Wednesday, April 14, 2010

Why I Persist Against The Consensus

I am asked why I persist in criticising the ‘unanimous’(?) consensus today that Adam Smith’s(?) ‘Invisible-hand’ guides markets, supply and demand, and individuals to serve the public good. Is it all that important? He’s been dead for over two centuries, I am reminded.

Well, yes, it important today because, given the consensus, the alleged ‘mystical powers’ claimed for ‘an invisible hand’ (including it being the ‘hand of God’) in public policy causes inappropriate reliance on a non-existent entity, with consequences we see in corporate behaviours and government behaviours.

I see the main problem since the 1950s as being associated with wholly ubiquitous, modern assertions of the invented ‘doctrine’ of Adam Smith’s invisible hand.

The mainstream view (Samuelson 1948, 1st edition, 36; cf. Samuelson and Nordhaus’s in their 19th edition, 2010, 29) that Smith taught that the pursuit of ‘selfish’ outcomes by each individual, ‘as if led by an invisible hand’, resulted in the ‘best good of all’ is a wild generalisation, not supported by Smith’s texts, and worse, by modern experience.

The nine paragraphs in pages 452-56 of Wealth Of Nations, containing the invisible-hand metaphor, show that Smith was discussing merchant traders deciding between investing their capital abroad versus investing it locally, the latter perceived by some merchants, but not all, to be less risky than the former.

It was not the general case at all, as asserted and implied by Samuelson.

Those (risk-averse) merchants who chose to invest locally, by the arithmetic of the ‘whole is the sum of its parts’, added to the national output of the ‘necessaries, conveniences, and amusements of life’, which to Smith was consistent with his meaning of the ‘public good’. It is also a strictly limited understanding of what is mean by 'public good' (in fact, it sounds more 'Stalinist' than Samuelson, and others, would have been comfortable with).

The rest of Book IV shows the likelihood that the same domestic contributors to the ‘public good’ were the main constituency from which the mercantile pressures for tariff protections, prohibitions and hostility to trading partners contributed to the pubic ‘bad’.

Smith also lectured on rhetoric (1748-63), in which he described metaphors as giving ‘due strength of expression to the object to be described and at the same time [doing] this in a more striking and interesting manner’ (LRBL, 29). What then was the ‘object to be described’ by the 'invisible hand' metaphor?

For Smith, the ‘object’ was the necessary consequence of the individual, risk-averse, merchant’s ‘own security’ which led to the individual contributing to total output. Yet, modern economists, since the 1950s, have made the invisible-hand metaphor its own object!

For that, and other reasons, I continue to tackle errors of attribution to Adam Smith of ideas he never held or, where he might be said to hold weak versions of them, it is necessary to be mindful of their context before generalising too much, e.g., his criticism of chartered merchant companies and anti-market criticisms of modern corporations.

If being dead for over two centuries is a barrier to being relevant today, why then do the purveyors of the myth of Adam Smith and 'his invisible-hand persist in quoting him as the authority for their modern economic policies?

Labels: ,


Post a Comment

<< Home