Wednesday, August 01, 2007

Milton Friedman's Basic Contradiction In his Advocacy of Freedom

A reader responded to my plea for a copy of the ‘birthday’ greetings to Milton Friedman yesterday in the Wall Street Journal (many thanks indeed) and I reproduce it below:

“Friedman's Legacy” by Thomas F. Siems
July 31, 2007; Wall Street Journal, Page A15:

“Friedman reminded us of the economic principles first outlined by Adam Smith. Take Smith's concept of the "invisible hand," by which individuals, who may intend to pursue only their own interests, ultimately promote the public welfare. In other words, a society composed of individuals acting in their own interests creates a freer, more stable and prosperous economy than one planned by the state.”

Comment
Not sufficient that Smith’s ideas are presented as he wrote them and intended them to be read, but 20th-century educators have found it convenient to add a mystical, semi-religious (Smith called it ‘pusillanimous superstition’ indulged in by pagans) and wholly over-blown aura to the observation that people behave in a certain manner, without intending to produce particular outcomes, but which nevertheless may have benign or malign consequences.

In a single case in Moral Sentiments and a single case in Wealth Of Nations, he added the metaphor of ‘an invisible hand’ to what he had already explained in clear detail in the previous paragraphs about the cause and consequences of the actions of the people concerned. The metaphor added nothing to the explanation that he had not already explained; it was, as metaphors normally do, a device to ‘an allusion betwixt one object and another’.

In my paper for the History of Economics Society Annual Conference this year, I described the role of a metaphor by quoting Adam Smith on the subject from his lectures in rhetoric:

The invisible hand metaphor, as a ‘figure of speech’, does precisely its job, as Smith intended, by drawing the image of an ‘an allusion betwixt one object and an other’, the object being the self-deception of the landlord and the ‘beauty’ of the metaphor that ‘is so adapted that it gives due strength of expression to the object to be described and at the same time does this in a more striking and interesting manner’ (And the prime candidate for undertaking this in a ‘striking and interesting manner’ was the oft-used literary metaphor of ‘an invisible hand’, which has come, incorrectly, though probably now irreversibly, a name tag from a version of ‘Smithian’ economics mainly from exponents of the neoclassical paradigm. But metaphors are representative, not real, they exist only as the imaginary image of what they allude to; they do not define it'. Adam Smith, Lectures in Rhetoric and Belles Lettres, I.v.38: pp 30-31, Liberty Fund edition).

It was not an ‘economic principle’; it was a misuse of an isolated metaphor (only three times in over a million words of Smith’s works from 1748-90); it was not a ‘concept’, and it was never a ‘theory’, at least not in Adam Smith’s mind. Smith in Wealth Of Nations wrote:

By preferring the support of domestick 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.” (WN, IV.ii.9: p 456)

The significance of his use of the words: ‘he is in this, as in many other cases’ is often missed. He did not say ‘in this, and in all other cases’, nor did he proclaim this ‘principle’ at the start of Wealth Of Nations, as he did the principles of the ‘propensity to truck, barter and exchange’, ‘the division of labour’, ‘the extent of the market’ and ‘natural and market prices’, etc. No, he inserted the metaphor in Book IV in the lowly example of merchants being risk averse towards non-domestic investment, and it was their risk aversion that led them to prefer local investment to foreign. The metaphor of the invisible hand referred to their risk aversion, and not to some spiritual force leading them to do what their risk aversion caused them to do on it own.

Milton Friedman had many qualities, many of them mentioned by Thomas F. Siems in his eulogy to Friedman’s memory, with which I would associate myself. But he did economics no favours by popularising the myth of the invisible hand as being a general statement that ‘individuals, who may intend to pursue only their own interests, ultimately promote the public welfare.’ This is a dangerous illusion, and Friedman should have known better to perpetuate it.

People pursuing ‘only their own interests’, may, and often do not, ‘ultimately promote the public welfare’. But Wealth Of Nations is replete with Smith’s examples of people who pursue ‘only their own interests’ which has negative, sometimes awful, consequences that lower, not raise, public welfare (monopolists, isolationists, protectionists, polluters, environmental despoilers, exploiters, corruptors, criminals, and such like), and the existence of the many counter-examples to contrary behaviours of other people, leaves an open goal for critics of Friedman’s real and positive message about the benefits of freedom.

In fact, in this light, Milton Friedman’s life-work had a contradiction in it. He favoured freedom of contract, and competitive markets, sound systems of justice and minimal interference by government dictators, with which I concur, but he spent a lifetime exposing the instances of distortions in markets. Yet, if the invisible hand myth was true, surely he would not have had to do this? Government bureaucrats, mean monopolists and protectionists, in pursuing their self interests, as they see them (which is all anyone can do), apparently are immune to the invisible hand. How come? Yes, because it is a form of words, a metaphor, and an empty one at that.

You can obtain an electronic copy of my paper: ‘Adam Smith and the invisible hand: from metaphor to myth’ (no, you will not receive junk mail or remain on my contact list) by contacting me by rearranging the following words in the usual manner: ‘gavin’, ‘negweb’, and ‘com’.

2 Comments:

Blogger Ron said...

The free market is always superior to top down government and political actions.

We are very pleased to announce the creation of The Free Market Hall of Fame where members of the Freedom Movement will have the opportunity to initially vote on individuals contributing the most to free market economics including academic economists, journalists and writers, business leaders, legislators and government officials and think tanks.

For more infor on the Free Market Hall of Fame go to http://www.freedomfest.com/hofhome.htm

Ron Holland, Editor
FreedomFest News http://www.freedomfest.com/news.htm

12:56 pm  
Blogger Gavin Kennedy said...

Rolland


Thank you for your news. Good luck with your initiative.

7:07 am  

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