Tuesday, October 31, 2006

Once More on Markets and self-Interests

From an editorial in The Guardian, 31 October:

‘Adam Smith may be ‘best known for the invisible hand’ but that does not mean that what he said about it had anything to do with markets.’

First, it was ‘an’, not ‘the’, invisible hand and it was a metaphor, not a theory of markets. Shakespeare used the same metaphor in ‘Macbeth’ (3:2), as did Defoe in ‘Moll Flanders’ (1722). Smith wrote about human motivations sometimes having unintended benign effects in the single case he used the metaphor in Wealth of Nations (Book IV.ii.9: page 9). He referred to those individual merchants who preferred to invest their scarce capital locally because the risks of distant investment, especially overseas, were too risky for them. In doing so they sought their own gain (i.e., to avoid losses) and inadvertently ensured that domestic capital accumulation was greater than it would be otherwise.

His writings on markets and how they worked did not mention ‘an invisible hand’ as being part of anything in them (Wealth of Nations Book I.v. and vii). That he allegedly mentioned the connection with markets is one of those myths that grew by popular repetition.

Lastly, in many numerous references in Wealth of Nations, too many to identify here, Smith drew attention to the malign outcomes of individual self-interest such as the self-interest of monopolists, beneficiaries of tariff protection, guild members, bank fraudsters, criminals, dominant churches, interest groups, combinations of employers, trivial national interests of petty princes fighting expensive wars for vain glory, or whatever.

It is amazing that commentators popularly acclaim, allegedly under the authority of Adam Smith, an automatic connection between the exercise of self-interest and the beneficial outcomes on society. This suggests that reading his books, ‘Moral Sentiments’ and ‘Wealth of Nations’, must have been abandoned not long after he died in 1790.


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