Tuesday, August 24, 2010

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.

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