Saturday, May 22, 2010

On the Genesis of the Invisible Hand Myth from the 1950s No. 3

James F. Willis and Martin L. Primack. 1977. Explorations in Economics, Houghton Mifflin and Company.

By the time that Adam Smith wrote The Wealth Of Nations in 1776, the dictates of the church that restrained economic abuses were replaced by the dictates of competition, which surprisingly exerted an even stronger effect, and in the same direction. Adam Smith’s “Invisible Hand” was competition. According to Smith, businessmen were selfish, and concerned only with their own personal gain. Greed ruled economic behavior, but competition restrained this greed, this desire to maximize one’s own economic good, and channeled it into maximizing the public good. Not altogether, of course, but the effect of competition was noticeable, for the following reasons.

Each producer had such a small part of the total market that he or she could not control the price of a given product and thus gain an advantage over others. Each small producer seeking customers had to produce at the most efficient level, turn out the kinds of products and services the consumer wanted, and sell them at the lowest price commensurate with staying in business. The selfishness of these small producers was guided, as if by and Invisible Hand (competition), to maximize the welfare of society at large. …

… So the tenets of the medieval church no longer exercise the force of law over people, and monopoly power has weakened Adam Smith’s Invisible Hand of competition
.’ (p 97).

From what authority did Willis and Primack link Adam Smith’s use of the metaphor of an invisible hand to competition?

Certainly not from Smith’s Wealth Of Nations.

Smith related the metaphor to the degree of insecurity of some, but not all, merchants. Those that were insecure about foreign or distant trade were led by their insecurity to invest locally and the consequence was that local – and in he aggregate, national – output and employment was larger than it would be if they invested abroad. A larger national output and the related employment was a measure of a country’s wealth and its spread of opulence.

Nor did he describe the behaviour of merchants as ‘selfish’. For Smith self-interest was far more nuanced than selfishness. It played a positive role too. A person’s self-interest could induce him to feed himself and his family – a person neglecting to do so would not be well regarded. Greed was always – still is – present wherever a number of humans congregate; it was not regarded a dominant force such that it ‘ruled economic behavior’.

Even from a slight acquaintance with Britain in Smith’s time would surely show Willis and Primack that the economy of the day was hardly competitive in the manner they suggest.

Trade Guilds and Incorporated Towns ran legal monopolies, supported by other legislation (not Church dogmas), which inhibited competition. Smith wrote extensively on the non-competitive nature of economic life in 18th-century Britain and its colonies in North America.

Ironically, a few years after Willis and Primack’s 1977 volume, the myth of the Invisible Hand took on a rock-solid grip in the discipline and was said to be a work in 20th-century North America and Europe, despite the contrary evidence of the actuality and the historical evidence of the shallow roots of the phrase in Smith’s writings.

Sadly, everything we now know about the metaphor was knowable from the mid-1980s, except nobody was looking. Modern economists in the 21st century have no such excuses.

You may read my 2010 paper on Adam Smith’s use of the Invisible hand metaphor HERE

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