Thursday, August 26, 2010

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.
David Friedman

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Blogger El caballer que diu kek said...

As you will understand since you comment your writing "situation" it's late here now too so I'll just point out one thing that I've hold on mind those last days and again and again appears to me.

Basing on the statement of Adam Smith, well you will have to excuse me again for late hours and can't find the quote right now, but refering to the "IH that leds the uninformed man to invest in domestic intead of foreign", doesn't say anywhere, from the quote since I didn't read WN yet, that those actions would be good since, remembering that part of the quote it was "led to results that he didn't expect nor searched for" so, even later or in other expresions it means to be for the better of the country in annuality as you point out many times, it doesn't remark any good just unpredicted co-lateral results.

Which in my humild opinion, may be goods or bads and since in that example as very well Adam Smith say's that sometimes does for better sometimes doesn't, and we've seen more doesn't, why is that? Well with the easy start of Smith's statement, he already said that man, with his lacks of information and power to expand beyond countrys, limitated his capability to speculate so he had to do it at home and "benefit" community, but since he's got the power to rule over the world, what stops that described "self-interest" quoted by Smith in the same analizy? Nothing I guess...

Again excuse my sometimes bad grammar and "losts of mind" I may had during post, again too late hours.

Regards, Bernat.

11:16 p.m.  

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