Tuesday, October 06, 2009

Edmund Conway’s Case "Not Proven" (as in the Scottish Verdict)

Edmund Conway’s "50 Economics Ideas You Really Need to Know" published by Quercus at £9.99, arrived yesterday and, as promised in Lost Legacy (29 September), I said I would comment on whether it justified my apprehensions, or not, by simply repeating the claims of modern economists that Adam Smith, allegedly asserted that every individual acting to promote their self interests contributed to the public good (a dubious contention is practice).

Chapter 1. ‘The Invisible Hand’ opens with the ‘Greed is Good’ quote in the film, Wall Street, comparing the impact of Gekko’s line to the “impact” Adam Smith’s “radical idea of the ‘invisible hand’ had when first proposed … in the 18th century.” (p 6) Strange then that Smith’s use of the metaphor on invisible hand passed almost unnoticed in his lifetime, and, indeed, for many decades afterwards, with nary a sign of it having any impact at all until mid-20th century.

By the end of these two paragraphs, I felt sure that Edmund Conway’s book was about to go the way of all lazy modern economists in their swallowing of the invisible hand myth. But, strange to say, “50 economics ideas” seems to have been edited somewhat crudely, or in a hurry, to avoid that fate. Otherwise, I would have to be much firmer with it than I find I need to be.

Edmund sidesteps my scholarly ire neatly by simply equating the metaphor of the invisible hand as “shorthand for the law of supply and demand”, adding that this law “explains the pull and push of these two factors [which] serve to benefit society as a whole”. Undeniably true, supply and demand serves to “benefit society as a whole”. But, of course, the metaphor had nothing to do with the law of supply and demand whatsoever (as analysed by Smith in Books I and II of Wealth Of Nations, without mentioning anything about “invisible hands”).

Edmund notes, inaccurately, that “Smith used the phrase only three times in his 1776 masterpiece” and then accurately quotes from the single instance of his use of the invisible hand metaphor in Wealth Of Nations (Book IV.ii.9: 456). Smith only used the metaphor 3 times in all of his works (over a million words): first once in his Essay on Astronomy [1744-58; published 1795 – he died in 1790] (HOA III.2: 49); then once in Moral Sentiments [1759] (TMS IV.ii.10: 184), and finally once in Wealth Of Nations [1790].

And that’s the lot, for an alleged “radical idea”, which hardly anybody took any notice of until the end of the 19th century, and latterly in the 20th century, particularly after 1950; the supporting evidence for the claim is slim indeed. The metaphor only became “radical” in the minds of its modern re-inventors from seeking to justify their “radical” mathematical models of general equilibrium from only 62 years ago onwards, a long time from the 18th century, and in competition with claims for Soviet/Social Democratic-style planning over Western markets.

Edmund restores his position to some extent in the last three paragraphs of Chapter 1:

Although the idea of the invisible hand has been hijacked by right-wing politicians in recent decades, it is not a theory that necessarily represents a particular political view … The invisible hand underlines the fact that individuals – rather than governments and administrators – should be able to decide what to produce and consume, but there are important provisos.

Smith was careful to distinguish between self-interest and pure selfish greed. It is in our self interest to have a framework of laws and regulations that protect us, the consumers, from being treated unfairly. This includes property rights, the enforcing of patents and copyrights and laws protecting workers. The invisible hand must be backed up by the rule of law.

This is where Gordon Gekko got it wrong [more correctly, where the Hollywood scriptwriter’s imagination got it wrong]. Someone driven purely by greed might choose to cheat the law in an effort to enrich himself to the detriment of others. Adam Smith would never have approved.”

Concluding assessment: Edmund Conway is about 60 per cent correct. By slightly obfuscating Smith and the invisible hand, in effect he shows that if the modern version of the metaphor was dropped altogether, and the sentences left were based on supply and demand, on markets and on the rule of law, the underlying commercial society that is at the root of our prosperity, plus our liberty and our moral sentiments, would ensure the least worse outcomes of all known (tried and untried) arrangements, including the ones we have just now. If his “50 economics ideas” gets than across he will do all of us (and Adam Smith’s legacy) a considerable favour.



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