sensible analysis mixed by self-contradictory mythology, of which he appears to be unaware.

“Adam Smith’s theory of the invisible hand, which says that market forces harness self-serving behavior for the common good”.

Which particular theory of Adam Smith’s “market forces” makes that statement? True, Smith makes a statement in Book IV of Wealth Of Nations similar to that credited to him by Robert Frank, but it was not about “market forces” at all. It was about some merchants, but not all, who were risk averse towards the risks of foreign trade to their capital that he preferred to invest locally, thus adding to local domestic capital investment and local output and employment.

Robert Frank, in line with modern thinking, generalizes Smith’s limited statement to involve “market forces”, even though the evidence for the generalization in Smith is absent and the evidence for it working as a generalization in modern markets is sparse to say the least (pollution, negative externalities, monopolies, conspiracies against consumers, price-fixing, outright fraud, government interventions, and the behaviour of capital owners vulnerable to Smith’s tirades against 18th-century “merchants and manufacturers”.

“The invisible hand, however, requires not just strong competition but also two other preconditions.”

How does this work? If the two conditions are not met markets are compromised. Whether the mystical entity of ‘an invisible hand’ ceases to function is of no interest – it’s a metaphor not an actual force! Why not stick with the analysis of “market forces” as Smith did in Books I and II of Wealth Of Nations, where Smith’s text is noticeable for the absence of any mention of “invisible hands”.

Robert Frank partly gives the game away with “A second problematic assumption of standard economic models…”. Originally he was talking about the working of the “invisible hand”, now he talks about “standard economic models”, of which his conditions may apply. He would be clearer if he stuck to “standard economic models” and left the “invisible hand” out of it.

Indeed, Smith’s single example of the invisible hand in Wealth Of Nations contradicts Robert Frank’s conflation of “standard economic models” with the metaphor of an “invisible hand”, namely that “that people are properly attentive to all relevant costs and benefits, even those that are uncertain, or that occur in the distant future.”

We can agree that people are not so wise as to consider everything that can affect the perfect model. Robert Frank notes that “in fact, most people focus on penalties and rewards that are both immediate and certain. Delayed or uncertain payoffs often get short shrift.” Agreed.

And that is what drove the psychic anxieties of the merchants Smith was talking about who were considering the security of their investments in foreign trade in distant countries, where the wrong choice of trading partners, ship owners and crews, foreign warehousing and distributors, and foreign remitters of payments, could spell disaster, even bankruptcy, if they overcame their aversions and went into business abroad.

It is interesting that Robert Frank sees the “focus on penalties and rewards that are both immediate and certain” and “Delayed or uncertain payoffs often get short shrift”, as being detrimental to the working of the invisible hand, whereas Adam Smith used the very same focus on “penalties and rewards that are both immediate and certain” as the relevant cause of these merchants being “led by an invisible hand”! (WN IV.ii.9.:456) Something surely is wrong with Robert Frank’s analysis?

I could add, the turn the screw further, that Robert Frank’s “Delayed or uncertain payoffs often get short shrift” was another of Adam Smith’s reasons why the uncertainties of foreign trade, where the turn round of foreign investment could take 4 -5 years, led some, but not all, merchants to be “led by an invisible hand” and to invest locally to benefit from its turnround of their capital 2-3 times a year.

Robert Frank’s analysis of the “invisible hand”, at least in respect of Adam Smith’s use of the metaphor, is upside down. I must conclude he has not read Adam Smith on the “invisible hand” and that he is slavishly following the modern version, invented post-1950, and ascribed to Adam Smith without a shred of supporting evidence.

That the modern version has legitimacy in its own right is fine by me; it is the ascription of it to Adam Smith’s legacy to which I object.

PS: Robert Frank strange assertion: "Such nervous systems provide an erratic guidance system for the invisible hand." So the "invisible hand" supposedly is guided by market forces as it "guides market forces". This needs to be sorted out.

News of Warren Samuels' Imminent Account of the Invisible Hand

I have mentioned several times that Warren Samuels is publishing his considered analysis of the use to which the “invisible hand” has been put over the centuries, and that I am waiting eagerly to read the finished material which he is about to publish.

In 2007, I attended the History of Economics Society annual meeting at George Mason’s University, Fairfax, Virginia and I listened to Warren presenting his paper as a foretaste of what his researches (since 1983) concluded. The session was well attended. He took questions afterwards and I also spoke to him and his wife momentarily during breaks in other sessions.

Naturally, I was particularly interested in his themes as I presented my own draft paper “Adam Smith and the Invisible Hand” (revised and published by Econ Journal Watch (May 2009) HERE: and see also:
HERE:

Warren Samuels is an impressive scholar and he is rightly highly regarded by all members of HES.

Yesterday, I posted a comment on the current enquiry about visualising (film clips, videos, and slides) the invisible hand for a lecture to non-economists. The contributions continue, most taking the enquirer’s project seriously.

Of greater import to the broader discussion, Ross Emett has sent to me a reference to a summary of Warren’s 2007 paper HERE:

At the time in June 2007, there was no paper from Warren available and I was unaware that his paper had been released since, and I am indebted to Ross Emett for sending the link to me.

I strongly recommend all readers of Lost Legacy to follow the link and to read Warren Samuel’s draft paper.

As soon as the main manuscript is published, I shall notify readers of where to order a copy. From the draft, I think Warren’s scholarship on the invisible hand is going to become definitive.

He does not support my approach, not does he particularly disagree with it; he puts the debate into its proper context of a much wider debate on the role of philosophical thinking. I shall refrain from commenting further until I read his considered thoughts.

And so the Myth of the Invisible Hand is spread (by economists!)

Members of the History of Economics ought to know better but so deep is the disinformation about Adam Smith (the one born in Kirkcaldy, Fife, Scotland, in 1723, not the one invented in Chicago in the 1930s) that an almost futile (its too serious to be utterly laughable) exercise is under way.

A member is giving a “an interactive lecture” to a “non-academic community on the invisible hand as a ‘great idea’ in history that has changed the way we think about the world” and seeks help to access video material on the invisible hand.

The idea of illustrating visually the ‘invisible hand’ is a bit odd, but leave that aside. The lecturer wants “to spice together some images and clips from popular movies, tv, or art that make reference to the idea, and I would appreciate your help.”

So far he has collected “the reference to Smith and the hand in "A Beautiful Mind," "Wall Street," and an early episode of "Family Ties" by the Friedman-loving Alex P. Keaton” and he wants to know if members “know of other films or TV shows that either directly reference the invisible hand or allude to it or an interpretation of it?”

History of Economics Society members are ever willing to help each other with research requests and so far (today) 6 members have made suggestions:

Other People's Money, Norman Jewison 1991 (esp. Gregory Peck's & Danny de Vito's addresses to the shareholders' assembly).

“Grapes of Wrath, John Ford 1940 ("I liked the book better", said the goat chewing on the reel).

Salt of the Earth, Herbert J. Biberman 1954 (The invisible hand's unseemly
gesticulations)

Man Friday, Jack Gold 1975 (another take on the Robinsoniads, Richard Roundtree and Peter O Toole at their very best).

and of course,

Aufstieg und Fall der Stadt Mahagonny (Rise and Fall of the City of
Mahagonny) opera Bertolt Brecht-Kurt Weil (1930) ("Oh show us the way to the next pretty dollar").”

“Maybe one way to get your audience thinking about scarcity and resource allocation is via a time-traveling Jean Luc Picard of Star Trek fame trying to explain the economics of his time. You could use the segment from 1:45 to 2:10 from

http://www.youtube.com/watch?v=TOcKGREiY30

This includes the lines:

"Money doesn't exist in the 24th century."

and

"The acquisition of wealth is no longer the driving force in our lives."

Googling "Star Trek economics" might lead you to other snippets or ideas that you might be able to use.”

“I like the Johhny Depp remake of Charlie and the Chocolate Factory.
Willy Wonka wants to make (invent) things that people want to buy out of his own self-interest to create. And it shows too the needed trust in 'capitalism', as in when he closes the factory for a while because his trade secrets were stolen. It's also interesting on the creative destruction of capitalism as when Charlie's Dad loses his job to automation, but then gets hired back to fix the very machine which replaced him. And it's a Dickensian, pre-welfare state because Charlie's whole family lives together and takes care of each other no matter how poor they are.

It's definitely a movie full of history of econ thought (and some Theory of Moral Sentiments too!) parables.”

“South Park's "Gnomes" episode never mentions Smith or the invisible hand by name, but is interpretable in light of it.

Here's a direct link to the episode: http://www.southparkstudios.com/guide/217

Here's Paul Cantor's take: http://www.lewrockwell.com/orig3/cantor3.html”

“Did you see "Commanding Heights" (PBS)? It is available through their website. There are three parts of two hours of material and this series does a rather impressing job reporting on the role of economists, including Adam Smith, in the globalization process.”

“The movie Tucker, the Man and his Dream is about the entrepreneurial drive to serve consumers for profit. Its not a perfect statement of Smith, but it brings up not only the invisible hand part of Smith, but also the mercantilist type efforts to interfere with invisible hand mechanisms that Smith criticized.”

Comment
But so far, there are no comments by fellow members of the History of Economics Society pointing out that Adam Smith’s slight reference to “an invisible hand” did not have the implications of the theme that the suggested video references imply.

So ingrained among academia is the Chicago re-invention of Smith’s metaphor among modern economists (very few of whom are actually familiar with the exact context of Adam Smith’s three citations that an inordinate extention of its meaning has gained wide, almost ubiquitous, circulation since the mid-20th century.

Smith's use of the popular 18th-century metaphor of 'an invisible hand', was not about how commercial markets worked, as described in Books I and II of Wealth Of Nations, it was about the self-deceptions of ambitious individuals in early commercial society, and was about pagan superstition in ancient Rome) that such a request for video material is almost immediately followed by the extensive selection above (no doubt more is to come as the day in the US moves towards midnight).

The references to Smith by Hollywood scriptwriters in the films “A Beautiful Mind" and "Wall Street" are erroneous, even counter-factual (see Lost Legacy archives where I discussed their errors against Smith’s actual writings) and I do not hold much hope that the other references will do other than continue the distortions.

For background to the Invisible Hand debate link HERE in which I trace its background: "Adam Smith and the Invisible Hand: from metaphor to myth" (published in Econ Journal Watch in May and September).

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.

Extremism is Seldom Convincing

Ben Linskey writes for the Observer online (London) HERE:

“Health care debate masks real issues"

“There are two basic means by which to do this. One option is to establish a free market, in which the "invisible hand" famously identified by Adam Smith works to distribute goods in the most efficient means possible. The other is to place all economic goods in the hands of a single governing agency and entrust it to use its presumably superior wisdom to determine who should have what. This latter method, of course, is fraught with problems. America has long favored free markets over central planning, but in recent years, the United States have abruptly and dramatically shifted course, bringing many formerly private sectors of the economy under government control and spending at an astonishing rate.”

Comment
Ben Linskey, reportedly a Libertarian, paints the picture in contrasting colours, when in fact it should be monochrome.

For a start Adam Smith did not use the metaphor of the invisible hand to illustrate how it “works distribute goods in the most efficient means possible”. That is a modern interpretation somewhat different from Adam Smith’s idea.

It gives the metaphor an aura it does not deserve nor does it carry it well. It’s what some Libertarians and assorted ideologues wish rather what happens.

I would think this should be abundantly plain to any reader of Wealth Of Nations who reads of Smith’s unfriendly suspicions of how 18th- century ‘merchants and manufacturers’ actually behaved in their steadfast pursuit of monopoly profits, schemes to eliminate competition, lobbying for special favours from legislators, gifts to those who influenced them, and hostility to free-trade for themselves.

Has that much changed in their behaviour today? How many lobbyists does it take to pass legislation in Congress or Parliament?

Smith’s use of the metaphor of the invisible hand in Book IV of Wealth Of Nations related to some – not all – merchants who were risk averse in respect of foreign trade (including with the North American British colonies) and who naturally preferred to trade locally in Britain. By doing so, they added to domestic capital formation, which raised domestic GDP (using modern terminology), considered by Smith, rightly, to be in Britain’s interests).

Markets were analysed in Books I and II of Wealth Of Nations and Smith did not mention the invisible hand as having any role in them. Whether the goods were distributed “efficiently” depended on a host of other factors, including profitability, successful investments, productively, lack of monopolies, the absence of restrictive practices and tariff protections.

Ben’s alternative to his vision of markets led by an invisible hand is “to place all economic goods in the hands of a single governing agency and entrust it to use its presumably superior wisdom to determine who should have what.” This reads more like something Marx and Engel’s might have written. It was not the alternative postulated by Adam Smith to his ideas in Wealth Of Nations.

The alternative to freer markets where possible (not laissez-faire, which was never advocated by Adam Smith), with state-funded and legal interventions where necessary. This was precisely what obtained in 18th-century Britain, the system of “mercantile political economy”, with state interventions at all levels (the Statute of Apprentices; the Settlement Acts; hostile tariff and prohibitions based on “jealousies of trade”, wars of dynastic succession in Europe, the Navigation Acts, and colonies).

Modern states have gone far beyond the interventions of the 18th century, as well as continuing some of the habits inherent in jealousies of trade. That modern societies required new forms of intervention does not decry their need. Smith advocated state interventions in banking, for example, to protect the citizenry even though individually they were “manifest violations” on perfect liberty (WN II.ii.94: 324).

He was never an ideologue, a tag that unfortunately cannot be disclaimed by some Libertarians.

Edmund Gets It Wrong Too

Edmund Conway, apparently the economics editor, writes in The Telegraph (London) HERE:

“What Gordon Gekko got wrong”

The "invisible hand" is shorthand for the law of supply and demand and explains how the pull and push of these two factors serve to benefit society as a whole. The simple conceit is as follows: there is nothing wrong with people acting in their self-interest. In a free market, the combined force of everyone pursuing his or her own individual interests is to the benefit of society as a whole, enriching everyone.

Smith used the phrase only three times in his 1776 masterpiece The Wealth of Nations, but one key passage underlines its importance: "[Every individual] by directing [his] industry in such a manner as its produce may be of the greatest value he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

Comment
Edmund Conway gets it wrong too.

Geko’s script writer was expressing Bernard Mandeville’s philosophy (The Fable of the Bees, 1724), and, in modern form, the ideas of Ayn Rand. He was not expressing anything written by Adam Smith.

Adam Smith’s use of the popular 18th-century metaphor of ‘an invisible hand’ in Wealth Of Nations (1776) had nothing to do with his exposition of supply and demand. Smith clearly states his theory of supply an demand in Books I and II of Wealth Of Nations without once mentioning ‘an invisible hand’.

Edmund Conway discloses, inadvertently I am sure, that he has never read Wealth Of Nations:

“Smith used the phrase only three times in his 1776 masterpiece The Wealth of Nations”

If he had read it even once he would know that Smith only used the metaphor, ‘an invisible hand’ ONCE in all 900-plus pages of Wealth Of Nations, in Book IV, chapter 2, paragraph 9, page 456 (Oxford University Press, 1976).

I wonder where the other two references are? If Edmund Conway can show us any other references to the metaphor in Wealth Of Nations, I and most other Adam Smith scholars would be most surprised to say the least.

As a journalist, Edmund should know that statements claiming to be fact should always be checked and then double-checked by Editors, especially economics editors.

Ron Mwangaguhunga writes in the Awareness Blog HERE

“Revisiting Adam Smith's "Invisible Hand"

Chinese Premier Wen Jiabao said:

“If you are familiar with the classical works of Adam Smith, you know that there are two famous works of his. One is 'The Wealth of Nations.' The other is the book on the morality and ethics. And 'The Wealth of Nations' deals more with the invisible hand, that is, there are the market forces. And the other book deals with social equity and justice. And in the other book he wrote, he stressed the importance of playing the regulatory role of the government to fairly distribute the wealth among the people.

If in a country most of the wealth is concentrated in the hands of the few, then this country can hardly witness harmony and stability.

"Harmony," granted is an organic part of Chinese thinking (as, say, "liberty" is a part of the American political vernacular). Still, Jiabao has a point despite his own country's profound deficits of freedom (Averted Gaze). This Sunday's New York Times Book Review also revisited Smith, noting, ".. as the historian Emma Rothschild has noted, 'The Wealth of Nations' uses the phrase 'invisible hand' precisely once. In the 1,231-page Bantam edition, it appears on Page 572." Only once!

It is interesting that the "invisible hand" has, over the years, become an almost inarguable Archimedian point as to how human beings make economic decisions. Did that "invisible hand" simply vanish the Scottish author's other long-forgotten book, Theory of Moral Sentiments?"

Comment
Wen Jibao has been saying the same thing for at least a year. I do not recognise anything in Moral Sentiments about redistributing wealth (not a common idea in the 18th century as we understand it).

Ron Mwangaguhunga may be giving a free paraphrase of what Wen said, or Wen may be freely paraphrasing Adam Smith knowing how few people in the West read either of his books.

But Ron quotes what many will find surprising – though no regular reader of Lost Legacy will be among them – from Emma Rothschild that Smith only mentions the so-called invisible hand metaphor only once in Wealth Of Nations and only once in Moral Sentiments (it didn’t ‘vanish’ at all).

Ron is correct in saying “the "invisible hand" has, over the years, become an almost inarguable Archimedian point as to how human beings make economic decisions”. How and why is the subject of a paper I am preparing for next year’s conference season (“An Invisible Hand: from myth to modern icon”).

Self-Interest and Copyright

William Patry writes the Blog, Moral Panics and Copyright Wars (‘a blog about copyright discourse’) which is about his book of the same name, published by Oxford University Press’ HERE:

“Adam Smith and the invisible hand of copyright” (22 August):

“Adam Smith’s theory was that “individuals were led in the pursuit of their own self-interest by an invisible hand to pursue the nation’s interest, but also that this pursuit of self-interest was a far more reliable way to ensure that the public interest would be served than any alternative,” especially government intervention. Joseph Stiglitz, however, rejoined that “the invisible hand often seemed invisible because it was not there.” (Page 98). John Maynard Keynes also rejected this view:

It is not a correct deduction from the Principles of Economics that
enlightened self-interest always operates in the public interest. Nor is
it true that self-interest generally is enlightened; more often individuals
acting separately to promote their own ends are too ignorant or too
weak to attain even these. (See pages 98-100 of the book).”

Comment
Copyright is the 'price' exacted by authors (and publishers) for potentially acting in the public interest (creating and publishing works which the public purchases from the publishers, a small portion of which goes to the authors).

Whether individual products are really in the public interest are separate issues – the bulk of books do not sell out their first printing; do not make a profit; often do not cover their costs; and sometimes do not cover their author’s advances (though some, such as David Hume’s, 1739-40 Treatise, ‘which dropped from the press stillborn’, but become a major contribution of philosophy and are still in print in the 21st century).

