Observing a Market in Kurdish Iraq

A reader, Frank J. Desparrois, Jr, wites and asks for my comments on a post on the Adam Smith’s Institute’s Blog. I responded as follows:

Jan Boucek writes in the Adam Smith Institute’s Blog HERE:

‘Erbil’s invisible hand’

‘Anyone doubting the existence of The Invisible Hand should pull up a chair on the street terrace of the Star Ice Cream Parlour on Iskan Street here in Erbil, the capital of Iraq’s autonomous region of Kurdistan. What else can explain the sights, sounds and smells that soon prevail?’

‘Where did all this stuff come from? How did it get here? The quantity, the variety, the affordability, the availability - all seem completely natural and expected.

Unless you think about it for a bit. There was no Ministry of Planning that decided how many Toyota Land Cruisers in white or black were needed. No Ministry of Agriculture that methodically allocated chickens to each kebab joint. No Ministry of Communications handed out mobile phones.

No, it was the Invisible Hand – a miracle.’

Comment
I read Jan Boucek's post (I read the Adam Smith Institute’s Blog daily) but I did not comment, having exchanged several blog postings on the invisible hand postings with a serious scholar, David Friedman, in the past few days and I felt I had dealt comprehensively with to subject at relatively ‘higher’ theoretical level that this posting by Jan Boucek, who writes with more enthusiasm than warranted a rebuff from Lost Legacy when I read it.

I receive 20-40 postings a day from my ‘google alerts’, most of them not worthy of a response, unless it is a ‘quiet week’ for more serious nonsense about the invisible hand.

On Jan Boucek’s post, what can I say? I do not believe in 'miracles', or the ‘hand of god’ explanations for how markets work. Their workings are comprehensively known among economists and most certainly were understood and explained by Adam Smith in Wealth Of Nations, Books I and II. Smith did not mention the invisible hand in relation to markets, as claimed by modern economists from the 1950s.

Jan Boucek, sans his reference to the invisible hand, describes a market scene in Kurdish Iraq, which is worth knowing about. It contrasts with the murderous tensions in the rest of Iraq.

Working markets do ‘seem completely natural and expected’ and they happen all over the world where ‘planners’, ‘bureaucrats’, regime soldiers, ‘inspectors’, ‘commissars’, ‘politicians’, and all such agencies keep out of the way, and liberty reigns under law. Markets are so natural, that they appear in the most unpromising of circumstances. The human propensity to exchange took root millennia ago and blossoms wherever individuals meet and mix, despite authoritarian, religious, politics, and stupid myopia tries to stamp it out.

As long as Kurdish Iraq remains autonomous, and free from the Sunni-Shia madness, and the depredations of Turkish nationalism, its people and their markets will prosper and Jan Boucek’s enthusiasm will continue.

Tyler Cowen Spots a Telling Quote

From a quote by Tyler Cowen (at Marginal Revolution Blog), of a book review of John Quiggin (of Crooked Timber Blog) (HERE) and author of: Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton, NJ: Princeton University Press. The review (not the book!), ‘First Bank of the Living Dead’ was written by Dan Drezner at National Interest (HERE):

“Quiggin thinks he’s only writing about the failure of free-market ideas, but he’s actually describing the intellectual life cycle of most ideas in political economy. All intellectual movements start with trenchant ways of understanding the world. As these ideas gain currency, they are used to explain more and more disparate phenomena, until the explanation starts to lose its predictive power. As time passes, the original ideas become obscured by ideology, caricature and ad hoc efforts to explain away emerging anomalies. Finally, enough contradictions build up to crash the paradigm, although current adherents often continue to advance the ideas in zombielike form. Quiggin demonstrates with great clarity how this happened to the Chicago school of economics. How he can think it won’t happen with whatever neo-Keynesian model emerges is truly puzzling.”

Comment
How true of big ideas associated with intellectual movements and how well what happened to Adam Smith’s legacy fairly quickly after he died in 1790.

In the early years of the 19th century the epigones stuck Adam Smith with an alleged commitment to laissez-faire and legislators and those who influenced them used Smith’s hostility to the depredations of mercantile governments, to hamper legislation that was directed at callous employers and their exploitation of children and females in their factories and pits, within an alleged general hostility to government intervention altogether. Wealth Of Nations did not support such an interpretation of Smith’s views on the proper role of government.

In the 20th century, modern economists advanced the view that big business and big government could rely on the invented myth of ‘Adam Smith’s’ invisible hand, without any regulation (what happened to Adam Smith on the role of the state to oversee the appropriate legal environment for markets to function?), which regulations, while not totally abolished, gave impetus (as in the 1820s) to policies and political narratives hostile to the scrutiny that Smith advocated whenever ‘merchants and manufacturers’, or their modern descendants advocated, anything at all in their favour?

‘As time passes, the original ideas become obscured by ideology, caricature and ad hoc efforts to explain away emerging anomalies.’ How true!

and:

‘Finally, enough contradictions build up to crash the paradigm, although current adherents often continue to advance the ideas in zombielike form.’ How true, too!

[All credit to Tyler Cowen (Marginal Revolution Blog) HERE.

Once Again that Metaphor

DF: ‘Your claim was it was a statement only about people choosing to invest at home rather than abroad’.

GK: In Wealth of Nation, p 455-56, Smith locate the subject of the ‘individual’ investing in ‘domestick industry’ as follows:

Para 6, penultimate line: ‘domestick industry’;
Para 7: line 2: ‘domestick industry’;
Para 8: line 4 and 5: ‘industry’;
Para 9: line 5: ‘domestick industry’;
Para 10: ‘domestick industry’;
Para 11: ‘domestick industry’;

Clearly, ‘every individual’ refers to those investing in ‘domestic industry’ as part of the discussion in this section which is concerned with ‘every ‘individual’ who chooses this option, to which the metaphor of ‘an invisible hand’ applies and the object of the metaphor (pace as per Smith’s ‘Lectures on Rhetoric’ ([1762] 1983, p 29) is the unintended consequence of such individuals contributions of their aggregate ‘revenues and employment’ ,which increases domestic ‘revenues and employment’ by the amounts of these items more than it would be otherwise (the whole is the sum of its parts).

DF: ‘He does however write that the same pattern holds in many other cases, which makes it clear that his point is not limited to the particular case you claimed. And he points out some of the other cases, without the metaphor of the invisible hand, elsewhere in the text--as I have already mentioned. Obviously he doesn't think that people are always lead by an invisible hand to do the right thing--if they were, the merchants and manufacturers wouldn't be lobbying for trade restrictions and monopoly privileges and the like.’

GK: Smith does indeed comment: ‘in this case, as in many other cases, led by an invisible hand’ to ‘promote an end which was no part of his intention’. This statement discloses, without identifying the other cases, that individuals promote ends unintentionally but we would still have to identify which particular objects are appropriately described in a ‘more striking and interesting manner’ using this particular popular 17th-18th century metaphor, or some other metaphor.

In the specific case that Smith deploys the metaphor he clearly states that the individual ‘intends only his own security’ as the object of the metaphor, which is the point I make in these discussions. It is not the metaphor of the invisible hand that reveals the economics – it is the avoidance of foreign trade risks that ‘lead’ the individuals to do what they do by investing domestically. By obfuscating – even implying – that the object is less important than the metaphor, it creates a wholly unnecessary ‘mystical’ (perhaps theological) presence within the social system, which is regularly alluded to economists of particular religious persuasions and those who detect theology in Adam Smith’s writings.

Merchants and manufacturers lobbied for ‘trade restrictions and monopoly privileges and the like’ because they were led to such lobbying by their perceived self interests. Hence, the ‘invisible hand’ was not a metaphor for self-interest, otherwise it would not be countable as an unintended consequence that generally benefitted society – often it doesn’t; often it does, but too many exceptions do not prove the rule. I have counted over 70 instances in Books I, II, and III of Wealth of Nations where ‘self-interested actions were no beneficial either for those affected by them and for society.

I noted David’s apparent dismissal of Smith published views on the role of metaphors (‘taking the statement in the context not of Smith's views of metaphor but his view of economics’ which is a common reaction from colleagues with whom I have debated these issues (I have yet to hear from anyone who discusses Smith’s views on metaphors on their merits in pursuit solely of justifying the modern treatment of the invisible hand (pace Paul Samuelson, from 1948).

DF: ‘I think you will find the argument, although not necessarily with Smith's metaphor, in Marshall…’.

GK: I am grateful for all references from colleagues who suggest references to the invisible hand from the 1920-1930s, which I have missed. That there appear to be so few of them is striking. I am familiar with Marshall’s editions but I have not found a reference. If David points to one I shall be delighted. The metaphor was discussed in Cambridge at the time, I do not doubt. Pigou incorporated it in his critique of an existing Cambridge oral tradition leading to his writings of Welfare; Chicago appears to have had a similar oral tradition in the early 30s. With US academic economists actively influenced by Christian theology (‘hand of God’, etc.,) from the 1880s onwards there is probably some basis for these oral traditions. I remain curious in these matters and open-minded.

[I have exchanged several informative emails with David which I have not published on Lost Legacy from which I learned a lot more of David’s interesting and instructive take on the invisible hand. We have not (yet) reached agreement and may not. Informed controversy like this is always beneficial. It clarifies perceptions and tests them, which is what I miss most since my retirement.]

