Good Teachers Should Refrain from Teaching the Modern Version of the Invisible Hand in Smith's Name

“My First Day of Class” by David Henderson in The Library of Economics and Liberty HERE

“When I give them my phone number so they can reach me (it ends with 1776), I ask them the significance. Invariably someone answers that it was the pub date of Adam Smith's Wealth of Nations (after the first typical answer that it was the date of the Declaration of Independence.) Then I show them The Wealth of Nations and tell them that many people dismiss it because it's "so 18th century." Then I read to them the famous quote about benevolence of butcher, brewer, and baker:

'It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages'

and the famous quote about the invisible hand:

'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. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

Then I read to them Smith's prediction that the 13 colonies would win the war and that they would become the most powerful nation in the world. I still get goose bumps when I read those quotes.”

Comment
David teaches Executive MBAs from in “front of a camera to 3 remote locations: D.C., Norfolk, and Oceana”. He’s “taught since 1975 with 4 years off to work at Cato or in the Reagan Administration, 1 year off for 2 half-year sabbaticals, and 1 year of leave without pay to work on the original Encyclopedia of economics.” He’s not bored teaching the same stuff “over and over” and has been doing it since his “first year at the University of Rochester in the fall of 1975” when he “was 24”.

I read (and you should too) David's regular contributions to Econlog with Arnold Kling and Bryan Caplan HERE

From reading his contributions, I believe David is an intuitive and inspiring teacher. That’s where my problem with the above extract from his post begins. His students will listen to him and, because he is a good teacher, and they respect good teachers, they will go away from class and believe for life what he has taught them.

Since the 1950s that is precisely has been happening all across campuses in North America and Britain, though not in the main from good teachers like David – what they half understand from their lectures they get reinforced in print in their standard textbooks, which mainly present the same misleading idea under the authority, apparently, of Adam Smith.

If they remember nothing much else about Adam Smith, their introduction to the “invisible hand” will probably be among the little they do about how modern markets allegedly work. And every media source they watch, hear or read, will repeat the metaphor of the “invisible hand” whenever the economy is discussed.

Lately, of course, some media sources will assert that the “invisible hand” is no longer working; others will assert that it would be working, “if only…” this or that intervention was or was not made. Each repetition of the metaphor embeds it deeper in their memories. The myth becomes real. There is an “invisible hand”!

Yet, David, and all other teachers, good like he is, or not so good, even those who are bad or positively worse, entrench the myth into a principle of economic theory and it becomes an actual truth, believed with the certainty of a religious precept and twice-blessed because its authority comes from an ancient text that few read, though many have a copy on their book shelves (and even more have the quoted paragraph to hand but who have never opened Wealth Of Nations to read for themselves). That Smith’s book shares the same revered year of 1776, as the Declaration of Independence, gives it an hallowed status too.

Against this tide, what chance has the truth about the making of the metaphor of “an invisible hand” into myth got? My experience of presenting the truth about the “invisible hand” to polite audiences of my fellow economists – including those who distinguish their scholarship with deep understanding of the history of economic thought – has been dire, if not wholly disappointing, with a few heroic, and much appreciated, exceptions. I shall try to do better in future.

However, I suggest to David that he continue to address his Executive MBA class with the same goose-pimple, inducing enthusiasm as always but with an amendment. I suggest that he drops the myth of the invisible hand – which was not Smith’s point (see my: “Adam Smith and the Invisible Hand: from metaphor to myth” HERE and Here
plus Dan Klein’s criticism HERE which is not the same as in its modern guise.

It misleads his audience into believing what is not true, namely that irrespective of what they do, a long as they act from the “self-interest”, it all works out for the ‘best of all possible worlds’, when manifestly it hasn’t and doesn’t (not least because “self-interest” is not always benign towards others).

I praise David for continuing to introduce his class to Smith’s ideas (as long as they are Smith’s ideas) starting with the role of bargaining (the parable of the “butcher, the brewer, and the baker”), and, perhaps, following with Smith’s assertion that “no society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable” (WN 96).

The rest, of course, I leave to David in the confidence that he knows his way round Wealth Of Nations and will use that knowledge to motivate future managers and entrepreneurs to do better than many of their predecessors.

Start With a Myth, End Without an Answer

Mike Farmer writes on “Analogies to America's 2009 recession” (28 September), on Bonzai (a Libertarian Blog) HERE:

“The 1929 crash exposed in addition the naviety [sic] and ignorance of bankers, businessmen, Wall Street experts and academic economists high and low; it showed they did not understand the sytem [sic] they had been so confidantly [sic] manipulating. They had tried to substitute their own well-meaning policies for what Adam Smith called the 'the invisible hand' of the market and they [had sic] wrought disaster. Far from demonstrating, as Keynes and his school later argued -- at the time Keynes failed to predict either the crash or the extent and duration of the Depression -- the dangers of self-regulating economy, the degringolade [sic][?] indicated the opposite: the risks of ill-informed meddling.”

Comment
Relying on “what Adam Smith called the 'the invisible hand' of the market” is unlikely to do much good because the idea of an “invisible hand of the market”, attributed since the 1950s to Adam Smith, is wholly mythical.

There is a libertarian case for criticisng history (both in 1929-41 and 2006-09) but I do not think Bonzai makes that case on this occasion.

Is Edmund Conway Innocent?

Edmund Conway’s "50 Economics Ideas You Really Need to Know" published by Quercus at £9.99,is "well timed".

"Each of the topics – from Adam Smith’s invisible hand through to the more modern “happynomics” – follows the same four-page template, with bite-sized sections, timelines and key quotations pulled out.

Conway, the economics editor of The Daily Telegraph, has clearly done his research and the book is well-referenced given its compact size. It should be essential for anyone keen to make sense of the causes, ramifications and solutions to the current crisis and should be on the desk of everyone working in the City.

Purists may hate it, but then it is worth remembering that it was some of the purer economic theories that got us into this mess."

Comment
I have ordered my copy and will comment again when I have read Conway’s book.

“Purists may hate it, but then it is worth remembering that it was some of the purer economic theories that got us into this mess.”

I agree, but it depends what he interprets as ideas we need to know.

For example, if Conway thinks we need to know about “Adam Smith’s invisible hand” as presented by modern economists along the usual lines of it controlling a process by which self-interests (in the extreme, even ‘selfishness’) are processed into always benefiting the public good, I will make an objection on the “purist” grounds that this is a wholly invented notion by the same modern economists who got us into the mess by turning an 18th-century metaphor into a myth.

Worse, they are unapologetic about what they taught their students since the 1950s that led them to believe the myth that gave comfort to entrepreneurs, politicians, media folk, and hapless employees and consumers, which inevitably had the result that reckless speculation, plus (never forget this) the role of governments and those who influenced them, together caused for the rest of us.

Anyway, let’s await the arrival of the book first, before damning Edmund, who may well be innocent of my premature suspicion.

Adam Smith and Religous Beliefs

Rev. Allen M Baker, Pastor of Christ Community Presbyterian Church in West Hartford, Connecticut, writes in Banner of Truth HERE

“Which will you choose?”

“By the sweat of your face you will eat bread (Genesis 3:19)”

In 1776 Adam Smith, a Scottish economist and Deist, a good friend of David Hume the sceptic, wrote his famous book Inquiry into the Nature and Causes of the Wealth of Nations that has profoundly affected the capitalist system in our world. Smith taught that an 'invisible hand of nature' guides the law of supply and demand and that if left alone will continue the increase in the wealth of nations equitably for all people. Smith failed, however, to heed the words of Genesis 3 concerning the implications of the fall into sin — namely that man is innately selfish and greedy, given to avarice.”

Comment
“Smith taught that an 'invisible hand of nature' guides the law of supply and demand and that if left alone will continue the increase in the wealth of nations equitably for all people.”

News to me, and I am sure it would have been news to Adam Smith. He never taught or wrote anything in the same sentence or paragraph about “the law of supply and demand” (Books I and II) and the “invisible hand of nature” (Book IV) (even the phrase “of nature” on this context is invented).

“the wealth of nations equitably for all people”.

Well, he wrote a book called (short title) the “Wealth Of Nations”, but did not refer in it to “equitably”. Distribution in its modern sense was not a topic in political economy in the 18th century. He said “progress to opulence” was a good thing – employment of labourers was good in the sense that it was better than destitution and the average life-span of 25 years.

Whether Smith failed “to heed the words of Genesis 3 concerning the implications of the fall into sin” is not documented. Being brought up in a Presbyterian household – his mother was very religious – he would know his Bible, but whether he took revealed religion seriously after his early 20s is another matter. It was unlikely that he was a Deist, at least after his mother died. In 18th-century Scotland, to be thought to be an atheist was not socially possible; Deism was also condemned but by the 1770s it was less so.

See my paper: The Hidden Adam Smith in his Alleged Theology”, presented to the History of Economics Annual Conference, University of Colorado, Denver, June 2009. Available from the address at the top of Lost Legacy’s Home Page.

“man is innately selfish and greedy, given to avarice”

“Innately” means it is within man from birth. What a low opinion Rev. Allen M Baker has of mankind. Some people are “selfish and greedy, given to avarice”, but many more are not. If we all were malformed that way we would “enter an assembly of men as [we] enter a den of lions” (Adam Smith, Moral Sentiments, 1759: TMS II.ii.3.4: 86).