No alternative system of mobilising the efforts of authors, covering the financial risks of the publishers and, in the wider sense, serving the public interest, has been devised so far.

Besides setting the rules of copyright in laws, the state has a minimal role in deciding what may be written and published by laws on defamation, libel, plagiarism, inappropriate language and subject, the administration of which is subject to a legal process, not the executive (in non-totalitarian societies).

Where I may disagree with William is the above repetition of errors about Adam Smith’s views on self-interest, such as the false characterisation that Smith asserted: “individuals were led in the pursuit of their own self-interest by an invisible hand to pursue the nation’s interest”.

This was a specific, not a general, assertion by Adam Smith in a single instance in his 900-page, Wealth Of Nations (Book IV) in the case of some, but not all, merchants investing locally and in aggregate thereby increasing the annual output of “necessaries, conveniences, and amusements of life”.

This was occasioned by some, but not all, merchants being risk-averse about investing in foreign trade, as he states quite clearly in chapter ii, of Book IV. Their ‘risk-aversion’ led them to do so, which Smith capped with a well-know 17th-18th century metaphor of “an invisible hand” to give a more “striking” representation of the link between their risk-aversion and a nation’s interest. (Metaphors are not real!).

It was not a universal rule, though it has been made into one by modern economists, few of whom ever read Wealth Of Nations, and is passed around by repetition since the mid-1940s.

The idea that Smith’s understanding of self-interest led him to assert the easily refutable notion that a mystical entity intervenes in the economy to lead self-interest individuals to benefit the national interest is a insult to his scholarship.

He never said such a thing.

Indeed, in Books I and II of Wealth Of Nations he gives over 60 examples of self-interested actions in which individuals act in a manner contrary to the national (even local) interest.

Consider his suspicious opinions of the behaviours (many of which he documented) throughout Wealth Of Nations, including in Book IV, before and after the single instance of his use of the metaphor of “an invisible hand”, of “merchants and manufacturers”, “legislators” and those who influenced them, and national governments, and then explain these widespread behaviours, based on the self-interests of the individuals concerned, with the alleged statement attributed to Adam Smith that, somehow, individuals end up achieving something manifestly at odds with what they actually achieve.

Smith’s ideas about self-interest were not “nuanced”; they were starkly clear and did not include the attribution modern economists give to him. I concur with Keynes and Stiglitz in their quoted assessments.

Update:

William writes that he was quoting Stiglitz on Adam Smith's reference to the invisible hand.

That is not as clear the way the Blog is written, but I accept that William is innocent and Stiglitz is the guilty party.

Either way, the assertion that Smith wrote the ideas I criticise in my post remains an error of attribution by modern economists.

An Author on the Money

Jed Graham of Investors Business Daily (HERE) writes:

“Adam Smith Was On The Money”

“In the fateful year 1776, Adam Smith took aim at Britain's heavy-handed rule of the American Colonies.

"To prohibit a great people ... from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind," he wrote in "An Inquiry Into the Nature and Causes of the Wealth of Nations."

... In a 1780 letter, he labeled his work, in part, as "a very violent attack ... upon the whole commercial system of Great Britain."

In the first three books of the 900-page tome credited with laying the foundation for modern economics, Smith revealed the "invisible hand" that unites the productive force of self-interested parties for the common good.

His work, which earned his place as the most influential economist in history, wasn't just timeless. It also addressed the most pressing issues of his day.
Smith made not just a humanitarian case against colonial suppression, but also an economic one.

He argued that the cost of monopolizing trade with the 13 Colonies wasn't worth the benefit — a marginal increase in the profit that British businessmen might earn: "It is ... a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers."…

Having opted not to follow the religious career path dictated by his scholarship, Smith returned to Scotland. There he studied while living with his mother for two years.

Then opportunity struck. Smith was invited by the Philosophical Society of Edinburgh to deliver lectures. They were a hit, earning him an appointment as professor of logic at the University of Glasgow.

Smith's ambition was grand. At the end of his first book, "The Theory of Moral Sentiments," which explained the natural link between self-interest and morality, he previewed future endeavors. He would attempt to give the world "a system of those principles which ought to run through and be the foundation of the laws of all nations."

"Wealth of Nations," published 17 years later, fulfilled part of his pledge. It was far more than an economic work, Glenn Morrow said in a lecture on its 150th anniversary. "It is a history and a criticism of all European civilization." …

Inspired by Newton, whose law of gravity explained planetary movement, Smith sought a connecting principle governing economics.

Smith perceived man's propensity to barter or exchange skill and labor as central to economic progress. This facilitates a division of labor that, in Smith's example of a pin factory, let 10 workers make 48,000 pins in one day, while a single untrained worker might be hard-pressed to make one.

Smith's intellectual labors were driven by a sense of mission. In his analysis, self-interest spurs innovation and is the surest way to spread wealth to all income groups.

Smith saw dramatic disparities in living standards. In his day, great wealth and overcrowded slums existed in close proximity on the Royal Mile in Edinburgh, says James Otteson, an economics professor at New York's Yeshiva University, whose introduction to Smith's work will be published by Continuum next year.

"He was concerned with figuring out ways to make the people at the lowest end of the economic spectrum better off," Otteson told IBD.

Smith tested his big-picture ideas with the most painstaking analysis.
Taking a decade to write "Wealth of Nations," he collected a wealth of anecdotal and historical information to explain his arguments.

His data ranged from wheat prices dating to 1200 to the price of butcher's meat paid by Prince Henry early in the 17th century.

"The philosophical base of 'The Wealth of Nations' is implicit in all the explicit reasoning about the real world, which Smith has observed in minute detail," wrote Nobel Prize economist Lawrence Klein.

His "Wealth of Nations" provided the first systematic explanation of how an economy functions.

Smith complemented exceptional training with real-world observation and data collection to inform and support his analysis.”

Comment
On the whole I found this an impressive, refreshingly original approach in a short piece on Adam Smith’s life and contribution to moral philosophy and political economy. Readers of Investment Business Daily, new to the authentic Adam Smith, will learn a great deal about him otherwise not available in the thousands of usually, low quality, short-journalistic articles reporting the usual wrong clichés about the philosopher.

Jed Graham cites Professors Jim Otteson (Yeshiva University), one of the younger, outstanding Smith scholars writing today, and Lawrence Kline, recent Nobel Prize winner.

However, I have one minor quibble with Jed Graham, and regular readers of Lost Legacy should have spotted it:

“In the first three books of the 900-page tome credited with laying the foundation for modern economics, Smith revealed the "invisible hand" that unites the productive force of self-interested parties for the common good.”

The first two books of Wealth Of Nations contain his analysis wrapped in Smith’s historical approach, neither of which mention the ‘invisible hand’. Book III is a broader sweep across history; it doesn’t mention the ‘invisible hand’.

Book IV is a central piece of Smith’s work in a detailed critique of mercantile political economy, which had dominated British government’s political economy since the 1600s (and, would argue, still does to some extent). Only in Book IV does he mention (only once) ‘an invisible hand’, as a metaphor for the conduct of some, but not all, merchants in their preference for the home trade rather than cope with the risks of foreign trade.

The driver was not the metaphor of ‘an invisible hand’ – a metaphor presents a grammatical object in a more ‘interesting’ way. It was in fact the risk aversion of the some merchants that led them to invest locally, even if it was less profitable than investing in cargoes to send or import from abroad.

OK, having said that, let us be clear on the mighty positives in Jed Graham’s piece. He correctly identifies the Wealth Of Nations as a critique of UK mercantile policy, not as textbook of ‘capitalism’, as usually presented by people unaware that ‘capitalism’, as a word, let alone the phenomenon, was not invented in Smith’s life time. The word was first used in English in 1854; the phenomenon of capitalism, as the word implies, emerged from mid-19th century as numerous large capital accumulations became available for serious capital intensive, profit-driven investments.

Jed notes that the propensity to ‘truck, barter, and exchange’ was the main behavioural trait that gradually spread into human relationships from pre-history, with the division of labour within processes and along the supply chains of commercial society, to distinguish some societies that had achieved small but significant advances in the annual output of the ‘necessities, conveniences, and amusements of life’, from those societies that remained fairly primitive in their material products.

Dramatic as were the living standards of the citizens of Edinburgh (living cheek by jowl in Edinburgh’s Old Town - and still standing), they were as nothong compared to the differences in the dependent situation of the meanest ‘savage’ compared to his savage ‘king’, who had the lives of his subjects at his disposal.

Follow the link; Jed Graham’s short piece in Investors Business Daily is worth reading.

A Confusing Commentator at Work

On “thought leader” by Mail and Guardian online (HERE), Sentletse Diakanyo writes:

“The financial crisis and rise of pseudo-socialists”

“It is important that we allow the market economy to function within the sensible parameters of oversight by the state. Adam Smith alluded to the “invisible hand” necessary to curtail the unbridled capitalist destruction of the economy. The fatal mistake made by politicians in the past was the general assumption that when the economy veers off its original path, competitive forces will intervene and ensure self-correction. The opposite proved true with disastrous consequences. What we cannot allow is paternal interventionism by the state that serves to disrupt economic progress and breeds crony capitalism.”

Comment
I have no idea what Sentletse Diakanyo is talking about, either in respect of socialist/Marxist/leftwing dictators in South America, or Adam Smith.

That he asserts that “Adam Smith alluded to the ‘invisible hand’ necessary to curtail the unbridled capitalist destruction of the economy” is beyond any explanation (or parody) I can give, and his article certainly is of no help.

Almost Entirely Wrong

One STDV (“Daily, Politically Incorrect Musings on Race, Culture, Intelligence, and Politics”)HERE:(6 August) posts:

“Darwin Takes on Adam Smith's "Invisble Hand" Theory”

“Via Lover of Wisdom comes this article applying Darwin's theory of natural selection to economics. The author contends Adam Smith's "invisible hand" idea doesn't apply in markets where relative success is important.
“Smith is celebrated for his “invisible hand” theory, which holds that when greedy people trade for their own advantage in unfettered private markets, they will often be led, as if by an invisible hand, to produce the greatest good for all... My prediction is that it will eventually be supplanted by a version of Darwin’s more general narrative...”

“The central theme of Darwin’s narrative was that competition favors traits and behavior according to how they affect the success of individuals, not species or other groups. As in Smith’s account, traits that enhance individual fitness sometimes promote group interests.”

Comment
A mixture of misinformation, myth, and acute observation! In short, he gets Adam Smith mostly wrong and Charles Darwin mostly right.

Adam Smith didn’t have a theory of ‘an invisible hand’. It was a metaphor for people sometimes responding to their perceptions of whatever they considered important that sometimes, but not always, had beneficial outcomes for them and sometimes, but not always, unintentionally had beneficial outcomes for the group (or society).

Smith never opined the view that “when greedy people trade for their own advantage in unfettered private markets, they will often be led, as if by an invisible hand, to produce the greatest good for all...”.

Smith considered selfish acts as anti-social and ‘licentious’. He never said that ‘they will often be led, as if by an invisible hand’. That is pure tosh. Nor did he think that such behaviour would ‘produce the greatest good for all.’ That is wishful nonsense.

I am relaxed about people being ‘politically incorrect’, but I prefer that people are correct in what they attribute to Adam Smith.

An Idea Devoid of Content

Richard Kagan writes on ‘Human rights and the news’ in The Daily Journal (Fergus Falls Minnesota) 30 July, HERE

“Article 19 of the Universal Declaration of Human Rights expands on this right. It includes the freedom “to seek, receive and impart information.” It is not enough to have the right of a free press. It is our responsibility to seek and receive information that is necessary to our well-being.

Two areas in the Journal are particularly responsive to this task: namely economic opportunity and environmental stewardship. The Nobel Prize Laureate in Economics, Joseph Stiglitz has criticized the Adam Smith assumption that there is an “invisible hand” that controls or determines our economy. Professor Stiglitz counterargument declares that information has economic value because it allows individuals to make choices more rationally. Without sufficient economically relevant information, individuals can be conned into make self-destructive decisions. When one person has more or better information than the other, there is an imbalance in the knowledge of reality. This negative relationship can lead to exploitation and ill feelings. The more the Journal can cover issues of economic growth and opportunity, the more we can make logical decisions about the local and national economy.”

Comment
Adam Smith did not assume “that there is an invisible hand’ that controls or determines our economy”, or, if he did believe that, he did not say that he believed it.

In fact, he said remarkably little about the role of ‘an invisible hand’ and even less about its possible role in ‘our economy’.

He only mentioned it once in Wealth Of Nations and then only as a metaphor for some merchants who, being risk averse, preferred not to send their cargoes out of their sight and instead preferred to invest their capital locally, even if they earned a lower rate of profit from doing so.

Other local merchants, willing to take greater risks, did send their cargoes abroad and they earned higher profits from doing so if their investments returned safely (the North Atlantic is a risky proposition for shipping; the Caribbean was infested with pirates; and India was over a year round-trip just for sea transportation.

By investing locally, these merchants unintentionally added to national output and employment. They were most interested in their own security.

It was in reference to this conundrum of the choice between foreign versus domestic trade that Smith wrote in Book IV, chapter 2, of Wealth of Nations his, now famous, but for most of the hundred years after his book appeared in 1776 largely ignored, use of the common 18th-century metaphor of ‘an invisible hand’, which he deployed to describe the consequential behaviours of those merchants who were risk averse.

The risk-neutral (and risk-seeking) merchants were not considered further – no ‘invisible hand’ guided them apparently.

So when Smith describes the behaviours of the risk-averse merchants being ‘led by an invisible hand’, he was considering them only.

His use of the words ‘every individual’ refers to this group only, though it is a common error to assert that the metaphor applied to everybody in the community and thereby leads most modern commentators to imagine that Smith said ‘all individuals’ do what they do, irrespective of what they do.

Few of these modern commentators have read Wealth Of Nations leading them to formulate a view of the economy attributed to, but never part, of Smith’s analysis of markets. Notably, in Books I and II of Wealth Of Nations, Smith analyses the working of markets in detail without mentioning ‘an invisible hand’ at all.

If the invisible hand guides some individuals to invest abroad and some others to invest at home it become a nonsensical metaphor and certainly an idea devoid content. It adds nothing Smith exposition in paragraphs 1 – 9 of Chapter 2, Book IV.

Professor Stiglitz should know all this, but apparently does not. If Stiglitz gets it wrong, what chance has Richard Kagan?

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.

New Book by Steve Medema Looks Promising

Real Time Economics(“Economic insight and analysis from The Wall Street Journal”)carries a Guest Contribution: “The Invisible Hand Isn’t Broken”

“The free market has gotten a bad rap, but the invisible hand was never meant to be completely unfettered, writes Steven G. Medema, professor of economics at the University of Colorado Denver and the author of “The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas” [Princeton University Press, 2009] HERE:

"The idea that the self-interested behavior could be good for the economy did not originate with Smith, but he provided the theoretical ammunition for this view and remains the historical figure with whom it is most closely associated. Smith’s view of things was that businessmen do indeed pursue their self-interest, but that such behavior can redound to the best interests of society as a whole — higher national wealth, lower goods prices for consumers, etc. — if that self-interested behavior is encased within a competitive market environment. This, of course, is Smith’s famous “invisible hand” argument, which has been championed by some as an argument for minimalist government and derided by others as a myth that has been disproved by events."

"But as convinced as Smith was of the utility of the market for promoting economic growth attended by benefits that extend across the population, he was not a champion of unfettered markets. Smith wrote at a time when various government schemes of protection established monopolies across the economy, which generated higher prices for consumers at the same time that they enriched the narrow classes of protected businessmen. He advocated the competitive process as an alternative to that system.
Smith saw an important role for the state within the market process. He was well aware that the unfettered pursuit of self-interest had many pitfalls associated with it, and he wrote at length about the need to embed the market system within an appropriate legal and moral environment, even going so far as to recommend legal ceilings on interest rates to prevent banks from lending large amounts of society’s financial capital for the pursuit of excessively speculative ventures”

Comment
Not quite there yet but definitely moving in the right direction.
From an automatic relationship of individual self-interest to social benefits (usually aided, directed even, by an invisible hand, there is a clear sign that this relationship is qualified by its dependence on the content of the self-interest embodied in it and its context (rule of law, justice, degree of competition, and types of behaviours).

Smith gave over 60 instances of self-interest working against the interests of other individuals in Wealth Of Nationssee footnote 3, Self interest is not always benign as far as Smith was concerned, but not a lot of modern economists seem understand that (most of them have never read Wealth Of Nations).

The Wall Street Journal article recognises this in part – follow the link to read Steve Medema’s important new book – I am about to start reviewing it for Lost Legacy and shall post my review soon.

A Welcome Step to Appreciating the Role of The Metaphor

Lawrance G. Lux write his Blog by the same name HERE:

‘Hole in One Golf’

“I have always believed in Adam Smith’s Invisible Hand, but not in the manner most cited; reread the previous paragraph, and ask whether the fiscal deficit as described is not a failure of a universal turn to that Invisible Hand. The award of Tax benefits without universal application negates the operation of the market, and the dysfunction of fiscal balance comes from the loss of guidance from that Hand.”

Comment
Follow the link for the rest of this interesting side-light on the invisible hand, which takes its meaning on it own terms. However, even on these terms it is partly contradicted by the context in which Adam Smith introduced the metaphor.

What Lawrence appears to be saying is that he considers the invisible hand has only operating effectively in a free and competitive market, with minimal or no government, and certainly no government intervention on the scale presently practised in western ‘capitalist’ countries today, for example, the current fiscal deficit.

This implies – near to the truth – that the invisible hand was a metaphor for people reacting to social signals to behave in certain specified ways, such as in Moral Sentiments (TMS IV.i.10: 184) where rich landlords, reacting to the obvious need to feed, clothe, and shelter their labourers (and their families), would provide them with sufficient subsistence (no doubt, widely interpreted by the landlords retainer’s and overseers) to do so. The landlords could do not other, because without subsistence, the farm labourers would not last the winter, and who would prepare, plant, and harvest next season?

In the Wealth Of Nations the invisible hand was a metaphor for some local merchant traders deploying their capital locally to hire labour (creating employment) and to produce ‘the annual output of the necessaries, conveniences, and amusements of life’ and profits, which Adam Smith considered to be the real wealth of a society. The whole annual output is the sum of its contributory parts, hence the more that local merchant traders acted in this manner, the higher would be a county’s annual output. In this case, what behavioural signals prompted some, but definitely not all of them to behave in this manner?

From the commercial society, their motives included the profits they could make which replaced the capital they deployed, and the wages they paid to labourers to transform capital into output by the application of labour. Out of their revenues, after paying all their costs, they earned income, which was either consumed, hopefully frugally but in some cases it was spent in prodigality, and they invested in new rounds of transforming capital into new revenues ('the great wheel of circulation').

