Wednesday, September 30, 2009

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.

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4 Comments:

Blogger Greg said...

I see no evidence that David makes the mistakes you imply.

None.

Because Arrow, Samuelson and Hahn were incompetent with the language of "the invisible hand" (in part because they are often incompetent economists) doesn't entail that David is incompetent.

3:41 pm  
Blogger Gavin Kennedy said...

Hi Greg

The partial quotation used by David misses out two things: the relevant arguments articulated by Adam Smith in paragraphs 1-9 (inclusive of the “invisible hand” reference”) which explains the context in which some, but not all, merchant traders prefer to invest locally rather than take the risks of investing abroad (“he intends only his own security” – which is missed off from the part quotation made by David).

In cropping the quotation where he does, David moves Smith’s point from being partial to becoming universal, at least in the minds of his Executive MBA audience (I taught MBA classes for 24 years too), who are unlikely to read the whole chapter (WN IV.ii.1-9: 432-56), and in common with almost all tutors who refer to the “invisible hand” metaphor, they will accept its single use in Wealth Of Nations * as being a general principle of Smith’s, resulting in a decidedly false ‘Panglossian’ view of the role of self-interested businessmen as presented in US academe, including its corruption in the media from “self-interest” into “selfishness”.

I am coming at this issue not just from the isolated quotation made by David in a single column in a Blog, but from a detailed examination of many US and UK economics textbooks from 1948 (Samuelson) through to recent tomes in use today. Presently, I am spending many hours searching the excellent University of Edinburgh Library for modern usage of the “invisible hand”, and I must say, so far I have not come across a single author who presents the metaphor in Smith’s terms (some examples are ludicrous, including the 19th edition of Samuelson and Norhdaus!).

For my detailed arguments on the metaphor as a myth, I gave links in my post on David’s article for readers to consult (they also appear in my: Adam Smith: a moral philosopher and his political economy, 2008, Palgrave-Macmillan), and they are regularly rehearsed here on Lost Legacy.

Now, if you are suggesting that David does not use the quotation in the manner I have asserted, and does understand its limitations, I shall be delighted to correct my assertions and to offer my sincere apologies.

[*] Adam Smith also uses the metaphor on two other occasions (making only three occasions in all): in Moral Sentiments (TMS IV. 1.10: 184) and in his essay on the History of Astronomy (1744-<58) (HOA III.2: 49).]

4:39 pm  
Blogger David R. Henderson said...

Dear Gavin,
Thank you for the gentle way you treated me. I don't want to mislead my students. I don't think I did, even after having read your initial article and Dan Klein's response. But if you could tell me up to two short things I should say when reading the quote from Smith, so as not to mislead, I would appreciate it. I teach the other section of the class tomorrow a.m.
Best,
David

10:57 pm  
Blogger Gavin Kennedy said...

Thank you David for your considerate response. If my post was intemperate, in any degree, my apologies. It certainly was not meant to be, as I admire your posts generally.

In my considered view, I suggest something like the following may promote the point that I believe Smith was making:

“From the simple arithmetic rule that the whole is the sum of its parts, investing locally makes for a larger domestic annual capital investment and promotes more local employment. It is the process leading to this outcome that Smith describes, metaphorically, as ‘guided by an invisible hand’ to sum up what he fully describes beforehand:

Merchants had a choice: invest abroad or invest locally?

If they chose to invest abroad, as many did in 18th-century Britain, there was a risk of losing their capital in the hands of relatively less trustworthy strangers in a distant land and, perhaps, endure waiting anxiously for 3 or 4 years before their capital returned, for which they expected, but did not necessarily enjoy, a larger profit.

Instead, they could choose to invest locally with people they knew, protected by legal remedies they trusted. Moreover, local investments may turnover 3 or 4 times a year and produce over 3 or 4 years a profit at least equal to, or not much less, than the expected higher profits from foreign investment, but without the higher risks.

Smith’s use of the metaphor of “an invisible hand” to describe these choices has become iconic and is often mistakenly applied to every act of self-interested investment. However, be clear, he did not say or imply that all self-interested actions unintentionally promote the interests of society. They may or they may not, and each outcome is best judged on a case-by-case basis (think of pollution, monopolies and price cartels, tariffs, protection and prohibitions, and other negative externalities).”

Best wishes

Gavin

9:48 am  

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