It’s Rev. Allen M Baker’s kind of Presbyterianism that drove most Scots from the Church once the “Holy Willies” (as Robert Burns put it) no longer were able to force everybody into conformity with its oppressive doctrines (young Thomas Aitkenhead, a theology(!) student was hanged in Edinburgh in 1697 for so-called blasphemy).

What kind of loveless people were these men?

Government Failure Also Endemic

Kevin Williamson writes in National Review Online, “Taming ‘Animal Spirits”
(‘Investors sometimes behave irrationally, and so do regulators’)
HERE:

“Animal spirits are indeed at play, and mischievously so, both in the marketplace and among those who seek to govern the marketplace. It is characteristic of our academic caste that Professors Shiller and Akerlof attend to the former case but are blind to the latter, and so they have produced an essay that is not so much conventional as convention itself, arguing, in a series of bland metaphors, that economic exorcists in Washington must be deployed against animal spirits in the marketplace: “If we thought that human beings were totally rational and acted mainly from economic motives, we, like Adam Smith and his followers today, would believe that governments should play little role in regulating financial markets. . . . But on the contrary, we believe that animal spirits play a significant and largely destabilizing role. Without government intervention, employment levels will at times swing massively, financial markets will fall into chaos, scoundrels will flourish, and huge numbers of people will live in misery.”

“There is no need to address the problems of that passage beyond cataloguing them: We have lots of government intervention in the economy, but employment levels do swing, financial markets have fallen into chaos, scoundrels do flourish with great exuberance, etc. And neither Adam Smith nor his intellectual heirs believe that economic man is an icy rationalist, or even that he is rational, broadly defined. Ludwig von Mises put the idea into theoretical form, but it has long been understood that man acts rationally in the sense that he takes actions that seem to him sensible in order to achieve a certain end, but that end itself may be irrational, erroneous, or criminal: Scientific researchers act rationally to achieve certain ends; so do serial killers, religious fanatics, drug addicts, and Wall Street traders.”

Comment
A most interesting article with which I mostly agree. Basically, it criticises the Homo economicus model of human(?) behaviour upon which so much of modern economics is based. Partly, the model was inevitable once it was decided to find a way to make political economy ‘scientific’, with maximum/minimum maths using calculus (Pareto, following Walras), out of which the mathematisation of economics into what it became from the mid-20th century.

The scribbles of modern economists influence public policy, often without the qualifying assumptions of the scribblers, and a whole host of dubious ideas get traction in the daily grind of politics.

The idea that markets are liable to fail, unless regulated, is having a renewed run just now, as if the regulators are some version of supermen and superwomen, who do no wrong, are immune to other than the public good and above reproach or suspicion. Being made of the same stuff as ordinary humans (absent from the models), regulators can be at least as bad as the worst market-makers, and on occasion, even worse.

I suggest you read Steven Medema’s, The Hidden Hand: taming self-interest in the history of ideas, Princeton University Press (2009), for an excellent account of the 1930s debate about the assumed probity of the selfless public servant in Pigou’s "Welfare Economics".

Adam Smith No Ideologue

Baron Bodissey writes long articles in the “Gates of Vienna” (HERE)and is connected (how, is not clear) to The Fjordman Files HERE the themes of which are too complex, long and not related much to Lost Legacy’s focus on Adam Smith.

“The Scottish philosopher Adam Smith, professor at the University of Glasgow, published his famous The Wealth of Nations in 1776 where he argued in favor of freedom of enterprise. Government should interfere with commerce as little as possible and limit itself to three primary duties: Provide defense against foreign invasion, maintain civil order with courts and police protection, and sponsor certain indispensible public works and institutions that could not make adequate profit for private investors. Smith made the pursuit of self-interest in a competitive market the source of a natural harmony and equilibrium. The “invisible hand” of free competition would gradually lead to increased wealth for all.”

Comment
I take the view that if Baron Bodissey is wrong in both detail and in general about a small paragraph from his long histories of the world, such as Adam Smith’s role in his big-picture spectacular history of everything, I expect the rest of his article may well contain similar errors too.

When Adam Smith wrote Wealth Of Nations he was no longer a professor at a University of Glasgow. He left the university in 1764 to undertake tutorial duties with the Duke of Buccleugh in a tour of Europe (1764-1766, during which he commenced writing his famous book from lectures notes from his professorial stint (1751-64), published in 1980 as Adam Smith’s Lectures On Jurisprudence (1978; Oxford University Press) and possibly from notes of his Edinburgh lectures, 1748-51. Wealth Of Nations took from 1764 to 1776 to write and was published in 1776.

Smith did not write in favour of “enterprise”; he wrote in favour of “commercial society”. The former is a projection of a modern word onto the past; in fact, he displayed throughout Wealth Of Nations strong suspicions about the conduct of “merchants and manufacturers”.

To summarise Smith as saying that “Government should interfere with commerce as little as possible” is another back projection onto the historical facts. It conflates Smith’s “violent attack” on the conduct of political economy in mid-eighteenth century Britain, in the form of “mercantile”, government-sponsored, monopoly privileges granted as favours to special interests, as promoted by individual legislators, and those who influenced them, often associated with bribery and other favours (of which the East India Company was a prominent example), with modern misinterpretations of Smith’s legacy by his epigones.

Smith was not opposed to government-directed activities, and those he specifically advocated were not minor aberrations. Defence was a major expense in the annual budget – the seven-years war with France cost £120 millions – and it remained a major budget item well into the 19th century. The defence sector employed tens of thousands annually, both in the defence establishment (unproductive soldiers and seamen) and in productive defence employees, manufacturing defence supplies for a profit for the defence establishment. Technologies associated with defence, shipping, navigation, charts, overseas exploration and bases, and foreign relations, played a major role in the changing domestic economy and in British international trade.

“civil order with courts and police protection” was an absolutely crucial pre-condition for the development of a domestic commercial society. It was not just an “expense” to be minimised in a sort of 19th-century “watchman state”. Without justice, society would “crumble into atoms” and “a man would enter an assembly of men as he enters a den of lions” (Moral Sentiments II.ii.4: 86). With the growth of commerce, the role of contracts proliferated and was reflected in the administration of law, and the professions of lawyers.

Smith’s observation is inadequately stated as “indispensible public works and institutions that could not make adequate profit for private investors”. This is a major task, the scale of which is hidden in the brevity of Baron Bodissey’s sentence.

The appalling state of roads in 18th-century Britain required the building of thousands of miles of roads; the construction of canals, likewise; and the dredging of the hundreds of harbours around Britain added to a major capital investment in both the building and, crucially, the annual maintenance of this infra-structure on a scale that mocks the dismissive assertion that this policy was one requiring the government to “interfere with commerce as little as possible and limit itself” to a few minor tasks.

Assuming that Smith’s suggestions for government were adopted by an 18th or a 19th-century government, it would have required the substantial commercial activity of scores of commercial firms for the profitable building and maintenance of the infra-structure, spread over many decades.

That the building of these projects could never repay the projectors (Smith’s original point) did not mean that they could not make a profit for building and/or maintaining them if the government funded their erection. How they were to be funded was a matter for the public finances (fight fewer wars?), which does not in any way limit their economic impact given existing relationships between government funding (defence, is classic) and commercial suppliers of the means (infra-structure builders). Most ‘watchman-state’ attributors to Adam Smith miss the point.

[Of course, the notion of the ‘watchman state’ is wrongly attributed to Adam Smith; it was actually invented as an idea by Ferdinand Lassalle, the 19th-century, fire-brand socialist – Adam Smith, once again was innocent).

Baron Bodissey in identifying Smith’s “limited” role for government to “indispensible public works and institutions”, missed out saying anything about “public institutions” (even missing the adjective, “public”, as used by Smith in Wealth Of Nations), which is somewhat sad because the sheer scale of intervention that would have been necessary to put his recommendations into effect hides the extent of the prime role of education he envisaged for a commercial society.

Briefly, to erect a “little school” in every parish would have involved more than 60,000 such schools across the country – though Scotland already had “little schools”, having started on mass education in the 1600s). Add the teachers for such schools to the simple buildings, and book supplies, this was a formidable undertaking – if it had been taken up.

Smith discusses the role of government (Book V, Wealth Of Nations) under the heading of public finance – budget items and taxation. He does not disucss the role of intervention of a legislative kind. He was ferociously critical of much government legislative intervention – the creation of monopolies, protectionism and barriers to trade, jealousies of trade, and wars cause by such, and the imposition of various statutes (Apprentices, Settlement, Guilds, Patents of monopolies, and such like), and colonial policies. This does not mean he did not envisage a regulatory role for government.

Smith advocated certain other roles too. Among these there are his call for government intervention in special cases, even when such regulations are “a manifest violation of that natural liberty”, as the issuance of “promissory notes” for small sums (WN II.ii.84: 324), a small step in 18th-century banking, but one that was bound to expand with the expansion of commercial banking . Smith associated such interventions with the building of party wall to prevent the spread of fire, as common sense, not excluded by ideology.