Here, most people read the 9th paragraph of the chapter (WN IV.ii.9: 456) too quickly. They forget the other social signals to all, not just some, merchant traders, who divided into two particular sets particularly. Individual merchant traders vary in their attitudes to risk – no investment round is absolutely certain to provide a return on their capital.

Merchant traders, who, considering their options and assessing whether to invest locally or to send their capital abroad, are swayed by the prospect of profits counter-balanced by their assessment of the risks of sending their capital out of their sight, to strange lands that may have different customs, uncertain local laws when deciding commercial disputes, and operated by people whose characters and reliability they know little or nothing about.

The different estimates of risk lead to two sets: those who are risk averse, and choose the home trade, and those who are risk neutral who choose the foreign trade, swayed by prospective higher profits.

Smith mentions, specifically, that the home trader who ‘intends only his security’ thereby invests locally ‘intending only his own gain’.

The foreign trade likewise ‘intends only his own gain’ but is relaxed about his security. The fact that the home trader, in consequence of this risk aversion, benefits home output and employment is the object of the metaphor of an invisible hand (which is all that most economists read from this passage) and which is related to the other fact that the foreign trader is not ‘led by an invisible hand’.

In short, the invisible hand is a metaphor for known behavioural social reactions to signals and it is not a prediction of how markets work to produce harmony or to result necessarily in beneficial results for society as a whole. Call this the neoclassical fallacy.

It seems to me that Lawrance G. Lux is close to understanding Adam Smith’s meaning behind his deployment of the metaphor of an invisible hand.

That some economists have made the metaphor into a theological interpretation of behaviours, that most regard it as somehow miraculous, and many have become immune to appreciate what is clearly staring them in the face, is far more mysterious a contagion of minds of many in our profession.

I remain optimistic that patient explanation will prevail in due course. So, I thank Lawrence for inciting this message on Lost Legacy.

From Little Acorns Great Oaks Grow

David R Lawson writes a blog, Ponder Anew 2 ! HERE:

David R. Larson on "The Disappearance of Adam Smith's 'Invisible Hand”, in which he posts an article originally published in Spectrum HERE He quotes from my paper, “Adam Smith and the Invisible Hand: from metaphor to myth”, avaialble HERE:

David's article is sympathetic and interesting. The comments to it are exceptionally helpful for those trying to understand Adam Smith’s use of The Metaphor.

A Chicago Version of Adam Smith

Martin Mandelman writes the Mandelman Matters Blog HERE:

“17th century economist, Adam Smith, in his treatise “The Wealth of Nations,” based his free market conclusions on the precept that human beings will act in their own self-interest, and by doing so, also be acting in the best interests of the society as a whole. Smith’s famous metaphor, “the invisible hand,” was used to describe the effect of everyone in the marketplace doing what’s best for themselves, and the economic growth that would result. But, time after time, when it comes to investing our own money, we continue to prove that we are flawed beings who are subject to acting out of greed and/or fear, even when it is clearly not in our best interest to do so.”

Comment
Martin Mandelman has some way to go before he understands much about Adam Smith.

Skipping over the slip about which century Smith lived in – the 18th, not the 17th – and noting that he did not write a ‘Treatise’ (it was getting close to a 1,000 pages, depending on which edition you put on your shelf; reading it is a distinctly minority activity), nor did he hold to a ‘precept’ that “human beings will act in their own self-interest, and by doing so, also be acting in the best interests of the society as a whole” (emphasis added).

“Smith’s famous metaphor, the invisible hand” wasn’t his at all- it was a rather commonplace metaphor from ancient times (Ovid) and increasingly used from Shakespeare’s time (Macbeth), and in Smith's time appeared in numerous published sermons (several dozen authors have been identified), and also featured in several literary works (Daniel Defoe, Voltaire, Bonet, Robinet, Walpole, and Reeve.

Of course, since the 1950s The Metaphor has become ubiquitous, albeit it re-invented by modern economists to mean something quite different from the Adam Smith born in Kirkcaldy in 1723, though it is stubbornly attributed to him.

For Smith the metaphor of the invisible hand, in the only place he used it in Wealth Of Nations, was NOT “used to describe the effect of everyone in the marketplace doing what’s best for themselves, and the economic growth that would result”.

It was about what some, but by no means all, owners of capital did who were risk-averse regarding investing abroad, even in the colonial trade with North America, and therefore preferred to invest locally where they could see the people with whom they did business, and how this added to domestic capital investment, creating local employment and adding to the annual output of the ‘necessaries, conveniences, and amusements of life’.

Of course, without the others who preferred to invest abroad – their profit rates were higher – Britain’s economy would be negatively affected.

Martin gets to the import of his message: “we continue to prove that we are flawed beings who are subject to acting out of greed and/or fear, even when it is clearly not in our best interest to do so”.

Yes, he is in the advice business. But I wonder how good he is if he quotes Adam Smith for support for his message and gets him so wrong?

Two Professors Argue About the Invisible Hand - And Both Get it Wrong too.

Dan Ariely, a behavioral scientist at MIT and the author of Predictably Irrational: The Hidden Forces that Shape Our Decisions, writes in Psychology Today HERE

“Irrationality is the real invisible hand”

Adam Smith first coined the term "The Invisible Hand" in his important book "The Wealth of Nations."

[No he didn’t! Smith first used words, ‘invisible hand” once in his essay on the History of Astronomy, began around 1744 and complete before 1758, and used it once again in Moral Sentiments (1759), and once later in Wealth Of Nations (1776).

Smith didn’t ‘coin’ the phrase at all. It was a well-known phrase going back to classical times (Ovid), and was widely used in the 17th and 18th centuries in both religious tracts, sermons and books, and in literary works (Shakespeare, Defoe, Voltaire and others.]

"With this term he was trying to capture the idea that the marketplace would be self-regulating."

[No he wasn’t. He used the term not in his discussion and analysis of markets (Book I and II of Wealth Of Nations), but in a discussion of the choice of export/importing versus investing in domestic businesses (Book IV of Wealth Of Nations on his critique of mercantile political economy). It had nothing to do with ‘regulating’.]

“The basic principle of the invisible hand is that though we may be unaware of it, an unseen hand is constantly prodding us along to act in line with what's best for the whole economy. This means that when this invisible hand exists, when we all pursue our own interest, we end up promoting the public good, and often more effectively than if we had actually and directly intended to do so. This is a beautiful idea, but the question of course is how closely it represents reality.”

[If Dan Ariely believes that “The basic principle of the invisible hand” represents reality he is totally mistaken. It was a metaphor Smith used only three times and he never said “that when this invisible hand exists, when we all pursue our own interest, we end up promoting the public good, and often more effectively than if we had actually and directly intended to do so.” That is a modern construction placed on the metaphor and has next to nothing to do Adam Smith].

“We are now paying a terrible price for our unblinking faith in the power of the invisible hand.”

[The only ‘terrible price’ is that of embarrassment among those economists who preached the above nonsense about the invisible hand, and, worse, believed that their invented roles for the metaphor were actually written by Adam Smith; they weren’t; and because professors of economics seldom read Adam Smith, except in clipped quotations, they did not realize what they were doing.]

“In my mind this experience has taught us that Adam Smith ‘s version of invisible hand does not exist …”

[Simply reading what Adam Smith wrote would have helped Dan and many others from making the mistake of believing what their tutors told them.]

“In Adam Smith's world the invisible hand was a wonderful force, and the fact it was invisible made no difference whatsoever.”

[The invisible hand was never in Adam Smith’s world in the form invented in mid-20th century by some economists who created the Chicago version of Adam Smith, while ignoring the Adam Smith born in Kirkcaldy, Scotland in 1723.]

“The irrational invisible hand is a different story altogether - here we must identify the ways in which irrationality plays tricks on us and make the invisible hand visible!”

[Yes, Dan has invented yet another version of Adam Smith – utterly ridiculous too – and talks nonsense.]

In the following issue of Psychology Today (HERE)

David Hirshleifer, who holds the Merage Chair in Business Growth and a professor of finance and economics at the Merage School of Business at UC Irvine responds to Dan Airely with this blast (equally wrong but for different reasons):

“To Dan Ariely, the invisible hand---the market force that gets people to help others, even when that is no part of their intention---is a pleasant fantasy.”

[Yes it is, but David suffers from the same condition]

“The most elegant statement of the idea he's whacking comes from Adam Smith himself:

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

[This quotation comes from Book I (chapter 2) of Wealth Of Nations and is often quoted as being about the invisible hand, and usually is mistaken in their interpretation of what it is about. It is really about the bargaining that occurs throughout commercial market economies.

Smith advises you to barter for your dinner by addressing not your own needs, but by addressing the needs of the sellers.]

You can read the rest of Dan’s and David’s articles by following the links. However, you won't learn much about Adam Smith's use of The Metaphor.

Too Clever By Half on Smith and Darwin

Nitish Grover (FCA, AICPA Intl Associate) writes (13 July) in the Blog of the Gersham, Lehrman Group (‘Intelligently connecting institutions and expertise’) HERE, a piece on “The Invisible Hand, Trumped by Darwin” in the New York Times (discussed on Lost Legacy yesterday):

Nitish Grover writes a witty (speaking loosely) piece to the theme: “Charles Darwin, Adam Smith, Accounting and Financial Rules”. He gives an 8-step analysis, which is more than tendentious in my view.

“1.The invisible hand has always been there in accounting and in the development of financial products.”

Nitish does not explain how ‘an invisible hand’ manifests itself in accountancy (but then Adam Smith only mentioned it once in Wealth Of Nations where it is clearly a metaphor not an actual entity.]

“2. Natural selection (Darwin) speaks of adaptability and change. The invisible hand refers to a population of businessmen doing the right thing for a selfish motive.”

[Hold it! Where does Adam Smith speak of ‘selfish motives’ having anything to do with The Metaphor of ‘an invisible hand’? He does no such thing, which leads me to ask if Nitish has read Wealth Of Nations or has relied merely on a summary of modern interpretations, plus a couple of Hollywood films (‘Wall Street’, ‘Beautiful Mind’, and perhaps those scriptwriters influenced by Ayn Rand).

The traders mentioned in connection with The Metaphor were those who were risk averse to sending their capital across to the British colonies in North America (the Atlantic was dangerous to small ships, the people they dealt with in the colonies were not known to them, the local courts were an unknown element, though based on British Law, and their goods were out of their sight). Consequently, they preferred to invest locally, which on the arithmetic of the whole is the sum of its parts, each risk averse trade increased local investment larger than it would be if these traders joined the non-risk averse traders who did business in the colonies. How is risk-averse behaviour ‘selfish’?]

”3. While the invisible hand and the selfish motive are driven by greed the process of natural selection is slower and driven by the environment.”

[It gets worse! Now they are driven by ‘greed’. Nitish confuses Adam Smith with Bernard Mandeville (1724) and the ‘Fable of the Bees’, a common enough misattribution to Smith who regarded Mandeville as ‘licentious) (see his Moral Sentiments, 1759). Nobody who reads Wealth Of Nations would make that elementary mistake.]

“4. While the invisible hand has a short term perspective the natural selection is more strategy driven.”

[The Metaphor has no perspective at all – it's imaginary, not real. Darwin did not instill ‘strategy’ into natural selection; individual adaptations can develop to a series of short-term events – a regular food declines, alternatives are tried by some individuals, some new habits become more regular, which may solve one problem – survival – but may induce others that become terminal. Natural selection works on the individual and does not have foresight, nor does it always and inevitably ‘progress’ (former sea creatures can evolve into land creatures, and much later return to the sea).

Hominids that failed to adapt to the growing nutrition needs of a growing brain, remained with smaller brains, lived for a million years or more as a species and then died out as the environment changed or bigger brained hominids out competed them. Has Nitish actually read Darwin? Does he understand Darwin’s theory of natural selection? He hasn’t read Smith and I suspect he hasn’t read Darwin either.]

5. Accounting standards have evolved more over a period of natural selection and due process (Darwin).

[Economic behaviour has also evolved over long periods. Exchange behaviours did not suddenly turn into bargaining behaviour. They went through a series of changes from ‘gift behaviour’, through voluntary reciprocation (the ‘quasi-bargain’), reciprocation enforced by sanctions, to bargaining proper (‘If you give me X then I will give you ‘Y’ – or the simultaneous exchange). This process is no different than that of ‘accounting standards’, except that the evolution of bargaining took much longer, measured in millions of years, not just millennia – has Nitish ever read any anthropology?]

Nitish's items 6 thru 7 and 8 are meaningless. I said his article was ‘witty’ but perhaps it was more ‘clever’ than witty, but its cleverness was more entertaining than instructive.

[Disclaimer: the Gersham, Lehrman Group disclaim any responsibility for the contents of its authors' articles]

Was Adam Smith Trumped by Charles Darwin?

Thomas McQuade writes (12 July) in Think Markets (‘A blog of the NYU Colloquium on Market Institutions and Economic Processes’) HERE:

“Frank and Stein

In a recent opinion piece in The New York Times (“The Invisible Hand, Trumped by Darwin?”), Robert H. Frank proposes that Charles Darwin, not Adam Smith, should be seen as the real intellectual founder of the discipline of economics. He claims that Smith’s most famous idea – that the competitive pursuit of individual self-interest can redound to social good – is but a special case of Darwin’s more general picture of competition in which individual benefit sometimes does, but often does not, benefit the larger group. The sort of competition for which the invisible hand does not work well is, he says, where the competition is for relative gain, i.e., when the rewards depend on relative performance, and people gain by bettering each other rather than by bettering nature.

The problem with Frank’s argument is his careless deployment of the analogy between human beings interacting in a highly structured social environment and animals in general interacting in an environment of considerably less social complexity. He is ignoring the effects of human institutions in constraining self-interested behavior. And compounding the error, he appears unable to distinguish between those institutions which provide constraining feedback and those which undermine and deflect such feedback.

The economic problem at hand is not, as Frank characterizes it, competition based on relative performance versus competition based on absolute performance. It is competition constrained by negative feedback versus competition freed from normal constraints. Successful social institutions, as well as providing positive incentives for personal gain, incorporate negative incentives for straying very far from conventional expectations. The interplay between these opposing forces can make for stable growth of the societal activity in question. It is the reason why science has been such a spectacularly successful social enterprise, and why markets, despite being set about by all sorts of monetary and regulatory interventions which weaken the feedback, have greatly increased human wellbeing.

Frank points to “the recent economic wreckage”, an instance of what can happen when “greedy people trade for their own advantage in unfettered private markets”, as evidence for his contention. Unfettered markets, if they existed, could certainly display greed, herding behavior and other “inefficiencies.

Adam Smith’s contention was that the pursuit of self-interest, constrained by appropriate social institutions, would be much more effective at producing societal wellbeing than actions which purported to aim at that wellbeing directly. And “appropriate” does not involve the overriding of constraining incentives. That is why so much of The Wealth of Nations is taken up with analysis and criticism of the social institutions of Smith’s day. Frank predicts that, 100 years from now, economists will point to Darwin as the owner of the shoulders they are standing on, not Smith. Let me make a competing prediction: that 100 years from now economists will look back and wonder how so many of their predecessors could have been so superficial in their appreciation of Adam Smith and, as a result, could have so completely misunderstood the economic events they lived through.

Comments
I think Thomas McQuade is closer to the truth than Robert H. Frank. In this month of celebration of Charles Darwin’s Origin of Species (1859), it is natural that writers look for new angles on both Adam Smith and Charles Darwin would compare with the banking crisis uppermost in our minds.

Robert Frank chooses to pit Darwin against Smith (albeit that Frank’s is a version of the Chicago Adam Smith rather than the Adam Smith born in Kirkcaldy in 1723). Even Frank’s contest for the supposed title of ‘the real intellectual founder of the discipline of economics’ is quite spurious (Smith was awarded the title today by others and with the supposed prestige of ‘inventing capitalism’ and or of being the ‘high priest of capitalism’, or similar hierarchical nonsense).

Frank writes: “Smith is celebrated for his “invisible hand” theory, which holds that when greedy people trade for their own advantage in unfettered private markets, they will often be led, as if by an invisible hand, to produce the greatest good for all. The invisible hand remains a powerful narrative, but after the recent economic wreckage, skepticism about it has grown. My prediction is that it will eventually be supplanted by a version of Darwin’s more general narrative — one that grants the invisible hand its due, but also strips it of the sweeping powers that many now ascribe to it.” (New York Times: HERE)

Smith is ‘celebrated’ by Frank for the invented reasons of modern economists (post-war in the late 1940s), not for what Smith actually wrote in Wealth Of Nations or Moral Sentiments. Smith never alluded to ‘selfish reasons’ and ‘greed’ (that was Bernard Mandeville, whom Smith described as ‘licentious’ in Moral Sentiments. Smith was made into a cartoon image by Hollywood script writers (‘Wall Street’ and ‘Beautiful Mind’). He certainly never claimed that “greedy people” will “often be led, as if by an invisible hand, to produce the greatest good for all” and it belittles Frank's credibility for him to claim that he did.

With such glaring errors about Smith, Frank's claims for Darwin are immediately suspect.

“The central theme of Darwin’s narrative was that competition favors traits and behavior according to how they affect the success of individuals, not species or other groups. As in Smith’s account, traits that enhance individual fitness sometimes promote group interests. For example, a mutation for keener eyesight in hawks benefits not only any individual hawk that bears it, but also makes hawks more likely to prosper as a species.”

Comment
At least Frank gets Darwin right. Of elks, Frank writes: “For instance, a mutation for larger antlers served the reproductive interests of an individual male elk, because it helped him prevail in battles with other males for access to mates. But as this mutation spread, it started an arms race that made life more hazardous for male elk over all. The antlers of male elk can now span five feet or more. And despite their utility in battle, they often become a fatal handicap when predators pursue males into dense woods.”

But is this not the same with Smithian competition? An individual exploits a handy source of raw materials, disregards the environmental damage, and enjoys prosperity for a while. He runs out of the resource, or the owners of the resource site impose heavy taxes, or take the resource over and run it themselves. Local maxima need not be higher than competitive maxima.

Frank: “Ideas have consequences. The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all. If, as Darwin suggested, many important aspects of life are graded on the curve, his insights may help us avoid stumbling down that grim path once again.

The competitive forces that mold business behavior are like the forces of natural selection that molded elk. In each case, we see instances of socially benign conduct. But in neither can we safely presume that individual and social interests coincide.”

Comment
Frank notes that the “uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts”, but which ‘disciples’ is he talking about? (Note the religious overtones of ‘disciples’).

The Kirkcaldy Adam Smith was quite clear on the need for regulations (or ‘police’ as they were called then) where ‘merchants and manufacturers’ misbehaved (see Smith’s discussion on regulating banks to curb the behaviours of ‘bold projectors’, WN II.ii.56-7: 304).

His reputation as a believer in ‘laissez-faire’ ideology is undeserved (he never used the words ‘laissez-faire’). Smith was no extreme ‘libertarian’, but he believed firnly in Liberty, tempered by the negative virtue of Justice, without which society would ‘crumble to atoms’; TMS II.3.4: 86).