From Perfect Rationality to Utopia

Dr Eamonn Butler writes on the admirable Blog of the Adam Smith Institute (London) another piece of excellent analysis from the pro-market ASI (HERE) :

“Stiglitz: A new economic model”

“I believe Professor Stiglitz is tilting at a straw man. Advocates of free markets have never believed them perfect. Markets are not static, like the textbook picture of supply and demand curves magically balancing at a particular price. As Mises and Hayek observed, markets are in constant motion: perhaps they are always tending towards balance, but with millions of buyers and sellers in millions of markets all competing for the same resources and getting in each other's way, they never quite achieve the textbook bliss. Nor are economic agents rational in the way the textbooks would have it, always demanding more of whatever is cheap. They are not computers, but human beings. There is a limit to the amount of anything they want. They value non-economic goods (such as honour) as much as economic ones, and will often give up the latter for the former. Economics is driven by those highly personal, emotional, wants and values: it is never going to be a matter of rational calculation....

It is perfectly possible to believe that markets do not clear perfectly and automatically, and that economic agents do not behave rationally, and yet conclude that markets work better if the government stays out of them. Sure there is market failure, but there is also government failure too. At least markets work through the wisdom and information of the whole population; government reflects the decisions of a small, distant, and inevitably self-interested class of politicians and civil servants. Sure we act as irrational human beings, and make mistakes in our planning that lead to losses and imbalances. But would we really trust that same small, distant (and, to be honest, rather slow) coterie to be able to plan our future better than we, ducking and weaving through a world that constantly changes, could do for ourselves?”

Comment
I think part of the problem was (and remains) the passionate search for making ‘political economy’ (as Adam Smith envisaged it) a ‘hard science’ from the 1870s and the subsequent formal achievement if that objective by the 1960s (though physicists in the Sante Fe Institute found that what passed for advanced maths among economists were somewhat primitive by the standards of 'hard science').

Starting with calculus, the rate of change of two variables and compressing the complexities of human behaviour into the single dimension of rationality and tracing the influence of variations in price, predictable outcomes were found, assuming that the world conformed to the stripped-down models that became prevalent in Economics textbooks from the 1950s.

With invented associations between rational self-interest and assumed ‘good outcomes’ for society, a narrative was created that bore little relevance to the real world. Predictions from such models were not realized – and occasionally proved to be disastrously out of kilter with real events – which caused and causes resurgences in ‘anti-market’ rhetoric from the Marxists, who never really went very far away, social-democrats and people like Stiglitz, who looks for a ‘top down’ new economics, as if anything as complex as an economy can be ‘designed’ (by who) for what agreed purpose?

History shows no such design capability exists.

A Marxist the Invisible Hand and Capitalism

It was bound to happen – the myth of the invisible hand has given comfort to modern economists and to legislators and those who influence them, but it also become a hostage to fortune for neoclassical economists, because sooner of later the alleged powers of the metaphor would be found wanting in practice and they would be clobbered, where not mocked, by those who believed what they had been told about the invisible hand (a fairly predictable experience in the recent crisis).

Moreover, those few of us who have read what Adam Smith actually wrote and then contrasted with what has been claimed by some modern economists (Nobel Prizes winners among them). Lost Legacy has been plugging away trying to right the wrong done to Adam Smith’s legacy.

Below, is the comfort expressed by a self-declared Marxist (David Ruccio) who uses my academic case against the myth of the invisible hand to clobber capitalism, predictably. HERE:
http://anticap.wordpress.com/2010/08/25/the-metaphor-of-the-invisible-hand/

DR: Take a course in neoclassical economics or listen to a neoclassical economist and you’ll soon learn of the magic of the invisible hand. And you’ll learn that the invisible hand was Adam Smith’s great contribution to modern economic thought.

Much of the rest of Smith is discarded or simply ignored. The labor theory of value. The role of trust and sympathy in allowing markets to operate. The need for public education in a world in which labor is often reduced to drudgery. And so much more.
But the invisible hand remains. The problem is, the invisible hand is an idea that Smith only invokes twice in his main texts—once in the Wealth of Nations, and once in the Theory of Moral Sentiments.

And, as Gavin Kennedy has been arguing, the invisible hand is a metaphor was not about markets, regulated of otherwise and in none of the three cases that he uses it was it about markets. The belief that he did refer to markets is a wholly invented myth by modern economists from the 1950s. [The third example Kennedy refers to is in Smith's Astronomy.]
Why does it matter? According to Kennedy:

GK: “If you insist that the ‘invisible hand’ is real, actual, or has content, you take on a wholly fictitious metaphysical idea (‘the hand of God’ or such like construction), which is theology not economics.

“My assertion that the metaphor was not used by Adam Smith in relation to markets is based on the close reading of his uses of it. Samuelson and others asserted that it was elated to markets, without a scrap of textual evidence – its is not mentioned in Books I and II of WN, which deal in detail with the workings of markets. Also, his use of it was hardly mentioned by political economists, while Smith was alive, nor for long after he died. Strange for a cardinal principle?”

“And that’s what we’ve been getting in recent years: a theology of free markets, justified by a powerful metaphor—the invisible hand—for which neoclassical economists have worked to invent a tradition beginning with Adam Smith.”

Comment
This is part of my beef with invisible hand myth. It erects a wholly unsupportable expectation on a very thin reed, which was bound to disappoint its true believers and those innocents who relied on its supposed benefits (no wonder the metaphor is appropriated regularly by theologians).

That a Marxist is hostile to the myth is not surprising; the myth obscures the real power of bottom-up markets which have done more good for humanity than all the top-down state-sponsored tyrannies that have existed since ancient times.

David Friedman Replies to the Invisible Hand Debate

"The first part of David's question (was Smith making a general statement about all individuals are 'led by an invisible hand')"

Since I never suggested that Smith was making a general statement that all individuals are led by an invisible hand, I do not see how this is relevant to what I posted. Your claim was that it was a statement only about people choosing to invest at home rather than abroad. There is a large range between that and "all individuals." Smith makes it explicit that his point applies to many other cases, hence the claim that it applies to only that one cannot be true. That doesn't require, nor does Smith suggest, that the point applies to every individual.

"Smith is not making a general statement or axiom in this paragraph."

He does however write that the same pattern holds in many other cases, which makes it clear that his point is not limited to the particular case you claimed. And he points out some of the other cases, without the metaphor of the invisible hand, elsewhere in the text--as I have already mentioned. Obviously he doesn't think that people are always lead by an invisible hand to do the right thing--if they were, the merchants and manufacturers wouldn't be lobbying for trade restrictions and monopoly privileges and the like.

I think it's clear, taking the statement in the context not of Smith's views of metaphor but his view of economics, that his point is that self-interest within a suitable legal framework generally leads to desirable results--more desirable than the results produced by top down central planning ("and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."). And what is relevant to that is not where he uses the metaphor of the invisible hand but where he makes that claim.

He doesn't have adequate tools to offer anything close to a rigorous argument, and in some places his intuition leads him astray--including the particular case of foreign vs domestic investment. The reasons he offers why investors prefer domestic investment at roughly equal returns are relevant to the efficiency of doing so, but they have very little to do with the reasons why Smith thinks that doing so is socially desirable. Put in modern terms, investing at home raises the domestic capital to labor ratio, benefitting domestic sellers of labor (and harming foreign sellers of labor), with the opposite effects on sellers of capital. That has nothing to do with the fact that the risk adjusted return on capital is higher at home if the non-adjusted rates are equal, which is, in modern terminology, the reason Smith's capitalists prefer to invest at home.

"In the 1920s and 1930s the invisible hand (focusing on versions of selfishness/self interest leading to social maxima in output or welfare) began to appear in isolation"

I think you will find the argument, although not necessarily with Smith's metaphor, in Marshall, although since I'm travelling at the moment--this post is being sent from a car driving across California, via a laptop and tethered cell phone--I can't offer you a specific passage.

Do send me your piece on Samuelson--I'm curious as to which of you is misreading either the other or Smith. Also you might (or might not) find my lecture notes from teaching history of thought, largely on Smith, of interest.

http://www.daviddfriedman.com/Academic/Course_Pages/History_of_Thought_98/History_of_Thought_98.html
--
David Friedman
www.daviddfriedman.com
daviddfriedman.blogspot.com/

A Debate on the Invisible Hand Continues

David Friedman writes:

‘And I remain puzzled as to how you can believe that the comment about the invisible hand was only about preferring local to foreign investment at nearly equal profits, when Smith both provides another example and says that his comment is true of many other cases as well. Beyond that, I would need a clearer idea of who and what you believe you are disagreeing with to tell to what degree your disagreement is or is not justified.’

Gavin responds:

The first part of David’s question (was Smith making a general statement about all individuals are ‘led by an invisible hand’) is answered by reading his text more carefully for context (all references are to the definitive Glasgow Edition of Smith’s Works and Correspondence, published by Oxford University Press and reproduced by Liberty Press):

The contextual theme starts in paragraph 1 and runs through to paragraph 9, pages 452-456, WN Book IV, chapter ii. Merely to take part of paragraph 9 (456), which is the usual format of the popular ‘quotation-only’ references, misses out Adam Smith’s argument about the distortions to what he called ‘natural’ processes were caused by mercantile political economy.

