Saturday, January 19, 2008

Silly Saturday Stories About Adam Smith no 10

In Reflections on everything (‘Write to be understood, speak to be heard, read to grow — Some dude’) here

This point, however, seems to be lost on people like Milton Friedman (who is a Nobel Laureate in Economics), whose statement was used in the Microeconomics textbook that I use to defend the laws of utility theory. The argument goes something like this: Just like the pool player does not know the laws of physics, but still knows ’somehow’ that hitting the ball in a certain place will make it go a certain way, models of economics are made ‘as if’ the individual were trying to maximize profit. If it fits reality , good, else too bad. To put it more simply, balls on a pool table cannot hear the laws of physics, but they follow it anyway, don’t they ? So, when Adam Smith discovered the ‘Invisible Hand’, and wrote an enormously influential treatise to propagate his ideas, people reading the treatise ‘realised’ that yes, this is very close to what they are doing.”

Comment
Adam Smith did not "discover the ‘Invisible Hand’". He used a fairly common metaphor (used by Shakespeare and Defoe, and many others) near the end of Wealth Of Nations to represent an instance to do with risk aversion, which had nothing to do with markets (which dominates the first chapters of his book). Its general attribution to all economic behaviour is an invention of 20th century economists, most of whom have not read Wealth Of Nations.

7 Comments:

Blogger Joy MM said...

This comment has been removed by the author.

12:48 pm  
Blogger Joy MM said...

Even if one admits that what you say is right, which it probably is, the point that I try to make here was more about postulating laws which influence human behavior. It was not meant to mock nor parody.

My copy of the ‘Wealth’ reads “… invisible hand to promote and end which was no part of his intention.” Whatever may be the context in which this statement was made, Smith is still telling us that without our knowledge, we work for the public good. Call it risk aversion, call it anything else, he is trying to make a model which according to him fits reality well, and my contention was that this observation is not removed or detached from the process which generates this behavior, rather, it actively participates in it.

I definitely have more respect for Smith that I do for ,say, a Marshall. I am not claiming that Smith had mystical visions of intangible forces, but rather that his model of the economy went some way in promoting itself.

Before you go about pasting 'silly saturday stories', It would help if you atleast waited for a reply to your comment. Every bit of text on the web that contains the words 'invisible hand' is not a bit of text that somehow smears Smith's lost legacy. If you read the post properly, It was not trying to put down or glorify or attribute false notions to Smith, but was talking about how laws/models do their bit in promoting themselves, especially normative ones.

12:50 pm  
Blogger Gavin Kennedy said...

Hi joy mm

Thank you for your comment. I can see your point about what you meant and if you had written it that way it would have been more acceptable, at least to me.

However, that Adam Smith's use of a fairly common metaphor after he had clearly described the process by which some merchants in certian conditions preferred the home trade to the foreign trade does not permit us to conclude that he was 'telling us that without our knowledge, we work for the public good'.

Read popular and scholarly accoutns of this suggestion and you will see what mischief it creates. If whatever we do for our self interests benefits society it excuses all kinds of expressions of self interest - pollution, protections monopolies, price increases, and other social misbehaviours.

Now Adam Smith never said this at all. Quite the opposite in fact. He mentions 50 occasions in the first two books out of five in Wealth Of Nations where self-interested inviduals act against the public's interests (I posted the page numbers on Lost legacy the other day).

He fully describes how markets work in Books 1 and 2 without mentioning anything about invisible hands doing anthing.
In fact, the only time in Wealth Of Nations hh mentions the invisible hand in on page 456 (Book IV, chapter ii.paragraph 9) which is about risk aversion, not markets, not a 'law', not a 'model' of reality, and certainly not about general behaviour.

My heading 'silly Saturday stories' is meant to be provocative of debate, not personal.

Stories and myths about invisible hands appear widely all over the world. I respond to them when I have time, as reading Lost Legacy should show you. I also provide scholarly evidence.

If you are offended, then I apologise for this. My exasperation sometimes overflows.

2:02 pm  
Blogger Joy MM said...

Im confused. I quoted from the 'Wealth', and I don't see how the quote could mean anything other than what it says. Im not deducing anything from his statement, but merely quoting it.

I agree with you that this metaphor has been abused to justify hideous deeds, to me this is a sign of externalization of costs. If people actually pay up for what they use, maybe this would not have amounted to an abuse.