How much of Adam Smith has Robert Frank actually read recently? He is, after all, an economist at Cornell, and a visiting faculty member at the Stern School of Business at New York University.

Frank adds: “The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all.”

I would agree, but the ‘invisible hand’ celebrated by modern economists, many of them proud to wear the title of ‘disciple’ of the Chicago Adam Smith, is actually a crown of thorns: he never had a ‘theory’, a ‘concept’, a ‘doctrine, or a ‘paradigm’ of ‘an invisible hand’ (fir him it was a mere metaphor), and while such people, and the people they influence (for good money), parade their version of it to limit some regulations, they also have used their influence to continue the mercantile regulations, which Smith railed against in the 18th century, and which blight modern economies through various forms of protectionism and tariff policies, and they lower world living standards both at home and abroad, particularly in poorer countries.

Thomas McQuade ends his review of Frank’s article with a a comment on Frank's prediction that:

“100 years from now, economists will point to Darwin as the owner of the shoulders they are standing on, not Smith. Let me [Thomas McQuade] make a competing prediction: that 100 years from now economists will look back and wonder how so many of their predecessors could have been so superficial in their appreciation of Adam Smith and, as a result, could have so completely misunderstood the economic events they lived through.”

I completely agree with Thomas McQuade and give a thumbs down for Robert Frank.

A Bit of 'Calvinist' Nonsense - Surely Not Serious?

Peter Thompson writes in Comment is Free, The Guardian, UK HERE:

Calvin, Weber and the vanishing mediator - The question: Why won't Calvin die?

“The purposeful order of the world in natural law is the religious equivalent of Adam Smith's doctrine of the invisible hand.”

Comment
Now we have: “Adam Smith's doctrine of the invisible hand”! What doctrine?
Where is it spelled out as a ‘doctrine’?

Should we take Peter Thompson seriously?

He finds a Calvinist explanation among the Chinese Communist Part leaders who ordered the Tiananmen Square massacre, and writes: “The future of British capitalism was made safe by Cromwellism and its defeat of Catholicism …”.

Perhaps there is an affinity between Thompson and the interpretation of a metaphor as a Panglossian explantion of everything resulting from all behaviours (odious as well as sublime) that result in the best of all possible worlds whatever evil has caused them. This is truly extreme neoclassical exculpation of all and any behaviours of states or businesses.

Monopolists, protectionists, slave drivers, polluters, ands their ilk are part of a Calvinist providential plan to create God's heaven on Earth! Is there no end to superstitious credulity?

Deception About Adam Smith

Marivic Butod writes in Thinking Made Easy (it seems to be an essay supplier for Asian students) HERE: “International Business”

“The market economy seems a very effective type of economy as it offers economic freedom, and limited government intervention in terms of trade. It has been reported that it follows theory of Adam Smith, that of the free market economy, where the allocation of resources is determined by the ‘invisible hand’ of the price mechanism, and is commonly associated with capitalism”.

Comment
If this is typical of the quality of Thinking Made Easy essays, I despair for the thousands of Asian students who are indoctrinated with extravagant myths that Adam Smith said anything like “the allocation of resources is determined by the ‘invisible hand’ of the price mechanism”.

I offer Marivic Butod a thousand dollars if he can cite from Smith’s Wealth Of Nations 1976, or Moral Sentiments 1982, any sentence that Smith wrote in the Glasgow Edition (published by Oxford University Press), where Smith makes such a statement as the ‘invisible hand of the price mechanism’.

That, of course, excludes secondary sources by modern economists who make similar assertions about Smith to Marvic Butod's. Like Marivic Butod, they haven’t read either Wealth Of Nations or Moral Sentiments.

Of course, thinking is made easy if you can just make it up, charge for it, and nobody is the wiser among innocent customers. Caveat Emptor.

On the 'Efficacy and the Efficiency of the Invisible Hand'

Du Won Kang writes in The Epoch Times (HERE): “Pathological Nature of Corporations Not Changed, Say Scholars”
in which he has this piece:

“Mistakenly Invoking Adam Smith to Justify Amoral Pursuits”

“According to Ira Jackson, Former Director of Center for Business and Government at the Kennedy School of Harvard University, it is inappropriate for Friedman and others to so often refer to Adam Smith to justify the greedy and amoral pursuit of profits.

Jackson says, “Adam Smith... believed very much in the efficacy and the efficiency of the invisible hand and also wrote as a moral philosopher about the obligation and need for businesses to extend a helping hand… if we go back and actually read Adam Smith, we see that the author… in fact was a moralist himself.” (The Corporation, DVD)

According to Bakan, to base a social and economic system solely on self-interest and materialistic desire is dangerously fundamentalist. He says that this rests on “a distorted and incomplete conception of human nature” because self-interest and materialistic desire are parts of who we are, but not all.

Bakan adds, “No social and ideological order that represses essential parts of ourselves can last, a point as true of the corporate order as it was for the fallen Communist one

Comment
I am not familiar with Ira Jackson (though he has a pedigree of some standing), and I know nothing about Du Won Kang. That he writes, apparently:

“Adam Smith... believed very much in the efficacy and the efficiency of the invisible hand and also wrote as a moral philosopher about the obligation and need for businesses to extend a helping hand… if we go back and actually read Adam Smith, we see that the author… in fact was a moralist himself”, suggests it has been a long time since he read Adam Smith, either in his Moral Sentiments (1759) or his Wealth of Nations (1776).

What Ira appears to have read recently, and throughout his distinguished career, are the assertions of most modern about what Adam Smith was supposed to have written, but didn’t.

Adam Smith never believed in “the efficacy and the efficiency of the invisible hand” and never wrote anything remotely like that in either of his books.

He only used the metaphor of ‘an invisible hand’ once each in those two books (and once in reference to the Roman heathen god, Jupiter, in his early essay on Astronomy, published posthumously in 1795). That make only three times in over a million words, and in none of these cases did his references have anything to do with markets.

Strange, given the modern claims of reputable economists, who should know better, plus the thousands of people who simply copy from Google the assertions of economists, that where Adam Smith writes about markets and how they work, such as in Books I and II of Wealth Of Nations, he never mentions the invisible hand at all.

The myth of the ‘efficacy and the efficiency of the invisible hand’, for myth it is, cannot be found in Adam Smith. It was an invention in Chicago in the 1930s and was spread widely from 1948 by (Chicago and Harvard graduate), Paul Samuelson in the 18 editions of his famous textbook, Economics, and by Milton Friedman and George Stigler in their numerous popular lectures and columns, until it is now believed to be true.

I suggest that Ira Jackson, and all other believers in the myth of the ‘invisible hand’, try reading Adam Smith’s Wealth Of Nations (Book IV, chapter 2, paragraphs 1-9, page 456).

They could also read my paper, ‘Adam Smith and the Invisible Hand: from metaphor to myth’ (HERE) in which I state the case for my assertions above.

Widespread Use of The Metaphor, But Nothing to Do With Adam Smith

Tomdonovanvoiceover writes in Tom Donovan Voiceover Blog (HERE):

“The Invisible Hand”

“Used to be The Invisible Hand, a term first penned by Adam Smith, an 18th century Scottish philosopher, referred only to free market dynamics and the trading of goods and services.

He had in mind an uncoordinated and unregulated exchange of value – a “this for that” proposition between citizens and nations he believed produces greater abundance and contributes to increased individual and collective happiness.
In essence, he was thinking about the reasons to employ one’s time gainfully. You see, Mr. Smith believed a benevolent God steers the Universe to maximize our bliss. Work produces wealth. Wealth produces happiness. Work is divine, or nearly so, anyway.

Nowadays, his metaphor is assigned to all manner of things, good or bad, economic or not.”

Comment
I chose this piece on the invisible hand metaphor, not for its economics or its historical lack of accuracy, nor even for its religious errors, but as an example of the unintended consequence of a few very smart economists caught up in their triumph over the anti-capitalist challenges of foreign communist systems and domestic socialist (or is that ‘liberal’) critical voices, inventing a quasi-plausible (they had read the Texts, hadn’t they?) attribution to a famous progenitor of their science that shrouded their formal models with a mystical, absolutely unscientific glow.

As long ago as 1876, critics in the British Academy queried why political economy was included in Section F as a science, given its heterogeneous nature, both with pretensions to being a science and with major exhibitions of its unscientific nature, melded as it was with religious, quasi-religious, and sociological vague notions of types.

From the 1950s, the science of economics reached a maturity and coincidentally adopted mystical allusions of an inherent harmony of forms, blessed with an invisible and redundant entity leading its elements to act in the manner which their psychological states would bring about anyway.

For the record, the metaphor of an invisible hand was not “first penned by Adam Smith” (it was a well known metaphor in the 18th century and has a much longer lineage back into classical times: see my ‘Adam Smith and the invisible Hand: from metaphor to myth’: email me at the top of the page for a copy).

Adam Smith’s use of the metaphor did NOT refer “only to free market dynamics and the trading of goods and services” – it didn’t refer to these categories at all!

It appeared in a late chapter of Wealth Of Nations (Book IV, chapter 2) in regard to the consequences of risk aversion in terms of their “own security” of some, but not all, merchant traders, who because of their risk aversion they preferred to invest locally rather than in foreign trade. Having explained these circumstances, Smith slipped in the metaphor, for the only time in Wealth Of Nations.

He did NOT have “in mind an uncoordinated and unregulated exchange of value – a “this for that” proposition between citizens and nations he believed produces greater abundance and contributes to increased individual and collective happiness.” He never mentioned the invisible hand in Books I and II (where he discusses “an uncoordinated and unregulated exchange of value – a “this for that” proposition between citizens”.

Mr. Smith did NOT believe that “a benevolent God steers the Universe to maximize our bliss.” As a moral philosopher he taught the views of many philosophers, ancient and modern, without necessarily asserting to his students that any one of the many philosophic systems that he taught were true, as can be seen if you read his Moral Sentiments (1759).

In fact it is quite clear that such assertions are not true (see my: ‘The Hidden Adam Smith in his Alleged Religiosity’, which can be obtained by emailing me at the top of the page).

Tom Donovan may believe that “Work produces wealth. Wealth produces happiness. Work is divine, or nearly so, anyway”, but that is nothing to do with Adam Smith’s ideas.

UPDATE

Tom has edited his original blog entry HERE
It is well worth reading as amended because he incorporates what is the correct presentation of Adam Smith in relation to the invisible hand metaphor and the correct presentation of opinions about hsi religous views.

Well done, Tom.

Markets and Panglossian Invisible Hands

John Markley writes “Review of Economics for Real People” at ‘Suite 101’ HERE

“Gene Callahan Provides an Excellent Introduction to Basic Economics”

“Next, Callahan expands from a single person to a group, bringing in the essential subject of exchange. With exchange come concepts such as specialization, division of labor, and comparative advantage. He also explains how market prices provide information that guides buyers and sellers and makes coordination possible without centralized direction of control, creating the famous “Invisible Hand” of Adam Smith.”

Comment
A promising announcement for educating people about economics, then the inevitable kick in the tail that invents a metaphor into a concept, and spreads the mystical ‘non-explanation’ about how markets work.

The myth about Adam Smith and his use of a metaphor in three quite different circumstances and adds to the substitution of science by mumbo-jumbo’.

Variously, users of the metaphor credit it with semi-conscious powers (quite good for a disembodied invisible hand), affecting all transactions indiscriminately, even when the participants pursue selfish and evil ends – a sort of utopia dominated by naïve optimism, associated with Panglossian ideas, sometimes related to religious ideas about God’s providence.

In the economic theory of general equilibrium – finally proven mathematically in the 1950s – exponents often drift off the mathematics and resort to the metaphor of the invisible hand, which is fine, of course. After all, the metaphor was quite popular in literature in the 18th century (and from long before in classical times), but it often was to do with murderous scenes, interventions by the gods and God, and mysterious things that ‘go bang in the night’.

But it was not Adam Smith’s allusion, particularly. Three references in a million words – none of them to do with how markets work – makes its use and attribution somewhat of an exaggeration, convenient may be, because it gives the prestigious gloss of a renowned figure in the history of economics to a pure. modern theory of an imaginary world without real humans present, but also dangerous, as recent events show leading to a financial crisis.

Remember the context (always remember context!) in the 1930s when Chicago University faculty introduced their oral allusion to the economy being guided by an ‘invisible hand’. This was the decade of the twin scourges of National Socialism and Soviet Communism coinciding with the Great Depression. Capitalism was under challenge and the notion of a superiority of the market dominated USA guided by the peaceful, amazing, and pacifistic “Adam Smith’s invisible hand”, unlike the state-managed systems of Germany and Russia, guided by the bloody fists of Gauleiters and Commissars, was attractive to nationals and refugee immigrants together.

Fast forward to the late 1940s, and Oscar Lange and Paul Samuelson, both from Chicago in the 1930s, each introduced the invisible hand, linked by name to Adam Smith into the literature of economics. Samuelson’s economics 101 textbook, Economics, published in 1948 and then through 18 editions, and translations, became an educational phenomenon across campuses worldwide. Its Keynesian macro-economics exuded confidence in capitalism and markets and responded to the needs of the West during the Cold War years with the Soviet Union.

Hardly noticed too, was the item on page 36 (1st edition), proclaiming, if cautiously to be sure, the metaphor of the invisible hand, which also spread across the discipline and took on a life of it own as each instructor interpreted it to suit. By the end of the century, the invisible hand, transformed from a metaphor into a ‘theory’, ‘ a concept’, even a ‘paradigm’, and was generally believed to be embedded in Wealth Of Nations and to be central to Adam Smith’s analysis of how markets work.

Few economists ever bothered to read Wealth Of Nations for themselves and to see how and where Smith used the metaphor, and in what context. They were taught, and believed, that Smith gave it a major role in markets, and because they were confined to the quotation in which he talks generally of ‘every individual’ seeking to make use of his capital to maximise his profit and how this produces the best result for society, they repeat the connection with disciple-like intensity whenever anybody challenges this interpretation.

Armed with these certainties, they accord to markets powers and consequences which they never had: the power to produce the ‘best of all possible worlds’ irrespective of the intentions, or the limited goals, of entrepreneurs and corporations. Some capitalist econoimies work better than others; some cannot even get started.

Currently, in the present crisis, scores of former-disciples of the invisible hand are rejecting markets (and Adam Smith) with the haste of those woken up to the crash of their illusions and what they have been taught and taught themselves.

Yet, if the went back to Wealth Of Nations and actually read the whole chapter, or even paragraphs 1 to 9 of Chapter 2, Book IV, they would see, perhaps for the first time, that Adam Smith fully explains the behaviours of some – NOT all – traders by their degree of risk avoidance in their decision to invest locally or in foreign trade with the British colonies in North America, or the European continent. Their actions are driven by their ‘own security’; those less insecure than others engaged in foreign trade and those more insecure than others engaged in local trade.

In what way are they ‘led by an invisible hand’ to do what their degree of insecurity compels them to do anyway? I have never had a direct answer to that question in all the years of the Lost Legacy Blog.

That Metaphor Again

“Quotable: Invisible hand or invisible foot?”
In Freedom Politics by Gary Galles preposted by R. Lee Wrights in on Rational Review HERE:

“Important people are commemorated on their birthdays. But the birthdays of some, such as Adam Smith, history’s most famous economist, are unknown. However, we do know he was baptized on June 5, 1723, making it an appropriate time to remember him. Smith is most remembered for articulating how the ‘invisible hand’ of market interactions can coordinate a society based upon liberty — i.e., private property and voluntary exchange — more effectively than the coercive power of the state. Unfortunately, Smith’s crucial insights are overlooked by politicians who talk of liberty, but legislate and regulate away its center piece — voluntary arrangements.” (5 June)

Comment
Smith is ‘most remembered’ for what modern economist in mid-20th century attributed to him (Paul Samuelson, Milton Friedman, etc.,) incorrectly in respect of an invisible hand of ‘the market place’.

Smith’s use of The Metaphor referred to the risk-avoidance of some, not all, merchants who thereby preferred the home to foreign trade. He didn’t use The Metaphor in Books I, II, III and V of Wealth Of Nations, though non-readers of his book would get the impression that the metaphor of an invisible hand is used throughout his magnum opus. It isn’t; only once does he use it in Book IV after describing why merchants prefer home to domestic trade – in consideration of their ‘own security’.

Long before the 18th century, societies legally protected ‘private property and voluntary exchange’ and had laws about contract. Liberty came later, slowly at first (the long struggles in feudal societies across Europe from the 11th to the 17th century) and then fairly rapidly from the 18th to the 21st century.

Liberty is about the rule of law, not men; Habeas Corpus; trial by juries; independent judiciaries; separation of powers; freedom of speech and assembly; and accountable governments.

Adam Smith criticised the mercantile political economy of his day, and in many shapes and forms its essential characteristics still function in all modern societies (Big Governments, protectionism, subsidies, tariffs and prohibitions, jealousies of trade, and hostile trading policies).

An Oxford Economist Comments on Adam Smith and 'An Invisible Hand'

Mark Koyoma, an editor of the Oxford journal, Oxonomics (Economic Perspectives from the Dreaming Spires) HERE: reports on the Kennedy-Klein debate on my paper, ‘Adam Smith and an invisible hand: from metaphor to myth’:

‘The Fight over Adam Smith’.

Lost Legacy will be publishing a response to Dan Klein’s reply in September in EconJournal Watch and therefore will not reply directly to Dan Klein’s interesting and well-considered article until then. You can read both my paper and Dan’s reply HERE>

However, I consider it appropriate to take up a paragraph from Mark Koyoma’s lucid article, without breaching my self-denying ordinance in respect of my September more detailed response to Dan Klein.

“At several points in both the theory of Moral Sentiments and the Wealth of Nations, Smith suggests a theory of social order as a emergent and self-organizing phenomenon. He also dwells on the role self-interest plays both in motivating the baker to supply us with bread and in driving merchants to pursue monopolistic rights and privileges. The interactions of self-interested individuals are what is ultimately driving the formation of the types of societal orders Smith is interested in. Together these two points suggest that identifying what institutions lead the interaction of self-interested individuals into produces socially suboptimal ends and what institutions lead to socially desirable ends, is an important question. From this perspective, the term `invisible hand' is a convenient short 'hand' for the types of processes that lead to 'good' outcomes.”

Comment
I think Mark Koyama has got it about right in the quoted paragraph, except for the mysticism he insists on including in his last sentence. There are two outcomes(roughly speaking) possible in any social interaction to which we can usefully contemplate. One is “what institutions lead the interaction of self-interested individuals into produc[ing] socially suboptimal ends and what institutions lead to socially desirable ends.”