To see why the statement in paragraph 9 links to what preceded it, read paragraph 6 (pp 454-5) and note the consequential importance of the home trade (‘a greater quantity of revenue and employment’):

‘… but a capital employed in the home-trade, it has already been shown, necessarily puts into motion a greater quantity of domestic industry, and it gives revenue and employment to a greater number of inhabitants of that country, than an equal capital employed in the foreign trade of consumption… Upon equal, or only nearly equal profits, therefore, every individual naturally inclines to employ, his capital in the manner in which it is likely to afford the greatest support to domestic industry and to give revenue and employment to the greatest number of people in his own country’ (p 455; emphasis added).

Smith clearly differentiates between the ‘domestic’ and the ‘foreign trade of consumption’ and goes on to refer to ‘every individual who employs his capital in the domestic industry’, which by doing so separates ‘every individual’ he refers to from those other individuals who engage in foreign trade and who do not invest their capital domestically. Capital sent to set up a ‘factory’ in India or a plantation in Virginia does not simultaneously impact positively and equally in domestic investment and output.

The investment of Glasgow tobacco merchants (of whom Smith was very familiar from 1751-64) added to Virginia’s domestic output and employment (including slavery), with some trickle-down to Scottish output and employment in shipping, warehousing, distribution and such like, plus building trades for their Scottish magnificent houses (consumption). Its predominant investment and employment effect was abroad.

Smith sets out his hypothesis, again separating domestic from foreign industry:

‘7. Secondly, every individual who employs his capital in the support of domestick industry, necessarily endeavours to direct that industry, that its produce may be of the greatest value’ (455).

Therefore, it should be clear that Smith in paragraph 9 refers to ‘every individual’ who engaged in domestic investment, but clearly not to those who engaged in foreign investment, because domestic investment did more for domestic revenue and employment than ‘an equal capital employed in the foreign trade of consumption’.

So we find that is perfectly legitimate from what Smith wrote to separate the ‘every individual’ tag from slipping from one specific group of capital investors (those investing locally) from another group investing abroad (Europe and the British Colonies, including India). Repatriated profits, especially on retirement, were mainly spent on splendid country and town houses personal consumption and prodigality, which Smith regarded as less beneficial to domestic capital investment and employment than the successive, regular and short cycles of individual capitals returning three or more times a year domestically (productive), rather than the four of five years (or even longer) they might take for one take in foreign trade. That is why the context is easily missed if Book IV, chapter ii is read hurriedly and if you are already convinced that Smith was making a general statement for all the actions of all individual investors, domestic and foreign when he was being more specific ‘in praise of, so to speak, the domestic investors.

Neoclassical economists who leapt on the ‘hurried’ reading, mainly, I suspect of the quotation separated out of paragraph 9 and not the chapter, such as Paul Samuelson, who take it as a general statement and not as Smith had written and, therefore, intended it.

This brings to the ‘case’ question: ‘he is in this, as, as in so many other cases, led by an invisible hand to promote an end which was no part of his intention’.

First, note in the second sentence of paragraph that the ‘he’, and ‘every individual, therefore, endeavours as much as he can both to employ his capital in support of domestick industry’ (which thereby clearly excludes every other individual who deploys his capital in the foreign trade of consumption and not ‘domestick industry’). Smith is not making a general statement or axiom in this paragraph.

Smith states specifically, ‘ in this case’ – those in ‘support of domestick industry – are ‘led by an invisible hand’ to invest locally. And the object of the metaphor? It is his intention of: ‘only his own security’ (namely ‘his’ aversion to the greater risk of foreign trade, specified in paragraph 6, p 454).

I have already specified what Smith regarded as the purpose of using metaphors: specifically to state ‘in a more striking and interesting manner’ their ‘object’ (his Lectures on Rhetoric and Belles Lettres, 1762: 1983, p 29). And the object that drives individuals to prefer the home trade to foreign trade: the security of their capital!

Now, Smith extends the applicability of the metaphor to other cases, but the same rhetorical ‘rules’ prevail, as for all metaphors (that is what Smith taught his students and has been known since Professor John M. Lothian of the University of Aberdeen, purchased 1978 in a Manor House sale two volumes of ‘Notes of Dr Smith’s Rhetoric Lectures’ (1762) and published them in 1963 (Nelson), which have been widely available from Oxford University Press since 1983.

Smith does not identify any other of the ‘many other cases’ in Wealth Of Nations, but he does identify one other use of the metaphor in Moral Sentiments (1759) and we can see the same format used by Smith of this metaphor. In TMS book IV, chapter 2, p 184, he refers to ‘the proud and unfeeling landlord’ who ‘without a thought for his brethren’ nevertheless is ‘led an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal proportions among all it inhabitants and this without intending it and without knowing it, advance the interests of society, and afford the means to the multiplication of the species’ (TMS IV. i.10, p 184-5).

Two common features to these two cases of the use of the same metaphor of ‘an invisible hand’: the agents concerned (the proud and unfeeling landlord’ and the ‘individual’ who invests in the home market) do not intend to promote the public interest and nor do they know about the consequences of their actions.

They are motivated to do what they do by distinct causes: the landlord must distribute ‘his’ food from ‘his’ fields to ‘his’ serfs, because, self-evidently, he had no choice but to do so. Without subsistence they would starve and the basis of his self-opinionated ‘greatness’ would perish (the invisible hand was his absolute necessity to share some of his food resources to continue to bask in his power and greatness, and this had the effect of ‘advancing the interests of society’ and the ‘multiplication of the species’); and the home trade investor driven by his perception of the comparative greater ‘insecurity’ of investing abroad to invest at home instead. In doing so, he increases domestic investment and employment, without this being his intention or even thinking about it. The whole is the sum of its parts. He pursues profit on his capital, not national advantage.

I suggest that Smith demonstrated the powerful use of a metaphor to explain in ‘a more striking and interesting manner’ the unintended consequences of individual motivation in both cases.

That there are numerous other cases where unintended consequences can be demonstrated is most likely. A French Physiocrat (I think it was Mirabeau) remarked that ‘individuals think they are working for themselves but in reality they were working for everyone else’. If we could examine what motivates each individual, we could identify the object of whatever metaphor we used to describe what they actually did.

The third question about just who am I criticizing is fair enough.
I have been tracking the explosive use of the metaphor as its own object seen in the oft stated assertion that there is an invisible hand of the ‘market, supply and demand’, a theorem, a paradigm, and which somehow led to social optima and equilibrium, which, allegedly was first stated by Adam Smith, and so on.

Originally, I found this attention strange, because I had found no references by others to Smith’s use of the invisible hand when he was alive (though the metaphor was extremely well used in the 17th-18th centuries in theology and literary fiction), nor much notice of his uses taken until the last fourth of the 19th century. In the 1920s and 1930s the invisible hand (focusing on versions of selfishness/self interest leading to social maxima in output or welfare) began to appear in isolation (Pigou, Knight, Chicago oral tradition, Lange) and, after Paul Samuelson’s Economics: an introductory analysis (1948; 19 editions and 4½ million sold) appeared, the references – and the myths - became endemic (I can send you my paper ‘Paul Samuelson and the Origins of the Modern Myth of the Invisible hand’ if you send me an email address: gavin@negweb.com).

This 20 May to 3 June, I began posting on Lost Legacy modern attributions of the invisible hand myths to Adam Smith in textbooks, but I was interrupted by illness and hospitalization from continuing until, probably, late September. You can look through the archives for examples; some titles appear below:

20 May: John Lindauer, Economics: a modern view, 1977, W. B. Saunders Company, p.12
21 May: Elbert V. Bowden, Economics: the science of common sense, 1974, South-Western Publishing Co. p. 405.
22 May: James F. Willis and Martin L. Primack. 1977. Explorations in Economics, Houghton Mifflin and Company
23 May: Edwin Mansfield: Economics: principles, problems, decisions, 1974. Norton & Co. New York, pp 16-18
24 May: Richard B. McKenzie and Gordon Tullock, Modern Political Economy: an introduction to economics, 1978, p. 111-12. McGraw-Hill, New York.
25 May: William Baumol and A. S. Binder, 1979. Economics: principles and policy, pp 593, 599, 806-7, Harcourt Bruce Jovanovich, New York
26 May: David Begg, Stanley Fisher and Roger Dornbush Economics (1984) New York: McGraw-Hill (British Edition of a popular US text)
29 May: George Reisman [1990] 1996. Capitalism: a treatise on economics, Ottawa, Illinois, Jameson Books
1 June: Alec Cairncross, 1944. An Introduction to Economics, London: Butterworth & Co
2 June: H. A. Silverman, [1922], 5th: 1928; 11th: 1940; 16th 1964. The Substance of Economics: for the student and the general reader, London: Pitman & Sons Ltd.
3 June: Edwin G. Dolan (with the collaboration of David E. Lindsey), 1977. Basic Economics. Hinsdale, Illinois: The Dryden Press.
d
You may respond with a post as long as you need, which shall be posted unedited in full (email my adress above)

Optimism About Free Markets

Let me introduce you to the best 640 words on optimism and free markets that I have read for a long time. They were written by Eamonn Butler, Director of the British think tank, The Adam Smith Institute, London. He is also the author of Adam Smith: a primer (IEA) and more recently, Austrian Economics: a primer (2010).

