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.

Beyond The Facts

Anthony North posts in Beyond the Blog HERE:

“Let me make something very clear. Greed is not bad. In order to succeed both individually and as a society, we need to be stimulated. Due to this, we have urges. Without them I doubt if humanity would have advanced at all – and greed is one of those urges.

The problem comes in the level of greed we display. Be too greedy and we hurt both ourselves and society, so it’s a matter of balance. Sadly, though, in today’s capitalism we have a glorification of greed, with it getting out of control. This was not how capitalism was meant to be, originally devised by Adam Smith as a
philosophy to go alongside thrift. We seem to have turned something noble into a feeding trough.”

Comment
“Greed is one of those urges” but is it predominant? Is everybody greedy for everything all of the time? I don’t think so. Life would be pretty grim if it was.

Bernard Mandeville, author of “The Fable of the Bees” (1724), developed a whole philosophy on the basis that greed predominated and he gave it his blessing (“Private Vice, Public Virtue”).

Ayn Rand modernised the idea that selfishness was a virtue and created a school for her philosophy (“Objectivism”) which found popularity undergraduates philosophy classes. (You can find some of her lectures on U-Tube, with wide-eyed students listening in awe).

However, greed and selfishness were never popular with Adam Smith. He called Mandeville’s philosophy “licentious” but plausible in parts as an observation of an aspect of human nature in his book The Theory of Moral Sentiments (1759).

Anthony asserts that “in today’s capitalism we have a glorification of greed, with it getting out of control.” Well, is a point of view, though you can read 18th-cxentury sermons in the same tone, and I doubt whether you will find examples throughout history where similar sentiments have not been expressed by someone about their contemporaries.

But Anthony also asserts “This was not how capitalism was meant to be, originally devised by Adam Smith as a philosophy to go alongside thrift.” Where does Anthony get the mishmash of erroneous ideas to compose such a sentence?

There is no such way in which ‘capitalism was meant to be’. Social systems are not ‘designed’ by anyone. The appear in various forms and experience different histories according to how individuals react to circumstances.

Hayek, and others, refer to this as a ‘spontaneous’, or ‘emergent’ order, unintentionally arising by the independent actions of people. That, if I may say so, is their strength. No single person could undertake the myriad of actions that would enable an economy to establish itself, for good or ill.

Which makes the second part of his paragraph, “originally devised by Adam Smith as a philosophy to go alongside thrift”, a misreading of both the emergence of what we call now call capitalism and a misattribution to Adam Smith of that which he had no conscious part.

For a start, Smith neither knew the word, nor the phenomenon of ‘capitalism’. The word itself was first used in English (Oxford English Dictionary) in 1854 by Makepeace Thackeray in his novel, The Newcomes. Smith died in 1790. He couldn’t devise that which did not yet exist, and couldn’t devise a complex economic system even if he had wanted to. In fact, he warned against ‘men of system’ who, ‘wise in their conceit’, force their designs upon others.

Adam Smith was a moral philosopher and saw his scholarly duty as ‘doing nothing, but observing everything’. He analysed how commercial societies functioned in 18th-century Britain – already a major trading economy and major political player in Europe – and wrote in his Wealth Of Nations a devastating critique of mercantile political economy, as practised in Europe.

The players in commercial society dispersed in their private lives did not conform to a master plan for commerce or government. Depending on their history and circumstances their commercial societies grew ‘slowly and gradually’ (some of which struggled because state interventions held back their natural courses and all were affected by the usual ‘jealousies of trade’, petty wars of dynastic succession, legislated anti-competitive tariffs, protections and prohibitions, and the vagaries of different personalities.

To see history as a journey from a sort of ‘ideal’ design towards “a feeding trough” is quite inadequate. Anthony North should re-think his assessments, perhaps read a bit more Adam Smith, and reflect on his current opinions.

Update on 19th Century Mercantile Britain

Up date on yesterday’s notice of Nye’s article on continuing mercantile policies of Britain in 19th century:

Douglas A. Irwin writes to mention his response to Nye’s paper: “Free Trade and Protection in Nineteenth-century Britain and France revisited: a comment on Nye” HERE:

I have yet to read both papers carefully and I shall report later.

Did Britain Ever Adopt Free Trade?