Baron Bodissey ends his ommision-filled paragraph with “Smith made the pursuit of self-interest in a competitive market the source of a natural harmony and equilibrium. The ‘invisible hand’ of free competition would gradually lead to increased wealth for all.” Lost Legacy readers will recognise the multiple errors in Baron Bodissey’s summary of Smith’s view wrapped in two sentences.

The derivation of “free competition” from the “invisible hand” (or vice versa) uses a redundant metaphor, which explains nothing and, being a metaphor, is not required to do so, and misleads by inferring the actual existence of such a entity (see Lost Legacy passim).

The metaphor of “an invisible hand”, used only once in Wealth Of Nations (Book IV.ii.9: 456) was really about the arithmeticl rule - 'whole is the sum of its parts' – the more merchants who invested locally, in preference to foreign trade because of their aversion to the risks of losing sight of their capital, the larger would be total local investment and employment.

Many merchants continued trading internationally profitably despite the perceived risks. This outcome – larger local investment and employment would result whatever the competitive, or non-competitive, commercial society, ergo, the invisible hand metaphor had nothing to do with competition – it was to do with profitability tempered by risks.

Baron Bodissey links conclusions from modern general equilibrium theory (“free competition would gradually lead to increased wealth for all”) and not from Wealth Of Nations.

“Increased wealth for all” is not contingent on free competition; “increased wealth for all” would be greatly assisted by “free competition" but has not yet been experienced so far, except in tiny pockets for short periods of time. Mercantile distortions on commerce have long been prevalent and despite them, a gradual increase in wealth has been experienced by large proportions of the populations of all commercial societies over long periods (in Britain’s case, since the 16th century).

There are no “invisible hands” guiding commercial societies; there are only the powerful affects of markets, distorted, hampered, and inhibited by the local institutions and habits prevalent in particular societies. Markets work despite obstacles put in their way (ruinous interventions, wars, civil strife, cultural prejudices, politics and religions). Some work more efficiently than others.

Smith observed and understood. He didn’t expect the utopia of free trade to occur, he didn’t perceive that “natural liberty” was an essential pre-condition for the “progress to opulence”. He was not a visionary, nor a ‘man with a mission’. He was a moral philosopher, not ideologue.

A (Bright) Students' Choice

Nick Kraft quotes in his article “Misleading Indicators” from David Colander’s book, The Making of an Economist, Redux and asks:

“How do people become economists?” (HERE)

“Were an undergraduate student to ask an economist how to become an economist, he would tell her to go to graduate school. She might demur, asking, “Wouldn’t it make more sense to go to Wall Street and learn how markets work?” Getting firsthand experience may sound like a good idea to her, but most economists would briskly dismiss the suggestion. “Well, maybe I should get a job in a real business—say, turning out automobiles.” The answer will be “no” again: “That’s not how you learn economics.” She might try one more time. “Well, how about if I read all the top economists of the past—John Stuart Mill, David Ricardo, Adam Smith?” Most economists would say, “It wouldn’t hurt, but it probably won’t help.” Instead, he would most likely tell her, “To become an economist who is considered an economist by other economists, you have to go to graduate school in economics.”

So the reality is that, to economists, an economist is someone who has a graduate degree (doctorates strongly preferred) in economics. This means that what defines an economist is what he or she learns in graduate school.

Over the past 30 years or so the graduate economics curriculum has become more and more like a program in applied mathematics with a corresponding de-emphasis of economic history, history of economic thought, industry studies and industrial relations. This narrowing of focus gets reinforced as the student finishes the Ph.D. and gets a job in the academy. The greatest rewards go to those who make advances in theory and publish in the half dozen top academic journals. Few articles will be accepted by these journals that do not start with the standard abstract model and then derive some new “interesting” result. Publishing in public policy journals, by contrast, is considered much less prestigious and can even count against an aspiring academic by showing that one is not a serious economist. And of course, after receiving tenure this is what one knows how to do.”

Comment
A fair enough generalisation (and not too much hyperbole) about the state of modern economics – without even going into the pernicious job-protection scam (not extended to staff) of “tenure”, as exercised by the existing professorial priesthood to control the supply of teachers who conform to their orthodoxy.

However, we live in the real world and must work within the system. So the young economist who asked the question should respond carefully in her choice of career preparation.

We can illustrate the choice, and the consequences, by reference to the choices chosen by Adam Smith and David Hume in 18th-century Scottish Universities. You find their experiences, remarkably, were not that much different to those that post-graduate-minded students might face today.

David Hume chose to buck the system and not conform, and though apparently willing to sign the Calvinist Confession of Faith to be appointed professor in Scottish universities, because that was a prime condition of such appointments in both Scotland’s four universities and England’s two universities well into the early 19th century, he was still refused positions at both Edinburgh and Glasgow universities, in both cases by the direct intervention of Presbyterian church ministers who vetoed his appointment (in Edinburgh the vote was 12 to 3; in Glasgow in was unanimous).

Adam Smith, incidentally an accomplished mathetmatician, chose a different route (in deference to his mother’s religious devotion); he signed the Calninist Confession of Faith, took the oath of Fidelity, and kept quiet about his (lack of?) religious belief. He took his place among the professors and managed over a life time to disguise his scepticism (the flimsy cover for atheism) in what appeared on the surface to be his Deism.

Hume published his Treatise, his Inquiry, his essays and his histories of human nature, and much else, and left his legacy, that endures, as one of Europe’s greatest moral philosophers and pioneering political economist.

Smith published Moral Sentiments, a masterwork of moral philosophy, as well as a masterly theological obfuscation, which still today misleads most who read (and study) it into believing that he was, variously, a Christian (Calvinist), a Theist, a Deist, a Stoic, or a devotee of Natural Religion.

However, when Moral Sentiments is ‘parsed’ * carefully, and Smith’s biographical details are considered, a different picture emerges, and Smith religiosity is highly doubtful.

My recent paper, “The Hidden Adam Smith in His Alleged Theology”, which was presented at the Summer Institute for the Preservation of the Study of the History of Economics, University of Richmond, Virginia, June, 2009, discusses the evidence for this assertion and is available by request from Lost Legacy (address on the top of the Home page).

Now, of course, in Adam Smith’s case he had to pass a religious test first, and an academic test later, and budding economists today do not face religious tests, though it wasn’t so long ago, in my lifetime, during the early years of the Cold War that US academics had to ‘pass’ a political test of not being, and/or not associating, with known communists.

The choice, therefore, is to avoid continuing to contend for academic posts in economics (per David Hume) or to study to meet the gateway criteria laid down currently by the self-appointed Manderins of the their version of the necessay agenda of our discipline.

If the student is self-confident in her brightness and natural talent, she could follow Hume’s or Smith’s road; if she is strong in mathematics she could apply for posts in maths departments or direct into economics’ departments (which in due course will become sub-sets with applied maths departments anyway), and then, once in, she could take her economics research wherever she fancies (Op eds, popular and topical blockbuster books, media interviewers, high-level advice on the recent failings of modern economics, and such like).

Whatever she does, I hope her reading includes some history of economic thought to get some perspective of what the discipline has lost as the price of achieving high-competence in imaginary worlds without real human beings.

* When I did English literature at school, the intransitive verb, ‘parsed’, was about grammatical analysis - subject, object, verbs, adverbs, nouns and nouns-in-apposition, and etc., - and not about supposed authorial meanings.

Smithian Competition Confirmed

Laura Fitzpatrick asks: “Are Humans Actually Selfish?” in
TIME (HERE)

“In his new book The Age of Empathy: Nature's Lessons for a Kinder Society, primatologist Frans de Waal uses a variety of studies on empathy in animals to debunk the idea that humans are competitive to the core.

Given all the science that tells us about empathy in animals and in ourselves, why do you think the idea persists that at bottom we're competitive backstabbers?

It was established at the beginning of the Industrial Revolution, when probably it was useful to have a picture of humans as competitive and to base the capitalist system on that image. And in doing so, a lot of political ideologues and economists started to forget that we are also a highly social species. The founder of economics, Adam Smith — to his credit — did realize that if you build a system completely on competitive principles it would not work very well.

What happened a year ago on Wall Street is exactly an example of what Smith was warning [about]. Society is not really made to be a purely competitive operation. And I think we have learned that lesson, but I don't know for how long. The whole argument that nature is red in tooth and claw, and for that reason society ought to be like that, is flawed. Because nature is not like that. If you look at our close relatives, you see animals who survive by cooperating. Yes, there is competition; there is dominance, hierarchy. They sometimes fight. They sometimes even kill each other. But they stick together because they survive together much better than alone.”

Comment
I’ve already commented this week on Frans De Waals’ new book this week, but it occurs to me that I have something to add in a comment on the context of ‘competitive’ in human relationships.

It has long been projected that Adam Smith favoured competition, as if he had written nothing about co-operation. Yet, in the first chapter of Wealth Of Nations he describes the long, and complex supply chain that eventually produced a common labourer’s woolen coat. Nobody was in charge of the supply chain – members of it may not have known, nor did they need to do so, anybody a link or two ahead or behind their place in it. Yet it functioned, if not effortlessly, well enough to provide the consumer with a woolen coat. This required, if not conscious co-operation, at least effective and consequential co-operation.