They are a nice complement to another piece of rest and restoration reading that I have enjoyed these few weeks in France (two more to go). I refer to Matt Ridley’s, ‘The Rational Optimist: how prosperity evolves’, from Fourth Estate (Harper Collins, London), of which I may write something soon.

Eamonn Butler’s ‘Optimistic about free markets’ is fine presentation of liberating ideas that throw light on the current crisis and what can be done, utilizing markets and judicious tax reforms, rather than fiddling about at the behest of pressure groups, worthy and otherwise (mostly the latter):

Read and enjoy:

‘Though my colleagues at the Adam Smith Institute regard me as the 'down' man, always seeing the difficulties presented by any new idea, underneath I'm really an optimist. I really believe that the free market will triumph, despite everything that our system of government conspires to do to shackle it. The free market is an entirely natural system, like evolution itself, which grows and adapts whatever adversity it faces. You can concrete over a path but still, before long, the grass pokes through. So do markets.

And I'm optimistic that Britain will sort out its tax and benefits system, and adopt a flat tax on incomes and a negative income tax to relieve poverty. Looking at the first tentative proposals of the coalition government in general and of the welfare and pensions secretary Iain Duncan Smith in particular, I think we can see the first green blades of common sense breaking through here too.

Our tax system is fiendishly complicated. Civil servants like it that way, because it creates work for them. Whenever you try to tax people, they will find ways round it. And when your own money is at stake, it is worth buying in good accounting brains to protect it. So tax becomes a cat and mouse game with the Treasury: a new tax is introduced, people find ways to avoid it (quite legally), so the Treasury has to close off the loopholes with new rules. A few years of that, and the rule book gets pretty complicated. The standard tax guide for accountants now runs to about 11,000 pages across four volumes.

We should cut right through all this nonsense and have a flat tax – as we have said many times in our publications on the flat tax. Cut out all the deductions, the loopholes and the clawbacks, and have a low, standard rate of tax that applies to everyone. Then everyone knows what they and their fellow workers are expected to pay. No escape and (sadly for accountants and Revenue civil servants), no need for a lot of complicated measures to avoid tax or to make sure people pay it.

I am optimistic that similar simplicity might come to social benefits too. We have roughly 51 different social benefits. They are designed – well, that's too strong: they have grown up under pressure from various interest groups – to make sure that everybody's unique circumstances are catered for, and that nobody falls through any cracks in the system. A laudable aim, but a madly complicated result. We should scrap it all and have perhaps just two benefits – a long- term benefit for those who simply cannot earn for themselves, and a short-term benefit for those struck by temporary unemployment. Instead of a complicated raft of benefits, we should have a negative income tax. If you have a good income, more than enough to live on at a decent level, you should pay tax. If you don't have enough to live on, you should get cash – the negative bit of the tax.

After all, when you get a job, your employer pays a rate for the job. Employers don't ask you about your exact family and personal circumstances before setting your wage. It should be the same with the benefit system. That makes it simple to administer, and it encourages people to curb their costs instead of thinking about how to maximise what they can get from the authorities. True, some people in special circumstances will face hardship. But alleviating that is something that seems the proper role for the charitable sector. True, we need then to liberate the charitable sector, with things like US-style tax deductibility to encourage more philanthropic giving, so that charities can step in where the state falls short and real help is needed. But I am optimistic that we can do that, too.’

[FOR REGULAR ACCESS TO THE ADAM SMITH INSTITUTE (LONDON) AND ITS LIVELY BLOG, CLICK ON: http://www.adamsmith.org/]

The Importance of Context in Wealth Of Nations

From Ray Love's earlier comments:

‘So, it seems that Dr. Stiglitz 'does' consider the invisible hand metaphor to imply that by "free markets", and by, the "pursuit of profits, [firms] are led, as if by an invisible hand, to do what is best for the world". In other words, you are using a quote from his writing out of context to align his position with your own. There is a subtle deceit involved here because the title suggests ('Stiglitz is Right') that Stiglitz is endorsing your position on what A. Smith meant by the 'invisible hand'... when, Dr. Stiglitz is suggesting nothing of the sort. Then you repeatedly distance yourself from his other views as if this distancing validates the quote taken out of context. Please explain.’

My Response.

Apologies. I missed this contentious paragraph from Ray Love when replying to the substantive Issues in dispute, which I hope I answered in full.

However, having missed replying to what is described as a ‘subtle deceit’, I would not want to leave it on the record unanswered and want to set the record straight.

My response to Stiglitz, which set this hare running, was not, and never could be presented as my claim that he had ‘endorsed’ my ‘position on what A. Smith meant by the 'invisible hand'.

For a start, I have never claimed anybody has ‘endorsed my position’ of Adam Smith’s meaning of the metaphor of an invisible hand. I am not happy to be in a minority of one (or at most a few) on this issue – but such is one of the burdens of my dissenting scholarship that, in main, I am ignored (and being retired, albeit it emeritus, I am happy to have the friendship and respect of a select number worthy scholars).

I am, however, content to have arrived at my position on what Smith meant on this subject from my a close reading of his published work over many years, including:

a) his three references to the invisible hand, which includes the associated texts (and from which reading, I detect in some, but by no means all, of my critics an apparent deficiency in this respect);

b) further close reading of Smith’s own teachings on the role of metaphors in his Lectures on Rhetoric and Belles Lettres ([1762] 1983), to which none of the my critics over a number of years have, so far, mentioned in their challenges to my interpretation, suggesting their less than authoritative assertion about what Adam Smith meant (The Oxford 1983 ‘Lectures’ are available at low cost from Liberty Fund).

To clear up the suggestion of my alleged ‘deceit’ in asserting that Stiglitz was ‘right’ when he said that the ‘invisible hand is not there’ which, it is claimed, is regarded by me as an ‘endorsement’ of my position.

I should point out that by drawing attention to Professor Stiglitz’s statement it was my endorsement of his latest stated position and not my claim for his endorsement of my position, as I have made clear in the second edition of my ‘Adam Smith: a moral philosopher and his political economy’, 2010, Palgrave, in which I quote from his earlier claims for the existence of ‘an invisible hand’, and further describe (cheeky!) his latest view as ‘his recantation’ of them.

But there is no deceit. Blog posts are necessarily more instant in composition than carefully revised scholarly and refereed papers. If my endorsement of Stiglitz’s statement is considered an endorsement of my position then that is an unwarranted assertion.

In my paper, ‘Paul Samuelson and the Origins of the Modern Myth of the Invisible Hand’, (in press) I detail his original statements (‘Economics: an introductory analysis, 1948), which started these hares running, and I follow his revisions through the 1960s-00s in 18 subsequent editions (perfect competition, welfare theorems, prisoner’s dilemma, general equilibrium) which derivatives, incidentally, are close to those of Stiglitz’s presentations over the years.

Hence, let me state that I am more than aware of Stiglitz’s earlier work on the invisible hand and that my endorsement of his singular statement (which cannot be an endorsement of my views – he is still stuck in neoclassical-theory land where I am not, and neither was Adam Smith). I am solely concerned with what Adam Smith meant when he used a metaphor (of which his works contain more than a few).

Lastly, Ray writes:

‘I am also curious about how you get around the obvious fact that the very paragraph containing the invisible hand metaphor begins with, and repeats, the term: "every individual". Which, you argue, actually means: "some" ("traders", "merchants") in a variety of ways? There is not a 'way' though, to transform the word 'every'... to mean 'some'.

Let’s read Smith’s text:

The paragraph (9: 455) actually begins with ‘But the annual revenue of every society’, but the contextual theme starts in paragraph 6 (454-5) with:

‘but a capital employed in the home-trade, it has already been shown, necessarily puts into motion a greater quantity of domestic industry, and it gives revenue and employment to a greater number of inhabitants of that country, than an equal capital employed in the foreign trade of consumption… Upon equal, or only nearly equal profits, therefore, every individual naturally inclines to employ, his capital in the manner in which it is likely to afford the greatest support to domestic industry and to give revenue and employment to the greatest number of people in his own country.’

‘7. Secondly, every individual who employs his capital in the support of domestick industry, necessarily endeavours to direct that industry, that its produce may be of the greatest value.’

Therefore, it should be clear that Smith in paragraph 9 refers to ‘every individual’ who engaged in domestick investment, but clearly not to those who engaged in foreign investment because domestick investment did more for domestick revenue and employment than ‘an equal capital employed in the foreign trade of consumption’.

So, contrary to Ray’s claim that ‘There is not a 'way' though, to transform the word 'every'... to mean 'some', we find there is a perfectly legitimate way from reading what Smith wrote. It’s called context, easily missed if read hurriedly and if already convinced that Smith was making a general statement for all the actions of all individual investors, domestic and foreign (and so, convenient for careless neoclassical readers).

Clearly, he wasn’t making such a generalization and this is supported by Smith’s general theme in Book IV of Wealth of Nations, specifically that ‘mercantile political economy’ with its fallacious emphasis on exports and colonies, backed by the Navigation Acts, policed by the Royal Navy and by colonial laws backed by force of arms against other European mercantile rivals, which for many decades had diverted scarce capital from Britain and cost scarce capital in military provisions (two wars), undermined domestic capital formation and lowered domestic annual output and employment.