John V.C. Nye’s paper, “Political Economy of Anglo-French Trade, 1689-1899: Agricultural Trade Policies, Alcohol Taxes, and War” is published by the American Association of Wine Economists, as AAWE Working Papers, no 38 Economics, HERE:

From the Abstract:

“Britain – contrary to received wisdom – was not a free trader for most of the 1800s and, despite repeal of the Corn Laws, continued to have higher tariffs than the French until the last quarter of the century.

War with Louis XIV from 1689 led to the end of all trade between Britain and France for a quarter of a century. The creation of powerful protected interests both at home and abroad (notably in the form of British merchants, and investors in Portuguese wine) led to the imposition of prohibitively high tariffs on French imports -- notably on wine and spirits -- when trade with France resumed in 1714. Protection of domestic interests from import competition allowed the state to raise domestic excises which provided increased government revenues despite almost no increases in the taxes on land and income in Britain. The state ensured compliance not simply through the threat of lower tariffs on foreign substitutes but also through the encouragement of a trend towards monopoly production in brewing and restricted retail sales of beer (which began around 1700 and continued throughout the eighteenth century).

This history is analyzed in terms of its effects on British fiscal and commercial policy from the early 1700s to the end of the nineteenth century. The result is a fuller, albeit revisionist account of the rise of the modern state that calls into question a variety of theses in economics and political science that draw on the naive view of a liberal Britain unilaterally moving to free trade in the nineteenth century.” (JEL Classification: F13, H20, N40, N43, N53, O13, Q17)

Comment
I received this paper this morning and was immediately attracted to it by the abstract.

Regular readers may have noted my occasional comment that Adam Smith’s free-trade reputation is often exaggerated and as often it is associated with claims that Wealth Of Nations ushered in an age of free trade policies in Britain. The mercantile political economy, of which Wealth Of Nations was heavily critical, is supposed to have been replaced by grateful legislators persuaded by Smith’s arguments.

I have long suspected that this picture is not just over done; it is absolutely wrong.

The end of the first British empire following the loss of the British colonies in most of North America (Canada, a prize won from the French, remained under the jurisdiction of Britain – from 1789 France turned in on itself; and the Caribbean island prizes remained slave colonies) did not usher in an era of free trade.

The old mercantile habits continued, and with them the lust for empire was nurtured.
In 1788 the penal colony of New South Wales was founded, to which New Zealand was added and the rest of Australia followed, by which time the disgrace that was India under the East India Company was taken over directly by London and the elements of the second British Empire took shape.

Into this mix, the idea grew that British foreign and domestic policy was one of free trade and the end of mercantile political economy with its regulations, restrictions, special interests, and jealousies of trade. I suspect this picture is untrue and I look forward to reading John Nye’s paper as a contribution to correcting part of the image.

I doubt if mercantile political economy has ever really gone away from Britain despite Adam Smith and the Wealth Of Nations and all the talk of major changes in the 19th century. The so-called industrial revolution – more like slow and gradual partial industrialisation – which produced the illusion of success affording the governments of the day the means to practise ‘business as usual’.

I shall keep you posted.

Interesting Reading List and a Surprising Exclusion

Mark Blyth, Professor of International Political Economy
at Brown University writes in Chicobilly and Other Stories HERE:

“WHAT TO READ ON STATES AND MARKETS”

Summary -- An annotated Foreign Affairs syllabus on states and markets.

“As governments around the world have responded to the global economic crisis, questions about the appropriate relationships between states and markets are once again a matter of intense public and policy debate. As the discussion proceeds, the subject's long history is worth bearing in mind. The canonical authors one might think to start with --Adam Smith and Karl Marx -- are not actually all that helpful. Smith's writings on the state should be read against his indictment of the mercantilist system, not in relation to the modern world, and Marx's writings on the state, despite some notable epigrams, are also not particularly relevant to the contemporary era.”

Comment
“Smith's writings on the state should be read against his indictment of the mercantilist system, not in relation to the modern world” is almost correct in so far as it rises beyond the modern (pathetic) assertion that because Adam Smith was severely critical of how 16-18th century government interventions that imposed mercantile policies on behalf of small private monopolies (originally with the best of intentions but soon corrupted by their anti-competitive behaviours), it followed, argued the epigones, that all state interventions were bad, for which they claimed Adam Smith said so. He didn't.

Hence, the myth of the ‘night-watchman state’ became a shibboleth of modern proponents of modern laissez-faire economics.