Buyers along the chain are not in competition with their suppliers; they are in competition with the set of other buyers, as are the set of all suppliers in competition with the set of other suppliers. The failure to appreciate this simple fact misleads many, including, too many, economists who mistakenly attribute to competition vices it never had.

Take the parable of the buyer in contact with the “butcher, the brewer, and the baker”. Most readers of the paragraph containing the parable, who have not read and understood Adam Smith in his books, Moral Sentiments and Wealth Of Nations, go hopelessly adrift in concluding that there is a clash of self-interest between the buyer of his dinner and his suppliers. They even quote it as evidence of their error in not understanding self-interst in Smith's lexicon!

Bargainers make and receive offers, which Smith states clearly as a conditional proposition:

“Give me that which I want, and you shall have this which you want” (WN I.ii.2: 26).

In short, the offers each makes are statements of potential exchanges they would accept. Until they find an offer acceptable to both of them, there is no deal.

The negotiation process is ubiquitous in commercial markets. Demanding everything for yourself and ignoring the demands of the other party is self-defeating.

In fact, Smith identifies how they reach a bargain a few lines further on:

“We address ourselves, not to their humanity but to their self-love, and never talk of our own necessities, but of their advantages.” (WN I.ii.2: 27)

In short, we have to persuade them (not force them), which is an entirely different image in practice to that of high-energy competition.

Over many years, I have extolled the virtue of competing with our rivals, not our customers.

Humans are not “competitive to the core” (a blatant misunderstanding among too many Homo-economicus thinking economists); we are social animals and, because of language, more so than our primate cousins.

The Wall Street Journal, which carried a similar report (thanks Brian) on Frans de Wall’s work, (“Tracing the Origins of Human Empathy” by Robert Lee Hotz HERE
ends with:

"They crossed the bridge with empathy, to realize something that is completely exotic to them," says Dr. Danziger. "True empathy is the ability to imagine how others are feeling, especially people who are not the same as you."

Most humans will recognise themselves in this observation. Smith also would appreciate the conclusion as confirming his 18th-century assertion Moral Sentiments.

Comment Moderation ON

I have been forced to activate 'Comment Moderation'. Apologies.

Lost Legacy has operated without it so far, but senseless posts have become a regular feature, which is disappointing.

Lost Legacy is an education project, not a silly Blog. Authors of such posts have other agendi, as is their right under free speech. But education is not best undertaken with somebody crashing a lecture or disrupting a seminar.

It's not as if Lost Legacy attracts comments by the score, but readers are entitled to their right to read and write without distractions from those who misuse free speech to impose their non-relevant views on others.

A house is protected by the good behaviour of guests; a host has the right to decide who enters his or her house, within the law.

William Letwin Recognises a 'literary embellishment'

William Letwin, 1963. p. 225. The Origin of Scientific Economics: English economic thought, 1660-1776. Methuen & Co:

“The invisible hand is introduced as a literary embellishment, an elegant way of summarising an argument already stated, and not, as it has been misrepresented, a dogmatic assertion of ‘natural harmony’ on economic life.”

Comment
Reading my notes for my forthcoming paper on the use made of the popular literary metaphor, the “invisible hand”, by modern economists who are ideologically wedded to their invented notion that the economy is managed by an unknown disembodied entity, with miraculous powers of intervention that sometimes lead participants to unknowingly benefit society, though for which role no term is included in the mathematics of general equilibrium, and its alleged presence in the real world is judged only by outcomes, not processes, I came across the above quotation.

It struck me for two reasons.

First, it is unusual – most modern economists give the metaphor a far greater role in the real world, as if they believe the entity actually exists (some even call it the “hand of God”, for which the supporting literature is quite vast, going back to the 17th century).

Secondly, William Letwin is one of the few examples that I have come across who approaches his discussion of Smith’s use of the metaphor with an erudite and eloquent discussion of the previous eight paragraphs (WN IV.ii.1-8: 452-455) in which he fully explains the process that leads some, but not all, merchant traders to invest locally rather than invest their capital in the foreign trade of consumption or the carrying trade.

It is only after his explanation that he introduces the phrase of the “invisible hand”. Most economists do not mention his explanation or its context (they may be unaware of this, relying on their generalisation of a short quotation, which clearly applies to a specific case in Smith’s example, into a whole economy principle for which it was never intended.

Letwin notes, brilliantly in my view’, that Smith used the metaphor because of the audience to which he address Wealth Of Nations:

“… gentlemen and squires, members of Parliament, busy, not excessively intelligent or devoted, who would take instruction at length only if it were presented in a pleasurable form, perhaps under the guise of sheer pleasure.”

Or, as I often put it, “legislators, and those who influence them”.

Letwin's book is an excellent survey of his chosen subject (students should consult it for material on its theme). It is an excellent read by a literate scholar.

Adam Smith On CSR

Shellie Karabell in “On Adam Smith, Gordon Gecko and controls on self-interest” writes about the views of H. Landis Gabell and Filipe Santos in an article on INSEAD Knowledge HERE that presents the corporate social responsibility case, much in line with Adam Smith’s views in Moral Sentiments: “On Adam Smith, Gordon Gecko and controls on self-interest”, which I recommend to readers.

Gabel (Emeritus Professor of Economics and Management at INSEAD ) looks to ‘rules of behaviour’ rather than “hard laws and regulations” to inculcate “voluntary compliance with social codes”.

Given Adam Smith’s suspicions about what “merchants and manufacturers” were up to when able to influence events by lobbying legislators, I fail to see why purists throw up their hands in horror. There are already laws and regulations available to curb, and punish, evasions of “social codes” – we don’t need more of them; every prosecution and law sentence is good news for capitalism. The certainty for exposure for shameful conduct (witness the expenses row among parliamentarians) is a salutary encouragement for “good behaviour”. I have long admired the US practice of appointing judges for “life and good behaviour”.

“Filipe Santos, INSEAD Assistant Professor of Entrepreneurship, says Adam Smith knew this, and wrote about it in his book Theory of Moral Sentiments as a professor of moral philosophy. “Smith believes that decisions are better made in a decentralised way by people, rather than dictated by one person or one central group,” adds Santos. “Instead of relying on the government for the allocation of resources, Smith believed it was better to let widespread market forces do it. The problem today is not Adam Smith’s philosophy, but the way in which a few of his ideas have been enacted by the business community as dogma.”

Both academics are contributory authors for Wiley’s book ‘Mainstreaming Corporate Responsibility’. Sounds good to me.

Lost Legacy Awarded an Heinze Variety Status

A new (to me) Blog (Online Universities Weblog) HERE has compiled a list of 100 economics Blogs

and has placed Lost Legacy at:

“57. Adam Smith’s Lost Legacy: This blog is a study on Adam Smith.”

Lost Legacy always welcomes publicity in Blogland, as I am sure readers would want to know when we get some.

Wrong On Darwin, Right on Adam Smith

'The Age of Empathy' by Dutch psychologist and primatologist, Frans de Waal, using primate tendencies as a model, contends that humans are hard-wired for compassion. In Los Angeles Times by Sara Lippincott, a freelance editor specializing in science. HERE:

“De Waal's principal thesis is that when contemplating our evolutionary heritage, we see ourselves more as natural-born competitors than natural-born empathizers and cooperators. "[U]ntil recently," he writes, "empathy was not taken seriously by science. Even with regards to our own species, it was considered an absurd, laughable topic. . . . " Some of us indeed have tended to think like Social Darwinist Herbert Spencer, who coined the phrase Darwin has been unfairly stuck with: "survival of the fittest." Indeed, some, like Hitler and the American and British eugenicists of the early 20th century, have tended to think that only the fittest ought to survive. But De Waal's readership is probably aware by now that altruism too has been built into the animal kingdom.

Nevertheless, he rightly argues that we modern humans need to recognize and cultivate our fellow feeling, "an innate age-old capacity" that has been naturally selected for -- for the excellent reason that without it we would have gone extinct long ago. "It's not as though we're asking our species to do anything foreign to it by building on the old herd instinct that has kept animal societies together for millions of years," he writes. "Every individual is connected to something larger than itself. . . . The connection is deeply felt and . . . no society can do without it."

De Waal bolsters his case with plentiful anecdotes of sweet-natured primates and contemporary examples of ill-advised human cold-bloodedness (Enron, the response to Hurricane Katrina). Along the way, you learn a lot of interesting primatological arcana, such as that apes can't swim and invariably defecate when excited.

In concluding, De Waal points out that Adam Smith, the alpha male of free marketeers, has consistently been misunderstood. Smith's disciples "leave out an essential part of his thinking, which is far more congenial to the position I have taken throughout this book, namely, that reliance on greed as the driving force of society is bound to undermine its very fabric."

Comment
Frans De Waal is a much respected scientist, often working at the frontier of primate studies and human societies. Hence, when Sara Lippincott attributes to Darwin the following statement:

“Social Darwinist Herbert Spencer, who coined the phrase Darwin has been unfairly stuck with: "survival of the fittest",

I am a loss to explain from where she got her ideas about the origins of the phrase, "survival of the fittest”. I am sure they do not come from Frans De Waal; at least I hope not, because Frans will be familiar with Charles Darwin’s, The Descent of Man and Selection in Relation to Sex’ (1871: John Murray, London) and Darwin uses the phrase, survival of the fittest”, several times.

