Monday, March 08, 2010

Modern Inventions About an Invisible Hand Have Nothing to do with Adam Smith

Robert Dysell writes (7 March) in the Planner Fed Blog (HERE)

”Generation 1: the fallacy of individuality”

Even hard nosed economists have woken up to the fact that the overly simplistic Adam Smith’ principals of the ‘invisible hand’ in business have led to a collective failure of financial systems commonly known now as the ‘the recession’.”

The so-called “the overly simplistic Adam Smith’ principals [sic] of the ‘invisible hand’ in business” do not appear in anything written by Adam Smith.

The elevation of the metaphor of ‘an invisible hand’ to that of a ‘principle’ is a wholly invented notion, which became popular – even ubiquitous – among modern economists from the 1950s in the USA and is now pandemic across economic departments around the world.

Ironically, since the recession, the whole notion of an invisible hand guiding markets has been challenged as if it had anything to do with Adam Smith.

Smith’s two mentions of an invisible hand in Moral Sentiments (1759) and in Wealth Of Nations (1776) had nothing to do with markets at all – that it was his part of the myth.

In Moral Sentiments, Smith referred to feudal landlords’ absolute necessity of feeding their servants, retainers, and peasants (they wouldn’t last the winter without food), which had nothing to do with (non-existent) markets.

In Wealth Of Nations, Smith referred to some, but not all, merchant traders preferring to invest locally where they felt more secure rather than invest abroad where they did not know the people they dealt with as well, and nor were they as familiar with the probity and impartiality of the legal system in foreign countries (apart from the risks of sea travel and the reliability of shipping). Risk-avoidance drove most of them to invest locally. Again, this had nothing to do with how markets work.

Modern economists made the metaphor of an invisible hand into its own object, whereas metaphors refer not to themselves but to their object. Yet, in both cases in Smith’s usage, described above, the metaphor was about necessity and the avoidance of risk.

With the apparent failures of economists in the current recession, Adam Smith is blamed for the misuses of a metaphor, not be him, but by leading modern economists.



Blogger Tom Hickey said...

Bryan Caplan is resisting.

"Laissez-faire is a relative concept, and always has been. I've read The Wealth of Nations, and Adam Smith is clearly a pragmatic libertarian."

No surprise there. The world appears to you as you are.

4:30 pm  
Blogger Gavin Kennedy said...

I am surprised at Brian's approach to this subject.

Laissez-faire is attributed to Adam Smith though it does not correspond to his works, he didn't use the phrase, and apparently it means whatever the economist takes it to mean.

I am not up to the latest on the terminology of "libertarian". which seems to run parallel to the left-right spectrum - I've also given up on the word 'liberal', as it appear to mean one thing in the UK and something entirely different in the US.


9:59 pm  

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