Saturday, August 21, 2010

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

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.

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Blogger Paul Walker said...

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.

4:32 am  
Blogger David Friedman said...

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.

1:33 pm  
Blogger Gavin Kennedy said...

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).

5:08 pm  
Blogger Gavin Kennedy said...


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?


5:38 pm  

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