He regarded the consequent distortion of the natural process of opulence creation as a heavy drag on the spread of opulence, especially to the majority of the population. Hence, what he described as his ‘very violent attack’ on the entire commercial policy of Britain in Book IV. That is context.

All economists owe it to Adam Smith to read what he wrote and to question what their modern colleagues – and, perhaps, they themselves in all humility – have invented about him since the 1950s.

Invisible Hand: the debate continues

Ray (and Paul)

Stilitz’s statement that ‘"Adam Smith, the father of modern economics, is often cited as arguing for the "invisible hand" and free markets: firms, in the pursuit of profits, are led, as if by an invisible hand, to do what is best for the world’ only partly true but in fundamental error; the bit that is true is that Smith … ‘is often cited’ but as he never said anything about an ‘invisible hand’ and ‘free markets’, such citations are false.

Those who cite him in this manner are copying what some modern economist has repeated from the modern economist who originally invented a non-existent association between what Adam Smith actually wrote. How do we know this: because we can compare what Smith wrote on the three times (only) when he used a metaphor of an ‘invisible hand’ and search fruitlessly for any mention of ‘free markets’, or indeed ‘markets’.

In Astronomy ([1744-50s] 1795; posthumous) he mentioned ‘the invisible hand of Jupiter (a Roman god) which was not remotely related to markets.

In Moral Sentiments (1759) he referred to ‘an invisible hand’ leading a ‘rich landlord’ (dating it ‘when Providence first divided the land’), which unambiguously had nothing to do with ‘markets’ free or otherwise.

In Wealth Of Nations (1776) he referred to contemporary ‘merchants’ who preferred to invest locally and not abroad, which had nothing to do with markets’ free or otherwise. It was about a risk-averse investment decision in a highly uncompetitive mercantile system (tariffs, protection, prohibitions, Navigation Acts,, Settlement Acts, Combination Acts, Town Guilds, etc.) where the alternative was equally restricted European countries and British colonies, none of which could be described a ‘free’.

When he discussed markets – in great detail – (Books I and II – and III) he did not mention ‘an invisible hand’. He never linked his use of the metaphor to ‘free markets’ (nor to ‘perfect competition’). Stiglitz – and most neoclassical economists – are wrong and misinformed at best; deliberately misleading at worse – to keep repeating that Smith did what they claim about his use of the metaphor in relation to ‘free markets’.

Stiglitz is right strictly within the confines of his statement that ‘the invisible hand is not there’. That he previously made many statements endorsing the myth of an invisible hand, as understood by modern economists (since Samuelson, et al since the 1950s) is well known to me (I quote his ‘myth’-making regularly in debates) but I jumped on his well publicized one-liner that the ‘invisible hand does not exist’, because it went round the world without qualifications, in the media and this opened the debate.

Indeed, this week’s unprecedented (and welcome) long commentaries on my response to Stigitz’s frankness (for his own purposes, no doubt) is positive because stalwart believers in the myth of an invisible hand in markets have been prompted to object and, in consequence, read an informed Smithian criticism of the myth. In my mind that is a positive outcome.

What Did Adam Smith Mean by the Metaphor of an Invisible Hand ?

Clearly, when Smith says of a trader, that ‘By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention’, he refers only to those who prefer ‘domestic’ to ‘foreign industry’ in this example of his use of the metaphor of ‘an invisible hand’, the object of which (see his ‘Lectures in Rhetoric and Belles Lettres’ ([1762] 1983, p 29, he uses the metaphor for ‘his own security’.

In short, the metaphor, ‘led by an invisible hand’ expresses ‘in a more striking and interesting manner’ the trader’s felt ‘insecurity’ that leads him to invest locally. This is English, not rocket science.

I am sorry to disagree with David because Smith is most certainly ‘limiting his point to the preference, at almost equal profits, for domestic over foreign investments.’ Otherwise, he would not differentiate between those who felt insecure (home traders) from those who didn’t feel so insecure (foreign traders). In an earlier paragraph (no. 6, 454) he discusses the basis of the home trader’s insecurity:

‘In the home trade his capital is never so long out of his sight as it is in the foreign trade of consumption. He can know better the character and situation of the person’s whom he trusts, and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress.’ (WN IV.ii.6:254).

Could Smith have written this clearer for economists? But he wrote mainly for a wider audience - legislators and those who influenced them. To assist his readers he re-expressed their being led by their insecurity by their being ‘led by an invisible hand’ because the metaphor expresses its object in a ‘more striking and interesting manner’, which is exactly what he taught his students and practiced as an accomplished rhetorician.

Interesting that David, who has read Wealth Of Nations, remembers the metaphor of an invisible hand’, but not Smith’s argument that leads up to it. Samuelson observed that economics graduates in the 1930s forgot most of their college economics but remembered the ‘invisible hand’ thirty years after graduating (Economics; an introductory analysis. 1948, p 36), which certainly shows the power of a good metaphor.

I would ask David to comment on Smith’s theory of metaphors and apply that to the first 9 paragraphs of Chapter 2, from which he so confidently asserts Smith’s intended meaning was different to mine.

I agree that Smith wrote ‘in this and many other cases’ where people were led (incidentally, never ‘as if by’) an invisible hand. But he never gave other examples in Wealth Of Nations, though he gave other examples of metaphors serving the exact same rhetorical purpose as is under discussion, wherever he felt he needed to reinforce a less clear object.

For example, when discussing the 'judicious operations of banking’, he referred in a ‘more striking and interesting manner’ by expressing how banks could ‘convert’ a ‘great part of its highways into good pastures and there by to increase very considerably the annual produce of its land and labour’, using, as he put it: ‘if I may be allowed so violent a metaphor, as a sort of wagon-way through the air’ (WN II.ii.86: p 321).

He also referred to the less secure basis of paper money, because paper, ‘as it were’ was ‘suspended on the Daedalian wings of paper money’ rather than ‘the solid ground of gold and silver’ (Ibid).

Smith’s reference to "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest", which is often associated with the metaphor of an ‘invisible hand’ by some modern economists (not always making clear it is from Book I not Book IV and on a different subject) does not require a metaphor to enhance its meaning (though theological critics of markets are given to making assertions about it showing Smith’s ‘greed’ and ‘selfishness’, but they misread it too). Both parties to the transaction act from their self-interests, and Smith specifically advises that each should address the self-interests of the other and not their own, to lay the basis for a bargain: ‘Give me that which I want, and you shall have this which you want.’ It does not require an invisible hand to lead them; only their self-interest in acquiring what they need (dinner for the customer, wherewithal for the sellers).

I shall ignore the invented assertions about ‘“Smith was in favor of home and motherhood and against the man-eating sharks”. I am a Fellow of the Adam Smith Institute (UK) and Trustee of the David Hume Institute Scotland) and I am not short of good reasons for preferring markets to state management and liberty to tyranny. Lost Legacy is an academic site dedicated to the defence of Adam Smith’s legacy. It avoids politics, particularly in countries where I do not vote, hence my avoidance of commenting generally on Stiglitz’s policies.

Lastly, I have long been skeptical of ‘laissez-faire’ from its origins in France, which was not about free markets for consumers. M. le Gendre was a ‘plain spoken’ merchant wanting freedom for merchants from Colbert’s Interference in 1690, but said nothing about consumers. Merchants can only be contained by vigorous competition. Laissez-faire does not provide that; the law can. I think this was why Smith did not endorse it; he preferred natural law and liberty. But that leads us to another discussion, namely moral sentiments.

[I am grateful for David for taking time to debate these issues and hope they help elucidate these important issues.]

Ray Love Explains His Case

A Correspondent writes: By Ray L Love: (paragraphs inserted for readability)

As it turns out, Wiki has a quote from Stiglitz that further explains his position on this very issue:

"The Nobel Prize-winning economist Joseph E. Stiglitz, says: "the reason that the invisible hand often seems invisible is that it is often not there."[10][11] "Stiglitz explains his position:" "Adam Smith, the father of modern economics, is often cited as arguing for the "invisible hand" and free markets: firms, in the pursuit of profits, are led, as if by an invisible hand, to do what is best for the world. But unlike his followers, Adam Smith was aware of some of the limitations of free markets, and research since then has further clarified why free markets, by themselves, often do not lead to what is best. As I put it in my new book, Making Globalization Work, the reason that the invisible hand often seems invisible is that it is often not there."

"Whenever there are "externalities"—where the actions of an individual have impacts on others for which they do not pay, or for which they are not compensated—markets will not work well. Some of the important instances have long understood environmental externalities. Markets, by themselves, produce too much pollution. Markets, by themselves, also produce too little basic research. (The government was responsible for financing most of the important scientific breakthroughs, including the internet and the first telegraph line, and many bio-tech advances.)"

"But recent research has shown that these externalities are pervasive, whenever there is imperfect information or imperfect risk markets—that is always."

"Government plays an important role in banking and securities regulation, and a host of other areas: some regulation is required to make markets work. Government is needed, almost all would agree, at a minimum to enforce contracts and property rights."