Now about that we are in unanimous agreement! Smith makes it clear (I refer to over 60 instances where the self-interested action of individuals where he does so) that there are multiple instances of sub-optimal outcomes identified in Wealth Of Nations in Book I and II (I stopped counting from Book III because this book and Book IV are predominantly about the sub-optimal outcomes of Mercantile Political Economy and from history, and Book V is about government expenditure and revenue raising).

The other kind of interactions producing optimal outcomes are different, but are not unexplainable! Smith does exactly explain how they come about, as he does in the famous paragraphs in Book IV which end with – don’t begin with – the use of the metaphor of ‘an invisible hand’ to do what a metaphor is supposed to do (as described in his Lectures on Rhetoric and Belles Lettres in 1763).

The metaphor was not an explanation – he had already given that in paragraphs 1 to 9 – it was a poetic flourish, if you like. But instead of its being seen as a metaphor it was re-structured as an explanation – a ‘theory’, even a paradigm - ascribing to Smith something he never implied. And that is the point. The modern construction – general equilibrium theories – is modern, not Smith’s.

Worse, the two alternatives outcomes that Mark has highlighted have been melded together by popular usage in post-War American dominance of the deiscipline from the 1940s into a single myth that the self-interested actions of individuals in a market economy inexorably lead to the benefit of society, irrespective of whether the self-interests of individuals tip in selfish greed, a wholly false attribution to anything Adam Smith wrote.

I have no objection to modern economists drawing such a conclusion in their own names; but it had nothing to do with Adam Smith’s ideas about markets or his use of the metaphor of an invisible hand.

That Hayek found some resonance in the metaphor for his work on ‘spontaneous order’ is a secondary issue, unless linked to the modern economists’ simplistic and politically dangerous notion of whatever self-interested individuals – and, pace Friedman, corporations, assisted by big government - do, they somehow benefit society,. which is precisely Smith's departure from the then prevailing Mercantile Political Economy of 'merchants and manufacturers' and legislators and those who influenced them.

Their conduct - monopolies, protectionist tariffs and prohibitions, sanctions against neighbours, 'jealousies of trade', hostilities, military posturing beyond the need of defence against invasion, colonies and wars or intrigue over dynastic quarells - were not only damaging of a country's real interests in progress towards the spread of opulence, they had real costs among those - the majority of the poor families - who were affected by them.

Welcome to New Readers

When Freakonomics usually appears in Lost Legacy it is because I am commenting on something it has written with which I disagree. Today its carries a report of the publication of my paper, 'Adam Smith and the Invisible hand: from metaphor to myth’, in Econ Journal Watch (and a critical response from Dan Klein): HERE

‘The Invisible Hand Hoax’ By Freakonomics

‘Adam Smith’s “invisible hand” theory of efficient markets is one of the first lessons taught to young economics students. James Tobin, a Nobel prize-winning economist, once described the theory as “… one of the great ideas of history and one of the most influential.” But in this new paper, Gavin Kennedy argues that Smith actually had no invisible-hand theory, pointing out that the phrase appears only three times in Smith’s writings. One scholar believes that Smith’s use of the phrase was a “mildly ironic joke.” (HT: Brad DeLong)’

Comment
Thanks.

Kennedy-Klein Debate

Dan Klein has kindly invited me to respond to his authoritative contribution on the invisible hand hand debate in the September issue of Economic Journal Watch and I have accepted his proposal.

Therefore, I shall not be responding on Lost Legacy in the meantime. This gives many opportunites for readers to familiarise themslves with both mine and Dan's papers the current (May) issue of EJW.

I shall address Dan Klein's main points and identify the main differences between us in the spirit of good-mannered, scholarly debate, as exemplified in Dan's serious treatment of my case in 'Adam Smith and the Invisible Hand: from metaphor to myth'.

You can read the Kennedy-Klein debate HERE

Hyperbole and the Invisible Hand

Walter Williams (Townhall.com) HERE in ‘aconservativeedge’ 18 February writes: “The Invisible Hand Is As Certain As The Law Of Gravity”

Adam Smith: “He is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. … By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” And later he adds, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”

Comment
Hyperbole in pursuit of making a statement does not improve its merits. In this case, it is almost laughable and certainly inappropriate. Gravity is a phenomenon across the entire universe, not just under apple trees. The invisible hand is a literary metaphor and as such it is not subject to the law of gravity.

The lines that Walter Williams quotes, from Book IV, chapter II, Wealth Of Nations (page 456) have been torn out of context.

Smith is talking about those merchants who prefer to conduct their business close to home and not abroad. He was not talking about all individual merchants. Their reasoning is their concerns for ‘their own security’ (it says so in the rest of the paragraph not quoted).

Risk aversion is well known today, so there is no excuse for not mentioning it (some insure against risks, some don’t). The merchants discussed by Adam Smith coped with foreign trade risks by not trading abroad with foreigners. The metaphor of ‘an invisible hand’ is a metaphoric treatment of their risk-averse behaviour. But many merchants did trade abroad and still do.

At the time, Britain exercised a monopoly of trade with its colonies in North America, enforced by the Royal Navy under the Navigation Acts (1660, as amended). These merchants were less risk-averse than the subject of the paragraph, only partly quoted. For taking the risks they received higher profits.

Apparently, they were not ‘led by an invisible hand’ – a strange omission if you think about it, given the importance of foreign trade in Smith’s analysis.

Next, Walter Williams exposes himself to a doubt that he has actually read Wealth Of Nations. He writes:

“And later he adds, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”

But the ‘benevolence of the butcher, the brewer, or the baker’ is not ‘added later’. It comes many pages earlier in fact, in Chapter II of Book I, on page 26, which is long before page 456! It also had nothing to do with Book IV.

What can one say? Not much.

Invisible Hand Paper Published

My paper, ‘Adam Smith and the Invisible Hand: from metaphor to myth’, has been published in the on-line Economic Journal Watch HERE:

Professor Daniel Klein, of George Mason University, Fairfax, Virginia, has written a detailed and serious response which is published with mine (incidentally, his is the first serious response I have received to my critique of the modern and widely accepted version of the invisible hand since Lost Legacy appeared in Februaqry 2007, for which I am, of course, grateful).

I shall not rehearse just now the differences between myself and Daniel on this occasion, some of which I accept ('good reason by force must give way to better') and many more which I do not and they require further elucidation and discussion). Due to my lack of Internet connections in France, I have only just read Daniel’s response; hence, I shall require further study of it before commenting.

In the meantime, I urge readers to follow the above link, and to read both papers. Together, they should be considered as educational.

Several important economic, sociology and philosophy Blogs have picked up on the 'Kennedy/Klein' debate ...

An Attorney Caught Out in a Falsehood and the Jury Knows He is Economical With the Truth

At the The Wizard of Laws HERE:
“Selective Free Market Economics and the Decline of Freedom”

“In the same year our nation was founded, Adam Smith published his magnificent The Wealth of Nations, in which he described the phenomenon of the "Invisible Hand," which holds that if consumers are allowed to choose freely what to buy and producers are allowed to choose freely what to sell and how to produce it, such a free market will result in prices and a distribution of goods and services that benefit all members of a community, and hence the community as a whole.

People are driven by self-interest and the desire to increase their own income and utility (a word economists use instead of satisfaction or happiness, to be measured in utils. Not kidding.). Since the income and happiness of society is the sum of individual incomes and happiness, all benefit from the individual pursuits motivated by the Invisible Hand.”

Comment
Obviously, the author (‘an attorney living and practicing in Michigan, also known as the Enchanted Mitten’) has not read Adam Smith’s Wealth Of Nations, though he comments on it with the authority of someone who implies he has (naughty, naughty and yes, a typical attorney-at-law who believes he is too smart to bother reading his briefing papers and leaves it to his, mostly unpaid, ‘devils’, as we call them in Scotland).

Is it worth showing the multiple errors in the attorney’s brief? OK, well briefly, everything written “his magnificent The Wealth of Nations” is utter rubbish, or in more polite legalise, is problematical.

If his client’s best interests depended on this attorney’s brilliance in the court room, she’d be looking at 20 years (I’ve watched tv dramatic court scenes, well, US versions, because in Scottish trials the advocates are kept under strict control by their training and the judge – no approaching the witness, no moving to the jury box to intimidate or smooze the jurors, no histrionics, no verbal tricks; instead, simply questions that relate to the evidence).

The metaphor of ‘an invisible hand’ did not relate, even closely to consumers or their choices. In fact, that subject is dealt with by Smith in Books I and II, and his single use of the metaphor of an invisible hand appeared only in Book IV, and had nothing to do with consumers, or markets.

Why did the attorney attempt to make a case that Smith said something he didn’t? I’d ask if I could but only after he has read Wealth Of Nations, and not just the likes of Wikipedia.

Don't Trust Anybody From Chicago on Adam Smith

Froma Harrop writes in Real Clear Politics Chicago, Illinois HERE:

“In a Q&A last year with the Pittsburgh Tribune-Review, former Pennsylvania Rep. Pat Toomey was asked what book he wanted Barack Obama to read. The Republican quickly recommended the work of Adam Smith, the 18th century economist and philosopher who held that individuals promote the good of society when they pursue their self-interest.”

Comments
The rest of her article is a report on the intricacies of Republican inner-party politics, about which I know little and which also comes under my self-denying ordinance of not commenting on the politics of a country other than the one I vote in.

The question is whether Real Clear Politics in general, and Rep. Pat Toomey in particular will advance their cause with complete a misunderstanding of Adam Smith’s actual observations about the role of self-interest and its impact on society, for good or ill.

The way Pat Toomey is quoted, ‘individuals promote the good of society when they pursue their self-interest’, it is clear from the evidence of human societies that there is no smooth, or even bumpy, relationship between individuals pursuing their ‘self-interest’ and the good of society. No society works, or has ever worked, like that.

Experiments with utopian-inspired communes show conclusively that they are not what some call today sustainable, despite the good intentions of those who shun normal society and found their ideal societies for ideal people. Variously, the next generation becomes bored and willfully disrupt their parents' expectations, or some of the parents fall out, and the little society withers in disillusionment.

But the more telling problem is that real societies do not function as model beneficiaries of the self-interested behaviors of individuals. This should be no surprise to observers of the societies they live in. Adam Smith was one such careful observer. He never said what Pat Toomey, allegedly alleged (I only have Froma Harrop’s word that Toomey did so allege that the words paraphrased as reported, were attributed to Adam Smith (admittedly, a common enough delusion of academics in Chicago and elsewhere).

Now, the fate of Pat Toomey is of little consequence in the big scheme of things, but that it is often alleged that Adam Smith was of a mind to have uttered something similar about self-interested actions, it is this assertion that I wish to correct.

The idea comes from a partial reading of the infamous passage, which for want of a better shorthand, let’s call it the 'invisible hand' paragraph in Wealth Of Nations (Book IV, chapter 2, paragraph 7-9: 455-56). Smith discusses the behaviours of some, but not all, merchants, who from their concerns for the ‘security’ of their trading capital, prefer to invest locally rather than in foreign trade. Their self-interest drives them to choose to employ their capital so as to generate the ‘greatest possible value’, which ‘necessarily’ gives ‘revenue’ and ‘employment’ to the greatest number of people in their ‘own country’, which in turn renders the annual revenue of the local society ‘as great as he can’.

It is this statement that some readers (or more likely, readers of quotes) of Wealth Of Nations draw the incredible idea that Adam Smith believed ‘that individuals promote the good of society when they pursue their self-interest’.

As a statement of the connection between those traders which Smith discusses in the paragraph and the general interest of society, it is of course, true, but whether it applies in all cases, all the time, that is another matter, as a reading of the whole chapter clearly shows. They may do so, but then they may not.

Indeed, Smith was suspicious to put it mildly, all through Wealth Of Nations, of the motives and behaviours of ‘merchants and manufacturers’. A little example, again from Smith, illustrates my assertion.

Consider the motive of the home trader, identified by Smith in the paragraph, but rarely noted by those who quote it:

‘By preferring the support of domestick to that of foreign industry, he intends only his own security [and ] his own gain …’ (WN IV.ii.9: 456)

So far so good, but some merchants and manufacturers easily note a chance to enhance their ‘own gain’, and simultaneously their ‘own security’, driven by their self-interest. Suppose, they may muse, it was possible to persuade legislators and people who influence them that by imposing tariff protection on foreign goods entering our domestic markets, this would raise our revenue (and profits) by the higher prices we could charge in the absence of foreign competition.

Instead of exporting local jobs to foreigners, we could increase local employment. That’s got to be good for the local economy (and, our profits). It is not so good, however, for local consumers who pay higher prices, nor for labourers seeking work, because the increase in tariff-protected employment is not likely to be proportionate (Smith makes this point too; he suggests that it is what we could call an ‘empirical question’).

Yet, Pat Toomey, taking just a part of a particular case, generalises a conclusion from that case and applies it to all expressions of self-interest, and concludes that ‘individuals promote the good of society when they pursue their self-interest’, and, worse, claims that Adam Smith said so.

No Sir! It is Pat Toomey who says so, not Adam Smith, and distinguished as Rep. Pat Toomey no doubt is, his name does not carry the authority of Adam Smith in economic matters, hence he is comfortable to use Adam Smith’s name with impunity.

However, Lost Legacy is dedicated to the restoration of Adam Smith’s legacy; and, as in the Wild West movies, I ‘call him out’. He should withdraw his slur on Adam Smith and present his own ideas in his own name.

Maxedoutmama joins the fray

‘Maxedoutmama’ posts a most interesting and imaginative explication of Adam Smith’s views related to the current financial crisis (HERE):

“I Digress: Taking a break from the somewhat grim global economic news:

”I always feel embarrassed to use a non-journalist's name when I am pointing out that someone's assertions are lunatic, so I won't cite the author's name. Instead, I will confer a charitable anonymity by using the sobriquet "Wonder Dummy" for the author henceforth.

The basic theme of Wonder Dummy's post:

‘Adam Smith first coined the term “The Invisible Hand” in his important book “The Wealth of Nations.” With this term he was trying to capture the idea that the marketplace would be self-regulating. The basic principle of the invisible hand is that though we may be unaware of it, an unseen hand is constantly prodding us along to act in line with what’s best for the whole economy. This means that when this invisible hand exists, when we all pursue our own interest, we end up promoting the public good, and often more effectively than if we had actually and directly intended to do so. This is a beautiful idea, but the question of course is how closely it represents reality.’

Comment
Do you recognise the author whom ‘Maxedoutmama’ quotes? I posted my criticism of him yesterday (Clue: he’s at Duke University).

‘Maxedoutmama’ continues:

“Of course the answer to the question is preordained by this careful miscast of Adam Smith's main assertion. That assertion is that economic efficiency is best for the economy, and that economic efficiency can best be attained by not interfering with prices in the marketplace. In fact, I suspect that Wonder Dummy has never read Adam Smith. I prefer to be charitable and assume that Wonder Dummy is not knowingly lying in order to lend credence to a meme that is currently popular, if completely wrong.”

And she recommends reading Adam Smith’s Moral Sentiments and Wealth Of Nations:

”If you want to find out what Adam Smith (1723-1790) really said, you can find most of his writing online….Adam Smith was no superficial thinker, and his economic musings were not based on an unrealistic view of mankind… To which I must add … my favorite Adam Smith quote:

‘What can be added to the happiness of the man who is in health, who is out of debt, and has a clear conscience?’

Comment
To which she adds a remark about Dan Ariely’s transmutation of the invisible hand into ‘government debt’:

“What a surprise. In fact, those who have actually read Adam Smith know that the "invisible hand" is used in the context of government control of trade, specifically, protectionist tariffs against foreign goods. The discussion is found in Chapter 2 of Book IV "Of Systems of Political Economy" …

“In short, this is about what governments can and cannot accomplish. Chapter 2 begins as a discussion of government-granted monopolies to domestic industries, and continues as an explication of the harm that such monopolies cause to the general welfare.

Comment
The rest of the post by ‘Maxedoutmama’ is on the details in the chapter which mentions the metaphor of an invisible had and the causes of the current crisis, and you should read it in detail (follow the link above).

While enjoying the skewering of Dan Ariely’s version of the invisible hand, I have reservations about Maxedoutmama’s version too. The survey of the build-up to the singular use of the invisible hand metaphor demonstrates that she has read Wealth Of Nations, which is an improvement on Dan’s version.

However, it neglects the specific details of the risk-aversion of those merchants who prefer the home trade to foreign trade. In doing so, it swaps a more realistic role for The Metaphor for the unrealistic and imaginative role accorded to it by Dan Ariely.

Thus, though more authoritative that Dan’s, ‘Maxedoutmama’s version is too close to the orthodox version, and also implicitly accepts some role for The Metaphor, when in my opinion it is just a literary metaphor.

However, congratulations to ‘Maxedoutmama’ (she seems to have the rhetorical punch of Deirdre N. McCloskey, of the University of Illinois) for her valiant efforts against Dan’s error.

Top Behavioural Economist Invents New Mythical Role for the Invisible Hand

Dan Ariely, James B. Duke Professor of Behavioral Economics at Duke University and a visiting professor at MIT’s Media Laboratory, has contributed and article (20 April) for Technology Review (published by MIT) HERE: and for Predictably Irrational HERE

'Irrationality is the real invisible hand'

“Adam Smith first coined the term “The Invisible Hand” in his important book “The Wealth of Nations.” With this term he was trying to capture the idea that the marketplace would be self-regulating. The basic principle of the invisible hand is that though we may be unaware of it, an unseen hand is constantly prodding us along to act in line with what’s best for the whole economy. This means that when this invisible hand exists, when we all pursue our own interest, we end up promoting the public good, and often more effectively than if we had actually and directly intended to do so. This is a beautiful idea, but the question of course is how closely it represents reality.

In my mind this experience has taught us that Adam Smith ‘s version of invisible hand does not exist, but that a different version of the invisible hand that is very real, very active, and very dangerous if we don’t learn to recognize it. Perhaps a more accurate description of the invisible hand is that it represents human irrationality. In terms of irrationality the hand that guides our behavior is clearly invisible — after all recent events have demonstrated that we are largely blinded to the ways rationality plays in our lives and our institutions. Moreover it is also clear that irrationality does shape our behavior in many ways, pushing and prodding us along a path can lead to destruction. Whether we’re procrastinating on our medical check-ups, letting our emotions get the best of us, or letting conflicts of interest and short term time horizon ruin the financial market, irrationality is certainly involved.

In Adam Smith’s world the invisible hand was a wonderful force, and the fact it was invisible made no difference whatsoever. The irrational invisible hand is a different story altogether - here we must identify the ways in which irrationality plays tricks on us and make the invisible hand visible!”

Comment
I am astonished that such a senior academic economist is unaware that what he asserts about Adam Smith is a myth invented in the mid-20th century, which, on the evidence above, he seems to have swallowed hook, line, and sinker.

The first three sentences of his piece above contain three errors.

Smith did not ‘[coin] the term The Invisible Hand’ – he used it twice previously, once in his Essay on Astronomy [1744-; 1795], and once in his Theory of Moral Sentiments [1759].

