Monday, August 23, 2010

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.

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