"The real debate today is about finding the right balance between the market and government (and the third "sector"—non-governmental non-profit organizations.) Both are needed. They can each complement each other. This balance differs from time to time and place to place.[11]" ---

So, it seems that Dr. Stiglitz 'does' consider the invisible hand metaphor to imply that by "free markets", and by, the "pursuit of profits, [firms] are led, as if by an invisible hand, to do what is best for the world". In other words, you are using a quote from his writing out of context to align his position with your own. There is a subtle deceit involved here because the title suggests ('Stiglitz is Right') that Stiglitz is endorsing your position on what A. Smith meant by the 'invisible hand'... when, Dr. Stiglitz is suggesting nothing of the sort. Then you repeatedly distance yourself from his other views as if this distancing validates the quote taken out of context. Please explain.

I am also curious about how you get around the obvious fact that the very paragraph containing the invisible hand metaphor ( see David's comment) begins with, and repeats, the term: "every individual". Which, you argue, actually means: "some" ("traders", "merchants") in a variety of ways? There is not a 'way' though, to transform the word 'every'... to mean 'some'.

David Friedman Replies to the Invisible Hand Debate

(Guest Column from the Comments to Previous post [Some paragraph breaks inserted]):

Smith and the Invisible Hand By David Friedman

You write: "he talks about some, but not all traders, who consider foreign trade to be too risky and prefer domestic trade. " Smith writes: "By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. " As you can see, he is not limiting his point to the preference, at almost equal profits, for domestic over foreign investments. As I already pointed out in a comment, he is also talking about directing one's industry to produce the greatest value. Furthermore, he explicitly says "in this, as in many other cases," thus making it clear that the point is not limited to the narrow case you claim it is. "If you insist that the ‘invisible hand’ is real, actual, or has content," That's a straw man. Nobody I know of, certainly no economist, claims the invisible hand is real.

The point, reinforced elsewhere in the text, is that actions motivated by self-interest result in behavior that is in the general interest. Smith doesn't, of course, have either the modern tools or the ideas of efficiency associated with Marshall, Pareto, and Hicks-Kaldor, but he is making the same point as the efficiency theorem in a much less precise form. "My assertion that the metaphor was not used by Adam Smith in relation to markets is based on the close reading of his uses of it. " And my assertion that it is describing behavior in the context of markets is based on a close reading of the book. Smith makes the same point repeatedly, without that metaphor, as when he writes: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." Absent a market on which they sell food and drink, it would not be in their self-interest to produce it for us.

I’m not sure there is much point to either of us continuing to repeat our arguments on what the invisible hand passage in the Wealth of Nations was about. Following links, I came across a brief summary of your more general views, and thought it worth commenting on. You write (about Smith): “He did not consider it appropriate for society to be run by or for ‘merchants and manufacturers’, and nor did he accept that the rich and powerful, including kings, had the right to oppress with punitive laws I’m not sure who, in this passage, you think you are arguing with. Certainly Smith did not think society should be run by merchants and manufacturers. But his chief complaint against them was that they used the power of government, via tariffs and other interferences in the market, to benefit themselves at the cost of the welfare of the rest of the society. That is the same complaint made by modern supporters of laissez-faire.

Consider the modern literature on regulatory capture, coming largely from Chicago school authors, or the public choice literature explaining the existence of tariffs. You don’t specify what “punitive laws” Smith did not accept and (presumably) you think modern supporters of capitalism do. Smith had harsh words for the punitive laws used to enforce the ban on wool exports--but his opinion on that subject would be shared by modern supporters of free markets.

You write, about Smith: “He did not encourage laissez faire (two words he never used) because he was aware of the limitations of markets and of the usefulness and limitations of the State, and nor did he support leaving the poor without realistic opportunities of sharing in their country’s wealth. In short, Smith’s ideas did not qualify him for the phoney cliché title of the ‘High Priest of Capitalism’ or its ‘Apostle’” It’s true, of course, that Smith was not an anarchist and so did not support complete laissez-faire. But he went further in that direction than most modern supporters.

His comments on schooling, for instance, consider as potentially legitimate a range of alternatives ranging from a completely private system to a degree of state intervention much weaker than current practice in the developed world. Someone who proposed that state intervention be limited to a partial subsidy of schooling--roughly speaking, the pro-state extreme of Smith’s range--would be viewed today, in the U.S. or U.K., as an extreme supporter of laissez-faire. Modern supporters of free markets view a laissez-faire society as the best way of providing the poor with realistic opportunities of sharing in their country’s wealth.

For some (American) evidence for that view, you might take a look at what happened to poverty rates in the postwar period. Prior to the beginning of the War on Poverty they were falling pretty steeply. Since it got fully funded and operational they have been essentially static, going up or down with the general economy. The most successful attack on poverty in modern history, along laissez-faire lines, was the almost unrestricted immigration policy followed by the U.S. prior to the 1920’s. The hostility to immigration in modern welfare states parallels, on a larger scale, Smith’s point about the negative effect of the poor laws on labor mobility. To this reader, your passage quoted above seems to come down to “Smith was in favor of home and motherhood and against the man-eating shark, which shows that he was not a supporter of capitalism--supporters of capitalism being known to oppose home and motherhood and approve of man-eating sharks.” You have the first half right. Perhaps this is too harsh-I haven't read your book, which might be more convincing, and I don't know what "supporters of capitalism" you are attacking. But it is how the passage I quoted comes across to a reader who is both an admirer of Smith and a supporter of laissez-faire.

Three Serious Economists Criticise My Reading of the Metaphor on 'an invisible hand'

Three serious economists commented on my previous post that 'Stiglitz is Right' and their statements are of exceptional interest to the Lost Legacy debate on what Smith meant by 'an invisible hand' on the three times only that he used it. Because their posts were of such high quality, I have reposted them here with my comments for a wider discussion to include those who do not normally read the comments made by correspondents.

Each reader's comment is followed by the response I made in the previous post:

1
Ray

Gavin, Perhaps I am missing something, but you seem to be stretching what Stiglitz said to suit your opinions on Smith's use of the invisible hand metaphor. Where is the "denial of the assertions"? Stiglitz also uses the phrase "it is not actually there" in the preface of his book 'Making Globalization Work', but, he says nothing there that relates to whether Smith intended the invisible hand to be a function of market efficiency. I have read a fair amount of Stiglitz and my interpretation of his position regarding the invisible hand is that it 'is' a force that has influence on the scales... but, a force that has always been manipulated, mainly due to information 'asymmetries'. This is of course at the apex of the work that made him a Nobel laureate. What I have always thought that Stiglitz meant to imply, by the oft used statement: "the invisible hand is often invisible because it's not actually there", is that the hand is being obstructed by stronger forces?


Comment
Ray
Thank you for your comment. I am quoting what Stiglitz said about the invisible hand not being there. He is right in my view about that. I am not endorsing everything he writes about is prescriptions for capitalism.

Smith’s use of ‘an invisible hand’ is quite clearly a metaphor. See above for Smith’s meaning of the use of metaphors in his Lectures on Rhetoric and Belles Lettres ([1762] 1983).

In the WN case, it was about the felt need for the security of his capital. Now, clearly security is invisible to the observer; it is felt by the merchant trader contemplating sending his capital abroad with its associated (for him) risks. This leads him to prefer to invent locally (Smith explains why this is so in the preceding paragraphs – usually not quoted by modern economists (and probably not read by them either)).

The only ‘stronger forces’ that can affect the trader are those that would reduce the ‘risk-aversion’ he feels – in which case he would send is capital (out of sight) abroad. Clearly, many British traders did precisely this. They consequently reduced domestic investment and productive employment in Britain. The invisible hand of insecurity was not operating for them.

Also, bear in mind, 18th-century traders were not operating in competitive markets. Domestically, the economy was riddled with mercantile monopolies (Guilds, Incorporated Towns, protection measures, prohibitions, combination and Settlement acts, etc.) and internationally by similar measures in the colonies and in other European economies, and the Navigation Acts. This makes the linking of the metaphor to ‘competitive markets” (even, via Samuelson’s 19 edition of Economics, to the 20th century’s welfare theorems and perfect competition!).

What else Stiglitz promoted is not my concern in this discussion. He right on the narrow statement he made; that is all I asserted.

Gavin

2
Gavin Kennedy writes: "Smith’s use of the metaphor was not about markets, regulated of otherwise and in none of the three cases that he uses it was it about markets." The quote from the Wealth of Nations is: "As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention." I am puzzled as to why you don't consider that a description of the socially desirable outcome of individually self-interested choice within the context of a market, and left wondering whether you have actually read the book or are merely reporting what someone else says bout it. Perhaps you could explain what you think Smith means.

Comment

David
Thank you for your comment and question.

I am well aware of the part of Adam Smith’s writing of the context in which he makes reference to the metaphor of ‘an invisible hand’. Indeed, I regularly quote and discuss it on Lost Legacy (and in several papers I have written and it is discussed in my book ‘Adam Smith: a moral philosopher and his political economy’, Palgrave, 2008, and in an extended form in the 2nd edition, 2010, Chapter 12). I have read ‘the book’ and his other two references to the metaphor in his Astronomy (1744-50s) and Moral Sentiments.

