Sunday, June 29, 2008

A Tall Sunday Story of an Invisible Hand

Dialektika (‘the working man in the world unit’)

Adam Smith and the invisible hand by Helen Joyce.

Joyce begins by slightly misleading her readers, by cutting into the famous paragraph 9 that mentions the metaphor of the invisible hand (WN IV.ii.9: 455-6).

By cutting out the crucial information that Adam Smith discusses not just the general individual in society but those particular individuals who employ ‘whatever capital [they] command’ (WN IV.ii.4: 454), namely merchant traders. He is dealing with a particular case of owners of capital who contemplate where to invest it and choose between engaging in the ‘foreign trade of consumption’, particularly, though not exclusively, in British colonies in North America or India, or investing it locally.

The decision centres on which destination is ‘most advantageous’, which boils down to which is most profitable and least risky? Both are profitable, but one (foreign trade) is more profitable and more risky than the other.

When he invests locally his ‘capital is never so long out of his sight’ and in the colonial trade it may be away from him for months, and subject to the vagaries of the weather at sea, risks of piracy, seizure during wars, dishonest handling in foreign ports, malfeasance when under the control of distant merchants, of whom he knows less than those close by him, the vagaries of foreign justice, and the fortunes of distant consumers.

Not considering the context of which Smith was addressing is tantamount to drawing in the minds of readers of the stripped down quotation a completely misleading impression that Smith is talking as a general rule of trade. He wasn’t! It isn't even mentioned during his long discussiosn of markets in Books I and II of Wealth Of Nations!

Smith is discussing the risk aversion of merchants to investing in trade abroad and necessarily investing locally. The consequence is for Joyce to downplay those parts of the quotation from paragraph 9 that make it clear of what he speaks.

The individual merchant ‘intends only his own security’ and it is this consideration, plus his desire to make profits, ‘provided he can thereby obtain he ordinary, or not a great deal less than the ordinary profits of stock’ (WN IV.ii.5: 454), which determine inexorably, by the arithmetic rule that the whole is the sum of its parts, that domestic products thereby ‘may be of the greatest value’, and certainly greater than they would be if merchants were risk neutral.

This conclusion is sufficiently explained by Smith and readers who understand its construction would see that truth immediately. His readers were educated and literate, but not necessarily all to the same standard, and to cap his presentation he drew on his knowledge of literature, both contemporary and classical, where the metaphor of ‘an invisible hand’, which was widely used and recognised in the 18th century, of ‘an invisible hand’.

The metaphor represents, as metaphors are supposed to, and as Smith taught in his lectures on Rhetoric (see: Lectures on Rhetoric and Belles Lettres,[1763] 1983), the object under discussion, namely the behaviour of risk averse merchants. It was not a ‘theory’, ‘concept’, or ‘paradigm’, nor the greatest idea of great significance. It was not a reference to God, or some divine intervention, which Joyce thought that Smith discovered because he ‘was profoundly religious, and saw the “invisible hand” as the mechanism by which a benevolent God administered a universe in which human happiness was maximised.’ Her conclusion is an assertion for which she has limited evidence.

Smith’s mother was ‘profoundly religious’ but there is no evidence that he was. Indeed, he had abandoned Oxford University to avoid continuing to become a priest in the Church of England and to preach in the Episcopalian Church in Scotland.

The metaphor of the invisible hand is just a metaphor. Nothing more.

Shakespeare used the invisible hand in Macbeth (the ‘Scottish play’), as did Daniel Defoe in Moll Flanders and Colonel Jack, and a score of other authors in books on the shelves of most educated people in the 18th century.

Helen Joyce makes several other wild assertions in her article (HERE). If I have time I shall return to them, but for now I have a conference to attend.


Post a Comment

<< Home