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.

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

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

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

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

“The Invisible Hand and Perfect Competition”

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

A few pages later, Samuelson and Nordhaus add:

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

Also:

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

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

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

“A Modern Restatement of the Invisible Hand Theory”

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

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

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

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

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

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

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

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

A Research Agenda

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

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

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

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

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

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

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

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

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

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

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

A Good Book Ruined by Misunderstanding Adam Smith

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Examples of Adam Smith's Lost Legacy

From the World Most Popular 20th century Textbook:

“Smith’s message said in effect:

‘You think you are helping the economics system by your well-meaning laws and interferences. You are not. Laissez-faire; let be; hands off. The oil of self interest will keep the economic gears working in almost miraculous fashion. No need to plan. No sovereign need rule. The market will answer all things’

Smith never did prove the truth of this. Indeed, until the 1940s, no one yet knew how to prove – or even to state properly – the kernel of it in Adam Smith’s invisible hand doctrine.”

Paul A. Samuelson and William D. Nordhaus, 1985. Economics: An introductory analysis, 12th edition, p 760

Comment
Pure imagination on Samuelson and/or Nordhaus’s part!

Smith never said anything like this “in effect” or otherwise.

Smith’s complaint about government was not about “well meaning laws and interferences” – he recognised the absolute need for laws and justice, without which, he said, society “would crumble into atoms” and “a man would enter an assembly of men as he enters a den of lions” (see Moral Sentiments, II.ii.3.3 & 4: 86).

He never said “Laissez faire; let be; hands off”. He never used the words ‘laissez faire’ anywhere in the near a million words he published. These words were uttered in 1680 by M. Le Gendre, a French merchant in Lyon, to M. Jean Baptiste Colbert, the French Minister of Finance.

He would never have said such a dangerous and seditious thing as “no sovereign need rule” in 18th-century Britain. Transportation would have been the least of his problems.

That such a popular textbook selling millions contained such twaddle is disappointing. No wonder the myths about Adam Smith are so widespread today.

[My comments do not detract from the huge debt economics as a discipline owes to Paul Samuelson.]

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.

Myths of Free Markets

Erik Kirschbaum writes in Cota 1061 HERE:

“German ‘cash for clunkers’ shows free market perils”

“THE INVISIBLE HAND
Scottish economist Adam Smith coined the term “the invisible hand” in the 18th century to describe the positive effects of the free market on individuals.
Yet the worst economic downturn since the Great Depression has led governments around the world to re-evaluate that belief in the “invisible hand” and to prop up sagging economies.”

Comment
In an otherwise reasonably sensible piece, Erik Kirschbaum, writes this nonsense about Adam Smith and the metaphor of ‘an invisible hand’.

Adam Smith did not ‘coin the term “the invisible hand”. The metaphor was well-known in the 18th century and widely used in literature, and had been known since classical times (Greece and Rome). It was used by Shakespeare (in Macbeth: ‘thy bloody and invisible hand’), and Defoe used in twice (Moll Flanders and Colonel Jack). Even Voltaire, among others. used it.

Adam Smith most certainly did not use the metaphor ‘to describe the positive effects of the free market on individuals’, which he discussed in detail in Books I and II of Wealth Of Nations (he only used in once, and not in reference to markets; it was about risk and uncertainty, Book IV of Wealth Of Nations).

Modern economists who ‘believe’ in the myth of the invisible hand have been misled by leading US economists (in Chicago in the 1930s; Oscar Lange (146); Paul Samuelson, 1948); Milton Friedman (serially from the 1950s); and hundreds of thousands of graduates from academe influenced by the scores of graduates who ‘believed’ what their tutors told them (without them, or their tutors ever reading Wealth Of nations for themselves.

That governments came to believe the myth of ‘an invisible hand’ is the fault of prestigious modern economists (including Nobel Prize winners) advising them.

Moreover, that they apparently believe that their economies are ‘free markets’ is astonishing, given that even a casual look at modern markets in economies with Big Governments would show they were as un-free as commercial markets were in Smith’s day, not just internaly, but also externally through tariff protection.

More Signs of the Early Eddies of an Incoming Tide?