Ironically, the actual phrase, ‘night watchman state’, indulged in by some over-enthusiastic propagandists of what they call laissez-faire, was a popular utterance of the 19th-century firebrand socialist, Ferdinand Lasselle, when mocking market-minded politicians for not establishing the strongest possible (socialist) state imaginable.

A reading of Wealth Of Nations (Books II, IV and V) shows that Smith's, often biting, criticisms of mercantile state policies did not preclude appropriate roles for a state (predicated on Liberty and Justice), or, as we might put it, ‘markets where possible, state interventions where necessary’).

Follow the link to read Mark Blyth’s recommended reading list – not quite what I would have selected. Also, given that the mercantile state is still with us in many respects, I would think Wealth Of Nations would be an admirable choice too.

Mythical Basis for a Theory

Linda Naiman writes at the Creativity at Work Blog HERE:

“Taking Responsibility for the Whole”

“Built into the concept of capitalism and free enterprise from the beginning was the assumption that the actions of many units of individual enterprise, responding to market forces and guided by the ‘invisible hand’ of Adam Smith, would somehow add up to desirable outcomes.

“But in the last decade of the twentieth century, It has become clear that the ‘invisible hand’ is faltering. It depended upon a consensus of overarching meanings and values that is no longer present. So business has to adopt a tradition it has never had throughout the entire history of capitalism: to share responsibility for the whole. Every decision that is made, every action that is taken, must be viewed in the light of that kind of responsibility.”

Comment
The “assumption” that market forces were “guided by the ‘invisible hand’ of Adam Smith” add up “to desirable outcomes” was not “built into the concept of capitalism and free enterprise from the beginning”.

That is a modern myth spread widely and repeatedly from the 1950s by modern economists (though it was earlier taught in the Chicago oral tradition from the 1930s). It was backdated to Adam Smith to give the myth high-level approval, as if he had made the metaphor of ‘an invisible hand’ a central theorem of his analysis of 18th century commercial markets (he never knew of ‘capitalism’, a word invented in English for the first time in 1854 – see Oxford English Dictionary).

Smith used the metaphor of ‘an invisible hand’ only three times in nearly a million words: once only in his Essay on Astronomy, written from 1744 to 1758, unpublished in his lifetime and published posthumously in 1795; once in Moral Sentiments, 1759; and once in Wealth Of Nations, 1776.

In no sense was the metaphor about “responding to market forces and guided by the ‘invisible hand”. In fact Smith discussed how markets worked in Books I and II in Wealth Of Nations without any mention of ‘an invisible hand’. That he is alleged to have done so is a myth – a sort of ‘academic campus myth’ like those ‘urban myths’ we hear so much about.

Modern economists blessed their mathematical models of general equilibrium with quasi-miraculous foundations and it was used also to proclaim the self-evident superiority of capitalist institutions and markets over the then prevailing counter-claims of the centralized planned economies of communist rivals.

Modern economists ‘over egged the pudding’, as we say in English. Markets are superior in most cases to non-market institutions and do not need the imaginary aid of so-called invisible hands, and certainly not associated with Adam Smith's isolated use of the metaphor, a wholly innocent victim of the purloining of his legacy.

That there may be a role for regulation, made on a case-by-case basis and not as a catch-all cop out, is quite consistent with Adam Smith’s moral philosophy and political economy.

Smith was NOT opposed on principle to intervention in some markets; his outright opposition to the forms of government inspired interventions from the 16th century in Britain through policies which he described as ‘mercantile political economy’ (many features of which remain active today) should not be taken as evidence for his general views on the levels of government promoted interventions.

Smith in Wealth Of Nations identified several important areas for government intervention – such as in banking regulations (even if it was contrary to his principles of ‘natural liberty’ when the security of people was at stake) - and in weights, measures, quality of cloths, gold and silver, the Mint, and post offices. He advocated public funding of in ‘public works’ (roads, bridges, canals, harbours, town cleanliness, and pavements) and in public institutions (education and aspects of health). He also advocated the separation of church and state.

His general policy is best summed as ‘markets where possible’ (operating under the justice system - an independent judiciary, Habeas Corpus, and trial by juries) and ‘public works where necessary’. Which is a far cry from the so-called ‘night watchman state’ (actually an idea of Ferdinand Lassell’s, the firebrand 19th century socialist, not Adam Smith’s).