He was not ‘trying to capture the idea that the marketplace would be self-regulating’. He never mentioned the invisible hand metaphor when he analysed markets in Books I and II of Wealth Of Nations; his sole mention of the invisible hand was in Book IV (page 456) and the end of an analysis of why some (not all!) merchants preferred to invest their capitals in the local market rather than face the risks (and, incidentally higher profits) of sending their capitals abroad to the British colonies in North America.

It was a case of their risk-aversion (read the whole of Chapter 2 in Book IV of Wealth Of Nations; don’t rely on the 1930s oral tradition at Chicago University or your tutor’s misunderstandings emanating from Paul Samuelson’s Economics,1948).

For a professor of behavioural economics to assert that ‘an unseen hand is constantly prodding us along to act in line with what’s best for the whole economy’ is astonishing. That wasn’t what Adam Smith said, nor does it correspond to his political economy.

He gives over 60 examples in Books I and II of Wealth Of Nations of instances where individual self-interested actions lead not ‘what’s best for the whole economy’, but what had negative consequences for those affected.

To turn these myths around and pose the ideas that ‘Perhaps a more accurate description of the invisible hand is that it represents human irrationality’ is breathtaking in its, er, error: there is no actual invisible hand, it doesn’t exist as an operator – it’s a only a mere metaphor, offered by Adam Smith after he had explained in detail why the risk-averse merchants behaved as they did, presumably for those readers who didn’t follow his argument (which apparently is the entire profession from the mid-50s in US and British universities).

Why did the brightest in the profession spread these errors? You’ll have to ask them, but remember the context. In the 1930s capitalism as an alternative to Soviet communist planning was struggling in the depression years (as it is just now) and once the Cold War was underway, the West was threatened militarily.

Someone got the bright idea to use an innocuous metaphor (fairly common in literary works in the 18th century) used by Smith, en passant, as a mysterious force, which they placed in market capitalism that had the miraculous powers of guiding individuals to benefit national goals without them knowing what they were doing. It didn’t require battalions of state planners, and the tyranny that came with them; it required liberty and freedom, both anathema to Communism.

It was game, set, and match, and given scientific credibility with the success of theorists of general equilibrium (Samuleson and Debreu), and propagandized across the world’s campuses. It was also given historical credibility by linking it to Adam Smith, even the linkage was dubious in the extreme.

But the question never answered is: which term in the theory of general equilibrium represents the invisible hand and what does it consist of and what does it do?

Dan has introduced a new role for it: irrationality; so it both invisible and part of cognition and behaviour!

For Dan to write: ‘In Adam Smith’s world the invisible hand was a wonderful force, and the fact it was invisible made no difference whatsoever’, frankly is embarrassing.

Smith never discussed it elsewhere in any of his writings – near on a million words – other than as a metaphor on the three occasions he used it. If it was true that ‘the invisible hand was a wonderful force’, one would expect it have been more central in Wealth Of Nations when he discusses markets in Books I Nad II, but he didn’t, nor did his contemporaries or anybody else, including critics at the end of the 19th century. It’s in the mid-20th century that the metaphor was re-invented as ‘a wonderful idea’.

It was so ‘invisible’ that none of Malthus, Lauderdale, Playfair, Ricardo, McCulloch, Mill, Marx, or even Bright and Cobden, mentioned it.

To get the invisible hand into perspective, download my paper: Adam Smith and the Invisible Hand: from metaphor to myth, HERE:

Ethical Crisis - What Crisis?

MURRAY WHYTE write in Toronto Star (The Star.com HERE)

‘Closed due to the recession’

“U of T's Lind, whose central field of study is economic ethics, points out that this is a relatively new quandary. Until the industrial revolution, ethics and economics were a unified field. Adam Smith, who described the advent of market economics as being guided by "an invisible hand," is often misconstrued as the early progenitor of the Milton Friedman-spawned, market-knows-all Chicago School. "But really, he was making a moral argument, because to him, there was no distinction."
As the 20th century dawned and economics turned away from the philosophical and more toward hard math, the separation grew. "The field of ethics went into crisis just as economics turned to mathematics," Lind says. "Economics became a hard science, whereas ethics became a confusion."

Comment
From where do they get these muddled ideas? Economics as a subject did not exist in the 18th century, certainly not as Adam Smith wrote about what was called ‘police’ (ensuring subsistence for a society).

Political economy was a title coming into vogue when Smith wrote Wealth Of Nations, which lasted a century until the 1870s when mathematical analysis began to appear. That title too declined in the 20th century.

Smith wrote about ‘commercial society’ and market, but did not mention The Metaphor of an ‘invisible hand’ in his analysis of how markets functioned (Books I and II of Wealth Of Nations). He certainly never said ‘the advent of market economics as being guided by "an invisible hand" ’.

It is, however, true that The Metaphor is ‘often misconstrued as the early progenitor of the Milton Friedman-spawned, market-knows-all Chicago School’.

Indeed, the modern myth of The Metaphor was virtually invented by ‘Chicago’ in the environs of 59th street (see Oscar Lange, 1946 and Paul Samuelson, 1948) and has become universally misconstrued as ‘markets always produce socially beneficial outcomes’, despite the presence of monopolistic practices, protectionist policies, tariffs and non-tariff barriers, pollution, and other negative externalities.

Economics didn’t turn ‘to mathematics’; scholars calling themselves economists ‘turned to mathematics’. Economics did not become ‘a hard science’; its proponents confused ‘hard science’ with economic models that were bereft of the presence of human beings.

And ‘ethics’ did not become ‘a confusion’ – the basic ideas of ethics (partly summarized by Adam Smith in his Moral Sentiments) remain valid.

The absence of people in mathematical modeling of the kind dependent on 19th-century calculus eliminates ethics from the equations. People are given objectives that lead to determinate solutions; the ‘solutions’ have little operational value.

I am not sure that ethics is in ‘crisis’; people without ethics are in crisis. The ‘U of T[oronto]’ should be teaching its students to think about the differences in the tone of this article and the reality of the dead-end where economics has come to rest.

Myths of Free Markets

Erik Kirschbaum writes in Cota 1061 HERE:

“German ‘cash for clunkers’ shows free market perils”

“THE INVISIBLE HAND
Scottish economist Adam Smith coined the term “the invisible hand” in the 18th century to describe the positive effects of the free market on individuals.
Yet the worst economic downturn since the Great Depression has led governments around the world to re-evaluate that belief in the “invisible hand” and to prop up sagging economies.”

Comment
In an otherwise reasonably sensible piece, Erik Kirschbaum, writes this nonsense about Adam Smith and the metaphor of ‘an invisible hand’.

Adam Smith did not ‘coin the term “the invisible hand”. The metaphor was well-known in the 18th century and widely used in literature, and had been known since classical times (Greece and Rome). It was used by Shakespeare (in Macbeth: ‘thy bloody and invisible hand’), and Defoe used in twice (Moll Flanders and Colonel Jack). Even Voltaire, among others. used it.

Adam Smith most certainly did not use the metaphor ‘to describe the positive effects of the free market on individuals’, which he discussed in detail in Books I and II of Wealth Of Nations (he only used in once, and not in reference to markets; it was about risk and uncertainty, Book IV of Wealth Of Nations).

Modern economists who ‘believe’ in the myth of the invisible hand have been misled by leading US economists (in Chicago in the 1930s; Oscar Lange (146); Paul Samuelson, 1948); Milton Friedman (serially from the 1950s); and hundreds of thousands of graduates from academe influenced by the scores of graduates who ‘believed’ what their tutors told them (without them, or their tutors ever reading Wealth Of nations for themselves.

That governments came to believe the myth of ‘an invisible hand’ is the fault of prestigious modern economists (including Nobel Prize winners) advising them.

Moreover, that they apparently believe that their economies are ‘free markets’ is astonishing, given that even a casual look at modern markets in economies with Big Governments would show they were as un-free as commercial markets were in Smith’s day, not just internaly, but also externally through tariff protection.

Smith in Glasgow '09 Conference Report

This was a stimulating conference (with only one or two duller bits) with about 70 participants (I was surprised at this attendance, as I envisaged it being packed). The format was conventional in that Plenary Lectures were interspersed with concurrent seminar sessions, which worked well in the two adjacent buildings (converted churches with imaginative use of space, easy flow for people and comfortable arrangements – Spartan, if functional).

First up was a concurrent seminar session that I chaired. Jeffrey Young of St Lawrence University presented ‘Justice, Property & Markets: economics as moral philosophy’. No surprise that I agreed with Jeffrey’s approach because it covered ground that I have addressed in my paper on the ‘Pre-history of Bargaining: multi-disciplinary treatment, Part I’ HERE.

Then Nerio Naldi (University of Rome La Sapienza) presented 'Rhetorical Influences on Adam Smith’s Analysis of Value and Prices in Wealth Of Nations'. He also announced that this is his last paper from a seven-year project and he has now switched to work on Samuel Pufendorf (who had enormous influence on the teaching of moral philosophy in Scotland in the 18th century). ‘Tis a pity because Nerio’s ideas on Smith’s value and prices were tantalising for me.

The first Plenary session was addressed by Nick Phillipson from the University of Edinburgh, whose final version of his intellectual biography of Adam Smith, he assured me, is almost off to the publisher for publication. Many people await Nick’s book, of which parts have been ‘trailed’ over the years (I last heard him lecture impressively on Smith in 2006 at Columbia University, New York). He too mentioned the influence of Pufendorf on Hutcheson and his student, Adam Smith, and how through Professor Robert Simson at Glasgow (Prof of mathematics) and his work of modern geometry, the Scottish moral philosophers ‘invaded’ territory normally ‘dominated of Christian theologians’.

Of note for me were Nick’s emphasis on Smith’s theory of language essay, which he included in editions 3, 4, 5, and 6 of Moral Sentiments, though dropped, ‘inexplicably’ by the Glasgow editors for the definitive bicentennial 1976 edition. As David Raphael, one of the editors of the Glasgow edition was present, I missed a serious opportunity to ask him the reasons for this omission, though we spoke several times during the conference.

I chose to attend the concurrent seminar session where Craig Smith presented his paper, ‘Adam Smith and the Dedicated Follower of Fashion’ (yes, from the 1980s song). This proved to be tour de force of Moral Sentiments on that species in society, mocked by Smith while recognising the important stabilising role of attention to attention-seeking personages in his day (as in ours). The chairman took Maria Carrasco’s paper (‘From Psychological to Moral Sympathy’) right away, and many participants were still queuing to speak at the close of the session.

The Plenary Lecture was from Professor J. Chandler (University of Chicago) on ‘Smith the Critic’, for which I took no notes. He concentrated on Smith’s rather obscure, short notes on literature and the imitative arts, saved from burning in 1790 by Professors Black and Hutton, and first published in 1795 in Essays on Philosophical Subjects. I confess, the lecturer’s themes, content, and conclusions were somewhat beyond me, though several contributors to the discussion were highly complimentary, so my lack of appreciation is probably my fault out of my ignorance.

Thursday concurrent seminars began (for me) with two excellent papers presented by Eugene Heath (SUNY) ‘Adam Smith and Ambition’ and Spiros Tegos (University of Crete), ‘The Demigod and the Superstitious Worshiper: the two sources of corruption of moral sentiments in Adam Smith’. In the debate, I linked some of the statements by the presenters to certain important biographical details about Adam Smith that shed light, in my view, on the subtleties of Smith’s well-quoted statements.

The Plenary Lecture was delivered by Tom Campbell, one of Glasgow’s own and author of Adam Smith’s Science of Morals (1971). He was extremely lucid and well prepared, and used extracts from Moral Sentiments to great affect, to support his subject: Adam Smith: method, morals and financial markets. I was struck by his Smithian approach to justice as ‘impartial resentment’ and particularly when he spoke of Smith’s religiosity in terms that left room both for the conventional assessment of Smith’s alleged Deism and for a more detached view (such as my own) of Smith’s ‘post-Deistic morals’.

However, he also presented the conventional assessment of the invisible hand in Smith’s books and I sought an early intervention in the discussion period, which the chairman, Professor Brodie (holder of Smith’s original Glasgow chair in logic), graciously called me first. I presented, briefly I hope, my critique of the modern interpretation of the invisible hand in Moral Sentiments and Wealth Of Nations (apologising for ‘getting the dissent out of the way for what I considered to be a brilliant lecture on Moral Sentiments’). Tom replied fulsomely, but not rancorously, and afterwards in conversation he asked to see my paper because he had not considered the implications of my critique in any depth before.

The last of the concurrent seminar sessions I attended were from a trio of excellent presentors and common debate and responses. Richard Boyd (Georgetown): ‘Smith on nationalism’; Fona Forman-Barzilai (UofC, San Diego): ‘Smith’s Anti-cosmopolitanism’, and Maria Paganelli (Yeshiva University, New York): ‘The moralising role of distance in Adam Smith: Moral Sentiments as a possible praise of commerce’; were in complete command of their subjects, with the audience in close attention. As younger members of the profession, they showed it is in good hands.

The last Plenary Lecture was by Amartya Sen, of whom little else besides superlatives can be offered. I last heard him conduct a post-graduate seminar in 1971 at seminar at Brunel University, West London, with astonishing style, empathy with the students, and complete clarity of expression. Only a physical change can be reported; his mind and modes of discourse is still beyond comparison, and like all truly praiseworthy individuals he showed no arrogance of tone, nor airs of disapproval under close questioning by members of the audience.

His theme was poverty and inequality, ‘prodigals and projectors’ (Smith’s phrase) and the limitations of rational choice theories, to which he is acknowledged to be a major contributor in his career, though he expressed reservations about the operational value of rational choice theory in the real world. In this, he is closer to Adam Smith’s approach – which he presented without dogma or the certainties of a ‘man of system’. A line, discussing the limitations of grand visions: ‘Some are born small, others do small things, and some have smallness thrust upon them’, caused wry smiles around those in the audience I could see.

He spoke of ‘transcendental institutionalism’, considering getting institutions right (social justice, for instance) to be a major priority, while recognising there were no ‘perfect’ solutions. He spoke of his early experience as a male in the feminist movement, mostly in relation to feminism where its absence has appalling consequences – more serious for women in the poverty economies than, I suspect, among women in the opulent world – in life expectancy, life treatment (mutilation was particularly noted) and alienation.

In the debate he showed everything that is good about his intellectual standing – listening to each question or point and methodically answering them with empathy for the truth, not for being ‘smart’. He made a very positive impression on everybody and many went to the front to ask, but mainly to listen, to the informal discussions he incited.

Of the conference arrangements, I consider them to have been excellent (whatever the panics out-of-sight below water!) and the Glasgow Adam Smith Research Foundation, led by Professor Chris Berry, demonstrated how to manage an academic conference without ‘tears’ or ‘pain’, at least for the participants.

Invisible Hands Explain Nothing: a response to a critic

“anon/portly” comments on my post ‘Never A Theory of Markets’ below, and I respond here on the main page so that it will be read by a wider audience:

‘His sole use of The Metaphor occurs in Book IV in his critique of Britain’s ‘mercantile political economy’, which legalised several monopoly practices prevalent in the 18th century. In this instance, he showed how the legal colonial monopoly of trade with the British colonies in North America, under the Navigation Acts, enforced by the Royal Navy and customs officers in every British seaport, heavily distorted British domestic capital growth.

Isn't this a bit misleading? When Smith introduces the Invisible Hand metaphor, the discussion at that point concerns merchants trying to make their own "produce" or revenue as great as possible in doing so make the nation's revenue as great as possible. The truth or accuracy of this point does not depend on Smith's placement of it within a discussion of tariffs and import restrictions and so on.

[Smith] did not relate the metaphor of ‘an invisible hand’ to ‘the market economy’.

How can this be so? A discussion of merchants and their incentives to employ their capital in domestic trade, foreign trade or "carrying trade" has nothing to do with the market economy?

...and by directing that industry in such a manner as its product may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote [society's gain]...

So the invisible hand applies not just here, but elsewhere. Where else? Maybe in other places where a businessperson intends only his own gain but the result is beneficial to others? Maybe like in the discussion of self-interest in book 1, chapter 2?’

Comment
A fair comment to which I reply as follows:

By a selective choice of what a paragraph does and does not relate to, “anon/portly”, skews his case solely to make it credible.

“anon/portly” claims that paragraph 9 does not, apparently, relate to the immediately previous paragraphs within which it is embedded (Book IV, Chapter 2, of Wealth Of Nations), but it does relate to paragraphs ‘in other places’ in Wealth Of Nations, including (‘maybe’, according to “anon/portly”,) those places in Book I, chapter 2, 427 pages earlier!

This argument might be (remotely) sustainable if the invisible hand metaphor had appeared elsewhere throughout the book, especially where Adam Smith discusses markets in detail, as in Book I and II, that is, in the first 375 pages of the Wealth Of Nations. But he didn’t use The Metaphor elsewhere in Wealth Of Nations at all.

Smith’s argument is clear enough: the general industry of society can never exceed the amount of capital society can employ. Regulations of commerce can only distort the distribution of capital; there is no reason to believe that regulation directs capital more advantageously than where it would go ‘of its own accord’ (paragraph 2, 453). Each individual ‘exerts’ himself to find the ‘most advantageous’ employment for his capital (his own advantage in profits, not society’s advantage), and this ‘necessarily’ leads him to prefer the ‘most advantageous’ distribution for ‘society’ (paragraph 4: 454).

At the first level, individuals prefer domestic (‘near home’) employment for their capital, provided they can ‘obtain the ordinary, or not a great deal less than the ordinary profits of stock’ (paragraph 5: 454). The choice context is:

“In the home-trade his capital is never so long out of his sight as it frequently is in the foreign trade of consumption. He can know better the character and situation of the persons whom he trusts, and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress.” (paragraph 6: 454)

Thus, his concerns for the security of his investment are informed by his knowledge of local circumstances (which knowledge is better than his knowledge of distant foreign places) – the people with whom he deals – and, should these prove unreliable, he is familiar with the domestic legal circumstances and the likelihood of his relief and redress should he be ‘deceived’ (explained in the long paragraph 6) (454-5).

The effect of all this, fully explained, risk-averse motivation, is to:
a) support ‘domestic industry’ and domestic ‘employment’ (paragraph 6);
b) give the ‘greatest value’ to the ‘produce’ of ‘domestic industry’ (paragraph 7: 455).

But, note, there is still no mention of the ‘invisible hand’ yet, and note also that not all merchants shared the same degree of risk aversion - many tens of milions of trade were conducted abroad with the British colonies, and with Europe, by local merchants, which is the significance of Book IV of Wealth Of Nations that contains The Metaphor among Smith's detailed criticisms of the distortions to British domestic capital formation caused by the very mercantile political economy that Smith criticises so strongly in Book IV of Wealth Of Nations.