Justus writes, Words Seeking Justus HERE:

‘Great Article - Huge Error’

‘I emphatically agree with 90% of Mark Vernon's article in the UK Guardian (HERE):

'I really like that Vernon emphasizes that virtues are not a restraint to our individual humanity, but that they allow individuals to live more abundant and satisfied lives. However, Vernon goes on to faultily blames Adam Smith and his invisible hand:

"Part of the problem here is capitalism, again. Its success stems in large part on appealing to our worst instincts. In one formulation at least, it is a system in which each person is supposed to look after their own self-interests, deliberately to the exclusion of others. That is the "ethical" thing to do, since by the power of the invisible hand, good is then bound to spread to all. No one believes that anymore."

Smith used the term "invisible hand" only once, and it was a common expression of the day, not a defining element, metaphor, theory, explanation, or summary of Smith's ideals. Smith also goes into detail in his works to differentiate self-interest from selfishness or greed. He was critical of entities that, through government-granted monopoly or limited liability, separated the interests of the owners from the interests of the managers and workers, which I personally view as a curse to our modern version of corporate capitalism. The term capitalism hadn't been invented while Smith was alive, and he despised the term laissez-faire. Overall, he saw order coming out of chaos in the action of individuals, but made plain that both governments and privileged businesses distorted the natural market between people.
The ethical thing to do is to act ethically. This is much easier for individuals with a moral or ethical framework to do. It is much more difficult for a non-human legal entity, such as a corporation, to do."

Comment
This is another example of those tiny pieces of evidence that the orthodox modern invention, as in the Chicago ‘Adam Smith’, created in the 1930s and spread by Paul Samuelson from 1948, who bore little resemblance to the Adam Smith born in Kirkcaldy in 1723, is likely to be under siege in the 21st century.

I encourage readers of Lost Legacy who see pieces in their local or national media that portray the Chicago Adam Smith (a most useful label from Jerry Evensky’s ‘Adam Smith’s Moral Philosophy: a historical and contemporary perspective on markets, ethics, and culture, 2005, Cambridge University Press) without a blush, instead of the ‘real deal’ expressed in the Kirkcaldy Adam Smith, to drop a comment to said media (even send a copy to myself).

Let’s see if the power of the Internet and the Blogosphere can make up for the 16 editions of Samuelson’s Economics text in the next ten years!

NB: Be clear, I admire Paul Samuelson’s academic work; it was an isolated snappy paragraph in his introductory textbook that did much of the damage to Adam Smith’s legacy, as usual and without doubt, unintentionally. It was the Chicago oral tradition that set this hare running.

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.

A True Believer is Dumfounded

Kirk Barrell writes on Random Roving Blog (‘A Non-Partisan Community for Communication And Collaboration’): “Don't Shoot The Messenger” (HERE):

‘I’m continually dumbfounded by the fact that most people believe that the economy is controlled by the president and their administration. I first ask: “wouldn’t all presidents want a good economy? If so, why don’t they create it?”. I’m a big believer in Adam Smith’s “invisible hand” [HERE] Markets beat to their own cycle. Presidents are like bullriders trying just to stay on for 8 seconds and if they’re lucky, maybe they steer the bull in one direction for a brief moment.’

Comment
If you rely on Wikipedia for knowledge, you get what you don’t pay for, in this case rubbish.

The clue to the real problem is that Kirk Barrell is a ‘big believer in Adam Smith’s invisible hand'.

He exhibits an almost religious belief in a myth; the myth being that Smith’s use of the metaphor of ‘an invisible hand’ was re-invented in Chicago in the 1930s as a mystical force credited with miraculous powers – even Godly – which passed into mainstream academe, like a meme, virus, thanks to Paul Samuelson’s phenomenally successful textbook, Economics, from its first edition in 1948 to its 13th edition in 1989 (there are claims that Economics went through 16 editions), which claimed that Adam Smith had first talked about markets ‘as if led by an invisible hand’, when in fact he never did.

But millions of students read Samuelson and got the message about mystical invisible hands; the ‘belief’ is now firmly entrenched and such authority as Wikipedia may have, means that millions more will become believers too.

Quelle domage!

If only these people would read Adam Smith and see what he actually said. They would find that the metaphor of ‘an invisible hand’ was not part of Smith’s exposition of how markets worked.

They could also download an early version of my paper, ‘Adam Smith and the invisible hand: from metaphor to myth’ (HERE) and read for themselves what he actually said.

