Next Major Project: modern use of the invisible hand

Background:

I have completed my response to Daniel Klein’s (“In Adam Smith’s Invisible Hands: comment on Gavin Kennedy” HERE: response to my article: “Adam Smith and the Invisible Hand” (HERE): My final response will be published next week in Econ Journal Watch (September 2009) HERE:

It is now time to move on to my next project (larger in scope and more ambitious): To consider the role played by the use of the invisible hand metaphor by modern economists. Yes, I shall name, though probably not shame, them.

My main charge against them collectively, is that they wrongly attribute their allusion to the invisible hand by name to Adam Smith – because the modern (post-1930s) (miss)use (miss)associates the metaphor with their quite different meanings – and they imply and, in many cases they directly claim, that Smith have said things about markets that he never did. I shall also offer an alternative explanation for the ubiquity of the invisible hand in modern discourse.

I suspect, somewhat cheekily, that many modern economists have never read Wealth Of Nations, nor do they realise how limited was Smith’s use of the popular 18th-century metaphor (once only in Wealth Of Nations, 1776, once only in Moral Sentiments, 1759, and once only in his short, posthumous essay on the History of Astronomy (1744-58), no one of which was connected conceptually to the others.

To date, I have collected some preliminary research materials on the modern usage of the invisible hand (some of which go well beyond its use as a metaphor; some authors believe that there is an actual entity of ‘an invisible hand’ operating in markets, some of them attributing the entity to the invisible God.

Until now, I have waited before embarking on my own assessments for Warren Samuels, a distinguished Smithian scholar, to publish his considered analysis of the modern uses to which the invisible hand metaphor has been put. His 2008 article: Adam Smith’s Invisible Hand, in The Street Porter and the Philosopher: conversations in analytical egalitarianism, edited by S. J. Peart and D. M. Levy. Ann Arbor: Michigan University Press, was the initial article I awaited, but I was advised that another article by Warren Samuels, is to be published in Jeffrey Young’s, (editor), forthcoming Elgar Companion to Adam Smith, Cheltenham: Elgar Publishing, in October 2009.

From private conversations, I understand this is a formidable piece of work and out of respect for Warren's work, I have held back to see to what degree his analysis of modern usage conforms to mine. I understand that he may also reply directly also to my Econ Journal Watch paper.

Where does this take us? Well, my hypothesis for the new project tests my assertions from time to time, that the invisible hand metaphor is a relatively modern adaptation of the 18th-century metaphor purporting to show the presence of an invisible hand in modern market capitalism, seen almost daily in the world media, and more importantly, as asserted in refereed journal articles and authoritative pronouncements in academic texts.

If its usage was confined purely to popular media, it could safely be ignored, but when Nobel Prize Winners and respected authorities from our discipline elaborate on the modern theory of ‘the invisible hand’, we need to separate ideology from analysis. The robust criticism I occasionally encounter of my counter-thesis suggests an investment in emotional subjectivism on the part of some economists.

Any help readers offer to me during this research project will be graciously accepted.

I have been tracing the early beginnings of the discipline’s interest in applying the metaphor to modern economies, starting with late 19th-century economists, some of whom were identified by Daniel Klein and others in correspondence with myself. I am particularly interested in early 20th-century exponents from Chicago University in the 1930s and thereafter.

For example, from Paul Samuelson (Economics, 1948: p 36) I noted that he reported, somewhat critically, on the oral tradition at Chicago which included ideas about the invisible hand operating in market economies. Among the first reference to this use of the invisible hand, I was directed to Oscar Lange’s article in The Review of Economic Studies (vol 13, 1945-46, p 19-32). Lange was at Chicago during the 1930s (as was Samuelson).

In his 1946 article Oscar Lange writes:

“The market has, therefore, been compared (by Adam Smith and others) to that of an invisible hand which produces out of the autonomous decisions of many separate units” (p 26).

What did he mean “by Adam Smith and others”? Who were the “others”?
Any information would be welcome from readers, including references, sources, and biographies. Though retired, I have access to a good library at a University and can probably follow up even vague references or books titles.

Thank you in anticipation of any help received.

Markets and Panglossian Invisible Hands

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

“Gene Callahan Provides an Excellent Introduction to Basic Economics”

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

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

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

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

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

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

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

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

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

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

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

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

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

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