Wednesday, May 27, 2009

An Oxford Economist Comments on Adam Smith and 'An Invisible Hand'

Mark Koyoma, an editor of the Oxford journal, Oxonomics (Economic Perspectives from the Dreaming Spires) HERE: reports on the Kennedy-Klein debate on my paper, ‘Adam Smith and an invisible hand: from metaphor to myth’:

The Fight over Adam Smith’.

Lost Legacy will be publishing a response to Dan Klein’s reply in September in EconJournal Watch and therefore will not reply directly to Dan Klein’s interesting and well-considered article until then. You can read both my paper and Dan’s reply HERE>

However, I consider it appropriate to take up a paragraph from Mark Koyoma’s lucid article, without breaching my self-denying ordinance in respect of my September more detailed response to Dan Klein.

At several points in both the theory of Moral Sentiments and the Wealth of Nations, Smith suggests a theory of social order as a emergent and self-organizing phenomenon. He also dwells on the role self-interest plays both in motivating the baker to supply us with bread and in driving merchants to pursue monopolistic rights and privileges. The interactions of self-interested individuals are what is ultimately driving the formation of the types of societal orders Smith is interested in. Together these two points suggest that identifying what institutions lead the interaction of self-interested individuals into produces socially suboptimal ends and what institutions lead to socially desirable ends, is an important question. From this perspective, the term `invisible hand' is a convenient short 'hand' for the types of processes that lead to 'good' outcomes.”

I think Mark Koyama has got it about right in the quoted paragraph, except for the mysticism he insists on including in his last sentence. There are two outcomes(roughly speaking) possible in any social interaction to which we can usefully contemplate. One is “what institutions lead the interaction of self-interested individuals into produc[ing] socially suboptimal ends and what institutions lead to socially desirable ends.”

Now about that we are in unanimous agreement! Smith makes it clear (I refer to over 60 instances where the self-interested action of individuals where he does so) that there are multiple instances of sub-optimal outcomes identified in Wealth Of Nations in Book I and II (I stopped counting from Book III because this book and Book IV are predominantly about the sub-optimal outcomes of Mercantile Political Economy and from history, and Book V is about government expenditure and revenue raising).

The other kind of interactions producing optimal outcomes are different, but are not unexplainable! Smith does exactly explain how they come about, as he does in the famous paragraphs in Book IV which end with – don’t begin with – the use of the metaphor of ‘an invisible hand’ to do what a metaphor is supposed to do (as described in his Lectures on Rhetoric and Belles Lettres in 1763).

The metaphor was not an explanation – he had already given that in paragraphs 1 to 9 – it was a poetic flourish, if you like. But instead of its being seen as a metaphor it was re-structured as an explanation – a ‘theory’, even a paradigm - ascribing to Smith something he never implied. And that is the point. The modern construction – general equilibrium theories – is modern, not Smith’s.

Worse, the two alternatives outcomes that Mark has highlighted have been melded together by popular usage in post-War American dominance of the deiscipline from the 1940s into a single myth that the self-interested actions of individuals in a market economy inexorably lead to the benefit of society, irrespective of whether the self-interests of individuals tip in selfish greed, a wholly false attribution to anything Adam Smith wrote.

I have no objection to modern economists drawing such a conclusion in their own names; but it had nothing to do with Adam Smith’s ideas about markets or his use of the metaphor of an invisible hand.

That Hayek found some resonance in the metaphor for his work on ‘spontaneous order’ is a secondary issue, unless linked to the modern economists’ simplistic and politically dangerous notion of whatever self-interested individuals – and, pace Friedman, corporations, assisted by big government - do, they somehow benefit society,. which is precisely Smith's departure from the then prevailing Mercantile Political Economy of 'merchants and manufacturers' and legislators and those who influenced them.

Their conduct - monopolies, protectionist tariffs and prohibitions, sanctions against neighbours, 'jealousies of trade', hostilities, military posturing beyond the need of defence against invasion, colonies and wars or intrigue over dynastic quarells - were not only damaging of a country's real interests in progress towards the spread of opulence, they had real costs among those - the majority of the poor families - who were affected by them.



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