For example:

“In an area as large as some of these islands [New Guinea, Borneo, Australia], the competition between tribe and tribe would have been sufficient, under favourable conditions, to have raised man, through the survival of the fittest, to have the inherited effect of habit, to his present high position in the organic scale” (page 157).

Either Frans is momentarily forgetful, or, more likely, Sara she carelessly summarising Frans’ observation on how often Herbert Spenser used the phrase in his arguments as an epigone of Darwin.

By the way, for balance, we should add some fairly respectable people to Hitler’s name, among whom we have Marie Stopes, Emile Zola, Bernard Shaw, H. G. Wells, Woodrow Wilson, Theodore Roosevelt, John Maynard Keynes, Winston Churchill, and Sidney Webb.

The last paragraph, however, is encouraging. Greed had nothing to do with Adam Smith’s theories of how humans interact socially. That notion comes from popular misattribution of “greed” as a philosophy to Smith when it was, in fact, an idea of Bernard Mandeville’s (1724).

Examples of Adam Smith's Lost Legacy

From the World Most Popular 20th century Textbook:

“Smith’s message said in effect:

‘You think you are helping the economics system by your well-meaning laws and interferences. You are not. Laissez-faire; let be; hands off. The oil of self interest will keep the economic gears working in almost miraculous fashion. No need to plan. No sovereign need rule. The market will answer all things’

Smith never did prove the truth of this. Indeed, until the 1940s, no one yet knew how to prove – or even to state properly – the kernel of it in Adam Smith’s invisible hand doctrine.”

Paul A. Samuelson and William D. Nordhaus, 1985. Economics: An introductory analysis, 12th edition, p 760

Comment
Pure imagination on Samuelson and/or Nordhaus’s part!

Smith never said anything like this “in effect” or otherwise.

Smith’s complaint about government was not about “well meaning laws and interferences” – he recognised the absolute need for laws and justice, without which, he said, society “would crumble into atoms” and “a man would enter an assembly of men as he enters a den of lions” (see Moral Sentiments, II.ii.3.3 & 4: 86).

He never said “Laissez faire; let be; hands off”. He never used the words ‘laissez faire’ anywhere in the near a million words he published. These words were uttered in 1680 by M. Le Gendre, a French merchant in Lyon, to M. Jean Baptiste Colbert, the French Minister of Finance.

He would never have said such a dangerous and seditious thing as “no sovereign need rule” in 18th-century Britain. Transportation would have been the least of his problems.

That such a popular textbook selling millions contained such twaddle is disappointing. No wonder the myths about Adam Smith are so widespread today.

[My comments do not detract from the huge debt economics as a discipline owes to Paul Samuelson.]

Two Errors on Adam Smith

"dakinikat" writes (19 Sept) “Support your new Alphabet Soup Agency” (HERE):

“Even Adam Smith, creator of the invisible hand and the term laissez-faire economics, realized the need for government regulation of certain markets.”

Comments
Oh, dear!

Two blatant errors, “creator of the invisible hand and the term laissez-faire economics”.

For the “invisible hand” see Lost Legacy (previous post and scores of earlier ones (also read my:

“Adam Smith: a moral philosopher and his political economy”, 2008: Palgave Macmillan).

For “laissez-faire economics”, $1000 if “dakinikat” can show that Adam Smith ever used the words “laissez-faire”.

Yes, Adam Smith identified that there were circumstances when there was a need for “government regulation of certain markets”.

Can “dakinikat” show where in Wealth Of Nations he did so? (Hint: in a business sector very much in the news recently).

The Genesis of the Invisible Hand

Readers will know of my work on identifying the actual meanings that Adam Smith placed on his use of the metaphor of the “invisible hand” and my oft- stated assessment that he used a popular 18th-century metaphor to lighten the work for his readers’ trying to understand the significance of his references to, first, the role of the necessary delusion that drove some of them from their beds each day to hasten the accumulations of their fortunes (Moral Sentiments, 1759) and the role played by the felt insecurities of some, but not all, merchants indecisions about the placing of their capital locally rather than abroad (Wealth Of Nations, 1776).

I have often remarked that the “invisible hand”, deployed by Smith only three times in over the million words he published, was hardly remarked upon by philosophers and political economists for about a hundred years after he died. The origins of the modern surge in interest in the “invisible hand” metaphor can be found roughly from the 1930s (Chicago’s oral tradition), then in a steady stream from the 1940s and into a vast flood from the 1960s, until today it is virtually ubiquitous.

My current research project is to explain this phenomenon, not just for exegetical purposes (interesting as that may be), because the metaphor’s attributed modern meanings, and their imaginative interpretations of the metaphor’s meanings for modern economics (partly ideological), are worthy of study. They explain a lot that is most interesting about recent and contemporary economic history and discourse, and the surprise when their convictions come awry.

One of the joys (and dangers) of research is the tripping over of little diversionary novel and amusing findings which do not appear to be really relevant to the main task. In reporting the “invisible hand” as a popular 17th-18th century literary metaphor, I have tried to downplay the scientific credentials claimed for it by modern economists (though decidedly not by Adam Smith) and this is often dismissed by correspondents and by my critics in conversations.

Well, exploring my notes from earlier research on this subject, I have taken a few moments to extend my characterization of the “invisible hand” as a popular contemporary literary metaphor in Smith’s life-time, to it being a popular literary metaphor from the time between his death in 1790 to (arbitrarily) 1937, or just before modern economists took to noticing it and to incorporating it into their analyses capitalist economies (e.g., General Equilibrium theory).

To sample my assertions, consider the following selection of eleven cases (out of scores) by famous literary authors and their use of the “invisible hand” in their famous works:

1 Frankenstein, or, The modern Prometheus‎ by Mary Wollstonecraft Shelley (1823):

“finished by an invisible hand. In the day, I believe, he worked sometimes for a
neighbouring farmer, because he often went forth, and did not return until ..”.

The Count of Monte Cristo by Alexandre Dumas (1844-45):

'Yes; we have never had the happiness of pressing his hand,' continued Maximilian. ... by an invisible hand - a hand as powerful as that of an enchanter. ...

Through the looking-glass and what Alice found there by Lewis Carroll (1865):

“She said afterwards that she had never seen in all her life such a face as the
King made, when he found himself held in the air by an invisible hand, ...”

Anna Karenina‎ (1873) by Leo Tolstoy:

“sprinkled with flour, that some invisible hand had put outside a baker's shop. Those loaves, the pigeons, and the boys were not of this earth.”

War and Peace‎ by Leo Tolstoy (1889)

The Reigate Puzzle ((1894) by Sir Arthur Conan Doyle:

“been struck from his mouth, as if by some invisible hand,”

The Invisible Man‎ by H. G. Wells (1897):

“still hiding his invisible hand, trying to discreetly slide over to where his glove sits on the table.”

The war of the worlds‎ by H. G. Wells (1898):

“They saw the flashes and the men falling and an invisible hand, as it were, lit the bushes as it hurried towards them through the twilight.”

Guy de Maupassant (1903):

“I distinctly saw the stalk of one of the roses bend close to me, as if an invisible hand had bent it, and then break, as if that hand had picked it!”

Tarzan of the apes‎ by Edgar Rice Burroughs (1914):

“A huge black, standing directly before him, lunged backward as though felled by an invisible hand. Struggling and shrieking, his body, rolling from side to side”

Jacob's Room by Virginia Woolf (1922):

“as if drawn by an invisible hand; when there are distant concussions in the air and phantom horsemen galloping, ceasing; when the horizon swims blue”

Comment
These examples can be added to by scores of others from classical times (Homer, Horace, and Augustine) and from the 16th through to the 18th century.

The main users of the metaphor were theological authors in their sermons and Latin texts (either side of Adam Smith 1723-90).

Food for thought by those enthralled by Adam Smith’s alleged “most important contribution [to] economic thought” (Arrow and Hahn, 1971) and “one of the great ideas of history and one of the most influential” (Tobin, 1992)?

Is a Change in Tone More or Less Convincing?

Pejman Yousefzadeh post on The New Ledger blog (‘a chequer board of nights and days) (HERE) on Stefan McDaniel On Free Trade, the subject of the previous post.

He comes at his criticism for from a robust rejection of McDaniel than Samuel Gregg.

Follow the link to see if the robust approach is more convincing for you than a less robust approach.

A Modern Moral Attrocity

Samuel Gregg post in Public Discourse (The Witherspoon Institute) HERE:

“Free Trade, utility, and the Good”, a response to Stefan McDaniel’s comments on Gregg’s “Free Trade”:

“No reasonable conception of the good can be limited to the economic realm, let alone utility. Unfortunately many contemporary economists do not see this, precisely because they are more-or-less utilitarian and positivistic in their outlook. In this regard, they differ from the founder of modern economics, Adam Smith. This much is evident from reading the corpus of Smith’s works, which traverse jurisprudence, philosophy, astronomy, and rhetoric, as well as economics. But while prepared to countenance particular forms of protectionism in a very small number of instances, Smith was not convinced that significant restrictions of trade within and between nations would help facilitate human flourishing within communities. Neither am I.”