My blog post was not about how the market functions either, you will not see that word anywhere. It was about how a person will behave given certain conditions. Now, you say that the metaphor was not used as a law, model about general human behavior. Then what was the intention of using it ? I doubt that it was to add rhetorical flourish to the prose.

2:30 pm  
Blogger Gavin Kennedy said...

joy mm

Merely quoting from Wealth Of Nations does not make its contents applicable in all aspects of human behaviour. Your previous response said:

‘Whatever may be the context in which this statement was made, Smith is still telling us that without our knowledge, we work for the public good.’

Is that what Smith meant? There are occasions in which that is true (Smith said so himself) but there are many occasions in which it is not true. To decide on which side your self-interest behaviours ‘work for the public good’, we have to examine the cases, as Smith was careful to explain.

In the case of the only time Smith mentioned the metaphor in Wealth Of Nations, he explains what risk averse merchants do when their aversion to the risk of foreign trade (pages 454-5) leads them to invest in their capital locally. Because they seek to ‘direct their industry that [their] produce may be of the greatest value’, they ‘necessarily’ labour ‘to render the annual revenues of society as great as [they] can’.

They people concerned do not have to do other than individually invest their capital locally. They do not have to consider the impact of their actions on the interests of society. In fact they can be totally oblivious of society’s interests.

This amounts to the arithmetic ‘whole is the sum of its parts’, which is hardly the most profound thought in Wealth Of Nations. After explaining this in the elegance of his prose, he adds that the individual is ‘led by an invisible hand to promote an end which was no part of his intention.’

Clearly, Smith is right in this specific case – and in any others where the conditions and specific consequence obtain – but it may not be the case in other circumstances. Relying on the single sentence, ‘By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it’ to generalise a metaphor as applicable generally is problematical. That is too strong an assertion on the basis of a single passage, in a book of nearly a millions words which only gives a single instance of the invisible hand metaphor.

If the ‘invisible hand’ metaphor was a major principle of general importance, Adam Smith would have included it at the beginning of Wealth Of Nations where he sets out the principles of behaviour – the ‘propensity to exchange’, the urge to ‘self betterment’, the ‘division of labour’, ‘savings’, ‘capital stock’, the ‘wheel of circulation’, ‘exchange value’, ‘market prices’, etc., – plus the disagreeable principles of behaviour evidenced by the ‘rulers of mankind’ through the ages.

He didn’t do so because it wasn’t a general principle. If he had it would have been recognised as in severe error on his part.

The general attribution of an invisible hand as you define or understand it to all economic behaviour is an invention of 20th-century economists, most of whom, sadly, have not read Wealth Of Nations – their understanding is confined to isolated quotations torn out of context.

‘you say that the metaphor was not used as a law, model about general human behavior. Then what was the intention of using it ? I doubt that it was to add rhetorical flourish to the prose’

Adam Smith was a moral philosopher, not an economist as we understand the term. He lectured in rhetoric as well as political economy. His books are full of rhetorical flourishes and very mature literary styles. The metaphor of the invisible hand was fairly common in literature at the time (Shakespeare, Defoe, Voltaire, and many others).

He had explained in detail why individual merchants in Wealth Of Nations, landlords in Moral Sentiments, and pagan Romans in his History of Astronomy (the only three occasions he used this metaphor) acted the way they did. I think your ‘doubt it was to add rhetorical flourish to the prose’ is, perhaps accidentally, the truth that explained what he was doing.

6:40 pm  
Blogger Gavin Kennedy said...

Hi joy mm

If you would like to read my detailed views on the metaphor of the invisible hand, amil me:gavin ||at|| negweb|dot|| com and I shall email to you my paper: 'The Myth of the Invisible hand'

Gavin

7:21 pm  
Blogger Joy MM said...

gavin,

Your explanation makes sense. Coming to the point why this whole issue came up, 'risk aversion' is a model of human behavior, is it not ? Saying that a person is only looking out for his own security will imply that he _ought_ to as well, that it is the sensible thing to do?

Like I mentioned earlier, mentioning Smith was coincidental (in retrospect, a happy one :), I could have mentioned Spencer's sociology and its effects in shaping American business attitudes as well.

1:06 am  

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