Ubiquitous Invisible Hand References

Another week-end and another long list of 'invisible-hand' alerts to read through.

I thought readers may like to know just how many mentions of the invisible hand there are in a week (I would put it in the high 90s, often more).

Now these alerts vary from direct quotations or discussion on economics, through to scores of unrelated subjects bounded only by the limitations of their authors' imaginations, as some of those included in my short extracts below show. Normally, I am selective and dump most of them.

But the point I am making is that the metaphor of 'an invisible hand' is as widely used today as it was among literate people in the 17th and 18th centuries, many of them before Adam Smith used it in twice in his two published books, Moral Sentiments (1759) and Wealth Of Nations (1776), plus once in his 'juvenile essay', published posthumously in 1795.

It was only with the new of interest in Adam Smith's use of the popular invisible hand metaphor in the late 1940s, that what became a proliferation gathered pace from the 1950s. It is now ubiquitous among modern economists and has spread out as the millions of readers of Samuelson's very successful textbook, Economics: an introductoy analysis, published in 1948 and now in its 19th edition, remembered the story of the invisible hand even if they forgot the economics, no matter where their career paths took them.

A selection from the first page of his morning's haul of invisible-hand references in the world's press:

1 Dianne Hardistry writes in Bakersfield.com HERE:

“Carlson came to the Treasury Department job with an MBA from Stanford University and years of experience in the banking industry. In between, she was a lobbyist in Washington, D.C., founded the business writing firm Invisible Hand LLC, served as the executive vice president of global government affairs for the Motion Picture Association of America and was a member of California Gov. Arnold Schwarzenegger's senior Washington staff.”

2 Damien Hoffman writes in Wall Street Cheat Sheet HERE:

“Michael Jackson's Invisible Gloved Hand Strikes Biggest Record Deal in History”

3 Alissa j. Rubin writes in The New York Times (19 March) HERE:

“In the shifting shadows of this often invisible war, where no one is sure who is lying and who is telling the truth, it seemed a reasonable way to resolve ..”

4 Daily Mail online, UK, 20 March here

“Joseph chief executive Sara Ferrero said:' 'He has been an invisible magic hand guiding me in this last two years. He will always be in my thoughts.'”

5 sikhsubculture writes in SikhNet (18 March) HERE:

“The future of Sikhism is threatened by Adam Smith's infamous invisible hand. Furthermore, attempts at regulating the vast and far flung patka market have failed as huge black markets in the backs of unscrupulous langar halls have taken ...”

6 John Langford writes (20 March) in Yahoo Research HERE:


“The Invisible Hand of Machine Learning”

7 Shubha (19 March) in Live Mint.com Lounge HERE:

“The invisible hand of audio engineers,”

8 Yair Ettinger writes (18 March) The invisible hand - Haaretz - Israel News HERE:

9 Monika Mitchell writes The Invisible Hand in Good Business International

Yet man is a funny beast Adam knew, and in case of a lapse in reason a guiding hand, “the Invisible Hand,” existed to override his less intelligent and ...

10 Wonkette DC gossip (20 March) HERE


GOP Congressmen Start Throwing Civil War References Around

“Also, if only there were no government interference with the marketplace, the miraculous workings of the invisible hand will ensure that virtue and hard work are rewarded, and dishonesty and laziness punished, and the markets will ...”

11 Chicago Breaking Business News (2o March) HERE:

“Fine, than the invisible hand will lead employees to look for better places to work and job seekers will not want to work for you. It's not all about keeping investors happy. You also need to keep employees happy or the ones you have ...”

12 The Last Psychiatrist: The Source Of Society's Ills writes (20 March) HERE:


“There's no "invisible hand" at work here. Wilkinson is not just another academic social policy theorist who references Marx; he is also the editor of the 2003 version of the WHO report on social justice. ...”

13 Victoria Yates writes on Jeremy Rifkin writes Writing From The Cafe HERE

'Empathy is the invisible hand – to empathize is to civilize, to civilize is to empathize' Rifkin

I have another 7 pages to read too, with more to come during Saturday.

A Clear Understanding of Adam Smith in Huffington Post

Klunk posed in Can.politics an article written by David Sloan Wilson HERE

The original article is from Huffington Post HERE

“The Invisible Hand is Dead. Long Live (Smart) Regulation”

“The invisible hand metaphor originates with Adam Smith in The Wealth of 
Nations (1776). Bernard Mandeville made a similar point with his Fable of 
the Bees (1705), which fancifully describes human society as a wondrously 
productive bee hive, even though each bee is as selfish as can be.

Smith was critical of Mandeville and presented a more nuanced view of human 
nature in his Theory of Moral Sentiments (1759), but modern economic and 
political discourse is not about nuance. Rational choice theory takes the 
invisible hand metaphor literally by trying to explain the length and 
breadth of human behavior on the basis of individual utility maximization, 
which is fancy talk for the narrow pursuit of self-interest. For the general 
public, unfettered competition has been turned into a moral virtue and 
"regulation" has become a sin.”

…. For those who wish to learn more about how economics is going beyond rational choice theory, I recommend a book titled Moral Sentiments and Material Interests: The Foundations of Cooperation in Economic Life (2006), edited by Herbert Gintis, Samuel Bowles, Robert T. Boyd, and Ernst Fehr. Gintis, Bowles, and Fehr are eminent economists while Boyd is an eminent evolutionary anthropologist, illustrating how integrative the new economic theory has become. I have also written an essay titled "The New Fable of the Bees" that explores the theme of this blog in more detail.”

Comment
There is much more as well. David Sloan Wilson (professor of biology and anthropology at Binghamton University, part of the State University of New York) is pretty-well informed about Adam Smith and his actual writings (and Bernard Mandeville’s too; plus recent work by behavioural economsts) and I highly recommend that you follow the link. It’s a short lesson in Adam Smith’s legacy.

If I have a criticism, it is that David Sloan Wilson accepts the modern invention of the invisible hand by default but criticizes it on its phony merits. But what is a small blemish in a fine article?

NB. The Huffington Post appears to be pretty consistent recently in its appreciation of Adam Smith from Kirkcaldy, compared to the usual North American version of Adam Smith, ‘alive and well and living in Chicago’ (George Stigler, 1976).

Long may it continue!

Review Commentary No. 6: Milgate and Stimson's "After Adam Smith"

Murray Milgate and Shannon C. Stimson's "After Adam Smith; a century of transformation in politics and political economy”, Princeton, Princeton University Press 2009

[My series of review commentaries has been delayed unavoidably due to domestic upheavals mentioned in recent announcements. I am now almost back to normal, though my library appears to be missing several volumes.]

Chapter 7 is on Thomas Malthus (1766-1834), whose name is immortalized. He intervened with a polemic in the 1790s on the revolutionary fervour of the likes of Britain’s William Godwin (1756-1836) and France’s Condorcet (1743–1794). The latter admired Adam Smith, whose Enlightenment association with the radical Frenchman, however, caused judicial enquires to be made in 1793 about Smith’s possible role in spreading unrest among British labourers in the shadow of the French Terror.

Malthus raised the issue of population exceeding the capacity of an economy to sustain living standards and Milgate and Stimson take us through the issues clearly for the most part. However, I sensed an orthodox treatment of the so-called ‘Malthusian’ vision as representative of economics as the ‘dismal science’, crowned with the ‘classic statement that this came from Carlyle’ (122), without their explanatory comment, as if it referred to Malthus.

The origins of the ‘dismal science’ accolade, regularly awarded to economics, classical and modern, had little to do with Malthus, and Milgate and Stimson should have taken the opportunity to say so. I refer readers to a paper by David M. Levy and Sandra J. Peart: “The Secret History of the Dismal Science. Part I. Economics, Religion and Race in the 19th Century” HERE which sets out the real story of economics becoming known as the ‘dismal science', wich they show had nothing to do with a description of Thomas Malthus:

‘While this story is well-known, it is also wrong, so wrong that it is hard to imagine a story that is farther from the truth. At the most trivial level, Carlyle's target was not Malthus, but economists such as John Stuart Mill, who argued that it was institutions, not race, that explained why some nations were rich and others poor. Carlyle attacked Mill, not for supporting Malthus's predictions about the dire consequences of population growth, but for supporting the emancipation of slaves. It was this fact—that economics assumed that people were basically all the same, and thus all entitled to liberty—that led Carlyle to label economics "the dismal science." ‘

Given the status of Carlyle, I think no opportunity should be taken to refrain from repeating the canard of the ‘dismal science’ in relation to Malthus, or, if it cannot be resisted, then at least economists should mention from whom – and WHY - the label originated. Carlyle’s ‘dismal science’ article was called ‘The N-----‘ Question, in one edition and in others, the less offensive title of ‘The Negro Question’ (though the contents are equally offensive).