“As a form of economic and social organization, guilds often began with a concern to produce a certain product of a certain quality. But they invariably became preoccupied with determining who could and could not engage in certain occupations or produce certain goods and services. Being what we would call today “closed shops,” they disliked free trade and competition—domestic or foreign—because it threatened their monopolies and often made available to consumers better, newer, and less-expensive products than those produced by guilds. A similar logic was recently at work with the recent effort of organizations such as the United Steelworkers to persuade the Obama Administration to raise tariffs on Chinese-made tires for the next three years.

The same insularity encouraged by various forms of protectionism also actually discourages nations from worrying about other countries’ economic problems. A good example is the fierce resistance of European and American farming lobbies to permitting developing countries wider access to European and American markets. Many developing nations would escape their poverty far more quickly if the highly protected American and European agricultural markets were “de-insularized.” But this would mean removing the legal and economic privileges presently accorded to many American and European farmers. They will never give up these privileges without a fight, no matter how much such measures impede developing countries’ emergence from poverty…

Smith was deeply conscious of the moral challenges posed by the emerging commercial society of his time. Rather than seeking to resolve real and imagined conflicts between human flourishing and market-oriented economic development through government intervention, however, Smith sought to achieve a similar end through infusing this new society with a synthesis of commercial, classical, and Christian virtues. As Ryan Patrick Henley illustrates in his excellent book, Adam Smith and the Character of Virtue (2009), Smith was convinced that human flourishing was possible for people living in modern commercial societies that embraced free trade with relatively few caveats. So am I.”

Comment
I agree with much of Samuel Gregg’s post. Particularly, the moral attrocity of the European and US protectionist policies against the poor world's agriculture. It's also bad long-term political eocnomy.

I recommend that you follow the link and read it.

Ryan Patrick Henley is a foremost US authority on Smith’s Moral Sentiments (I have heard him lecture twice on TMS and on both occasions was impressed by his authoritative content and his excellent communication style). I await high expectations the arrival of his new book, Adam Smith and the Character of Virtue, 2009.

Research Project to Challenge Modern Economists on Their Invisible Hand Explanations

I returned to more serious research today for my larger project on the invisible hand. This work has gone slowly up to now because, as I have mentioned, I am waiting for Warren Samuel’s paper to be published (now set for later this year in a collection edited by Jeffrey Young and is to be published by Cambridge University Press). I considered it prudent not to go too far ahead in case Warren’s promising treatment made my own redundant, or, in the unlikely event that Warren was off target in some fundamental way, my own paper may have required considerable re-work.

Research develops its own pace, sometimes like walking through treacle into dead-ends, tinged with boredom, and at other times flies along under an exciting momentum from the pieces falling into place, opening new insights, re-constructed ideas, and closing the gaps in understanding.

Having dealt with Adam Smith’s meaning of “an invisible hand” in two papers for the Econ Journal Watch (May and September), I am now working more intensely on phase 2, so to speak, (and have been since 2008) which analyses how and why the invisible hand metaphor was taken up, mainly in the middle decades of the 20th century, by modern economists, in part to make an ideological case for markets (sometimes tinged with theological claims and assertions) over the challenges from both creeping state capitalism and Soviet-style central planning. The other part, included genuine enthusiasm among economists from the 30s to the 70s from their pursuing lines of research into general equilibrium theory.

The problem, which I have been focussed on since my preliminary work from 2003, for my book, Adam Smith’s Lost Legacy (2005), is why modern main-stream economists embedded their theories of “invisible hand” in capitalist markets and, simultaneously, attributed to Adam Smith the role of progenitor of their work.

I have been unable to read into Smith’s works anything remotely like these modern attributions – the fact that they do not qualify for such roles on the basis of what he wrote remains, for me, in stark contrast to what senior colleagues in the discipline claim to have found.

This next project is my attempt to answer this dichotomy from what distinguished economists assert they have read in Moral Sentiments and Wealth Of Nations (and his essay on the History of Astronomy) by coming at the problem from the other direction:

What exactly do modern economists claim for their “invisible hand”, where did these views originate (Chicago, MIT, LSE, and so on, and what evidence is there for such a role in their models of modern economies (general equilibrium, growth theories, welfare economics, business cycles, and recent history)?

I shall report from the research front occasionally on Lost Legacy and share my progress with readers.

Don Boudreaux Demolishes Protectionist Author

As if on cue, following the previous post, my question about which Adam Smith Chicago or Kirkcaldy is challenged is partly answered by Don Boudreau of Café Hayek HERE: under “Witless on Trade”

Don Boudreaux writes many of the best, brief, articles on free trade and competition in the main stream media today (that is, when his witty letters are published by the editors).

Consider this one, which he sent to the Financial Times (15 September):

“According to Mr Prestowitz, the case for free trade relies on the validity of “the assumptions that the markets are perfectly competitive, that exchange rates are not manipulated, that there are no economies of scale, that there is no cross-border investment or cross-border transfers of technology, and that there are no government subsidies or export requirements.”

But with the possible exception of the assumption about economies of scale – an assumption that even its notable champion, Paul Krugman, regards as being academic rather than practical – the case for free trade in no way depends upon any of these assumptions. For example, although free-trader Adam Smith well understood competition, he never heard of “perfect competition” (as the model wasn’t developed until the 1930s). And even if he had heard of this model, Smith would have understood that free trade’s benefits are positive even when industries are not (as they never are) ‘perfectly competitive.’ (The supermarket down the street from me doesn’t compete in an industry that’s ‘perfectly competitive,’ yet I gain every time I choose to trade with it – as I frequently do.) …

… Not a thing in Mr Prestowitz’s poorly reasoned, factually inaccurate, and economically uninformed essay justifies Uncle Sam’s efforts to penalize American consumers who wish to purchase imports from China.”

Comment
Donald J. Boudreaux produces similar brief rebuttals to protectionist propaganda regularly and I recommend that you bookmark Café Hayek and scan his posts for excellent economics (and a good knowledge of Adam Smith too).

Chicago is a Long Way From Kirkcaldy

Simoleon Sense HERE contains this erroneous gem:

“The Profile Of Robert Shiller, Mr. Bubble” (via Yale Alumni Magazine)

They argue that flaws and excess are inherent to a market economy — and that they are not minor. “The economics of the textbooks seeks to minimize as much as possible departures from pure economic motivation and from rationality,” Akerlof and Shiller write. “Our book marks a break with this tradition. In our view economic theory should be derived not from the minimal deviations from the system of Adam Smith but rather from the deviations that actually do occur and can be observed.”

Comment
The problem with this gem is to which “system of Adam Smith” is Simeon Sense referring?

Is it the invented system of “pure economic motivation and from rationality”, otherwise known as the “Chicago Adam Smith” of post-1950s US academe, Nobel Prize winners and all, or is it the system of the Adam Smith born in Kirkcaldy, Fife, Scotland in 1723, as outlined in his "Moral Sentiments" (1759) and his “Wealth Of Nations" (1776)?

A Wild Goose Chase; Another Disappointment

In another debate elsewhere on the invisible hand in Adam Smith, which I am engaged in lightly, a contributor identified not three uses by Smith of the popular 18th-century metaphor, but four.

That sent me to the library to search out the source of the 4th use. When examined, I find the claim is in History of Political Economy in January 1990, nearly 20 years ago.

I was surprised by the revelation of a fourth invisible hand in Adam Smith that I had missed, but my surprise soon became wonder – how did I miss it? - which, however, was soon dampened when I located and read it. The article, by Syed Ahmad, at the time of the Department of Economics at McMaster University, Hamilton, Canada, boldly titled “Adam Smith’s four invisible hands” (HOPE, 22:1 (137-44).

It discusses the three well-known instances, somewhat inadequately in my view, and achieves the four count by asserting that the reference to ‘an invisible hand’ in Moral Sentiments has two distinct meanings, adding a fourth meaning to the original three. Yes, I agree the claim is close to tentative in the extreme, but, to be fair, if Syed’s reasoning had worked he would have made a major discovery. Unfortunately, it doesn’t and he didn’t.

Syed asserts that the first invisible hand appears in Moral Sentiments in the guise of the “size of the landlord’s stomach” (139). You can read the quotation in full at: TMS IV.ii.10: 184-85. I must ask why does the physical limits of a human stomach – and all other stomachs in nature - need “an invisible hand”?

Syed adds the comment: “Without this limitation ‘all the thousands’ would have perished through his selfishness” (139). But the stomach’s limit is physical, not psychological. Moreover, if the landlords' stomach was without limits, so would every other human’s stomach be without limits too – the problem of starvation would then be exacerbated without limit.

Syed notes correctly that the “selfishness of the landlord is constrained for human survival”, but this has nothing to do with the invisible hand. He also accepts that “it was not man’s prudence or reasonableness or any other mental attitude which prevents catastrophe; it is the physical limitation of his stomach.”

But wait. Syed introduces the ‘second’ invisible hand ‘in the form of the residual selfishness of the landlord”. He notes that the size of the stomach prevents the landlord from ‘eating all the food he has” but “he could still let the rest go to waste” (a view implied by W. D. Grammp (2000. 'What did Adam Smith means by the invisible hand?' Journal of Political Economy, 108: 3, 441-65)in his weird account of the invisible hand). Syed calls this a “positive role” for “selfishness”.