Modern Economists since Samuelson, Economics, 1948, page 36, have treated that part of Smith’s statement quoted by you (WN, IV.ii.9: p 456) as if he is talking about all individuals, when the context is clear; he talks about some, but not all traders, who consider foreign trade to be too risky and prefer domestic trade. (WN IV.ii.1-9).

The metaphor describes ‘in a more striking and interesting manner’ its object, as I believe Smith meant, which was the security (modern risk-aversion) that ‘led’ such traders to invest locally, and, unstated but clearly linked, had the unintended consequence that domestic output and employment (concerns of Adam Smith) were higher than they otherwise would be. I suggest the arithmetic rule that ‘whole is the sum of its parts’ captures this consequence.

If you insist that the ‘invisible hand’ is real, actual, or has content, you take on a wholly fictitious metaphysical idea (‘the hand of God’ or such like construction), which is theology not economics.

My assertion that the metaphor was not used by Adam Smith in relation to markets is based on the close reading of his uses of it. Samuelson and others asserted that it was elated to markets, without a scrap of textual evidence – its is not mentioned in Books I and II of WN, which deal in detail with the workings of markets. Also, his use of it was hardly mentioned by political economists, while Smith was alive, nor for long after he died. Strange for a cardinal principle?

Gavin

3
Gavin. I think you are missing the point of what Stiglitz is saying. In my view he isn't saying I have read Adam Smith and understand what he wrote and how and when he used the idea of the invisible hand. From what I have read of Stiglitz I see on real understanding of Smith. What I think he is saying, in short, is "I hate markets". Stiglitz's understanding of markets and "market failure" is a neoclassical understanding. He believes in the,and uses a a benchmark for market failure, the fundamental theorems of welfare economics and as I have noted before, Mark Blaug argues that Smith's notion of markets has noting to do with these theorems. When Stiglitz says the invisible hand doesn't exist, he is saying that it is not there in terms of the neoclassical model, ie there are market failures and thus we need government actions to correct these.
By Paul Walker on Stiglitz is Right on 22/08/10

Comment
Paul
I am commenting on Stiglitz's sentence, ending in the 'invisible hand is not there', nothing else. That statement in my view is correct. The metaphor as used by Adam Smith was a metaphor, as taught by Smith to his students attending his Lecture in Rhetoric and Belles Letters ([1762] 1983, p 29), which represent 'in a more striking and interesting manner', it's object. Modern economists, including neoclassical and Miseian economists, treat Smith's use of the metaphor of the invisible hand as it own object, i.e., they assert that it exists - there is an invisible hand! Whatever else it is, it is not its own object, as Adam Smith understood, taught his students, and meant by it.

That is my point in quoting Stiglitz (whose other ideas I may not agree with).
Gavin

Stiglitz is Right

‘fundamentalist’ writes in The Economist comments column on an article Rawls and the open economy (Matt Yglesias) HERE:

‘Stiglitz: "Celebrated results, such as Adam Smith’s invisible hand, did not hold; the invisible hand was invisible because it was not there."

He is exactly right! The invisible hand was not there because the state had hog-tied it and stuff it in a well with its 50,000 pages of new regulations every year. No free marketeer has ever suggested that the market will work perfectly in every and all circumstances. They have always warned that state intervention will crush the invisible hand.’

Comment
The invisible hand ain’t there because it ain’t. Adam Smith never said it was, ’50,000 pages of new regulations every year’ notwithstanding.

Smith’s use of the metaphor was not about markets, regulated of otherwise and in none of the three cases that he uses it was it about markets.
The belief that he did refer to markets is a wholly invented myth by modern economists from the 1950s.

After Nicholas Phillipson' New Book, No Excuse For Ignorance of Adam Smith's Legacy

Bill Dunlop reviews a talk by Nicholas Phillipson given at the Edinburgh International Festival on 19 August HERE

'A New Look At The Ideas Of The Founder Of Modern Economics’

"The Wealth of Nations" has never been out of publication since it first appeared some two hundred and thirty years ago… Phillipson points out that until early in the previous century, Smith’s work was not regarded as a defence of capitalism, far less as a tract for libertarianism…

… He explains commerce as an extension of language, created to facilitate exchange between strangers, and thus part of the foundation of trust enabling the "good society" to progress. Smith’s humans are frail animals, subject to the savage natural world around them, compelled to co-operation for survival and thereby to association with and trust of their fellows…

The discovery of extensive notes from Smith’s University of Glasgow lectures on Rhetoric and Jurisprudence offer a glimpse of Smith not only as teacher but as thinking through other aspects of his theory which have not survived in other forms.

It’s perhaps worth mentioning that the phrase "the invisible hand", beloved of free-market economists, appears but three times in Smith’s work; as a close friend of the intellectually rigourous atheist David Hume, Smith’s own views were likely similar, but living with his mother in douce Kirkcaldy whilst writing The Wealth of Nations, he may well have felt a need to appear to conform to something close to conventional piety.’

Comment
Follow the link.

Bill Dunlop's review is remarkably clear at explaining key point about Adam Smith's works and this is a credit to the Book Festival's organisers' choice of reviewer - no mere hack could produce such an erudite understanding of Nicholson Phillipson's purpose.

'Tis a pity, as David Hume would have put it, that so many modern economists, tenured, well-paid and highly regarded by their peers, have not taken the trouble to read Adam Smith and learn something about what he actually wrote and its context.

Now that Nicholas Phillipson's book, Adam Smith: an enlightened life (Allen Lane, London) is available they will have no excuse for their various atrocities to Adam Smith's legacy.

How to Weaken a Good Case

James Arvanitakis, a lecturer in the Humanities at the University of Western Sydney, writes in the Centre for Policy Development (Australia) (19 August) makes to good case for a stimulus HERE:
wanders into mythical waters alleging that Adam Smith described ‘an “invisible hand” of the market’:

‘Supporting The Stimulus Package: They Got It Right’

‘When describing the “invisible hand” of the market in the eighteenth century, Adam Smith made it clear it was a metaphor to depict a broad range of activities – it is a pity that contemporary politicians and commentators read it literally. The stimulus package confronted this myth – and Rudd and Swan should be commended for it – despite their other shortcomings.’

Comment
It might be a good idea for James Arvanitakis to read ‘an invisible hand’ properly as a metaphor, as Smith taught his students in his Lectures on Rhetoric and Belles Lettres ([1762] 1983, page 29): namely to express ‘in a more striking and interesting manner’ its object.

It would be even better, to be accurate too. Smith never expressed the metaphor in relation to markets; that is an invention of modern economists (Samuelson, among many others).

Smith’s three (only) references to the metaphor of ‘an invisible hand’ were not about markets.

In his History of Astronomy (written: 1744-50s; published posthumously, 1795) its object was the heathen god, Jove (Jupiter); in Moral Sentiments (1759) its object was the ‘rich (feudal) landlord’; and in Wealth of Nations (1776) its object was some, but not all, merchants who preferred to trade locally rather than abroad (risk aversion) in a commercial mercantile economy noted for its domestic monopolies, tariffs and the Navigation Acts, none of which were remotely competitive markets.

An Interview with Nicholas Phillipson

Nicholas Phillipson Interviewed in Edinburgh Festivals (The Scotsman) HERE:

"Interview By Susan Mansfield
: Nicholas Phillipson - 'This is Adam Smith as mountain gorilla"

Nicholas Phillipson took the David Attenborough approach to his biography of the great Scottish economist, he tells Susan Mansfield

'IF I were to travel back 210 years, from the spot where I'm sitting now in The Scotsman's Holyrood offices, I might be able to make out plumes of smoke from a bonfire rising above Edinburgh's Canongate. At his home in Panmure House, Adam Smith is dying, and at his behest his papers are going up in smoke.

Correspondence, lectures notes, chapters from unfinished books - historians today can only speculate at all which was carried away on the wind that day in 1790. "But Smith does things right," says Dr Nicholas Phillipson, whose new biography has just been published. "So he did his bonfire right. It all went up. We have the account of his executors who had to do it."

It does mean that anyone undertaking a biography of Smith has rather less to go on than for many of the other great figures of the Enlightenment. The author of The Wealth of Nations, the man described as the father of modern economics, was determined that his legacy would live on only in his published works.

"What makes the thing even worse is that Smith was a lousy letter writer," Phillipson continues. "Take any of the great 18th-century letter writers - David Hume, James Boswell, Rousseau - these are people who are writing letters the whole time, as much as we write e-mails, they're chattering to each other in letters. Someone tried to collect Smith's letters; it's not a very fat volume - you find friends ticking him off for not answering letters."

So Phillipson, who is an honorary research fellow at the University of Edinburgh and a leading Enlightenment scholar, knew that a different approach would be required. Adam Smith: An Enlightened Life is the product of years of research, telling the story of Smith's intellectual formation, the various forces which shaped the mind of the studious boy from Kirkcaldy into one of the great thinkers of his day.

"I'm not an economist and I'm not a philosopher, I'm an observer," Phillipson says. "What I want to do is to watch Smith at work. When I look at what philosophers do, I see myself as David Attenborough pursuing a rare species of mountain gorilla. It's enormous fun just going into the jungle and watching what these extraordinary creatures do and how they behave, and to do it in the knowledge that it's inherently fascinating and not altogether incomprehensible. This is Smith as mountain gorilla."