Milgate and Stimson make a clear presentation of the evolution of the population ideas of Malthus in the various editions, without getting bogged down in the intricacies of Malthus’s argument.

I noted one interesting gem among these pages, namely that Malthus in the Quarterly Review for 1824 ‘maintained, like Smith, that in the presence of positive profits, exchangeable value was no longer determined by the quantity of labour employed to obtain them’ (132). This is a view I have expressed for some years. Smith did not have a labour theory of value except in ‘rude’ society, before the emergence of property and capital – but I have been unable to convince many others, so far.

What I also found fascinating was the Milgate and Shannon’s discussion of Malthus on ‘unintended consequences’ (133-35) and the distinction between ‘unintended’ and ‘unforeseen’.

They write that people are not relieved “of moral authority for their actions for “ignorance and inattention” and add that “Smith has also placed accountability ‘to God and his fellow creatures’ at the centre of an individual’s character as a moral being’ (giving the reference as ‘(1976 -85, 6:52) (134), which I could not find. However, I am familiar with an alternative reference, from which paragraphs were moved and some dropped for the 6th edition (1790), including the following:

“[3] A moral being in an accountable being but an accountable being, as the word expressed, is a being who must give an account of his actions to some other, and that consequently must regulate them according to the good liking of this other. Man is accountable to God and his fellow creatures. But tho’ he is, no doubt, principally accountable to God, in the order of time, he must necessarily conceive of himself as accountable to his fellow creatures before he can form any idea pf the Deity, or of the rules by which the Divine Being will judge of his conduct.”) (TMS III.3: page 135, footnote 1).

This was withdrawn for the 6th edition, as part of extensive revisions Smith undertook to Moral Sentiments that had the effect of diluting many of the religious passages to make TMS more secular and less religious. Malthus was quoting from earlier editions of TMS [See my “The Hidden Adam Smith in his Alleged Theology”, January 2010). HERE:

Milgate and Shannon fail to discuss, what ought to be perhaps, a mystery of the absence in Malthus of mentions of Adam Smith’s use of the “invisible hand”, if modern economists are correct in their assertion that this was Smith’s great idea, concept, or paradigm. The absence of discussion of the metaphor in Malthus, who had read Wealth of Nations closely, is worthy of discussion. They refer instead to references to the metaphor appearing in the works of evangelical Christian economists, such as Thomas Chalmers (136).

To date, I have not looked closely at these references (they cite Chalmers, 1832, On Political Economy, in connexion with the moral state and moral prospects of Society, Glasgow: Collins). In this context, Milgate and Stimson introduced me A. M. C. Waterman (1991) Revolution, Economics, and Religion, Christian political economy, Cambridge University Press). A sign of a great book is when it prompts readers follow lines of enquiry on issues of interest; I am sure that historians of economic thought will also find many prompts in this book of a similar kind.

They give some explanation for Malthus not mentioning the invisible hand: ‘Malthus could not longer make use of the invisible hand (nor indeed any other classical economist) as Smith had done – a felicitous metaphor for informing ordinary people’s perceptions of market society’ (137). They suggest it was because Malthus, ‘writing nearly a quarter of a century after Smith, and from within a more fractious political and economic context, Malthus could not make use of the invisible hand’ (137). Extraordinary is one word for the validity of this proposition. Waterman is quoted as saying that “Malthus “formulated an ‘invisible hand theorem’ in regard of ‘moral restraint’ as a form of an ‘unintended consequence’. Highly imaginative springs to mind! And nothing to do with Adam Smith’s use of the metaphor in my considered view.

I liked the reference to Malthus (1803) wishing to amend Smith’s syllabi for the parish schools to include ‘the simplest principles of political economy’ to ‘reading, writing and account’ (138).

In summary, Milgate and Stimson will enlighten readers who are currently confined to the mechanics of the population problem and, perhaps, will draw them into wider reading – it has me!

If I may recommend to those interested in the deeper significance of the population debate, I would suggest reading Greg Clarke’s, A Farewell to Alms: A Brief Economic History of the World (Princeton Economic History of the Western World) (Princeton University Press, 2007).

[I shall next report on Chapter 8 Utility, Property, and Political Participation next.]

Adam Smith is Innocent

Michael Tilley writes (14 February) for The City Wire HERE

"Anger management"

“The last gasps of the near-dead out-of-touch traditional media want us to believe greedy corporate bastards are the root cause for whatever ails us, but down deep we all rightly suspect that too many bureaucrats have perverted the movements of Adam Smith’s unseen hand.”

Comment
Michael Tilley writes fluently about the anger of people caught the financial crisis and uses his large stick to implicate Adam Smith and his ‘hidden hand’, which, presumably, he believes exists and operates as modern economists told us since the 1950s (precious few had heard of it before then, though Smith mentioned it once in Wealth Of Nations in 1776).

Tilley’s story line is that ‘too many bureaucrats have perverted’ Smith’s hidden hand, presumably by acting as if it didn’t exist or somehow preventing it working.

Well, story time over folks.

The people who first ‘perverted’ (a bit strong, but I’m quoting Tilley’s angry expression) ‘Adam Smith’s unseen hand’ were the very same modern economists who gave it to us 60 years ago, including our Nobel prize winners, though one, Joe Stiglitz recanted last December.

You see, Michael, Adam Smith never made the claims for ‘his’ hidden hand that were attributed to him 174 years later. He used a well known literary metaphor from the 17th-18th century to illustrate “in a more striking manner” what he had just described about the consequences of risk-aversion in some, but not all, merchants choosing between investing their capital in trading ventures abroad to Europe or the British colonies in the America’s and investing at home.

The more merchants who chose not to take the extra-risks of foreign trade and invested at home instead, the greater would be domestic capital investment and, in consequence, the larger would be domestic output on the well-known arithmetic rule that the whole is the sum of its parts.

Saying they were led by ‘an invisible hand’ to set off these consequences is far more ‘striking’ than explaining it accurately as he did before he used the metaphor. And that, Michael Tilley, is what a metaphor does (though I am sure you know that already being such a clear writer).

In short, Adam Smith is innocent; the financial traders and bureaucrats who caused the crisis did it all by their lonesome selves.

A Good Idea for a Celebration, But...

College of Charleston holds an annual ‘Adam Smith Week’ (8 March), which, normally, I would welcome handsomely for its educational mission (details HERE) .

John Stossel , the talented free markets’ advocate, is to speak during it, so it will do some good.

But, wait, what’s this?

“Adam Smith is one of the most recognizable figures in economics, and his contributions to the fields of philosophy and economics are still relevant today,” says Pete Calcagno, associate professor of economics and Director of the IPCM. “His concept of the invisible hand is considered the classic statement on laissez faire capitalism.”

Comment
Oh dear! Pete Calcango manages to perpetuate two myths which are slurs on Adam Smith’s life work, simultaneously in a single sentence.

By whom is the “concept” (sic) of an “invisible hand” considered ‘the classic statement on laissez-faire capitalism”?

Not by Adam Smith, whose works show the metaphor (not a concept) to refer to feudal (not capitalist) landlords feeding the “thousands whom they employ” (they had no real choice but to do so); see Moral Sentiments (1759) TMS IV.ii.10: 184; and to some, but not all merchants who were risk-averse and concerned for the security of their capital and in consequence preferred to invest locally rather than abroad, which, on the arithmetic rule that the whole is the sum of its parts, added to national output; see Wealth Of Nations (1776) WN IV.ii.9: 456.

Lost Legacy urges students (and, clearly, staff tutors too!) to look up the only two references to “an invisible hand” that Smith makes in his two main books.

They do not amount to a “concept” and had nothing to do with “laissez-faire” (words that Smith never used), nor to “capitalism” ( a word invented in English in 1854 by Thackeray; Smith died in 1790).

Absolute Nonsense About Adam Smith and the Invisible Hand

The Zippy Cart team write in their Blog the following nonsense HERE:

“The InvisibleHand name comes from economist Adam Smith’s theory, that suggests people will make rational economic decisions when they have perfect information available to review. This is true today,”

Comment
Speechless!

Where do they get such nonsensical inventions from? Certainly not in anything Adam Smith wrote.