Origins of the Myths of the Invisible Hand

I was looking for a reference in a book in my library and came across, at the back, as you do, my rather battered copy of Paul Samuelson’s popular textbook, ‘Economics’ (which I had looked for unsuccessfully for many years).

In the 1960s, my later edition of this book was the class textbook at my university; I also bought a first edition of it at a bookfair in the 70s.

I knew thatSamuelson had mentioned the ‘invisible hand’ in his textbook and he is, in my view, more than anyone else, responsible for popularising the incorrect notion that Smith believed there was an invisible hand at work in the general economy, which in the minds of modern economists somehow, mysteriously, was behind the undoubted success of capitalism in making possible unprecedented living standards. (The Cold War was on and many academics and their students were more impressed with Marxism than capitalsm.)

The reputation of Paul Samuelson, from the start of his illustrious academic career, and the publication of his Phd, Foundations of Economic Analysis (1947), deservedly is enormous.

His popular textbook, Economics, was used to teach, literally, tens of thousands of post-war students, and even his latest writings on his profession (e.g., ‘Inside the economist's mind: conversations with eminent economists‎, 2007 show why his reputation was and remains so high.

However, Samuelson was certainly wrong on one subject.

Metaphors, like ‘waggon way through the air’ (Wealth Of Nations, II.ii.86: p 321)or the ‘invisible hand’ (IV.ii.9: 456), are representative, not real; they exist only as the imaginary image of what they allude to; they do not define to what they allude (Smith: Lectures on Rhetoric and Belles Lettres, 30-1).

Modern economists have projected onto a venerable literary metaphor a significance well beyond anything implied by Adam Smith, whom they allege was the originator of their modern and different, version of the metaphor.

Among the first to do so was Paul Samuelson, in the first edition
(1948) of his famous and influential textbook, Economics: an introductory analysis, he wrote (page 36) that Adam Smith, ‘the canny Scot’:

‘was so thrilled by the recognition of an order in the economic system that he proclaimed the mystical principle of “the invisible hand”: that each individual in pursuing only his own selfish good was led, as if by an invisible hand, to achieve the best good of all, so that any interference with free competition by government was almost certain to be injurious. This unguarded conclusion has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their college course in economics.’

But the ‘canny Scot’, of course, said no such thing.

Smith did not proclaim ‘the mystical principle of “the invisible hand” ’. He was so reticent about his use of the metaphor that he mentioned it only once in Wealth Of Nations, more than half-way through his book, buried in a chapter about how some cautious (risk-averse) merchants preferred the ‘home trade’ to ‘foreign trade’ in pursuit of their ‘own security’.

Smith never proclaimed in favour of ‘selfishness’, nor did he describe the actions of such merchants as ‘selfish; he always recognised self-interest’, which he never confused with ‘selfishness’, an attribute of Bernard Mandeville's philosopy (1734), which Smith regarded as licentious'.

Smith never regarded nor stated that ‘any interference with free competition by government was almost certain to be injurious’; he identified the circumstances where government policies, such as the dominant policy of mercantile political economy since the 16th century, had slowed ‘progress towards opulence’ and he identified which of these policies should be changed.

Smith didn't think much good came from sovereigns and legislators telling merchants what to do - he didn't think governments were up to the task

In fact, Smith identified that the main ‘interference’ with ‘free competition’ came from the ‘merchants and manufactures’ themselves, with their agitation for legislators, and those who influenced them, to legalise or award monopolies and trade protection, which were against the public interest in general and the interests of consumers in particular.

I conclude, given the misunderstanding of Adam Smith’s political economy that began in the mid-twentieth century, which led to ideological protection of much corporate behaviour (not much different from their behaviours in his day) that if Samuelson had read Moral Sentiments and Wealth Of Nations for himself, instead of recalling what he was taught incorrectly by his Chicago tutors in the 1930s, he could have prevented many tens of thousands of students, who in the 16 editions of his textbook taught from it well into the 1970s, from ‘remembering’ the same error that he passed on to them, many of whom became teachers of yet more students. And so the myth was spread across generations of studenets and tutors.

His readers spread the nonsense of the myth of the invisible hand widely for more than forty years. They have also made Adam Smith culpable for the current crisis, when, he is, in fact, wholly innocent. The epigones are the guilty party.