Smith next relates how ‘industry’ adds value to the materials it employs, and this activity ‘proportionally’ adds to the ‘profits of the employer’, and it is ‘only for the sake of profit that any man employs a capital in the support of industry; and he will always, therefore, endeavour to employ it in the support of that industry of which the produce is likely to be of the greatest value, or to exchange for the greatest quantity either of money or of other goods’ (paragraph 8: 455).

Now paragraph 9 on pages 455-56, from which “anon/portly” wishes to detach the critical ‘invisible hand’ and transfer it, ‘maybe’ elsewhere, brings the arguments in the previous 8 paragraphs together:

“But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” (WN IV.ii.9: 455-6)

Note that the employer of capital ‘intends only his own security’ – his aversion to the risks of the foreign trade of consumption, as summarised in earlier paragraphs, are, in this particular case, the motivating drivers for the employers of capital who consider where to trade when faced with the circumstances alluded to: invest capital in foreign trade, which necessarily meant dealing with foreign partners whose “character and situation” he knows less about than the local persons “whom he trusts”, and in the event of them deceiving him “he knows “ not very well “the laws of the country from which he must seek redress”. Foreign trade, despite the higher profits from the Navigation Acts, enforced by the Royal Navy and British customs officials in all British seaports in Britain and the colonies, contributed extra and higher profits to the traders but at some cost to British capital formation, and, therefore, to British domestic employment and profits.

In these circumstances, Smith asserts, that merchants who are concerned with their security, would prefer to invest locally, a wholly unsurprising conclusion, fully explained and understood, or at least understandable, from paragraphs 1 to 8, and confirmed in summary in paragraph 9, complete with, at the end of his argument, with his sole use of ‘an invisible hand’ metaphor, to make it easier for those of his readers (surely not modern economists!) who did not follow his arguments. I have discussed all this in my paper: “Adam Smith and the Invisible Hand: from metaphor to myth” (HERE), and why Smith felt a need to support his technical argument with a well-known (to him) popular literary metaphor.

“anon/portly” closes with what he considers to be a devastating final ‘proof’ of his assertions:

“Maybe in other places where a businessperson intends only his own gain but the result is beneficial to others?”

If “anon/portly” is asserting that the invisible hand is at work wherever “a businessperson intends only his own gain but the result is beneficial to others” he is not saying much. Of course, we may all gain from the unintended actions of others, especially from the productive sector of the economy (that's the power of commercial markets), but not all unintended actions of ‘businessmen’, politicians, and those who influence them, are beneficial to others (today's main story!).

This is true now as it was in Adam Smith’s day. Indeed, Smith gives over 60 instances in Books I and II of Wealth Of Nations where the actions of individuals for their own ‘gain’ have less than beneficial consequences on those around them: WN: BK I: 40; 43; 51-2; 77; 78; 79; 80; 84; 89; 90; 91; 95; 96; 106; 111-12; 115; 116; 124; 125; 126; 135; 136; 137; 139;140; 141;142; 143; 144; 145; 146; 151; 152; 153;154; 156; 157; 158; 160; 163; 171; 174; 266-7 [47]; BK II: 285; 302-03; 304-05; 308; 310-17;321; 323-24; 326; 339-42; 344; 346.

The invisible hand is a metaphor, not a reality. Economists can examine any set of actions for the explanation of their consequences (that’s our claim to being a science), but in no cases does The Metaphor of ‘an invisible hand’ explain anything at all. That many modern economists believe that it does is a comment on the state of mysticism in the subject, not shared by Adam Smith, nor by any economist who is not a ideologue.

Only In It For the Truth - and For Economics To Make a Difference

From Michael Tobis in ‘Only In It For the Gold’ HERE:

Even "mainstream" economics is struggling with it's evident shortcomings:
Robert Solow: Economic History and Economics

"modern economics has an ambition and style rather different from those I have been advocating. My impression is that the best and brightest in the profession proceed as if economics is the physics of society. There is a single universally valid model of the world. It only needs to be applied. You could drop a modern economist from a time machine-a helicopter, maybe, like the one that drops the money-at any time, in any place, along with his or her personal computer; he or she could set up in business without even bothering to ask what time and which place... We are socialized to the belief that there is one true model and that it can be discovered or imposed if only you will make the proper assumptions and impute validity to econometric results that are transparently lacking in power.... Of course there are holdouts against this routine, bless their hearts... Let me recapitulate. If the project of turning economics into a hard science could succeed, it would surely be worth doing. No doubt some of us should keep trying... There are, however, some reasons for pessimism about the project. Hard sciences dealing with complex systems-but possibly less complex than the U.S. economy-like the hydrogen atom or the optic nerve seem to succeed because they can isolate, they can experiment, and they can make repeated observations under controlled conditions. Other sciences, like astronomy, succeed because they can make long series of observations under natural but essentially stationary conditions, and because the forces being studied are not swamped by noise. Neither of these roads to success is open to economists. In that case, we need a different approach."

Or Joseph Stiglitz: There is no invisible hand "Adam Smith's invisible hand - the idea that free markets lead to efficiency as if guided by unseen forces - is invisible, at least in part, because it is not there.... That such models prevailed, especially in America's graduate schools, despite evidence to the contrary, bears testimony to a triumph of ideology over science. Unfortunately, students of these graduate programmes now act as policymakers in many countries, and are trying to implement programmes based on the ideas that have come to be called market fundamentalism... Good science recognises its limitations, but the prophets of rational expectations have usually shown no such modesty."

Comment
I cannot write it clearer; these two top professionals of the discipline state the true situation of the cul de sac where modern mathematical economics has come to rest (despite, or because of, the feverish activity in our peer-reviewed journals that impose their authority across the board).

That Michael Tobis has drawn his, and now my, and, hopefully, through our readers, many others, to this problem is a remarkable achievement. Congratulations Sir!

In a small recompense of appreciation, Lost Legacy awards its April Prize to you for your magnificent contribution.

More Signs of the Early Eddies of an Incoming Tide?

Justus writes, Words Seeking Justus HERE:

‘Great Article - Huge Error’

‘I emphatically agree with 90% of Mark Vernon's article in the UK Guardian (HERE):

'I really like that Vernon emphasizes that virtues are not a restraint to our individual humanity, but that they allow individuals to live more abundant and satisfied lives. However, Vernon goes on to faultily blames Adam Smith and his invisible hand:

"Part of the problem here is capitalism, again. Its success stems in large part on appealing to our worst instincts. In one formulation at least, it is a system in which each person is supposed to look after their own self-interests, deliberately to the exclusion of others. That is the "ethical" thing to do, since by the power of the invisible hand, good is then bound to spread to all. No one believes that anymore."

Smith used the term "invisible hand" only once, and it was a common expression of the day, not a defining element, metaphor, theory, explanation, or summary of Smith's ideals. Smith also goes into detail in his works to differentiate self-interest from selfishness or greed. He was critical of entities that, through government-granted monopoly or limited liability, separated the interests of the owners from the interests of the managers and workers, which I personally view as a curse to our modern version of corporate capitalism. The term capitalism hadn't been invented while Smith was alive, and he despised the term laissez-faire. Overall, he saw order coming out of chaos in the action of individuals, but made plain that both governments and privileged businesses distorted the natural market between people.
The ethical thing to do is to act ethically. This is much easier for individuals with a moral or ethical framework to do. It is much more difficult for a non-human legal entity, such as a corporation, to do."

Comment
This is another example of those tiny pieces of evidence that the orthodox modern invention, as in the Chicago ‘Adam Smith’, created in the 1930s and spread by Paul Samuelson from 1948, who bore little resemblance to the Adam Smith born in Kirkcaldy in 1723, is likely to be under siege in the 21st century.

I encourage readers of Lost Legacy who see pieces in their local or national media that portray the Chicago Adam Smith (a most useful label from Jerry Evensky’s ‘Adam Smith’s Moral Philosophy: a historical and contemporary perspective on markets, ethics, and culture, 2005, Cambridge University Press) without a blush, instead of the ‘real deal’ expressed in the Kirkcaldy Adam Smith, to drop a comment to said media (even send a copy to myself).

Let’s see if the power of the Internet and the Blogosphere can make up for the 16 editions of Samuelson’s Economics text in the next ten years!

NB: Be clear, I admire Paul Samuelson’s academic work; it was an isolated snappy paragraph in his introductory textbook that did much of the damage to Adam Smith’s legacy, as usual and without doubt, unintentionally. It was the Chicago oral tradition that set this hare running.

Why Bother With Adam Smith?

Mark Thoma of the authoritative Economist's View Blog re-posts my 'Thought for the Day - 3' posts of yesterday HERE, as 'Why Bother With Adam Smith?'

There are several interesting comments from his readers, to one of which I penned a response, explaining why Lost Legacy seeks to defend Adam Smith's Legacy from its virtual hyjack by Chicago in the 1930s and the consequencies of attributing to Adam Smith their fallacious ideas about self-interested corporations.

Interestingly, the intervening period between the 1930s depression and today's is a clear example of what goes wrong with misreading the history of economics.

Those who do not understand the past are condemned to repeat it, sooner or later.

It's not that Adam Smith had the answers to modern depressions; it's that inventions about his alleged views that justify modern interpretations of the appropriate policies - let self-interest rule whatever the self-interests of the players - leave policy determination to whatever is sellable electorally or enforceable politically; surely a rash form of civil governance?

Never A Theory of Markets

Jacqueline Best (a professor in the School of Political Studies at the University of Ottawa and the author of The Limits of Transparency),writes in Globe And Mail HERE:

Market's ‘invisible hand' is supposed to be just

“We forget that Adam Smith, the father of modern economics, held a chair in moral philosophy at Glasgow University. He argued that the “invisible hand” of the market economy was not just economically efficient, but also politically and morally beneficial – ensuring that the pursuit of individual self-interest would ultimately provide for the public good.”

Comment
Jacqeline asserts the above with the authority of her professorship, but in doing so she purveys a major myth about Adam Smith and the ‘invisible hand’.

Adam Smith did not argue that ‘the “invisible hand” of the market economy was not just economically efficient, but also politically and morally beneficial – ensuring that the pursuit of individual self-interest would ultimately provide for the public good.’

He did not relate the metaphor of ‘an invisible hand’ to ‘the market economy’. His detailed discussion of the ‘market economy’ was concluded in Books I and II of Wealth Of Nations without mentioning The Metaphor of ‘an invisible hand’ at all.

His sole use of The Metaphor occurs in Book IV in his critique of Britain’s ‘mercantile political economy’, which legalised several monopoly practices prevalent in the 18th century. In this instance, he showed how the legal colonial monopoly of trade with the British colonies in North America, under the Navigation Acts, enforced by the Royal Navy and customs officers in every British seaport, heavily distorted British domestic capital growth.

However, those British merchant traders who were risk-averse to the Atlantic sea trade, despite its greater profits, who preferred to invest their capital locally, also benefited British domestic capital investment – the whole is the sum of its parts, or and the more ‘parts’, the larger the ‘whole’.

After explaining the nature of the risks of distant overseas trade, and how some, but not all, preferred the home trade, he showed why this was beneficial for Britain (Smith was not too keen on the then colonial policy because of the inevitable costly wars with France).

As his argument was fairly complex (you must read the whole chapter in Book IV, chapter 2), and for those of his readers who found it difficult to follow, he followed with his, now famous, metaphor of these merchants being ‘led by an invisible hand’.

So inconsequential was his use of The Metaphor that neither he, nor anybody else until the late 19th century, commented upon it. It was never Smith’s view that the ‘invisible hand’ was ‘not just economically efficient, but also politically and morally beneficial – ensuring that the pursuit of individual self-interest would ultimately provide for the public good.’ That is a false attribution; worse, a pure ‘invention’.

He certainly preferred competitive (not monopoly) markets to non-markets (though he also preferred government action where necessary), but in both cases the ‘invisible hand’ played no role.

Moreover, it was only in Chicago in the 1930s that The Metaphor was generalised into Smith’s so-called ‘law’ of markets. Paul Samuelson (1948, 1st edition), in his famous textbook, Economics (16 editions), publicised this invention with the inevitable affect on modern economics, as tens of thousands of his readers took it on trust as true.

Thought for the Day 2

‘Security, therefore, is the first and the principal object of prudence. It is averse to expose our health, our fortune, our rank, or reputation, to any sort of hazard. It is rather cautious than enterprising, and more anxious to preserve the advantages which we already possess, than forward to prompt us to the acquisition of still greater advantages. The methods of improving our fortune, which it principally recommends to us, are those which expose to no loss or hazard; real knowledge and skill in our trade or profession, assiduity and industry in the exercise of it, frugality, and even some degree of parsimony, in all our expences.'
(TMS VI.i.6: 213)

Comment
I have made many references to the use by Adam Smith of the metaphor of ‘an invisible hand’ in Wealth Of Nations (1776) and I thought it relevant to quote the above passage from Smith’s Moral Sentiments [1759, ed 6. 1790].

He discusses security and specifically mentions how security is ‘averse’ to exposing ourselves and ‘our health, our fortune, our rank, or reputation to ‘any sort of hazard’.

I was recently criticised by a academically respected referee for using the more modern term, ‘risk averse’, to describe the motivation for why some (but not all) merchants, discussed by Smith in Chapter IV (ii.9: 456) of Wealth Of Nations, preferred to trade and invest locally rather than take the risks of trading or investing abroad, particularly in the American colonies.

The referee considered ‘risk-averse’ as being about the utility functions of players in modern game theory and not applicable to the merchants that Smith identified in his famous ‘invisible-hand’ paragraph.

Despite my reservations, I accepted the referee’s assertion, not being able to lay my hands of the relevant quotation at the moment I needed it. But I found it this morning while looking for something else.

I consider Smith’s comments on the ‘prudence’ of ‘security’ and ‘aversion’ excuse my original mentions of ‘risk aversion’ as the direct cause of these merchants investing locally and thereby, on the arithmetical law that the whole number is the sum of its individual parts, the behaviour of these merchants, which unintentionally made domestic national output and employment larger in total than it otherwise would be, completely explain what motivated them to do so.

The outcome was brought about, and is eminently explained by the causes identified by Adam Smith before he used The Metaphor of 'an invisible hand', thus making The Metaphor redundant as an explantion, and with its redundancy ,all the subsequent chatter that The Metaphor itself was an explanation are shown to be wrong.

The modern myths of invisible and disembodied hands, including the 'Hand of God' and other mysteries, were not part of Adam Smith's original explanation for the phenomenon, the merchant's 'risk-aversion' ('he intends only his own security' (WN IV.ii.9: 456).

The real mystery, in my mind, is why so many respectable and senior fellow economists can read the same passage from Wealth Of Nations and endorse the modern myth.

In these circumstances I feel permitted to use the term 'risk aversion' as being the cause of the merchants' conduct, without implying any connections to elements of modern games theory.

A True Believer is Dumfounded

Kirk Barrell writes on Random Roving Blog (‘A Non-Partisan Community for Communication And Collaboration’): “Don't Shoot The Messenger” (HERE):

‘I’m continually dumbfounded by the fact that most people believe that the economy is controlled by the president and their administration. I first ask: “wouldn’t all presidents want a good economy? If so, why don’t they create it?”. I’m a big believer in Adam Smith’s “invisible hand” [HERE] Markets beat to their own cycle. Presidents are like bullriders trying just to stay on for 8 seconds and if they’re lucky, maybe they steer the bull in one direction for a brief moment.’

Comment
If you rely on Wikipedia for knowledge, you get what you don’t pay for, in this case rubbish.

The clue to the real problem is that Kirk Barrell is a ‘big believer in Adam Smith’s invisible hand'.

He exhibits an almost religious belief in a myth; the myth being that Smith’s use of the metaphor of ‘an invisible hand’ was re-invented in Chicago in the 1930s as a mystical force credited with miraculous powers – even Godly – which passed into mainstream academe, like a meme, virus, thanks to Paul Samuelson’s phenomenally successful textbook, Economics, from its first edition in 1948 to its 13th edition in 1989 (there are claims that Economics went through 16 editions), which claimed that Adam Smith had first talked about markets ‘as if led by an invisible hand’, when in fact he never did.

But millions of students read Samuelson and got the message about mystical invisible hands; the ‘belief’ is now firmly entrenched and such authority as Wikipedia may have, means that millions more will become believers too.

Quelle domage!

If only these people would read Adam Smith and see what he actually said. They would find that the metaphor of ‘an invisible hand’ was not part of Smith’s exposition of how markets worked.

They could also download an early version of my paper, ‘Adam Smith and the invisible hand: from metaphor to myth’ (HERE) and read for themselves what he actually said.

Origins of the Myths of the Invisible Hand

I was looking for a reference in a book in my library and came across, at the back, as you do, my rather battered copy of Paul Samuelson’s popular textbook, ‘Economics’ (which I had looked for unsuccessfully for many years).

In the 1960s, my later edition of this book was the class textbook at my university; I also bought a first edition of it at a bookfair in the 70s.

I knew thatSamuelson had mentioned the ‘invisible hand’ in his textbook and he is, in my view, more than anyone else, responsible for popularising the incorrect notion that Smith believed there was an invisible hand at work in the general economy, which in the minds of modern economists somehow, mysteriously, was behind the undoubted success of capitalism in making possible unprecedented living standards. (The Cold War was on and many academics and their students were more impressed with Marxism than capitalsm.)

The reputation of Paul Samuelson, from the start of his illustrious academic career, and the publication of his Phd, Foundations of Economic Analysis (1947), deservedly is enormous.

His popular textbook, Economics, was used to teach, literally, tens of thousands of post-war students, and even his latest writings on his profession (e.g., ‘Inside the economist's mind: conversations with eminent economists‎, 2007 show why his reputation was and remains so high.

However, Samuelson was certainly wrong on one subject.

Metaphors, like ‘waggon way through the air’ (Wealth Of Nations, II.ii.86: p 321)or the ‘invisible hand’ (IV.ii.9: 456), are representative, not real; they exist only as the imaginary image of what they allude to; they do not define to what they allude (Smith: Lectures on Rhetoric and Belles Lettres, 30-1).

Modern economists have projected onto a venerable literary metaphor a significance well beyond anything implied by Adam Smith, whom they allege was the originator of their modern and different, version of the metaphor.

Among the first to do so was Paul Samuelson, in the first edition
(1948) of his famous and influential textbook, Economics: an introductory analysis, he wrote (page 36) that Adam Smith, ‘the canny Scot’:

‘was so thrilled by the recognition of an order in the economic system that he proclaimed the mystical principle of “the invisible hand”: that each individual in pursuing only his own selfish good was led, as if by an invisible hand, to achieve the best good of all, so that any interference with free competition by government was almost certain to be injurious. This unguarded conclusion has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their college course in economics.’

But the ‘canny Scot’, of course, said no such thing.