Modern Inventions About an Invisible Hand Have Nothing to do with Adam Smith

Robert Dysell writes (7 March) in the Planner Fed Blog (HERE)

”Generation 1: the fallacy of individuality”

“Even hard nosed economists have woken up to the fact that the overly simplistic Adam Smith’ principals of the ‘invisible hand’ in business have led to a collective failure of financial systems commonly known now as the ‘the recession’.”


Comment
The so-called “the overly simplistic Adam Smith’ principals [sic] of the ‘invisible hand’ in business” do not appear in anything written by Adam Smith.

The elevation of the metaphor of ‘an invisible hand’ to that of a ‘principle’ is a wholly invented notion, which became popular – even ubiquitous – among modern economists from the 1950s in the USA and is now pandemic across economic departments around the world.

Ironically, since the recession, the whole notion of an invisible hand guiding markets has been challenged as if it had anything to do with Adam Smith.

Smith’s two mentions of an invisible hand in Moral Sentiments (1759) and in Wealth Of Nations (1776) had nothing to do with markets at all – that it was his part of the myth.

In Moral Sentiments, Smith referred to feudal landlords’ absolute necessity of feeding their servants, retainers, and peasants (they wouldn’t last the winter without food), which had nothing to do with (non-existent) markets.

In Wealth Of Nations, Smith referred to some, but not all, merchant traders preferring to invest locally where they felt more secure rather than invest abroad where they did not know the people they dealt with as well, and nor were they as familiar with the probity and impartiality of the legal system in foreign countries (apart from the risks of sea travel and the reliability of shipping). Risk-avoidance drove most of them to invest locally. Again, this had nothing to do with how markets work.

Modern economists made the metaphor of an invisible hand into its own object, whereas metaphors refer not to themselves but to their object. Yet, in both cases in Smith’s usage, described above, the metaphor was about necessity and the avoidance of risk.

With the apparent failures of economists in the current recession, Adam Smith is blamed for the misuses of a metaphor, not be him, but by leading modern economists.

How to Learn Without Arrogance

Last evening in Melbourne I was invited to give a talk on Adam Smith, part biography part his ideas to a weekly discussion group fascilitated by an extraordinary and genuinely self-confident, but in no way arrogant, man called Produs, who is passionate about learning from engaging with people who have something positive to contribute to the understanding of 'members' of the audience (and speakers). The ethos of the discussion in firmly fixed on the celebration of capitalist values in the context of freedom and liberty.

How refreshing from the usual moaning pressure-minded scholars, who are expert at denigrating each other's ideas and outlook, and aredoom-laden with moans about everything they talk about, and who usually talk in place of learning.

The discussion that followed, under guidance from Produs, involved the audience, including some new attendees and 'old hands', was direct, and fairly robust. My answers were gently chided when not to the point of the questions! I can think of many academic seminars where such interventions would have been appropriate from the chair, and productive ...

I introduced the myth of the invisible hand - which was closely qestioned from several listeners - and was (correctly) objected to by a participant when I appeared to leave out Smith's assertion that self-interest drove behaviour and this had beneficial outcomes in the main and was not negative. In making one point that merchants and manufacturers often acted in a protectionist manner - narrow the competition to broaden the market for themselves - but without the beneficial aspects of self-interested motivations, I was open to justified criticism. So, speakers learn how to present their views in the round too!

If I lived in Melbourne, I would join this group to keep my feet on the ground. The meeting finished at 9.30 on the dot (what admirable discipline from the chair) and the participants dispersed happy that they had not wasted their evening.

It's back to Sydney today.

Murray Milgate and Shannon Stimson, 2009. Review Commentary no 5

Murray Milgate and Shannon Stimson, 2009. After Adam Smith: a century of transformation and political economy, Princeton: Princeton University Press

No 5: ‘The Economic Machine and the Invisible Hand’

[Apologies: my review commentary has been interrupted due to the domestic complications of a triple move of house in Edinburgh.]

Milgate and Stimson review in a masterly fashion, the concept on an economy as a ‘machine’ (an ordered social system ‘resembling a machine’), which had some support by analogy with Newtonian mechanics among the participants in the Enlightenment. Language like the ‘market mechanism’ fitted neatly into this vision, and Adam Smith gave attention to such analogies in his essay on Astronomy (1744-).

Indeed, Smith’s central role for his ‘propensity to truck, barter, and exchange’ since deep into pre-history, as a ‘necessary consequence of the faculties of reason and speech’, made it the driving force for the sustained operation of social exchange among humans, leading eventually, through ‘very slow and gradual consequences,’ to markets, money and prices in ‘improved societies’.

Milgate and Stimson locate the driving force of the economic machine in competition (Smith) and these thoughts attract the attention of modern economists in the gravitation of market prices towards natural prices, a distinction that appeals to a sense of order, and a basis for a seemingly ‘scientific’ analysis (Books I and II of Wealth Of Nations), but which did not survive to the end of the 19th century.

This wasn’t quite ‘perfect competition’ – more like an ideal than a reality – and nor was it a reality in 18th-century Britain, with its economy littered with monopolies, statutory regulations, and (purchasable) privileges. The analysis showed what could happen; the analyst’s understanding came from recognising what prevented it happening in its ideal form (Book IV, Wealth Of Nations).

Here, Milgate and Stimson link much of their analysis to the roots of ‘equilibrium’ in economics (J. S. Mill, explicitly) analysis, at once suitable for a mathematical treatment using calculus, as the exponents of this innovation in the later 19th century were to nudge towards.

The authors round off this chapter with a discussion-survey of the invisible hand in economics, much of which is familiar territory for regular readers of Lost Legacy. I blew hot and colder reading this section, ‘hot’ when they leaned towards the ‘hand’ being a metaphor; ‘colder’ when they tended to philosophise, though thankfully they seemed not to buy into those who see in the invisible hand something divine at work.

Partly, I detected a misreading of the invisible hand of Jupiter in Smith’s essay on Astronomy, a failing, in my view, of such authors as Macfee, one of the first to notice this early use of the metaphor by Smith (though not cited in the bibliography). Smith discussed the role of superstition among savage societies and lists how the irregular events of nature (eclipses, lightning, earthquakes, and other frightening events) lead to invoking the anger of invisible gods as weird explanations for them. The ‘invisible hand of Jupiter’ (the Roman god, replicated in statuettes and on some coins) was believed to fire thunderbolts at enemies of Rome.

Milgate and Stimson ascribe to Smith that Jupiter’s invisible hand (remember, he too was invisible) the same status as the ‘invisible’ ‘gods, daemons, witches, genii, fairies’ thought to be the cause of the irregular events. Now Smith knew his classical mythologies and the differences between the superstitions about the ‘gods, daemons, witches, genii, fairies’ and the religious beliefs about Jupiter (his large statue stood on the Palatine hill overlooking Rome) in which he was not a myth to believers; he was all too real to those who sacrificed and prayed to him in fear.

I agree with our authors that the metaphor of ‘an invisible hand’ was used as a metaphor to help explain something readers may not understand when they read his explanation (which he gives on both occasions before he uses it in Moral Sentiments and Wealth Of Nations). A metaphor in Smith’s considered view, as expressed in his Lectures in Rhetoric and Belles Lettres (1763), is used to offer ‘in a more striking manner’ a link between the metaphor and its object.

In the first case (Moral Sentiments, 1759) the metaphor ‘explains’ what drives ‘the rich and unfeeling landlord’ to feed the thousands whom he employs – if he didn’t feed them from the harvests they produce, they would starve and the means by which the landlord was rich would perish too. The ‘invisible hand’ captures this absolute necessity to feed his people, though Smith has already explained what happens beforehand.

[Note that Smith uses the words ‘necessary’, ‘necessarily’, ‘naturally’, and ‘natural’, 16 times, spread in eight paragraphs either side of the metaphor. How many times makes a hint?]

In the second case (Wealth Of Nations, 1776) the metaphor explains what drives some, but not all, merchants to prefer to invest locally rather than invest abroad. He also explains very clearly before he deploys the metaphor why these merchants chose to do so – it is the concern for their own security, a not inconsiderable concern when the risks of foreign trade are greater than trading locally. Smith specifies the nature of those risks – foreign countries have less well-known legal systems, the people you deal with at a great distance are less well known to you, their probity is less certain, and you may not see your investment again, apart from the dangers of loss from the sinking of ships across the Atlantic.

