Sunday, August 05, 2007

The Myth of the Visible Foot (no kidding)

Adam Smith and the Visible Foot of Government’ by Gary Galles of the Ludwig von Mises Institute (5 June 2006) [I have no idea why this appeared today!], writes:

“Smith is memorable for the commitment to liberty he had in common with the Declaration of Independence, whose 1776 date The Wealth of Nations also shared, and for his articulation of how the "invisible hand" of market interactions can coordinate a society based upon liberty — i.e., private property rights and voluntary exchange — more effectively than can the coercive power of the state.

Seemingly everyone has heard of that invisible hand, by which market transactions lead people pursuing their own self-interest to advance the interests of others as well. ("By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.") Unfortunately, however, those in government and their political supporters talk of liberty, while legislating and regulating away the voluntary arrangements that comprise it

I wonder how ‘everybody has heard of the invisible hand’ in the USA? You could not say that about ‘everybody’ in Scotland in the late 18th century and through most of the 19th century. Most readers took no notice of the metaphor, until Chicago-trained economists started talking about it to their students (it would have been wonderful if their students had actually read Wealth Of Nations before they passed it on to their students, and so on, ad infinitum).

Gary moves on to a (not very original) new metaphor, ‘the clumsy visible foot of government’. He adds, in an outburst of honesty: ‘Adam Smith is history's most famous economist, yet people know precious little about what he wrote.’ Absolutely true, and I think most everyone who ‘has heard of that invisible hand’ make up the overwhelming majority of the non-readers.

To say that Smith articulated how ‘the "invisible hand" of market interactions can coordinate a society based upon liberty — i.e., private property rights and voluntary exchange — more effectively than can the coercive power of the state’, is not to set a very high standard, but Smith didn’t quite say that because the invisible hand was not about markets at all. It’s about individual motivations, in this case of risk aversion of merchants to sending their capital abroad, which can have unintended positive effects on domestic growth. They can also have unintended negative effects from individual motivations from forming monopolies, engaging in protectionist measures, raising prices, causing externalities in pollution, going bankrupt, and so on.

The rest is a series of quotations from Wealth Of Nations, supposedly illustrating the ‘invisible foot of government’. All of which miss the point. While Smith criticised government intervention in the economy, mainly at the behest, please note, of the same merchants and manufacturers who operated in the economy, he did not dismiss all roles for government. He was never a libertarian, certainly not to the same (impossibly) high standard of idealist Mises Institute’s members.
Wealth Of Nations is not a textbook of economics at all. It was a report of Smith’s lonely inquiry into the nature and causes of the wealth of nations in general and of the case of 18th-century Britain in particular. He did not write a blueprint for all commercial economies. His critique was of mercantile political economy, as it had been applied in Britain since Elizabethan times to the mid-18th century. It was not about ‘capitalism’, which did not exist until the mid-19th century (the word capitalism was first used in 1854 by a novelist, William Makepeace Thackeray in his novel, The Newcomes, and then by Karl Marx from 1864).

Smith addressed singular economic problems brought about by mercantile policies and colonialism. It says nothing about an industrial revolution in Britian, which was not apparent, in the form of power-driven not hand-operated, machinery, until the 19th century. He knew nothing of the consumer society, nor one driven by massive flows of capital from savings, pension funds, and international investment. He knew nothing of big governments, now common across the world, intervening on scales unimagined in his day.

And in all of this, the metaphor of ‘an invisible hand’ was mentioned all of once in Wealth Of Nations in Book IV, not at the beginning with his other principles governing society’s progress to opulence. Gary Galles ought to know this.


Blogger Ken Houghton said...

"I have no idea why this appeared today!"

If you're viewing posts through a Reader of some sort, such glitches appear periodically. (I'm guessing when a blog owner refreshes their content or somesuch.)

Happened with Google Reader and the World Bank's PSD blog.

Consider it a feature, not a bug.

12:52 am  

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