Paul Samuelson's Nuanced Assessment of the Invisible-Hand Doctrine

Following yesterday’s post on Paul Samuelson’s 1948 introduction of the alleged “theory” of Adam Smith about the “invisible hand”, I thought I should bring the debate a bit closer than 62 years ago (as a correspondent, Garry, suggests via email).

Turning to my draft text, I shall quote from Paul Samuelson and William D. Nordhaus’s 12th edition of Economics, published in 1988, or 22 years ago (I did not make notes of the 18th edition in 2008; a new, 19th edition is imminent), because it added little to the debate, but I shall make notes on my next visit to the library).

After quoting the (in)famous paragraph from Wealth Of Nations (WN IV.ii.9: 456), chapter 3 continues:

“The Invisible Hand and Perfect Competition”

“Smith proclaimed the principle of the ‘invisible hand’. It says that every individual, in selfishly pursuing only his or her personal good, is led, as if by an invisible hand, to achieve the best good for all. In this best of all possible worlds, any interference with free competition is certain to be injurious.” (p 41)

A few pages later, Samuelson and Nordhaus add:

“After two centuries of experience and thought, however, we now recognise the scope and realistic limitations of this doctrine”, mentioning the “absence of perfect competition” and “externalities” as contributing to the doctrine’s limitations. (p 46)

Also:

“The invisible hand can also misguide the economy when economic activities spill over outside the market place … This review of the failures of the invisible hand doctrine serves as a prologue …the virtues of the invisible hand must to some extent be discounted. And in such circumstances, the truth of the invisible-hand doctrine may vanish” (p 46)

“Yet we must not forget that the invisible hand can sometimes lead the economy onto the wrong path” (p 47)

These admirable qualifications to the invisible-hand doctrine, originally hinted at by Samuelson in his 1948 introduction of it in his first edition: an “unguarded conclusion has done almost as much harm as good in the past century and a half”, p 36, is followed up at the end of the 12th edition by stepping backwards so to speak to the modern myth, under the heading:

“A Modern Restatement of the Invisible Hand Theory”

“If Adam Smith were alive today, he would probably agree with all of this. Moreover, one ventures the guess, from his biography, that he would probably …say in effect (p 681):

“You think you are helping the economic system by your wll-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 a miraculous fashion. No sovereign need rule. The market will answer all things.” (p 760)

“Smith never did prove the truth of this. Indeed, until the 1940s, no on yet knew how to prove – or even state properly – the kernal in Adam Smith’s invisible hand doctrine.” ( p 760)

A footnote from Samuelson’s 10th edition (with Peter Temis), 1976:

“In short, Adam Smith, in the famous passage quoted on page 41 [from WN IV.ii.9: 456], had no right to assert that an Invisible Hand successfully channels individuals who selfishly seek their own interest into promoting the “public interest” as these last two words might be defined by a variety of prominent ethical and religious notions of what constitutes the welfare of a nation. Smith has proved nothing of the kind, nor has any economist since 1776” (p 634).

Garry’s point (for which I am grateful) is well taken – and is in my draft manuscript – but I have not included it so far in Lost Legacy because the focus has been rather narrow. The 19 editions of Samuelson’s Economics provide a significant contribution to the spread of the “invisible-hand doctrine” among modern economists, but Samuelson’s contribution is quite nuanced (thankfully, and ackonwledged by me) compared to the epigones who simply repeat what their tutors and textbooks told them.

From the start, Samuelson expressed misgivings about the metaphor and, in the above quotes (among others), he makes explicit that the assumed universality of the invisible-hand doctrine is suspect, partly, I think because he was among the first, if not the first, in the 1940s to state properly what the alleged proposition really meant and to work out its form, without it being solved, except implicitly, in general equilibrium mathematics (heavily restricted in its assumptions).

This makes the fallacies of turning a metaphor into a myth, as happened in modern economics, all the more significant and it makes the constant association of the myth with Adam Smith’s use of a mere metaphor, all the more futile.