However, those that invest locally experience lower risks, and, unbeknown to them, their local investments add to the total investment locally and provide employment, all of which adds to what we would call GDP. This outcome is unintended – the individual is concerned with his own profit not the benefit to society, and doesn’t need to be concerned. If the analysis is too difficult to follow, the metaphor of being ‘led by an invisible hand’ expressed the analysis in a more ‘striking manner’, which I what Smith taught his students was the metaphor’s purpose.

Moreover, the consequence of increasing local investment – the arithmetic rule that the whole is the sum of its parts – is to increase the local availability of the annual output of the ‘necessaries, conveniences, and amusements of life’. Interestingly, and as with the associated words either side of the ‘invisible hand’ reference in Moral Sentiments, Smith deploys the word ‘conveniences’ many times around the same metaphor in Wealth Of Nations.

Is Smith’s arrangement in this manner accidental or intentional? Milgate and Stimson arrive at a similar conclusion to mine above but by a different route. The invisible hand metaphor:

‘provides a comprehensive, coherent and attractive image’ … ‘that will be familiar and comfortable to its intended audience, and framed in terms compatible with communally accepted standards of propriety” (p94).

I agree with their conclusion and commend it to readers.

Milgate and Stimson conclude with some interesting observations, again close to the treatment I have been offering on the metaphor of an invisible hand among modern economists such as: the apparent absence of comment by economists on Smith’s sparing use of the metaphor in his lifetime contrasted by the almost ubiquitous use of it ascribed to Smith by modern economists since the middle of the 20th century, a view challenged by Daniel Kline in debate with me (Econ Journal Watch, May and September, 2009).

They also quote from Samuelson’s 1948 first edition of his famous textbook (p 36) (quoted on Lost Legacy earlier in 2009), in which he noted that faculty at Chicago in the 1930s referred orally to Smith’s invisible hand metaphor and in which he also cautioned readers in too general a reliance on it. In subsequent editions, Samuelson continued to refer to the invisible hand, linking it to perfect competition, while continuing his cautions, and deprecating the idea (now widespread) that modern markets are close to the perfectly competitive, Pareto optimal, constructs also taught in undergraduate courses.

From no mentions as far as I can ascertain in the 18th century while Smith was alive and from 1790 after he died, there is a long gap until the late-19th century before the metaphor is mentioned as linked to Smith. There is an extended footnote extract, without comment on the metaphor from Wealth Of Nations in Dugald Stewart’s Lectures in Political Economy [1809] 1856.

There are score of examples of the use of the metaphor throughout the 17-18th centuries (and earlier into classical times) by numerous authors, but not in reference to economics; so many, in fact, that the invisible hand metaphor was well-known and popular in Smith’s time, particularly with theologians and in Sunday sermons (hence some today, but not me, see Smith’s use of it as having theological significance; see my “The Hidden Adam Smith in his Theology”, 2009).

Milgate and Stimson’s comments on Smith’s use of the invisible hand metaphor, move the debate some ways towards what I have been arguing since 2005 when I began blogging on Lost Legacy. I am much encouraged by that and by the prospect that they will influence their readers of their excellent book in such a direction.

A Wee Thought While For My Journey to Oz

It occurs to me in my new paper on the invisible hand, as it became in mid-20th century economics, that it is worth considering what happens after those merchants who are risk-averse to foreign trade and, in consequence, invest locally rather than take the greater risks (as perceived by them, but not all merchants - many do invest abroad, of course), which Adam Smith observed, benefitted the national economy (the whole is the sum of its parts), that the tale ought not to end there.

Modern economists generalise from the narrow case which Smith discusses in Wealth Of Nations (WN IV.ii.1-9) to make the bold - near heroic! - assertion that self-interested people end-up benefitting the public by acting on their self-interest. Milton Friedman (among many others) celebrated this assertion, supposedly attributed to Adam Smith.

However, consider the real consequences of a national policy of investing as much as possible domestically. True (absolutely true), the more merchants who invested in profitable projects domestically, the larger would be national output (and employment) on grounds of the 'whole is the sum of its parts'.

'Tis but a short step from such a conclusions for the same domestic merchants delivering their outputs locally for some of them (it only takes a few, even one) to realise that they can raise their profits yet more by curbing rival suppliers from competing in the same domestic markets.

One obvious target is foreign traders sending foreign outputs to doemstic markets - including those domstic marchants who exported abroad and returned with foreign goods to sell domesticlaly. Of domestic merchants, confined to the domestic market, having been 'led by an invisible hand', the temptation to go for retrictive tariffs and outright protection by prohibition must become real.

So, being led by an invisible hand to forego profitable trade with foreigners (Smith's narrow example), they are likely to promote protectionism, to narrow the competition for local consumers by widening the market for domestic merchants.

The question occurs to me: are they led by an invisible hand to take this step?

We can ask ourselves: which group of merchants usually prefer tariffs and prohibitions against foreign traders? Which lobbies their legislators and those who influence them to this end? Is it the domestic merchants primarily, or is it those merchants who invest in foreign trade?

I conclude (for short), that the merchants engaged in domestic trade only (driven by their risk aversion from foreign trade) are the most likely proponents of tariffs and prohibitions on imports, and not the less risk averse domestic merchants who do engage in foreign trade.

As there is unlikely to be an invisible hand at work leading domestic merchants to prefer tariffs and prohibitions (the latter also brought about by narrow national interests - 'jealousy of trade'), which must make the general interpretation of the doctrine of invisible hands, as a special, limited, and partial phenomena. Smith, of course, knew this, and he also knew he was not making a general recommendation against foreign trade. Modern economists, 200 years on, ought to know this too.

What went wrong?

Adam Smith's Close Colleague Did Not Mention the Invisible Hand

I had an opportunity today to spend it in University of Edinburgh library and among the items I selected from the shelves was volume IX of Dugald Stewart’s Collected Works, edited by Sir William Hamilton, Bart, and published in Edinburgh by Thomas Constable and Co., (and Little Brown, and Co. Boston). This volume contains, Dugald Stewart’s, Lectures on Political Economy, volume II, delivered in 1801.

In Chapter III, ‘Of Trade’, Stewart discusses, not uncritically, Smith’s Wealth Of Nations and quotes as an extended footnote, containing an abstract of the first 8 chapters of Book IV. This includes in ‘the following satisfactory and conclusive manner’, a direct quotation of the paragraphs from Chapter 2, including the famous paragraph 9 containing his reference to ‘an invisible hand’.

Dugald makes no comment on Smith’s use of the metaphor of ‘an invisible hand’. Now Dugald Stewart was a close, intimate friend on Smith’s (his father, Michael Stewart, had been a fellow student of Smith’s at Glasgow and they remained friends while Michael was the professor of mathematics at Edinburgh (a chair that Dugald 'inherited. before switching to the professor of moral philosophy). Indeed, Dugald gave the Eulogy on Smith at a meeting of the Royal Society of Edinburgh in 1793.

That Dugald did not mention the alleged significance of the invisible hand, which some modern economists insist was Adam Smith’s ‘greatest idea’, neither in his 1793 eulogy, nor in his 1801 lectures, is in itself highly significant. If anybody would have known of Smith’s alleged attachment to his so-called ‘greatest idea’, his ‘concept’, ‘theory’, or ‘doctrine’, and its significance, or otherwise, it would have been Dugald Stewart, but he never mentioned anything about it, even in his lectures on political economy.

This suggests that the modern certainties of the significance to Adam Smith of the metaphor of ‘an invisible hand’, are highly exaggerated at the very least, and, in my view, wholly invented. The metaphor does not appear to have meant anything to Dugald Stewart.

Invisible Hand as a Metaphor

“James” writes in “Bubble Meter” HERE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here it is:

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

Update 2:

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

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

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

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

Gavin

A New Slant on the Invisible Hand

Susan McWilliams writes a review of "Methland: the death and life of an American smalltown" by Nick Reding in Front Porch Republic HERE http://www.frontporchrepublic.com/?p=7899
as:

"The Book You Should Read This Year"

“In this book we see corporations work with governments, again and again, to prevent legislation that would stem the flow of methamphetamine across national borders. So the national interest in, say, regulating the importation of pseudoephedrine, a key ingredient in meth production, is deemed not as important as the pharmeceutical industry’s desire to avoid regulations at all costs. (Reading all this, it is worth remembering Adam Smith’s own explanation of the “invisible hand” mechanism begins with the assumption that actors are all “preferring the support of domestic to that of foreign industry” – an assumption that is questionable at best in the era of the global corporation."

Comment
Extraordinary that we should read in a book review something I have never (yet) read in a serious article on economics about the context in Wealth Of Nations where Adam Smith uses for the once and only time the metaphor of ‘an invisible hand’.