Smith did not proclaim ‘the mystical principle of “the invisible hand” ’. He was so reticent about his use of the metaphor that he mentioned it only once in Wealth Of Nations, more than half-way through his book, buried in a chapter about how some cautious (risk-averse) merchants preferred the ‘home trade’ to ‘foreign trade’ in pursuit of their ‘own security’.

Smith never proclaimed in favour of ‘selfishness’, nor did he describe the actions of such merchants as ‘selfish; he always recognised self-interest’, which he never confused with ‘selfishness’, an attribute of Bernard Mandeville's philosopy (1734), which Smith regarded as licentious'.

Smith never regarded nor stated that ‘any interference with free competition by government was almost certain to be injurious’; he identified the circumstances where government policies, such as the dominant policy of mercantile political economy since the 16th century, had slowed ‘progress towards opulence’ and he identified which of these policies should be changed.

Smith didn't think much good came from sovereigns and legislators telling merchants what to do - he didn't think governments were up to the task

In fact, Smith identified that the main ‘interference’ with ‘free competition’ came from the ‘merchants and manufactures’ themselves, with their agitation for legislators, and those who influenced them, to legalise or award monopolies and trade protection, which were against the public interest in general and the interests of consumers in particular.

I conclude, given the misunderstanding of Adam Smith’s political economy that began in the mid-twentieth century, which led to ideological protection of much corporate behaviour (not much different from their behaviours in his day) that if Samuelson had read Moral Sentiments and Wealth Of Nations for himself, instead of recalling what he was taught incorrectly by his Chicago tutors in the 1930s, he could have prevented many tens of thousands of students, who in the 16 editions of his textbook taught from it well into the 1970s, from ‘remembering’ the same error that he passed on to them, many of whom became teachers of yet more students. And so the myth was spread across generations of studenets and tutors.

His readers spread the nonsense of the myth of the invisible hand widely for more than forty years. They have also made Adam Smith culpable for the current crisis, when, he is, in fact, wholly innocent. The epigones are the guilty party.

An Economist Talks Sense

Matthew Benjamin writes at Blomberg.com HERE:

“Stiglitz Enabled Obama With Nobel Ideas to Scorn Them (Update 1)”

“Adam Smith’s invisible hand -- the idea that free markets lead to efficiency as if guided by unseen forces -- is invisible, at least in part, because it is not there,” Stiglitz wrote in a 2002 article in The Guardian newspaper.
The idea implies that there’s an important role for government to play in the economy, he wrote.”

Comment
Well, Stiglitz is on the right track, almost. The invisible hand is not there at all. It’s a mystification of the economic processes of commercial markets in general and state-capitalist markets in particular.

The allocation of resources, production transformations into products and services that are sold in markets, and government expenditures and waste are all explainable without imaginary, invisible body parts, which belong to superstition, mumbo jumbo, and represent the absence of science.

So, good old Stiglitz, I say (for once), and may the readers of Blomberg.com take note.

Folly Of Relying on Poor Teaching

estherbintliff writes in The Filtnib’s Progress Blog (HERE):

“The idea that individual greed might help boost wider economic conditions and thus wider society too, was first suggested by the great Scottish economist and philosopher Adam Smith in his Wealth of Nations in 1776:

“By directing that industry in such a manner as its produce may be of the greatest value, (the individual) intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it.
By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

Alas, this recipe has recently gone a bit wrong. Given free rein, the invisible hand of the market didn’t allocate resources quite as accurately as expected”

Comment
Readers familiar with this quotation will know that it is truncated from several pages of argument which ‘estherbintliff’ is either suppressing to make her argument stronger or, more likely, is unaware of, and therefore comes to the conclusion that suits he argument. The full analysis containing the quotation runs across pages 453 to 457 in Book IV of Wealth Of Nations, chapter 2.

First, Adam Smith never endorsed a policy of, or the behaviour of, greed. That is to confuse Adam Smith with Bernard Mandeville, author of the Fable of the Bees, 1734 (written over the years 1704 to 1737), who made greed a private vice but a public good. These views had nothing to do with Adam Smith, who described Mandeville’s theories as ‘licentious’.

Second, in the quotation esther has made (she claims to have done A-level economics), Adam Smith was talking about the influence of risk-avoidance on the decision of some merchant traders not to engage in foreign trade, even though it was more profitable, and to confine their activities to their domestic country of residence.

Meanwhile, other merchant traders traded with foreign places (largely with the British colonies in North America) because the higher profits of this monopoly trade compensated them for the risks of the Atlantic voyages, uncertain legal decisions, piracy, and fraud.

So Smith was not making a general point about self interest being always beneficial; it clearly wasn’t – he gave over 50 examples in Books I and II of Wealth Of Nations of self-interested actions which led to sub-optimal, as we say today, outcomes for society.

On the example, he quoted above, the outcome of risk-avoidance was that the local society’s annual output was higher than it would otherwise be (the whole is the sum of the parts), which is hardly a stunning conclusion in these circumstances. The metaphor of ‘an invisible hand’ is not of general applicability and neither did Adam Smith say it was.

I am sorry to say that brief encounters with a ‘leftwing teacher of A-level economics’ is not a safe source for the real views of Adam Smith.

Morality and Economics

Lee Randolph writes the Debunking Christianity Blog HERE:

“MORALITY IS ANALOGOUS TO ECONOMICS"

'From what I can see, "morality" is a category of behaviors that result from the self-interest of many agents. It is a form of self-organization of these agents according to their mental capabilities into groups behaving according to implicit rules that will become explicit in humans and has an analogy in economics. Its like circumstances are being guided by an "Invisible Hand". "The Invisible hand" is "an economic principle, first postulated by Adam Smith, holding that the greatest benefit to a society is brought about by individuals acting freely in a competitive marketplace in the pursuit of their own self-interest."
The American Heritage® Dictionary of the English Language, Fourth Edition. Houghton Mifflin Company, 2004. Answers.com 04 Mar. 2009. http://www.answers.com/topic/invisible-hand)

The difference between Self-interest and Selfishness
I see a lot of people make the claim that Adam Smith was endorsing "selfishness". Selfish is to Self-interest as Revenge is to Justice. While similar in concept, one is harmful and the other is not. Selfish and Revenge are about gaining an advantage, Self-interest and Justice are about maintaining an equilibrium.”

Comment
I have no comment on the author’s ‘de-bunking Christianity’ mission.

Mankind has always lived in societies, as our primate ‘cousins’ did and do. Smith’s Moral Sentiments is about the social basis of morality, the primitive origins of which pre-dates Christianity by hundreds of thousands of years, and is older than the earliest beliefs of the earliest religions. While bones fossilise, beliefs don’t.

Early Hominines (the hominids) were born into groups – they didn’t ‘form’ into groups (as far as we can surmise). The speciation from the Common Ancestor 4-6 million years ago (itself a social animal) was from an existing group of primates, some individuals of which speciated separately into chimpanzees, which also live in groups. What changed for the hominine species was the continuation of development manifested in bipedal postures and walking, growing brain-size and development, intense sociability, and changes in the social arrangements for reproduction to accommodate biological changes.

Given that economic aspects of social life pre-dated commercial society I am not clear how analogous moral behaviours are to economics. Lee Randolph cites a statement in The American Heritage® Dictionary of the English Language (see link above), which on this evidence is likely to be unreliable: "The Invisible hand" is "an economic principle, first postulated by Adam Smith”.

Readers will know that The Metaphor was not an ‘economic principle’ that was ‘postulated' by Adam Smith. It has become an ‘economic principle’ and was ‘postulated’ by modern economists since the 1950s, and has nothing at all to do with Adam Smith, nor any of the many other 18th -century authors who used the same metaphor in their literary works.

However, I think Lee Randolph is quite right when the identifies the differences between selfishness and self interest when he writes: ‘Selfish[ness] and Revenge are about gaining an advantage, Self-interest and Justice are about maintaining an equilibrium.’

A Reply to a Commentator

My post yesterday, which I attributed to ‘anon’, apparently comes from a ‘gk’, or ‘Gary’, from Knoxville, Tennessee, though I did not notice his initials when I commented, for which I apologise. His initials, in small type, are easily missed (at least by me).

I shall reply to his comments in general terms – a blow-by-blow critique of them would probably cause deeper friction than is expressed in his response in the Lost Legacy comments, and which are much enhanced on his Blog (HERE): As an educator, I have no interest in causing friction when there is an opportunity to learn something.

I accused Gary of appearing not to have read Wealth Of Nations in respect of Smith’s use of The Metaphor of ‘an invisible hand’. His critique of President Obama’s misuse of The Metaphor was not/is not the subject of my post; I do not comment on another country’s politics).

My interest is in defending Adam Smith’s legacy, which, in my view Gary has not understood, and no wonder. Almost the entire body of US (and UK’s) academe misrepresents Adam Smith’s use of The Metaphor (see earlier posts since 2005 on Lost Legacy), including the worthy encyclopaedias and internet dictionaries cited by Gary – of which Wikipedia is particular notorious).

This misrepresentation began in the early 1950s as economists reacted to the assault on ideas about Western capitalism emanating from the Cold War (but ‘hot’ in places), with Soviet communism. The contest between communist planning and market capitalism was in the forefront of these debates, as Western European economies, with several social-democratic parties in government, and large communist parties in France and Italy, hotly contested which economic system was appropriate.

Economics textbooks, such as Paul Samuelson’s, introduced a modern version of the metaphor of ‘the invisible hand’ and credited it, under Adam Smith’s name, as being his ‘theory’ of markets, which markets were (and are) superior to state planning. These textbooks gradually became the norm across academe, training hundreds of thousands of students in beliefs that markets were guided by an ‘invisible hand’ to lead to optimum solutions of problems of market resource allocation and efficiency, in contrast to the manifest failings of Soviet State planning, and Western social-democratic ‘nationalisations’.

What became of The Metaphor (unintentionally, I am sure) in the rest of the 20th century was a belief, widespread to be sure, that markets had a ‘mystical’ ingredient in them that made them superior – in some recent versions, the invisible hand has become the ‘Hand of God’ – which is wholly ridiculous if linked to Adam Smith and the Wealth Of Nations.

Moreover, the modern myth of the invisible hand, mentioned only once by Adam Smith, and then not about how markets work, is based in part of a paragraph in a chapter about a specific issue (risks in the colonial trade), as if it was a major element in Adam Smith analysis of commercial society. It was, in fact, nothing of the sort.

I have made this case regularly on Lost Legacy (follow the ‘invisible hand’ label, including on my comment on Gary’s post), and in my books; ‘Adam Smith’s Lost Legacy’, 2005; and ‘Adam Smith: a moral philosopher and his political economy’, 2008, both by Palgrave Macmillan.

I have also posted a downloadable paper, ‘Adam Smith and the Invisible Hand: from metaphor to myth’ on this site (it’s on the Lost Legacy Home page; click on the red lettering; scroll through to ‘Articles and Press’ and then click ‘The History of Economic Thought 40th Anniversary Conference at University of Edinburgh: Adam Smith and the Invisible Hand: from metaphor to myth: A Lecture by Gavin Kennedy’.

I did not on this occasion go into such detail in my comments on Gary, because the documentation supporting my assessments is widespread on Lost Legacy. I quote examples of the popular prior use in literature of the metaphor of an invisible hand, as follows (refs are in the above paper):

“ Homer (Iliad, 720 BC); ‘And from behind Zeus thrust him [Hector] on with exceeding mighty hand’; [12]

Horace, Fulminantis manus Jovis (‘The mighty hand of thundering Jove’); [13]
Ovid of Caeneus at Troy: ‘twisted and plied his invisible hand, inflicting wound within wound’;[14]

Lactantius (De divinio praemio, c.250-325): early use of ‘invisibilis’;

Augustine, 354-430AD, “God’s ‘hand’ is his power, which moves visible things by invisible means’;[15]

Shakespeare, (1605) ‘Thy Bloody and Invisible Hand’;[16]

Glanvill, J. 1661. ‘nature work[ing] by an invisible hand in all things’; ‘invisible intellectual agents’;[17]

Voltaire (1694-1778) in (1718): “Tremble, unfortunate King, an invisible hand suspends above your head’; and ‘an invisible hand pushed away my presents’;

[18]Daniel Defoe, ‘A sudden Blow from an almost invisible Hand, blasted all my Happiness’, in Moll Flanders (1722); ‘it has all been brought to pass by an invisible hand’ (Colonel Jack, 1723); [19]

Nicolas Lenglet Dufesnoy (1735) an “invisible hand” has sole power over “what happens under our eyes”;[20]

Charles Rollin (1661-1741), whom Pierre Force describes as ‘very well known in English and Scottish Universities’, said of the military successes of Israeli Kings “the rapidity of their consequences ought to have enabled them to discern the invisible hand which conducted them”;[21]

William Leechman (1755): ‘the silent and unseen hand of an all wise Providence which over-rules all the events all the events of human life, and all the resolutions of the human will’;[22]

Charles Bonnet (whom Smith befriended in Geneva in 1765) wrote of the economy of the animal: “It is led towards its end by an invisible hand”;[23]

Jean-Baptiste Robinet (1761) (a translator of Hume) refers to fresh water as “those basins of mineral water, prepared by an invisible hand”;[24]

Walpole, H. 1764. ‘the door was clapped-to with violence by an nvisible hand’[25]

Reeve, C. (1778) ‘Presently after, he thought he was hurried away by an invisible hand, and led into a wild heath’.[26]

Adam Smith had many of these books in his library. The invisible hand metaphor was a popular literary reference in the 18th century.

For Adam Smith, the metaphor came into use (only once in the entire volume) after he had succinctly explained in detail in Chapter 2: ‘Of Restraints Upon the Importation from Foreign Countries of Such Goods as Can be Produced at Home’, how merchant traders chose between using their capital in the export/import trade or using it in domestic investment. The key variable for them was the relative risks of both:

“Thus, upon equal or nearly equal profits, every wholesale merchant naturally prefers the home-trade to the foreign trade of consumption, and the foreign trade of consumption to the carrying trade. In the home-trade his capital is never so long out of his sight as it frequently is in the foreign trade of consumption. He can know better the character and situation of the persons whom he trusts, and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress. In the carrying trade, the capital of the merchant is, as it were, divided between two foreign countries, and no part of it is ever necessarily brought home, or placed under his own immediate view and command.” (WN IV.ii.6: p451 or Edwin Canaan’s 1937 edition, p 421, Random House).

This is about risk avoidance, which Smith clearly identifies (‘he intends only his own security’), repeated in the passage that Gary quotes from:

“By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” (WN IV.ii.9: p 456; or in Canaan, p 423)

Now, any close reading of the whole chapter up to paragraph 9 shows what were Smith’s arguments. He identifies risk avoidance as the ‘trigger’ for the actions of some, but clearly not all British merchants, because many merchants traded with the British colonies in North America under the advantages of the British Navigation Acts, which gave British ships, crews, and owners of cargoes a monopoly on exports from Europe to the colonies and imports from the colonies to Europe, all enforced by the Royal Navy and at all British sea ports.

Those merchants who were more risk-averse than the exporters/importers willingly preferred the less risky domestic trade even if it was less profitable. It was this prior decision, fully explained by Adam Smith, which caused them to invest locally and, on the arithmetic law that the whole is the sum of its parts, by doing so it meant that local domestic investment was higher than it otherwise it would be, which benefited domestic capital formation and domestic employment as an unintentional consequence.

Now any reader who had followed Smith’s argument in the previous eight paragraphs had no difficulty in understanding Smith’s conclusion, but not all readers of political economy (then as now) follow every argument, which was important to Smith’s general critique of monopoly foreign trade, especially with the British colonies in North America and, to make sure he carried all his readers with him, he added at the end of his clear argument the metaphor of ‘an invisible hand’ leading them to do as they did on entirely on their own account under the influence of their risk aversion. His use of the metaphor of ‘an invisible hand’ meant nothing more or less than that.

Hence, when I read, as I do, 10-20 times a day from the world’s press and academic papers, assertions to the effect that Adam Smith was the first to identify the invisible hand and that he applied it to his political economy of markets (markets are discussed thoroughly in Books I and II without a single mention of the metaphor in any role at all), I quite often remind Lost Legacy readers of this fact.

Modern economists who make assertions about the invisible hand and associate it with Adam Smith are absolutely wrong to do so.

Smith is wholly innocent of involvement in the mystification of markets; their workings are understood, and were understood by Adam Smith. It insults his legacy to suggest otherwise.

Markets are superior to state-managed economies, including state-capitalist corporate economies, which presently dominate the West, and which enshrine monopolistic principles in place of the superiority of competition, which promote legislators, and those who influence them, to directing roles for which their capabilities are well-short of modest competence.

In that opinion I agree with Gary that governments are not as competent as markets; but this has nothing whatsoever to do with ‘hands’ that are ‘visible’ or ‘invisible’ or with anything that should be associated with Adam Smith.

The Metaphor, the President, and the Critic

‘Anon’ writes (25 February) on Effor.com (‘Rambling rants from the lunatic fringe'), HERE:

“This will not help”

“President Obama today said “If we once again guide the market’s invisible hand with a higher principle, our markets will recover, our economy will once again thrive and America will once again lead the world in this new century as it did in the last”.

Has he actually read The Wealth of Nations, the classic Adam Smith book that coined the term “invisible hand?” Does he even know what the term means?

Evidently not, because “invisible hand” is the term economists use to describe the self-regulating nature of markets. I’d like for President Obama to reconcile that with his call today for increased regulation of financial institutions.”

Comment
‘Anon’ asks if President Obama has read Wealth Of Nations, strongly implying that if he has, or did, he would not have used The Metaphor in his speech. Moreover he would know what the ‘term’ means.

This is problematic because it is not evident that ‘Anon’ has read Wealth Of Nations.

Adam Smith did not ‘coin the phrase’ at all; he used a fairly commonplace metaphor, well known to readers in the 18th century, though less so in the 19th and hardly at all to readers in the 20th century until it was dusted down by some economists in the 1950s, given an entirely bogus meaning, turned into a ‘theory’, a ‘paradigm’ even, and widely publicized to add popular mystical properties (even implying religious purposes) to how markets work compared to state-run communist economies (a bye-product of the Cold War).

Needless to say (or is it?) these pure inventions had had nothing whatsoever to do with Adam Smith and his use of The Metaphor only once in Wealth Of Nations and only once in Moral Sentiments had nothing to do with markets.

Even ‘Anon’ got something right: the ‘invisible hand’ is ‘the term [modern] economists use to describe the self-regulating nature of markets’.

The error is to link this modern use to Adam Smith – and, of course, to mock the President for something he/she has not done himself/herself.

A Philosopher Pontificates in Ignorance

Steve Gimbel, a philosopher at Gettysburg College writes Philosopher’s Playground Blog,(‘One Part Sandbox, One Part Soapbox: An on-going game of intellectual tag concerning ethics, science, politics, and all topics philosophical’), HERE:

“But we can layer onto rationality the question of morality. Even Adam Smith, the father of Capitalism, wrote his classic Theory o