Adam Smith Did Not 'Invent' Capitalism

Natasha Chart writes in Sustainable Food (HERE)
Natasha Chart writes in Sustainable Food (HERE)

‘Market Consolidation and Anti-Trust’

“It would have disgusted Adam Smith, the moral philosopher who invented capitalism, to see such powerful monopolies still running the show and claiming to be following the system he proposed to rid the world of mercantilism and all-powerful guilds.

Comment
We know what Natasha means but, for the record, Adam Smith did not ‘invent capitalism’.

The word itself was unknown in English until 1854 (Oxford English Dictionary) and Smith died in 1790. Smith wrote about ‘commercial society’, as practised in mid-18th century.

Moreover, societies are not ‘invented’ by anyone. They evolve of their own volition from the unintended consequences of the actions of individuals over long time periods. Attempts to ‘invent’ societies always fail (e.g., Marxist , socialist and other ‘utopias’, as, nowadays calls for a complete legislative change from modern capitalism to independent, local, entities), and end up with tyrannies unanticipated by their idealistic initiators.

Adam Smith was a philosopher who ‘did nothing, but observed everything’.

He was a fairly severe critic of the existing commercial arrangements of Britain, but also a very moderate realist about the prospects for major legislative changes in the near future. He believed tariff changes would only work if introduced slowly and gradually because of their disruptive consequences for the labourers affected by unemployment, and for the lack of will among legislators and those who influenced them, for example.

He did, however, propose the repeal of the mercantile Acts of the British Parliament, especially those pertaining to the ‘all-powerful guilds’, the Settlement Acts (preventing labourers leaving their parish to look for work in other parishes), the Apprenticeship Acts (preventing skilled and semi-skilled labourers from exercising their skills in places other than where the served their 7-years as apprentices, and preventing the easier spread of new technologies in 'apprentised trades'), and the legislative abuses of the Acts of Navigation (he agreed with the Act in principle when limited to ensuring that Britain had enough seamen and ships to defend it island from naval attack, but thought the all-embracing monopoly of the colonial trade (with North America and the Caribbean) was detrimental to Britain’s (and the colonists’) interests (see Book IV, Wealth Of Nations)

In the event, some of these changes were not affected until the mid (the Navigation Acts) and late 19th century (universal education provisions).

But, of Adam Smith ‘inventing’ capitalism, there is no evidence whatsoever. That he would see modern society as essentially unchanged from 18th century mercantile political economy that he knew so well (timid steps to free-trade in the major economies, like the US and Europe; predominant popular views associated with ‘jealousies of trade’ and beggar-thy-neighbour' popular policies; wars not for defence and often for indeterminate ends; and the dominant practises of local monopolies, etc.,) I do not agree with Natasha that he would be 'disgusted', or even surprised.

Smith well understood the foibles of people, especially in government and the legislatures. In probably the only prediction he ever made - the future supremacy of the USA's economy over all others by the late 19th century - he would feel vindicated
But 'disgusted' - I don't think so.

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).

Newish Blog on the Block

An interesting Blog has come to my attention. It’s called The Debts of a Nation (‘dedicated to presenting finance and economics news in plain English’) HERE:

Its heading description is tantalising:

“In Debt We Trust

The Debts of a Nation is a modern revision of "The Wealth of Nations" by Adam Smith. Smith structured his arguments as a critique against the prevailing economic and political ideology of his time - namely mercantilism. Under mercantilism the colonial powers of Europe amassed enormous amounts of gold and silver wealth through strict control of exports and the wholesale looting of foreign shores. Their colonists were locked in a cycle of indebtedness with financiers in their home countries. Fast forward to the modern age. Not much has changed - except instead of specie wealth we have fiat based currencies based on overleveraged government bor[r]owing. Mercantilist trade imbalances still exist. Citizens continue to live under debt bondage. And Western governments continue to loot emerging markets. The next few years will be a time of unknown risks surfacing. The majority of market pundits continue to operate under the assumption that all known risks have been contained. They still believe that the system's parameters can sufficiently contain the world's credit problems. They still continue to believe in the debts of a nation.”

Comment
Briefly, as I am preparing for a visit to geological site today (the ‘non-conformity’ at Siccar Point, near Edinburgh, discovered and explained by James Hutton, 1726-1797, and a close friend of Adam Smith) and I will come back later to discuss The Debts of a Nation in more detail, which appears to parallel my general approach to what has changed/not changed since Adam Smith wrote Wealth Of Nations, as discussed on Lost Legacy.