This speaks volumes of the quality of the economics profession on what is surely now the main, if not the only, idea that readers worldwide – and well beyond the discipline of economics – know about Adam Smith.

Smith’s example is in paragraph 9 of chapter 2, Book IV of Wealth Of Nations, page 456, and discusses a consequence of some, but by no means all, British merchants prefering to trade locally rather than take the higher risks of trading abroad with Europe or the British colonies in North America, the Caribbean, Africa and India.

These overseas trading partners were risk-tolerant and represented a significant share of annual trade and, in Smith’s view diverted significant amounts of capital abroad, while these merchants who traded locally were risk-averse.

Smith concluded his analysis with his reference to ‘an invisible hand’ leading the local merchants to invest locally and thus contribute to domestic output and employment (the whole is the sum of its parts). Clearly, the other merchants trading abroad did not contribute to domestic output and employment to the extent to which they would have if they were as risk-averse as those following the ‘invisible hand’.

Viewed as Smith actually wrote about the invisible hand, it hardly qualifies as his most notable idea or as a general ‘proof’ that people following their self-interest unintentionally benefit the economy (in some versions today it is claimed that they perform a public service no matter what their motives).

Susan McWilliams does a great service to her readers, I hope some of them notice her reference to the invisible hand in, or at least close to, its proper context.

Almost Right, But No Cigar

Carlos Navaro, Online Journal, writes (5 January) HERE:

“Meet the real Adam Smith”

“Time to debunk the propaganda and myths: Modern-day American capitalism is not totally synonymous with free enterprise; making money is not necessarily the same thing as creating wealth; Wall Street and big government are but flip sides of the same power structure; the big-time money makers behind the scenes who finance the careers of political leaders and, in fact, write for them the laws that make their dealings legal are not entrepreneurs in the true sense of the word.

In his iconic The Wealth of Nations (1776), Adam Smith exposed and warned against the kind of corrupt laws and customs that in his day stifled free markets.

Unfortunately, few mass media pundits nowadays have read the book or, if they have, they deliberately ignore its message, latching instead on the author’s “invisible hand” simile, quite out of context, to justify the unbridled greed of making money for its own sake. They conveniently fail to mention that Adam Smith was first and foremost a moral philosopher, not the amoral, dog-eat-dog economist that he has been portrayed to be, as is evident in his other classic, The Theory of Moral Sentiments (1759).

Adam Smith’s moral philosophy was simple enough. … the only way to assure social stability was by allowing [people] to freely exchange labor, goods, and services for profit. If you have something that I want and I have something that you want, and if no king or deity prohibits us from trading what we want from each other, and if whatever those wants are, are not harmful to society, then despite our religious and political differences, whether we like each other or not, we can live in harmony. … Taken at a mega level, it was clear to Smith that the whole of society, as if guided by an “invisible hand,” would benefit from this competition.

Therefore, the main, if not the sole, role of government, according to Smith, was to assure that the competition was free and fair, and, moreover, that the competitors were imbued with a moral conscience, for otherwise the completion would degenerate into the law of the jungle. In his calm, philosophical voice, Smith noted how in his day the overlong terms of apprenticeship (a form of slave labor), the local restrictions against laborers from outside communities, the collusion among wealthy owners of land and capital to set prices, the stashing of bank gold deposits in private coffers and covering withdrawals with unsecured paper notes -- stealing the gold, in effect -- were, among other ruses, preventing the “invisible hand” from working its magic.

Adam Smith, for the record, was a man of modest tastes and means. The fabled guru of capitalism was no capitalist. He never owned a business or held a private sector job. His most remunerative employment was in the public sector as commissioner of Customs in Edinburgh.”

Comment
Carlos Navaro is right about the comparative power structures of 18th-century Britain and modern-day societies like the USA and those found in Europe, including 20th-century Britain. The parallels are striking. Did they ever change?

The power-elite, thanks to the press, the 24-hours news cycle, and the Blogosphere, particularly the less-constrained latter medium, is under constant view and exposure.

Smith’s Wealth Of Nations exposes the close alliance among the sovereign, his legislators and those who influenced them, the large landed-estates and the burgeoning merchants and manufacturers, en route to becoming the most powerful force in the land from a few decades later.

Smith’s main target was mercantile political economy – the fallacy that a country grew rich (and, therefore, could afford large armies to fight in Europe’s dynastic wars) by exporting more than it imported (the countries it traded with were often seen as the enemy, not as partners in joint prosperity) and, crucially, a country’s merchants and manufacturers prospered if they were state regulated by the King awarding to selected favourites a chartered monopoly status.

Smith’s stance of opposition in Book IV to mercantile political economy has often been misunderstood; he didn’t oppose all government action and intervention, he opposed the then current government’s actions and interventions where they curbed natural liberty and held back progress to “opulence” and diverted activity into prodigality. This also included the great diversion of scarce capital and labour into colonial monopolies, and their defence in particular.

Carlos Navaro gets most of this right. He begins well in identifying that they misread and thereby misuse the “author’s invisible hand simile, quite out of context, to justify the unbridled greed of making money for its own sake.”

I excuse Carlos Navaro’s misnaming Smith’s use the metaphor (not a “simile”!) of “an invisible hand”, but was relieved to see he condemned the modern version that uses it to “justify the unbridled greed of making money for its own sake”. Well done, I thought.

But reading on, I was disappointed – hence, no cigar – when he wrote about that competition would benefit society when allowed to operate “as if guided by an “invisible hand”.

If Smith had formulated his use of the invisible hand in such a manner that it operated “as if”, then it would be a simile, but he didn’t, nowhere, ever, use “as if” in association with “an invisible hand”.

The simile we can live with – it clearly implies that there isn’t an invisible hand –but the metaphor has become a belief that the invisible hand actually exists, which is nonsense when you think about it, unless you believe in the divine guidance of all the details of human society.

My concerns were compounded when I read that Smith’s critique of mercantile political economy, practised through legislation, prejudice and warfare, let alone the domestic policies of the Apprentices Statutes, the Settlement Acts, the Incorporated Town Guilds, and Cromwell’s Acts of Navigation, prevented “the invisible hand from working its magic”.

That may well be Calvos Navaro’s belief, but it was not Smith’s.

He never linked the invisible hand metaphor to markets on the single occasion that he used it in Wealth Of Nations (or in the other occasion in Moral Sentiments). If we are to “debunk propaganda myths” about US capitalism, we ought not to carry on with modern myths about Smith’s use of the invisible hand metaphor, a wholly contrived invention by modern economists since the 1950s.

Calvos Navaro’s takes a few steps in the right direction of understanding Adam Smith (hence, congratulations) but then falls back a step or two from buying another modern myth, hence no cigar, on this occasion.

Incidentally, Adam Smith, for the record, had one private enterprise job: he took the young Duke of Buccleaugh and his brother to France as their private tutor from 1764 to 1766, his only post outside the public and semi-public sector, for which he received a salary and a life pension from the Buccleaugh estate until 1790.

Hurray! Joe Stiglitz Stamps on the Invisible Hand

Joseph Stiglitz (an Economics Nobel laureate and university professor at Columbia University. Author of:”Globalization and Its Discontents” and “The Roaring Nineties. His latest book, Freefall, will be published in January ) writes (31 December) in China Daily
HERE: and HERE

“Harsh lessons we may need to learn again”

“The best that can be said for 2009 is that it could have been worse, that we pulled back from the precipice on which we seemed to be perched in late 2008, and that 2010 will almost surely be better for most countries around the world. The world has also learned some valuable lessons, though at great cost both to current and future prosperity - costs that were unnecessarily high given that we should already have learned them.

The first lesson is that markets are not self-correcting. Indeed, without adequate regulation, they are prone to excess. In 2009, we again saw why Adam Smith's invisible hand often appeared invisible: it is not there. The bankers' pursuit of self-interest (greed) did not lead to the well-being of society; it did not even serve their shareholders and bondholders well. It certainly did not serve homeowners who are losing their homes, workers who have lost their jobs, retirees who have seen their retirement funds vanish, or taxpayers who paid hundreds of billions of dollars to bail out the banks”.

Comment
At last! A major modern economist sees the light about the fiction of the “invisible hand”, usually, with knee jerk regularity, attributed to Adam Smith, as if he made the metaphor mean what most modern economists insist it to mean: the invisible guiding influence in the commercial/capitalist economy that creates that wonderful ‘miracle’ that no matter what your motivation it ensures that it benefits ‘society’.


