Saturday, August 28, 2010

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.]

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2 Comments:

Blogger David Friedman said...

"Hence, the ‘invisible hand’ was not a metaphor for self-interest, "

Nor does anyone I know of argue that it was.

The claim which I think you are disagreeing with is that it is a metaphor for the way in which self-interest, under some but not all sets of rules—specifically under the rules of the market but not those of the political system—leads to socially desirable results, a point Smith also makes in the context of the self-interest of the butcher, baker, and brewer serving the welfare of the rest of us, and elsewhere in the text.

5:13 p.m.  
Blogger Gavin Kennedy said...

David F: Hence, the ‘invisible hand’ was not a metaphor for self-interest, " Nor does anyone I know of argue that it was. The claim which I think you are disagreeing with is that it is a metaphor for the way in which self-interest, under some but not all sets of rules—specifically under the rules of the market but not those of the political system—leads to socially desirable results, a point Smith also makes in the context of the self-interest of the butcher, baker, and brewer serving the welfare of the rest of us, and elsewhere in the text.

GK:
“it is a metaphor for the way in which self-interest, under some but not all sets of rules—specifically under the rules of the market but not those of the political system—leads to socially desirable results’…

I am at loss to follow your statement above. I am also at a loss to separate the two parts of your sentence, specifically that: ‘the ‘invisible hand’ was not a metaphor for self-interest leading to socially desired results’ (as I claim is made by many modern economists), but (according to your good self) the invisible hand ‘is a metaphor for the way in which self-interest, under some but not all sets of rules—specifically under the rules of the market but not those of the political system—leads to socially desirable results’, which is more or less the same thing, even accepting your narrowing its applicability to ‘the market system’!

Here is how Samuelson, who was among the early modern economists (selling 4½ copies of his immensely popular textbook) was among the first to start the hare running:

“even he [Smith] was so thrilled by the recognition of order in the economic system that he proclaimed the mystical principle of the “invisible hand”: that each individual in pursuing only his own selfish good was led, as if by an invisible hand, to achieve the best good of all, so that any interference with free competition by government was almost certain to be injurious”
(Economics: an introductory analysis, 1948, p 36, McGraw-Hill, New York).

However, the problem here is that Smith said nothing about

‘pursuing only his own selfish good was led, as if by and invisible hand, to achieve the best good of all’.

Moreover, in the only example Smith gave of the metaphor it was not a general statement, but referred to individuals who, concerned ‘only with their own security’ invested in ‘domestic industry’, rather than abroad, adding to ‘domestic revenue and employment’ albeit unintentionally.

Now adding to ‘domestic revenue and employment’ is a fairly specific outcome, not necessarily the ‘best good of all’ as modern economists have attributed to him. ‘The ‘best good of all’ is far too broad an assertion; after all adding to ‘domestic revenue’, even for an individual, it s a strictly quantitative arithmetic outcome, not a rich welfare function.

All the British traders in foreign countries and colonies were also following their self-interest as they saw it, but not adding so much, if anything, to total domestic ‘revenue and employment’ through ‘domestic industry. That was Smith’s point in Book IV of Wealth Of Nations. He regarded the British colonies in North America as distorting the domestic
spread of opulence and costing the economy from the prevalence of wars and associated mercantile policies.

I shall come back to the 'butcher, brewer, baker' theme tomorrow (its rather late just now'.

7:25 p.m.  

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