He joins this muddle to Bernard Mandeville’s “Private vices, publick benefits” (“Whilst Luxury/ employ’s a Million of the Poor”). This sidesteps Smith’s concerns with the “thousands whom they employ” on their land producing the acres of food for consumption, before we take up the the issue of the landlord’s consumption of the luxuries supplied by the town’s artisans and producers of foreign imports.

Like the physical limitations of the stomach – an attribute of all humans long before the first landlords appeared from the agricultural ‘revolution’ 8-11,000 years ago – the absolute, inescapable necessity of feeding the labourers (and their families) who prepared the land, sowed the seeds from last season’s harvest, tended the crops (and the farm animals), and harvested and stored the products of the land is fully explainable without an invisible hand metaphor. If the labourers received nothing from a season’s harvest, they would starve and, if it was a general rule across all of society, who would undertake the labourers’ roles in the following spring?

Syed describes the limited stomach’s of the landlords as the first ‘invisible hand’ and the second role of distributing a share of the harvest to the farm labourers, the second invisible hand. Both roles are spurious as examples of an invisible hand explanation. In both examples, the parties to these transactions had no choice but to do what they did; there was no role for an invisible hand to lead them to do what they had to do anyway.

The only meaning that Smith could have meant was the singular role of the landlords in doing what they did as an example of unintentional outcomes, despite their delusions of greatness as the owners of their great estates and the employers of the thousands, who tended their fields and their domestic luxuries, plus, as trade between the country and the town (and foreign towns too) grew, their supply to landlords effective employed the skilled artisans and merchants who supplied luxury items (fine clothes, jewels, gold and silver plate, tapestries, and furniture).

Syed Ahmad did not discover a fourth invisible hand, and the two he elaborated upon in his article were contrived and, therefore, spurious.

Link in Freakonomics to Lost Legacy's Paper on the Invisible hand

In Freakonomics (HERE) they ask:

Is the Invisible Hand …

“… one of Adam Smith’s key theories, a “mildly ironic joke,” or “a popular literary 17th- to 18th-century metaphor with no significance”? Arguing for number three, Gavin Kennedy keeps the debate alive, in a new paper published in Econ Journal Watch.”

Comment
Thank you, Freakonomics for the link.

Read some of the comments as well.

I comment on an article covering the post by Robert Frank (commented on Lost Legacy yesterday) in Seeking Alpha Blog HERE:

“The Adam Smith concept of the invisible hand, the collective effect of all self-interests guiding economic activity to societal good is fundamentally flawed.”

You attribute to Adam Smith a modern invention about the metaphor of the “invisible hand”. Smith’s was not referring to “all self-interests” in society guiding it to the common good. His sole reference in Wealth Of Nations is in Book IV of Wealth Of Nations and refers to those merchants, but by no mean all, who were discouraged from engaging in foreign trade and shipping because of their perceived risks to the “security” of their capital and therefore preferred to invest locally, which added to domestic employment and output.

In the 1950s the “invisible hand” was re-defined by modern economists to become a general statement applying to all expressions of self-interest through markets and 50 years later it is widely believed, particularly by economists, most of whom have not read Adam Smith’s limited reference in Book IV, chapter 2, paragraphs 1 through 9, Wealth Of Nations.

Hence, any consequences from the modern, not Adam Smith’s, meaning of the “invisible hand” is caused solely by modern, not classical, economic theory. Robert H. Frank has blamed Adam Smith, who on the meaning on "an invisible hand", is in fact an entirely innocent man."

Let Millions of Indian Street Vendors Flourish into Middle Class Taxpayers

Sauvik Chakraverti (Libertarian Opinion From Indyeah) posts in ANTIDOTE HERE:

Sauvik Chakraverti covers the eviction of Indian street vendors in Bangalore and discusses the effects of this behaviour on the development of the poor trading classes. He finishes by contrasting the experiences of poor traders in Singapore:

“When Singapore became independent in 1965 (after Nehru’s death) there were 2,50,000 street hawkers in the city-state. They are all part of the tax-paying middle class today. The same can – and must – happen here.”

This is by way of a debate with a senior economist on Adam Smith. Plenty of material for an illustrated session with students on the realities of economic development. Follow the link.

Modern Versions of Invisible Hands Are Not Compatible with Adam Smith's

Robert H. Frank, an economist at Cornell University, finds (New York Times 13 Sept) the
“Flaw in Free Markets: Humans” (HERE)

“Adam Smith’s theory of the invisible hand, which says that market forces harness self-serving behavior for the common good, assumes that markets are competitive, and most markets have in fact become more competitive over time. Today, if an opportunity exists anywhere in the world, information-age entrepreneurs can seize it more quickly than ever.

The invisible hand, however, requires not just strong competition but also two other preconditions. The economic models that spawned Mr. Greenspan’s former optimism simply assume those conditions, despite compelling evidence of their absence.
First, those models assume that rewards depend only on absolute performance, but in the real world, payoffs are often tightly linked to relative performance. When a valuable new piece of information becomes available to the investment community, for example, the lion’s share of the gain goes to whoever trades on it first. For an individual firm like Goldman Sachs, it is thus completely rational to invest millions of dollars in computer systems that can execute stock trades even a few seconds faster than others. But rivals inevitably respond with similar investments. Taken together, these expenditures are wasteful in the same way that military arms races are.

A second problematic assumption of standard economic models is that people are properly attentive to all relevant costs and benefits, even those that are uncertain, or that occur in the distant future. In fact, most people focus on penalties and rewards that are both immediate and certain. Delayed or uncertain payoffs often get short shrift.

Given the conditions under which human nervous systems evolved, these aspects of our behavior are unsurprising. Because immediate threats to survival were pervasive, those who didn’t seize short-term advantage often didn’t survive.

Such nervous systems provide an erratic guidance system for the invisible hand."

Comment
I shall separate the opening quotation with the last sentence because Robert H. Frank has said enough of his linkage to Adam Smith to show a mixture of sensible analysis mixed by self-contradictory mythology, of which he appears to be unaware.

“Adam Smith’s theory of the invisible hand, which says that market forces harness self-serving behavior for the common good”.

Which particular theory of Adam Smith’s “market forces” makes that statement? True, Smith makes a statement in Book IV of Wealth Of Nations similar to that credited to him by Robert Frank, but it was not about “market forces” at all. It was about some merchants, but not all, who were risk averse towards the risks of foreign trade to their capital that he preferred to invest locally, thus adding to local domestic capital investment and local output and employment.

Robert Frank, in line with modern thinking, generalizes Smith’s limited statement to involve “market forces”, even though the evidence for the generalization in Smith is absent and the evidence for it working as a generalization in modern markets is sparse to say the least (pollution, negative externalities, monopolies, conspiracies against consumers, price-fixing, outright fraud, government interventions, and the behaviour of capital owners vulnerable to Smith’s tirades against 18th-century “merchants and manufacturers”.

“The invisible hand, however, requires not just strong competition but also two other preconditions.”

How does this work? If the two conditions are not met markets are compromised. Whether the mystical entity of ‘an invisible hand’ ceases to function is of no interest – it’s a metaphor not an actual force! Why not stick with the analysis of “market forces” as Smith did in Books I and II of Wealth Of Nations, where Smith’s text is noticeable for the absence of any mention of “invisible hands”.

Robert Frank partly gives the game away with “A second problematic assumption of standard economic models…”. Originally he was talking about the working of the “invisible hand”, now he talks about “standard economic models”, of which his conditions may apply. He would be clearer if he stuck to “standard economic models” and left the “invisible hand” out of it.

Indeed, Smith’s single example of the invisible hand in Wealth Of Nations contradicts Robert Frank’s conflation of “standard economic models” with the metaphor of an “invisible hand”, namely that “that people are properly attentive to all relevant costs and benefits, even those that are uncertain, or that occur in the distant future.”

We can agree that people are not so wise as to consider everything that can affect the perfect model. Robert Frank notes that “in fact, most people focus on penalties and rewards that are both immediate and certain. Delayed or uncertain payoffs often get short shrift.” Agreed.

And that is what drove the psychic anxieties of the merchants Smith was talking about who were considering the security of their investments in foreign trade in distant countries, where the wrong choice of trading partners, ship owners and crews, foreign warehousing and distributors, and foreign remitters of payments, could spell disaster, even bankruptcy, if they overcame their aversions and went into business abroad.

It is interesting that Robert Frank sees the “focus on penalties and rewards that are both immediate and certain” and “Delayed or uncertain payoffs often get short shrift”, as being detrimental to the working of the invisible hand, whereas Adam Smith used the very same focus on “penalties and rewards that are both immediate and certain” as the relevant cause of these merchants being “led by an invisible hand”! (WN IV.ii.9.:456) Something surely is wrong with Robert Frank’s analysis?

I could add, the turn the screw further, that Robert Frank’s “Delayed or uncertain payoffs often get short shrift” was another of Adam Smith’s reasons why the uncertainties of foreign trade, where the turn round of foreign investment could take 4 -5 years, led some, but not all, merchants to be “led by an invisible hand” and to invest locally to benefit from its turnround of their capital 2-3 times a year.