The sheer implausibility of this modern assertion (invented in Chicago in the 1930s, and then carried forth across US campuses everywhere – in Britain there was a slower uptake) from the 1950s to today.

That Joe Stiglitz has stepped out of line, no doubt to be rubbished by many colleagues (‘how dare you say there is no Santa Claus – take that you spoiler of children’s happy illusions … [biff, bang and butt]. Of course there is an invisible hand (and an invisible foot too) and everybody who knows anything about Adam Smith and markets – except for some cranks - says there is’.

It’s about the current crisis and the moral dimension of who gained most, as if nothing has happened or changed, and who lost out.

UPDATE: The 2009 Prize for the best contribution to restoring Adam Smith's Lost Legacy is awarded to Professor Joseph Stiglitz.

UPDATE 2: The Stiglitz annnouncment that the invisible hand does not exist is reproduced at Business Insider (Silicon Valley) HERE

UPDATE 3: It's at The Huffington Post too HERE:

A New Myth for the Myth of An Invisible Hand

“Steve” posts (27 December) at Radimisto HERE:

‘THE "INVISIBLE HAND" MYTHOLOGY’

"In his biography of Adam Smith, Ian Simpson Ross attributes Smith's belief in an invisible hand that makes free markets work as if there were a Free Market Fairy derives from his readings in Stoic philosophy. I didn't realize the Stoics had anything that could justify this, so I went to the online Stanford Enccyclopedia of Philosophy and read the entry on Epictetus and found this:
Equally important for him is that human rationality has as its setting a maximally rational universe. His confidence in the fundamental orderliness of all things is expressed in frequent references to Zeus or “the god” as the designer and administrator of the universe.

This also explains why Smith also used the "invisible hand" argument decades before he wrote the Wealth of Nations.

1The life of Adam Smith / Ian Simpson Ross.
Oxford : Clarendon Press ; New York : Oxford University Press, 1995.”

Comment
This looked promising, at least in the title.

Ian Ross’s biography of Adam Smith is about as definitive as can be got. In fact, a second edition is in press at the moment and should be published in 2010.

However, a lot of water has gone under the bridge since its first edition in 1995 and I look forward to reading his treatment of aspects of Smith’s writings, including his current views on the significance for Smith of his use of the invisible-hand metaphor.

I had several discussions with Ian Ross at academic conferences at Balliol College, Oxford and in Edinburgh (the latter including a memorable visit together to Panmure House, Edinburgh, Smith’s last residence from 1778-90; now owned by Edinburgh Business School, Heriot-Watt University).

Ian has also read my paper, “Adam Smith and the Invisible Hand Myth”, in the May 2009 edition of Economic Journal Watch (ejw_wat_may09_kennedy.pdf) and while keeping his proper, because neutral, distance as Smith’s biographer, he made some useful comments in subsequent correspondence. I do not think you can with justics accuse Ian Ross (or indeed Adam Smith) of believing in a “Free Market Fairy”.

Smith as a classical scholar, in both Moral Sentiments and Wealth Of Nations, was more than familiar with stoic philosophy – he taught philosophy after all – but I find no connection between stoic philosophy and his two uses of the invisible-hand metaphor, once only in each of his two books (and once only in an early juvenile essay on The History of Astronomy, began in 1744, which had nothing to do with economics, or stoic philosophy).

Indeed, I would go so far as to say that the proponents of the invisible-hand metaphor, who give it great significance (especially since the 1940s, but rarely before then, right back to the 18th century) always, almost without exception – I may have missed one or two – never discuss in any detail the exact contexts in which Smith used the metaphor. The attribute the metaphor to Smith's theory of prices, of markets, of supply and demand, and growth, all anlaysed in detial in Books I and II of Wealth Of Nations without mentioning the metaphor; yet his only use of it is once in Book IV.

They de-contextualise and introduce separate philosophical references, and quote what others – never Smith – said about loosely related issues, as if the views of others are important for deciding on issues of the significance of his rhetoric for Smith.

For instance, I have not yet seen any discussion by believers in the mythology of the invisible-hand which analyses the paragraphs preceding the use of the metaphor, or the exact contexts (quite often they get the meaning of the ‘invisible hand of Jupiter’, the Roman god in his Astronomy essay, quite wrong), which I find significant. If you do not discuss – virtually hide- the context, you mislead yourself and your readers.

As for Smith on religion, see my 2009 paper, ‘The Hidden Adam Smith in his Alleged Theology’ (available on request from: gavin AT negweb dOt com).

Steve’s theory, sadly, like his title, is empty of what it promised.

An Invisible Hand That Claps!

“Chris” writes in Mapwatt Blog HERE:

“Copenhagen was about a bunch of politicians getting together so it looked like they were doing something to slow Climate Change (to be fair, I’m sure most of them really wanted to work it out). But a better strategy for solving Climate Change is one that has been around since America declared its independence in 1776: The Invisible Hand. Adam Smith put forth in The Wealth of Nations that when we act in our own self-interest, society as a whole benefits.

“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 not 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.” [Wealth Of Nations, IV.ii.9: 456]

“So why don’t we start promoting a Clean Energy strategy not as the solution to Climate Change, but as a path to greater prosperity for America? And when America acts in its own self interest to get off fossil fuels, we will also be aiding the climate as a side effect.”

“….As we learned from Adam Smith, society benefits the most when each country acts in its own self-interest, which is what is always going to happen anyway because the International community doesn’t keep politicians in office (and if you don’t believe me, please get off your idealistic high-horse). Instead of trying to convince 190 countries – each with their own culture, industry, and goals – that they all need to agree on a solution (we can’t even get politicians in our OWN country to agree on what to do about Climate Change), let’s show each country that by adopting a Clean Energy strategy and getting off fossil-fuel that the country AND the climate will benefit.”

[And finally:]

“….Once everyone realizes how a Clean Energy (a.k.a. fossil-fuel reduction) strategy benefits their whole country ALONG WITH THE CLIMATE, the invisible hand will start clapping.”

Comment
I don’t with to be picky, but there are a number of holes in Chris’s argument, of which I am sure he realises. Let alone that political systems don’t quite work like that in welcoming an idea that assumes that it hasn’t been thought of many times before, and promises in its simplicity to over-ride the disparate self-interests present in societies, large, like the USA (and China, India, Brazil) and smaller, like the UK, France, Germany, and tiny like the Pacific islands.

The price for co-operation in Copenhagen-like jamborees – 15,000 delegates no less – is billions of dollars per year, probably trillions per decade, and still they can’t get agreement. A marketing man’s appeal to a PR campaign on behalf of self-interest, if it worked, would be a wonder to behold. Except that what appeals to the self-interest of Chris may not be in the self-interest, or even the attention span, of others. Even the idea of the self-interest of a country – however defined – may not be perceived as in the self-interest of other countries, making the idea of the self-interest of the whole world, somewhat vacuous.

Moreover, it would not take long for someone to note – a reader of Lost Legacy, perhaps (the author is too modest to say anything) – that Adam Smith did not quite say what Chris (and many others, top economists too) interprets him as saying.

He starts by quoting one of the paragraphs from Wealth Of Nations, disconnected from the previous 8 paragraphs, which directly connect to paragraph 9. Smith sums up an argument about the distorting affects of foreign trade, especially when part of a monopoly trading scheme as existed in the British colonies of North America, policed by the Royal Navy, which diverted scarce capital to Europe and the Americas, and thus reduced the employment generating and economic growth potential of domestic trade and investment in the Britain.

For a moment, let’s look at the merchants engaged in foreign trade, and not the ones, whose concerns for their security (mentioned above) leads them to invest locally, the metaphor for which action, is Smith’s use of the popular, 18th-century metaphor of “an invisible hand”.

Now both sets of merchants, whether engaged in foreign or in local trade, are guided by their self-interest, which happens to be, and is, different in both cases, but the same in one sense: - they both seek to make profit to enhance their capital “by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain”.

What is the greatest value for the foreign trader? Profit from exercising his foreign trade activities, despite the greater risks from doing so (shipping losses, piracy, foreign problems with local traders, fraud and criminality, and his misjudgements about his trading partners probity, honesty, and capabilities). He enhances the value of his capital by such foreign ventures, but it does not enhance his country’s. His capital could remain in the country he trades with and, in the case of the colonies, could be represented by plantations, mansion properties in town, other ships and stores.

The domestic merchant on the other hand, acting from similar self-interest, personal to him, invests locally and, seeking to enhance the value of his capital stock, he enhances the value of the capital stock of his country, which promotes the interests of his country.

