Tuesday, February 14, 2006

Invisible Hand no 30

When I read the two sentences of Steve Lydenberg’s piece in GNet my heart beat a little faster, momentarily. It seemed OK, and then it turned to dust:

One of the great challenges of our times is how to encourage corporations to act in the public interest. A powerful obstacle is the myth of Adam Smith's "invisible hand" which suggests that if everyone -- corporations along with investors and consumers -- act solely in their own short-term self-interest, a greater good will inevitably be served.”

Steve was not announcing a break with the myths about Adam Smith and the invisible hand, of which I have spoken many times on this Blog. Oh, no! He was arguing against the myth of the invisible hand as if Adam Smith was its source. He was not!

It is a lie perpetrated by modern, mainly neo-classical economists (some innocent, many not) and some of their 19th century forebears, and is now a parody of the original isolated metaphor (from Shakespeare: Macbeth 3:2), and is now firmly ensconced, drinking double brandies and smoking Havana cigars in campus academe, polluting the minds of students from Economic 101 onwards. I think I now understand how generations of religious believers can believe the most absurd propositions, even to the point of killing those less credulous who ask questions.

First of all Smith never asserted that “that if everyone -- corporations along with investors and consumers -- act solely in their own short-term self-interest, a greater good will inevitably be served.” He suggested something much milder: people acting in self-interest to better their condition (an urge that I with us from the cradle to the grave) they could, given certain other factors, produce a ‘greater good’ for society, but (and it is a big but) they could also work against the public interest. Greedy monopolists, scheming merchants and manufacturers, private interests and ‘vile rulers’, could work against the public interest by their nefarious practices.

It was never automatic. If it was, then Smith would have no complaint about mercantile policies imposed by governments, urged on by the winners with influence at the expense of the losers without influence, because benign self interest would triumph over malign self interest. But that was never the message of “Wealth of Nations”, which is why he never gave the invisible hand metaphor free reign in his book, and nor did he advocate a policy of laissez faire (he never mentioned the words).

The way it is taught, one would believe without checking the source for oneself (and most do not – even professors of economics teaching invisible hands and laissez faire in Smith’s name have never read Smith’s “Wealth of Nations”, except isolated quotations), that his works were replete with examples of the invisible hand and praise for laissez faire. If they read what they preach they would soon discover a scarcity, where they have taught abundance, of references to these alleged ideas of Smith. Strange, to say the least.

The ignorant peasantry of Europe in the dark ages after the fall of Rome had an excuse for accepting all they were told by articulate priests, who preached from the Bible in Latin, a dead language they did not comprehend, until it was translated into their own tongues. With comprehension came dissidence. But “Wealth of Nations” and “Moral Sentiments” are in English and are translated into all main languages. What excuse do campus tutors have for perpetrating the nonsense they espouse?

But to get back to Steve Lydenberg’s piece. He is right. The problem, I agree, is the “powerful obstacle [of] the myth of Adam Smith's "invisible hand". But not quite as he believes it to be. It is not Adam Smith’s myth of the invisible hand that is the problem, but myths about Adam Smith and the invisible hand that is the problem. When Wall Street bankers and CEO’s of commercial enterprises, assorted academics who should know better, understand this truth they can adopt policies more in keeping of how markets work.

Steven D. Lydenberg is Chief Investment Officer of Domini Social Investments. As the founder of KLD Research & Analytics, he was instrumental in the creation of the Domini Social Index, the first SRI index, launched in 1990. He has written widely on issues of corporate social responsibility, including his most recent book, Corporations and the Public Interest (Berrett-Koehler, 2005).

His article is at: http://www.gnet.org/news/Print.cfm?NewsID=30281

What Steve Lydenberg should do now is read “Wealth of Nations” by Adam Smith to straighten him out on some fundamentals of Smithian economics.


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