Robert Frank’s analysis of the “invisible hand”, at least in respect of Adam Smith’s use of the metaphor, is upside down. I must conclude he has not read Adam Smith on the “invisible hand” and that he is slavishly following the modern version, invented post-1950, and ascribed to Adam Smith without a shred of supporting evidence.

That the modern version has legitimacy in its own right is fine by me; it is the ascription of it to Adam Smith’s legacy to which I object.

PS: Robert Frank strange assertion: "Such nervous systems provide an erratic guidance system for the invisible hand." So the "invisible hand" supposedly is guided by market forces as it "guides market forces". This needs to be sorted out.

News of Warren Samuels' Imminent Account of the Invisible Hand

I have mentioned several times that Warren Samuels is publishing his considered analysis of the use to which the “invisible hand” has been put over the centuries, and that I am waiting eagerly to read the finished material which he is about to publish.

In 2007, I attended the History of Economics Society annual meeting at George Mason’s University, Fairfax, Virginia and I listened to Warren presenting his paper as a foretaste of what his researches (since 1983) concluded. The session was well attended. He took questions afterwards and I also spoke to him and his wife momentarily during breaks in other sessions.

Naturally, I was particularly interested in his themes as I presented my own draft paper “Adam Smith and the Invisible Hand” (revised and published by Econ Journal Watch (May 2009) HERE: and see also:
HERE:

Warren Samuels is an impressive scholar and he is rightly highly regarded by all members of HES.

Yesterday, I posted a comment on the current enquiry about visualising (film clips, videos, and slides) the invisible hand for a lecture to non-economists. The contributions continue, most taking the enquirer’s project seriously.

Of greater import to the broader discussion, Ross Emett has sent to me a reference to a summary of Warren’s 2007 paper HERE:

At the time in June 2007, there was no paper from Warren available and I was unaware that his paper had been released since, and I am indebted to Ross Emett for sending the link to me.

I strongly recommend all readers of Lost Legacy to follow the link and to read Warren Samuel’s draft paper.

As soon as the main manuscript is published, I shall notify readers of where to order a copy. From the draft, I think Warren’s scholarship on the invisible hand is going to become definitive.

He does not support my approach, not does he particularly disagree with it; he puts the debate into its proper context of a much wider debate on the role of philosophical thinking. I shall refrain from commenting further until I read his considered thoughts.

A Wholly Innocent Adam Smith

George Hanshaw comments on an article by Mary Lyon: “What Still Ails America” on California Progress Report HERE:

“…it's fundamental ideology at the root of all America's political "smack down" events.. it's embedded with a convoluted of view of what a society should be... for all... yet, thanks to the legacy of our founding fathers.. devoted Calvinists.. there can never be social justice here in USofA.. economic equity... certainly any thing like "national health care for all" is blasphemous if you are Calvinist. The Repig party was founded on the social construct laid down by John Calvin in 17th Century and their bible is not King James, it's "wealth of nations" written by Adam Smith, a devout Calvinist that wrote a socio-economic doctrine based on keeping separate the "chosen" and the "not chosen" .. and that is a covenant that cannot be broken in their view.”

Comment
For a rant by somebody with a forest, not a chip, on his shoulder, this is pretty strong – and wrong – stuff, at least in reference to Adam Smith.

Smith was not a “devout Calvinist” at least from 1744, when he experienced a ‘secular epiphany’ and in severe stress eventually drove the childhood demons from his mind by starting his first essay he intended for publication.

This can be read under the title, “The Principles which lead an direct Philosophical Enquiries illustrated by the History of Astronomy”, which he finished some time before 1758. It was published, at his insistence, posthumously in 1795, edited first by Joseph Black and James Hutton, his literary editors. It appeared in several editions in the 19th century (example: in 1872) and is now available from Liberty Fund in “Essays on Philosophical Subjects”, edited by W. P. D. Wightman and J. C. Bryce, Indianapolis, 1982.

For an account of the alleged religiosity of Adam Smith, see my paper: “The Hidden Adam Smith in his Religiosity” (from gavin AT gmail DOT com) (presented as a paper at the History of Economics Society Annual Conference at the University of Colorado at Denver, June 2009), which discusses the background to popular (but mistaken) views about his religious affiliations and illustrates the arguments by reference to his carefully worded, and deliberately obscurantist prose, aimed at confusing religious zealots in the Calvinist Protestant Church of Scotland to avoid the persecution aimed at his friend, David Hume.

George Hanshaw, whatever his dispute with President Obama (on which I have no view, as I only comment on current political issues in the country, Scotland, where I vote), he appears to implicate Adam Smith in a role for which he was wholly innocent.

Samuel Johnson's Early Observation of the Division of Labour

ELIZA GRAY (a Bartley Fellow) writes for the Wall Street Journal:

“Samuel Johnson and the Virtue of Capitalism: The great 18th century writer on commerce and human happiness.”

HERE:

“He was even more struck by the contrast between places where markets thrived and those where they didn't. In Old Aberdeen, where "commerce was yet unstudied," Johnson found nothing but decay, whereas New Aberdeen, which "has all the bustle of prosperous trade," was beautiful, opulent, and promised to be "very lasting."
Johnson also understood that what Smith would later call the division of labor was instrumental for human happiness and progress.

"The Adventurer 67," which he wrote in 1753 at the height of a commercial boom (and 23 years before Smith published "The Wealth of Nations"), delights in the sheer number of occupations available in a commercial capital like London. The insatiable demand for the most specialized goods and services means employment for anyone who wants to make a living: ". . . myriads [are] raised to dignity, by no other merit than . . . contributing to supply their neighbors with the means of sucking smoke through a tube of clay."

"[E]ach of us singly can do little for himself," he wrote insightfully, "and there is scarce any one amongst us . . . who does not enjoy the labor of a thousand artists." He also saw the market as the only mechanism by which the diversity of human desires could be satisfied: "In the endless variety of tastes and circumstances that diversify mankind, nothing is so superfluous, but that some one desires it . . ."

Johnson described what today we would call the capitalist system. Of course, the term "capitalism" was unknown in his day (though "capitalist" was; Johnson pithily defined it in his dictionary as "He who possesses a capital fund"). Also unknown to Johnson was the notion of "ideology." Rather, what he wrote was drawn from observations and reflections on human nature as he saw it—a nature that always aspired for more and better and (when properly instructed) nobler things. That nature is still with us, as is the economic system that Johnson observed is best adapted to it. Our latter-day moralists shouldn't lightly throw it away.”

Comment
Eliza Gray supplies a gem of which I was not aware and which may be of interest to lecturers seeking new angles for jaded Econ 101 lectures and writers looking for good references to identifiable names like Samuel Johnson who said something interesting in the context of basic economics.

Of course, the contrast between bustling London in a boom and the daily life of contrasts in Old and New Aberdeen, let alone the desperately poverty-stricken Western Island communities in mid-18th century Scotland, is stark and shocking.

Those moderns contemplating – nay, evangelising in favour of - a return to local, self-sufficient economies in place of modern, global capitalism, may wish to take on board the realities of what such a return would mean, including the need to liquidate 2-3 billion humans to make it happen. Never has mass murder on such an unprecedented scale been advocated by so plausibly nice campaigners as one finds among environmentalists (though, true, some of them really are weird).

But Johnston’s point surely stands.

A small caveat about Eliza’s reference to Adam Smith includes the fact that he never claimed to have been the first to in any way to notice the division of labour. He makes the point en passant in Wealth Of Nations that the phenomenon “has been very often taken notice of”; he didn’t claim to discover it. (WN I.i.3: 14).

Moreover, Johnson’s acute observation was reported in 1753 which Eliza notes was “23 years before Smith published ‘The Wealth of Nations’”, implying for casual readers of WSJ that Johnson identified the division of labour before, by a country mile, Adam Smith. However, Smith lectured on society’s economic subjects from his time in Edinburgh (1748-51) and then in Glasgow (1752-64).

He stoutly defended his early record in his lectures in an enigmatic paper (since lost) read by Dugald Stewart in his eulogy to Adam Smith in 1793 at the Royal Society of Edinburgh. Known as the ‘1755’ paper, it contained this in it:

“A great part of these opinions .. enumerated in this paper is treated at length in some lectures which I still have by me … They have all of them been the constant subject of my lectures since I first taught .. the first winter I spent in Glasgow, down to this day, without any considerable variation …[and were] the subjects of lectures which I read in Edinburgh the winter before I left [1750-1]…”
[Quoted in Ian S. Ross, The Life of Adam Smith, 1976: p 108, Oxford University Press – a second edition is to be published in 2010.]

We know also from the student notes, published as Lectures on Jurisprudence (Oxford University Press, 1978), of Smith’s lectures in 1762-63, that his chapters in Wealth Of Nations on the division of labour are almost verbatim from his Glasgow lectures (see for example, lecture for 5 April, 1763: pp 355-6).

In short, the 23 year gap, if there is one, is considerably shortened and the analytical detail gone into be Adam Smith considerably advances to acute observations of Johnson.

Still, economists should be grateful to Eliza Gray for her reporting the early recognition of the benefits of specialisation in mid-18th century Britain.