The “invisible hand’s” role in all this is somewhat unexplained by Smith. Does it only work for the patriotic, risk-averse, local merchant? But what about the risk-tolerant foreign trader? It isn’t clear is it? And that’s the problem with using metaphors that are unsuitable beyond the exact situation where they are placed.

But, most readers of Wealth Of Nations since the 1950s (it was largely ignored before then) ignore the metaphor’s limited applicability, and generalise from the limited extract to make Adam Smith supposedly say that “an invisible hand” leads all individuals “to promote an end which was no part of his intention”. For here on (roughly beginning in the 1930s at Chicago University) and spreading right across US campuses, until from the 1970s onwards, the metaphor of an “invisible hand”, invariably attributed to Adam Smith, became ubiquitous among modern economists, a mythical status it maintains even today.

Yet all around, in Smith’s time and ours, conflicts of personal self-interest abound. I shall not generalise in detail, but I suggest that this is the flaw in Chris’s well-intentioned advocacy of his solution to what we call “climate change” in common discourse.

Getting from here to there is not going to be achieved by “an invisible hand” – even one that claps!

The Invisible Hand and Markets

Seth Sandronsky posts (26 December) in Alternet (HERE):

"Our 'Green Jobs' Dollars Help a Ritzy Car Company Open a Toxic Manufacturing Plant?”

“Here it may be useful to recall economist Adam Smith. In his 1776 work The Wealth of Nations, he wrote of an "Invisible Hand" that guides the marketplace when individuals pursue their self-interest to buy and sell. This individualism, in turn, improves the common good if government stays away. His theory of the invisible hand of the market (replacing the visible hand of the monarch) holds no small sway in many circles today, even with the Great Recession currently. Readers can judge how Smith’s view holds up in the case of Tesla.”

Comment
Sorry, Seth, but where in Wealth Of Nations did Adam Smith write “of an "Invisible Hand" that guides the marketplace when individuals pursue their self-interest to buy and sell”?

He did not write such a “theory”. It was a metaphor, not a prescription.

I suggest you look up Wealth Of Nations, turn to Book IV, chapter 2 and read paragraphs 1 thru 9. His single reference to the metaphor of an invisible hand is on page 456 (Oxford University Press edition).

The invisible hand was not about “individuals” “buying and selling. That is an modern invention, going back to the 1930s, not 1776.

It was about some, but clearly not all, British merchants preferring to trade locally and not to engage in foreign trade with Europe or the British colonies in North America, even though the latter activity was more profitable; it was also more risky. Some merchants were more risk-averse than others.

Smith’s alleged view in your case would not be relevant in terms of his use of the metaphor of an “invisible hand” because the Tesla investment is in Texas, or California, USA, (the condition of the loan). It is also a subject of government policy and is not a free choice of location.

The world and economics has moved on a great deal since Smith wrote Wealth Of Nations, but there were few free markets in his time and precious few today, including in the USA.

Also, In Smith's works there was never an “invisible hand” in Wealth Of Nations guiding buyers and sellers in markets either.

A Reader is Perplexed by Lost Legacy on the Invisible Hand

[A Reader, Ian B, comments on yesterday's post and his question deserves a fuller treatment than afforded by space on the comments page. It raises issues which may of wider interest. My reply follows.]

Thank you, Ian B, for asking your question and for the polite manner by which you express your perplexity and disagreement.

You will note that the blog is about Adam Smith’s Lost Legacy and has been published since February 2005, during which time I have addressed the “invisible hand” on many – probably on most – occasions.

Economics as a discipline has many problems when dealing with the history of its ideas. Among these we can list several ideas wrongly attributed to Adam Smith, the invisible hand being a prime example.

Few people who quote from Wealth Of Nations, 1776, or his earlier, Moral Sentiments, 1759, have read either of his works and many know very little about him. The minority who have read his works, often attribute to him ideas he never had nor expressed. They go with the flow, like a crowd of latter-day flatterers cheering the proverbial ‘naked emperor’.

The metaphor of the “invisible hand”, used only three times by Adam Smith, once only in each in his two books, and once in his ‘juvenile essay’ on Astronomy, commenced when he was a 21-years old student at Oxford. It was published posthumously in 1795.

The metaphor itself, however, was a popular literary metaphor in both classical times, before the fall of Rome, and from the 17th century through to the 21st century (it appears in one of the “Tarzan" novels). I know of over 40 independent instances of its use, many in books in Adam Smith’s library.

Hence, on the starting-line for a debate on the significance of the “invisible hand” for Adam Smith, we have a popular literary metaphor, his use not commented upon in his lifetime by his readers, and hardly commented upon until the late 19th century by anybody. From mid-20th century until today, floods of references to “Smith’s invisible hand” appear – nowadays daily - and so frequently, that the metaphor and Adam Smith are almost synonymous.

Most comments upon his isolated use of the metaphor impute various meanings to it, for which there is scant evidence that Smith regarded it as imputed(your example is fairly common; but there are many others that are complex, general, and even theological).

In brief then, what do we make of the metaphor of “an invisible hand”? You state that the metaphor is: “simply the (surely reasonable) observation that the economy is self ordering due to the selfish actions of its agents.”

With that view you jump two centuries from Adam Smith’s in Wealth Of Nations. My observation is that whatever the truth of your view, perfectly fine if it is your name only, but it was not Adam Smith’s, and the claim that it was is a “myth”.

You may protest that whatever Smith said or meant is less relevant than the “surely reasonable” observation of many economists that the economy is “self-ordering due to the selfish action of its agents”.

Well, of course, Adam Smith did not consider self-interest to be “selfish”; in fact he went some ways to reject selfishness as an operational motive in economic (and social) transactions. In his earlier work, Moral Sentiments, he explicitly rejected such ideas, as expressed by his earlier “licentious” contemporary, Bernard Mandeville in his “Fable of the Bees” (“Public vice, public virtues”), 1734. (There are several earlier posts on Lost Legacy discussing these particular points.)

I shall move on. You confirm that the metaphor of an “invisible hand”, as understood today, is derived from Adam Smith’s use of it in Wealth Of Nations and you assert that there is “plenty of evidence that confirms Smith's invisible hand - the less regulated the market, the more ordered it is”.

Two problems with your assertion: first Smith never said anything like this in Wealth Of Nations, and second, he found in the case of banking in mid-18th-century Scotland that the absence of certain necessary regulations caused turmoil in the banking sector and required the intervention of law, noting, en passant, that even though this was “a manifest violation of natural liberty” it was necessary because their actions otherwise “endanger[ed] the security of the whole society” (WN II.ii.94: 324).

Let us now look at Smith’s actual use of the “invisible hand” metaphor. First, he used the metaphor only once in Wealth Of Nations; second his use had nothing to do with markets, supply and demand, the absence of regulations, or prices. Those associations for it were invented in the second half of the 20th century by modern economists.

Smith discusses the distortion of the British economy by the diversion of merchants’ capital from the home trade to foreign trade in Europe and with the British colonies in North America. From the British monopoly of all trade with its colonies, and the monopoly influence of the Acts of Navigation (imposed since Cromwell’s time), merchants’ foreign trade could be highly profitable compared to local trade. Likewise, in respect of trade with Europe. However, there were higher risks in such profitable trade: shipping losses, poor investments, local fraud in foreign countries and the colonies, and long delays in turning-over capital for re-use.

Some merchants, but manifestly not all, preferred to invest locally in Britain because, though less profitable, it was more secure for them. It was these merchants that Smith focused on:

“…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” (WN IV.II.ii.9: 456).

All merchants are motivated to use their capital most profitably and the only difference between those merchants who engage in foreign trade and those who engage in domestic trade is that the latter do so because of their concerns for their “own security”. We now call this risk aversion. Smith explains that it is their insecurity that leads them to do what they do. In fact, no other explanation is given nor needed.

However, he goes on to point out that their actions have unintentional and unintended consequences, specifically that “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it”, and it this outcome (society is wealthier, measured by the “annual output of the necessaries, conveniences, and amusements of life”, or what we now call GNP) that people are “led by [NOT “as if by”] an invisible hand”.

But he has already identified the subject of the metaphor: their “own security”. And here we can agree: “no such hand actually exists”, but much of the profession, since the 1950s, has come to believe that there is “an invisible hand”, guiding the market, prices, supply and demand, general equilibrium, social harmony and so on, and on most campuses teach their students to believe that the metaphor is a real object, that it exists, when manifestly it doesn’t, at least to Adam Smith.