Most prominently, we still live in a world dominated by mercantile political economy, jealousy of trade, wars not for defence, tariff and non-tariff protectionism, limited free trade, state-favoured business (made worse by Big Government), regulations beyond that necessary for good government, and constant tinkering in personal affairs, and the dominance of a legislative cycle that is shorter than the policy-effectiveness period need to prove the effectiveness or otherwise of the interventions.

The Debts of a Nation, on the basis of a rapid glance, looks serious. I shall test my first hasty impression later after my geological expedition.

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.

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.

Adam Smith on Liberty

Doug Thorson writes The Freedom factory (‘life, liberty, and the Pursuit of Cash’) Here:

“Adam Smith, who lived in the eighteenth century, provided the philosophical and most systematic arguments for the underpinnings of a laissez-faire economic system in his book “The Wealth of Nations.” Smith makes the argument that it was only the interference of government which disrupted the natural working of economic society and created poverty and decay rather than abundance and harmony.

As Smith explained:
The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred obstructions with which the folly of human laws too often encumbers its operations.

The drive for greater government regulation is the drive toward increased poverty, unemployment and the loss of liberty. With the Obama administration pushing an ever expanding federal government plan to take control of our financial institutions, health care system, the auto industry, and its attack on free speech, the time is now to clearly articulate the differences between free markets and free people, and government administered markets and government control of our lives.”

Comment
Smith was more ‘nuanced’ (as is the fashion in these matters) about the causes of wealth creation (poverty is not ‘caused’; it is a consequence of the absence of wealth). Smith did not ‘underpin’ laissez-faire as an economic system in Wealth Of Nations. That is an ideological myth.

He wrote a critique of the existing political economy of the British state and, by implication, of other European states. He did not dismiss all government actions and interventions; his critique focused on specific government policies, some in place since the 16th century, summarized as mercantile political economy, and which directly hindered the creation of wealth and thereby allowed poverty to continue for a segment of the population.

These mercantile policies included ‘jealousy of trade’ against neighbours (who were Britain’s customers), wars that projected political interferences in continental countries and not to promote legitimate defence interests of an island society, erroneous policies of hoarding gold and silver which led to tariffs and prohibitions on wealth creating trade, laws and statutes than inhibited capital and labour mobility (the Town Guilds, Corporate monopolies of wholesale and retain trades, Apprentices Statutes, and Settlements Acts, all of which were promoted by legislators and those who influenced them, and, the roles of Chartered Trading Monopolies (the East India Company) and the foundation of colonies in North America, which grossly distorted wealth creation through trade monopolies, excess profits, and expensive wars to maintain, well beyond any benefit to Britain.

In response to these inhibitions by government policies, Smith advocated a substantial role for government in funding the infrastructure investment across Britain in project to ‘facilitate commerce’, such as in a national road-building programme, the creation of safe harbours for trade and travel, canals between population centres, the paving of large towns, street lighting, sewage and waste disposal, and the proper administration of ‘police’ (a broader term than modern day usage, which included ensuring the appropriate supply and regular availability of subsistence for town populations.

He also advocated national education facilities in ‘little schools’ in every parish to educate every child to ‘read, write, and do account’, preferably with some geometry in place of Latin because such skills would be more suitable for young adults looking for work. He also made a little noticed case for government palliative care for people suffering leprosy and ‘other loathsome diseases’ (a provision with large future cost implications).

Smith saw competition as the major stimulus for commerce in place of monopoly and regarded many ‘merchants and manufacturers’ as a barrier to the growth of commerce from the attempts to lobby legislators and those who influenced them for trade protection and special privileges.

Doug Thorson may not appreciate the extent to which Adam Smith was not an advocate of laissez-faire as advanced by some the French économistes or Physiocrats. In 17th-18th-century France, local trade markets were highly regulated by central government and the inspectors appointed by Government interfered closely in the day-to-day running of businesses, large and small, to a degree unknown in Britain. Their cry for ‘laissez nous faire’ had a different basis to Smith’s advocacy of commercial markets where possible, government intervention where necessary.

The ‘folly of human laws’ was not advanced by Adam Smith as a case for no, or limited, laws. He insisted on instruments of justice as a foundation for human society, but he knew, as we do, that governments pass laws regularly, some of which are manifest follies in the consequences, and which are the faults of the use of political processes for sectional interests.

That is why Liberty, enshrined in law and practice, is a foundation for the creation of wealth.