He deliberately decided to study Smith's intellectual life without making the assumption that everything he did led up to the writing of what is now regarded as his masterwork, The Wealth of Nations. "I don't want to make any ex-historical judgments about which is the most important [of his works]. At the very end of his life, Smith said that he actually preferred [his earlier book on ethics] The Theory of Moral Sentiments."

Comment
That is just a taster from a relatively long and insightful report of an interview with Nicholas Phillipson, author of the new intellectual biography of Adam Smith from Allen Lane, London: Adam Smith:An Enlightened Life by Nicholas Phillipson is published by Allen Lane, London.

Follow the link and find out more, both of Adam Smith and Nicolas Phillipson. It's a good read.

The Phoney Adam Smith Quotation Nailed

The question of who invented this alleged quotation and attributed it to Adam Smith first came to the notice of Lost Legacy from something posted by ANDREW C. REVKIN posts in Dot Earth (HERE):

‘The Endless Pursuit of Unnecessary Things’

“Adam Smith, the father of economics, 250 years ago, said: “An investment is by all right-minded people to be commended, because it brings comforts and necessities to the citizenry. But, if continued indefinitely, it will lead to the endless pursuit of unnecessary things.”

Reading the sources given by Andrew Rivkin, it appears that the so-called quotation was alleged by Charles Handy (HERE):

‘CHARLES HANDY: Now that I am sitting where the great Peter Drucker walked and talked, I wonder how he would have reacted to some of the things that bother me. For instance, how would he respond to what I call "Adam Smith's Great Conundrum?"

Adam Smith, the father of economics, 250 years ago, said: "An investment is by all right-minded people to be commended, because it brings comforts and necessities to the citizenry. But, if continued indefinitely, it will lead to the endless pursuit of unnecessary things."

Now that I am living for a while in California, I am staggered by the amount of "unnecessary things" that I see in the malls that dot the suburbs. America is no different from anywhere else, of course -- just more so.
The conundrum is this: All that stuff creates jobs -- making it, promoting it, selling it. It's literally the stuff of growth. What I'd love to ask Peter Drucker is: How do you grow an economy without the jobs and taxes that these unnecessary things produce?’

A regular Lost Legacy commentator, ‘David’ offers this comment, which parses the language of the quotation:

'An investment is by all right-minded people to be commended, because it brings comforts and necessities to the citizenry. But, if continued indefinitely, it will lead to the endless pursuit of unnecessary things.” The entire phrase does not seem authentic: “Investment” does not appear in WON. Investigate and Investiture are the only are the only references to Invest. “All right minded people” comes very close to question begging. “Comforts” is never used in this sense. The usual phrase is “necessaries and conveniences”. “Citizenry” is never used. Presuming this is meant to be investment for manufacture and that the Industrial Revolution had not really begun. The capacity for the production of necessary things was barely sufficient. This appears to be a modern idea looking for historical justification, without a convenient “invisible hand” to support it one had (perhaps) to be created. David


My original comment was:

‘Smith described wealth as the annual output of the 'necessaries, conveniences, and amusements of life'(Wealth Of Nations). Basic hunter gathers were limited to 'necessities' by the limits of what an individual could make of the bounties of nature and the fruits of his/her labour. The conveniences came later (shepherding and farming) and mostly enjoyed by the elites.

In the transformation to commerce, consumption gradually rose (population increased, but per capita incomes of the majority remained basic - the elites syphoned off luxuries and stone 'civilisation'.



Smith said the driving force for these changes was the urge to self-betterment, epitomised by his fable of the ambitions of the 'poor man's' son (Book IV, WN), who strived and suffered for wealth, represented by 'trivia', but this cleared the land and created the technologies that 'crossed oceans', etc.

Now this is close to the 'unnecessary things' themes, but misses the point. Life on 'necessaries' is mean, low population (10 million not 6 billion), and short, in the midst of ignorance (murderous superstition). 

The 'unnecessary things' theme is an unwarranted perversion of Smith's meaning.’

Looking closer at Charles Handy’s statement. Note the date it was made: 4 February 2008. Long enough to develop a following, but not enough to make it true. But it unravels on examination, as shown by ‘David’ above.

Charles Handy, an economist of some note,also exposes its basic weakness:

‘Now that I am living for a while in California, I am staggered by the amount of "unnecessary things" that I see in the malls that dot the suburbs. America is no different from anywhere else, of course -- just more so.’

He visits malls and spots many thing he has no demand for at all, and, concludes that these are ‘unnecessary things’ because he does not think them ‘necessary’ for him. Staggering arrogance in my view.

Before travelling to France some weeks ago, I visited a bookshop in and Edinburgh mall (my doctor advised walking as part of my recovery programme, hence, I pushed a shopping trolley round the supermarket with my wife and called at the bookshop on my way back to the car). I passed many food cabinets without stopping – technically their contents were ‘unnecessary’ for me, but not for those many other customers who would select from them.

Low and behold in the large bookshop, I passed by most shelves without a glance at the titles. I made my selections from only three displays out of the scores available and chose 14 books out of the many thousands in the shop. Did that make these thousands of other books ‘unnecessary’? Individually, for me, perhaps ‘yes’, but socially, for the entire book-buying population of Edinburgh, almost certainly ‘no’.

And a moment’s reflection would show that the author of the so-called ‘Adam Smith’ quotation (definitely not Adam Smith) was totally misguided and in effect, totally authoritarian. What he or she regards as ‘necessary’ is a ‘necessity’, and should be produced, but all else in her/his view ‘unnecessary’ and should not be produced. Absolute codswallop.

The so-called 'Adam Smith's Conundrum' is not a conundrum at all. It is rubbish, as far a Adam Smith's involvement is concerned because Adam Smith said no such thing.

If Charles Handy did not invent his silly quotation, he should tell from whom did he first hear or read it. That the story appeared in the New York Times (a paper noted for its careful editing) itself gives the attribution an undeserved credibility.

UPDATE:
This just in:

'I tend to agree with you David. There are elements of Smith but also of Keynes, mixed with a bit of 'Hollywood' buddhism. And other stuff besides. It's increasingly sounding to me like something from a 'League of Gentlemen' stocktake in the Local Shop. I have a suggested script, if you're interested...;-)' Ruari.

Yet Another Good Review of Nicholas Phillipson's Enlightened Life of Adam Smith

Adam Smith: an Enlightened Life By Nicholas Phillipson (Allen Lane, London). Reviewed by Diane Coyle (New Statesman, 16 August) HERE:

'The myth of Adam Smith is that he was the hard-nosed high priest of self-interested capitalism. A new biography shows that his intellectual goals were far greater and nobler.

Adam Smith's best-known book, An Inquiry into the Nature and Causes of the Wealth of Nations, still exerts an extraordinary influence, well over 200 years after it was first published in 1776. Many people know some of the book's most celebrated passages; a few even still read it. It is acknowledged as one of the founding texts of economics, and widely believed to be an apologia for unrestricted free markets. This belief dates from the enthusiastic adoption of Smith by free-market politicians and economists a generation ago. In this new biography, Nicholas Phillipson reclaims the author from that ideological fringe. He gives us the rounded man in place of the caricature.

… In setting out the scope of his subject's intellectual goals, Phillipson has portrayed an Adam Smith for our times. Perhaps every generation gets the Smith it is looking for. We are certainly living in an era when the idea that self-interest is a principle sufficient for a well-ordered society and economy has lost the appeal it once had. But more than that, this new biography reminds us that the goal of constructing a Science of Man was a driving force of the epoch of discovery in the 18th century. Men like Smith and Hume did not regard the study of human visual perception, say, as a field of endeavour separate from and unrelated to the study of the division of labour. Today, there is once again convergence between the academic disciplines as we learn about the evolutionary roots of patterns of human thought and behaviour. (I am sure that Smith, were he alive today, would have been enthralled by these discoveries - he would likely be an avid participant in TED­Global conferences.)

For all its . . . daring, his philosophy is the work of a modest man who set out to reflect on a simple, apparently unremarkable characteristic of human nature: our desire, when all things are equal, to improve our own lot, that of our families and that of the civil society to which we belong. It was a disposition the day labourer shared with the aristocrat, the young person making his or her way in the world with the sage and elder statesman.

Human nature hasn't changed; Smith's question is still the one to answer.'

Comment
Diane Coyle’s review is both sympathetic to Phillipson’s project and in my view a fair representation of Adam Smith’s life’s work. I cannot say the same for two commentators.

‘Tim’ writes: ‘Smiths' explanation of markets reaching equilibrium due to the "invisiable hand" is a a fallacy. Markets do not always reach equilibrirum and the failure of economist to challenge this rather than accept equilibrium theory as a given shows a lack on itntellectual rigour’.

That the invisible hand metaphor has become a myth since the 50s (Samuelson) does not discredit Adam Smith: he never wrote anything about the invisible hand in relation to markets, nor did he write about equilibrium in markets. For Smith they were always in flux.

‘William’ takes the biscuit: ‘he (Smith) never examined the world’.

This a preposterous nonsense. His ‘world’ took him from Greco-Roman times back and forwards to 18th-century Europe, India, China, South-central-and North America. His use of data is tiring (not missing) and his examples multiple which one reason for the book being so long and so off putting to modern readers as poorly informed about history as they are of the contents of Wealth Of Nations.