It is that “part of Smith's invisible hand [which] is mythical” in my view.

I hope I have elucidated the issues which you raise and reduced, if only a little, your “perplexity” upon reading Lost Legacy for the first time.

Myths and Reality

A Mr Jacob R. Freudenthal of New York writes to the Financial Times HERE

“The iron fist forcing though healthcare reform”

“I am not an economist, but I had always thought that capitalism was supposed to be based oncompetition and freedom of consumer choice. When a politically influential interest group is able to harness the power of the state in order to expand its stranglehold over an industry that is so essential to the health and wellbeing of the entire population, Adam Smith’s invisible hand looks more like an iron fist.”

Comment
A typical ‘popular’ take on the metaphor of the invisible hand used by Adam Smith and by scores of others from classical times, particularly in the 17th-18th centuries, but also right up to modern times (even in a “Tarzan” novel).

I have seen a variation of the “Iron Fist” version in the form of “a middle finger” (I understand this is an allusion to a vulgar “street” sign given out by some incompletely-educated people today).

In this case, it’s about a row over a Health bill going through the US Senate, of which I have no views (I only comment on political issues in the country where I vote – Scotland).

I can comment on the remark about “capitalism was supposed to be based on competition and freedom of consumer choice”. This is a remarkable statement from Mr Jacob R. Freudenthal. On one abstract level he is right, but not in the sense that this view corresponds to any (to my knowledge) modern state-capitalist societies in the 20th-21st centuries. It could even be argued that no such ‘capitalist’ society has ever existed.

Adam Smith wrote a devastating critique of mercantile political economy and it’s state-commercial integration almost from the 16th century onwards.

Think of 18th-century legislation to regulate society, making it less competitive in practice – Statute of Apprentices; Settlement Acts; Navigation Acts; Corporate and Guilds Acts; Protection and Prohibitions; Primogeniture and Entails laws; Chartered Monopolies and Tariff policies.

Smith’s critique was not against all state legislation or even in favour of minimal legislation (another myth dince the 19th century); it was against legislators and those who influenced them who passed laws that perverted the effects of competition.

The point is that much of what was eventually repealed was replaced by new forms of anti-competitive measures. The USA is hardly a bastion of free trade, as can be said of most others. The ultimate case is that of agriculture, a standing disgrace that rich countries discriminate against some poor countries potential exports.

In all of this, of course, the metaphor (and myth) of “an invisible hand” is a diversion. It has no relevance to the issue of health supply. That’s down to politics, finance, and the electoral system.

Origins of a Fable

Neil Buchanan writes in Dorf On Law Blog HERE

“Bastard Keynesianism Today”

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

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

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

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

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

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

A Twisted Tale of Falsehood About Adam Smith

Niall Ferguson, a distinguished historian, writes an interesting, if inaccurate and perplexing piece, “Dead Men Walking: why 2009’s truly top thinkers are yesterday’s news” in Foreign Policy (18 December) HERE.

Ferguson’s theme is somewhat predictable, given recent events in the global economy, and fairly consistent presentations of Adam Smith’s alleged writings since the 1950s.

Where before not hold – and certainly did not hold such attributions to anything like the degree to which modern economists credited to him – it is now fashionable to announce, if not recantations of their earlier errors, then certainly what amounts to mealy-mouthed confessions that their earlier attributions showed Smith to have been wrong, while failing to recognise, let alone admit, that it was their attributions that were false, not Smith's ideas!

I find it difficult to express my frustration at this approach, so carefully constructed by Niall Fergusson in “Dead Men Walking”, because it shows many modern economists have learned nothing from the impact of the events leading to a revision of their past views. Here is a sample of his approach:

“It has, for example, been a bad year for Adam Smith (1723-1790) and his "invisible hand," which was supposed to steer the global economy onward and upward to new heights of opulence through the action of individual choice in unfettered markets.”

Comment
Coming at the head of Ferguson’s “Dead Men Walking”, this unqualified nonsense sets one’s heart thumping.

Ferguson justifies the wrong, absolutely wrong, attributions of Smith’s lost legacy, instead of, perhaps, revisiting Wealth Of Nations to check the validity of his false attributions.

After all, Ferguson, a distinguished historian by any measure, should practise elementary scholarly caution by checking his references back to the original texts and compare them with their modern interpretations.

My own books, Adam Smith’s Lost Legacy (2005, Palgrave) and Adam Smith: a moral philosopher and his political economy (2008, Palgrave), with all their defects, can modestly claim to have identified where the modern misattributions are located.

How did Adam Smith’s modest use of a popular 16th-21st century metaphor once only in Wealth Of Nations (and once only in Moral Sentiments), in reference to the preferences in mid-18th-century of some, but not all, merchant traders to trade locally, rather than undertake the greater risks of foreign trade, manage leap across the years to the mid-1950s and onwards, and supposedly “steer the global economy onward and upward to new heights of opulence through the action of individual choice in unfettered markets”?

Moreover, given the counter-factual that the ‘global economy’, or main parts thereof, never come to be characterised by “individual choice in unfettered markets”, I find it difficult to understand how a top historian can look outside his window, or review his case notes, or read the papers, and write such a sentence and still attribute the false view to Adam Smith.

Pure laissez-faire was never a notion attributable to Adam Smith (see Jacob Viner, 1928, Adam Smith and Laissez faire). In fact, he never used the words at all, anywhere in his writings or correspondence.

The myth that he did so began to spread in the mid-19th century such as from John S. Mill 1849; the Manchester School; Cobden, the editor of The Economist, and assorted speeches in the House of Commons on behalf of mill-owners and manufacturers, and lazy authors, sub-editors, and other who did not read Wealth Of Nations (or they only read isolated, out of context, sentences which they gratuitously transposed to suit their claims). They quoted the only French they knew, or could remember, because others they read said so.

It sounded Smithian. But Smith always emphasised that the main enemy of competition was monopoly and the main legal protection of monopoly was particular (but not all!) government-sponsored state regulation, and illegal collusions among corporations. He commented that legislators and those who influenced them, giddy with the false arguments of mercantile political economy, used regulations to stymie competition, whether from other merchants (and would-be merchants) and their employees through collective action, plus, of course, legalised protectionism, tariffs and prohibitions.

En passant, Ferguson makes another slight against Adam Smith with this bundle of nonsense:

‘…At a time when other University of Chicago-trained economists were forging the neoclassical synthesis -- Adam Smith plus applied math -- Minsky developed his own math-free "financial instability hypothesis".’

There is a world of difference between the maths of “the neo-classical synthesis” and Adam Smith's writings. While Adam Smith was an accomplished mathematician by 18th-century standards and expressed his admiration for mathematicians(TMS III.2.20: 124), he did not conceive of humans in society as reducible to equations. He had nothing to do with the invention of Homo economicus in the late 19th century.

He specifically rejected the idea in his (famous) comment in Moral Sentiments about the “man of system” who “seems to imagine that he can arrange the different members of society with as much ease as the hand arranges the different pieces on a chess–board …” but “in the great chess-board of human society, every single piece has a principle of motion of its own” (TMS VI.ii.2.17: 234).

Interestingly, those “University of Chicago-trained economists” who “were forging the neoclassical synthesis” to whom Ferguson refers, were also among the first to invent the wider modern role for the metaphor of “an invisible” hand in the 1930s.

Paul Samuelson, who died recently, aged 94, graduated from Chicago in 1935 and was the first to note the dangers of taking the metaphor too far (Samuelson, Economics, 1948, page 36). Ironically, after Samuelson, most authors of textbooks did just that.

But at the end of his article, Ferguson drops his headline of Smith, and others, being “Dead Men Walking”, and commences a partial resurrection of their reputations:

“…So though superficially this crisis seems like a defeat for Smith, Hayek, and Friedman, and a victory for Marx, Keynes, and Polanyi, that might well turn out to be wrong. Far from having been caused by unregulated free markets, this crisis may have been caused by distortions of the market from ill-advised government actions: explicit and implicit guarantees to supersize banks, inappropriate empowerment of rating agencies, disastrously loose monetary policy, bad regulation of big insurers, systematic encouragement of reckless mortgage lending -- not to mention distortions of currency markets by central bank intervention.”

Taking the last sentence on its own, there was no need to write the first part of his article in the manner in which he did. Many readers might well stop after the first page, miss the second and third pages, and from the reputation of the author, remain attached to the new myth about Smith being the cause of the recent recessions and global financial crises!

That he wasn’t, in historical truth, and wasn’t in recent fact, makes Ferguson’s article more than unsatisfactory.