A New Series on the Genesis of the Invisible Hand Myth from the 1950s No. 2
Elbert V. Bowden, Economics: the science of common sense, 1974, South-Western Publishing Co. p. 405.
‘You have heard of Adam Smith, who, back in 1776, wrote a big and famous economics book called Wealth Of Nations. Adam Smith understood and explained the market process, and about specialisation and the gains from trade. He was strongly against governmental controls of “mercantilism”. He said the nations would be most wealthy and everyone would be better off if the government would get rid of its economic controls and just let each businessman and each person go his own way.
One of Adam Smith’s most famous statements was that if you leave people alone to follow their own personal interests, each will be automatically guided “as if by an invisible hand” to do the best things for society. The idea of “the invisible hand” is the idea of the market process at work. It’s the idea that society’s economic choices will be made automatically, in response to the wishes of the people. The “sovereign consumers”, through the market process, will cause the labor, land, and capital to do the best things for the society, as though all were guided by “an invisible hand” (405)’.
Comment
I have no objection to anyone writing in an avuncular fashion if it helps their readers understanding. I do object, however, when the author completely misleads them about an eminently checkable set of facts with a distorted version of what the authority they purport to report upon wrote to the contrary.
Professor Bowden had not read Adam Smith when he wrote the above.
Smith never used the phrase ‘as if by an invisible hand’. He never linked the metaphor of ‘an invisible hand’ to a market process. He did not consider that ‘market processes’ always, or necessarily, did ‘the best things for society. They could do the ‘best things’, but as often do not.
Mercantile political economy – since the 19th century known by it German language root as ‘mercantilism’ – was not just a policy instituted by ‘government’. It was a commercial policy brought about by the clamour of mercantile interests (‘businessmen’) linking their persuasive influence to that of ‘sovereign kings’ not ‘sovereign consumers’. Kings were gullible from their need for money to fight continental wars (often merely dynastic squabbles) and to ‘maintain the dignity of their office’ (i.e., live in the splendour to which they were accustomed). Customs tariffs provided those resources and narrowed the market for the profitable benefit of ‘businessmen’. Its modern version is still with us and is a multi-billion dollar with, known as lobbying.
Smith reference to ‘an invisible hand’ was not about markets. It referred to the consequence of some, but not all, merchants, choosing to invest locally rather than abroad, because of their concerns at the risks of sending their capital to foreign countries or the British colonies in North America.
It followed that each merchant keeping his capital within his sight and with people he knew, and under a legal system he was sure of, added to local investment. This made national investment and the associated employment larger than it would have been if they were less ‘insecure’ and sent it abroad.
The consequence was not ‘magical’, nor mysterious. It was simply the necessary outcome of the arithmetic rule that ‘the whole is the sum of its parts’. The more parts, the larger were national output and employment, which Smith considered to be an important public benefits (output equalled ‘national wealth’ and employment equalled the ‘spread of opulence’, particularly to the otherwise poor).
This simple and singular observation of Smith’s was turned into a general statement that whatever businessmen and people did in pursuit of their self-interest ‘automatically’ benefitted society, which is a nonsensical statement and very unSmithian.
Professor Bowden misled his readers and his students.
‘You have heard of Adam Smith, who, back in 1776, wrote a big and famous economics book called Wealth Of Nations. Adam Smith understood and explained the market process, and about specialisation and the gains from trade. He was strongly against governmental controls of “mercantilism”. He said the nations would be most wealthy and everyone would be better off if the government would get rid of its economic controls and just let each businessman and each person go his own way.
One of Adam Smith’s most famous statements was that if you leave people alone to follow their own personal interests, each will be automatically guided “as if by an invisible hand” to do the best things for society. The idea of “the invisible hand” is the idea of the market process at work. It’s the idea that society’s economic choices will be made automatically, in response to the wishes of the people. The “sovereign consumers”, through the market process, will cause the labor, land, and capital to do the best things for the society, as though all were guided by “an invisible hand” (405)’.
Comment
I have no objection to anyone writing in an avuncular fashion if it helps their readers understanding. I do object, however, when the author completely misleads them about an eminently checkable set of facts with a distorted version of what the authority they purport to report upon wrote to the contrary.
Professor Bowden had not read Adam Smith when he wrote the above.
Smith never used the phrase ‘as if by an invisible hand’. He never linked the metaphor of ‘an invisible hand’ to a market process. He did not consider that ‘market processes’ always, or necessarily, did ‘the best things for society. They could do the ‘best things’, but as often do not.
Mercantile political economy – since the 19th century known by it German language root as ‘mercantilism’ – was not just a policy instituted by ‘government’. It was a commercial policy brought about by the clamour of mercantile interests (‘businessmen’) linking their persuasive influence to that of ‘sovereign kings’ not ‘sovereign consumers’. Kings were gullible from their need for money to fight continental wars (often merely dynastic squabbles) and to ‘maintain the dignity of their office’ (i.e., live in the splendour to which they were accustomed). Customs tariffs provided those resources and narrowed the market for the profitable benefit of ‘businessmen’. Its modern version is still with us and is a multi-billion dollar with, known as lobbying.
Smith reference to ‘an invisible hand’ was not about markets. It referred to the consequence of some, but not all, merchants, choosing to invest locally rather than abroad, because of their concerns at the risks of sending their capital to foreign countries or the British colonies in North America.
It followed that each merchant keeping his capital within his sight and with people he knew, and under a legal system he was sure of, added to local investment. This made national investment and the associated employment larger than it would have been if they were less ‘insecure’ and sent it abroad.
The consequence was not ‘magical’, nor mysterious. It was simply the necessary outcome of the arithmetic rule that ‘the whole is the sum of its parts’. The more parts, the larger were national output and employment, which Smith considered to be an important public benefits (output equalled ‘national wealth’ and employment equalled the ‘spread of opulence’, particularly to the otherwise poor).
This simple and singular observation of Smith’s was turned into a general statement that whatever businessmen and people did in pursuit of their self-interest ‘automatically’ benefitted society, which is a nonsensical statement and very unSmithian.
Professor Bowden misled his readers and his students.
Labels: Genesis Series, Invisible Hand
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