Monday, August 23, 2010

What Did Adam Smith Mean by the Metaphor of an Invisible Hand ?

Clearly, when Smith says of a trader, that ‘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’, he refers only to those who prefer ‘domestic’ to ‘foreign industry’ in this example of his use of the metaphor of ‘an invisible hand’, the object of which (see his ‘Lectures in Rhetoric and Belles Lettres’ ([1762] 1983, p 29, he uses the metaphor for ‘his own security’.

In short, the metaphor, ‘led by an invisible hand’ expresses ‘in a more striking and interesting manner’ the trader’s felt ‘insecurity’ that leads him to invest locally. This is English, not rocket science.

I am sorry to disagree with David because Smith is most certainly ‘limiting his point to the preference, at almost equal profits, for domestic over foreign investments.’ Otherwise, he would not differentiate between those who felt insecure (home traders) from those who didn’t feel so insecure (foreign traders). In an earlier paragraph (no. 6, 454) he discusses the basis of the home trader’s insecurity:

In the home trade his capital is never so long out of his sight as it is in the foreign trade of consumption. He can know better the character and situation of the person’s whom he trusts, and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress.’ (WN IV.ii.6:254).

Could Smith have written this clearer for economists? But he wrote mainly for a wider audience - legislators and those who influenced them. To assist his readers he re-expressed their being led by their insecurity by their being ‘led by an invisible hand’ because the metaphor expresses its object in a ‘more striking and interesting manner’, which is exactly what he taught his students and practiced as an accomplished rhetorician.

Interesting that David, who has read Wealth Of Nations, remembers the metaphor of an invisible hand’, but not Smith’s argument that leads up to it. Samuelson observed that economics graduates in the 1930s forgot most of their college economics but remembered the ‘invisible hand’ thirty years after graduating (Economics; an introductory analysis. 1948, p 36), which certainly shows the power of a good metaphor.

I would ask David to comment on Smith’s theory of metaphors and apply that to the first 9 paragraphs of Chapter 2, from which he so confidently asserts Smith’s intended meaning was different to mine.

I agree that Smith wrote ‘in this and many other cases’ where people were led (incidentally, never ‘as if by’) an invisible hand. But he never gave other examples in Wealth Of Nations, though he gave other examples of metaphors serving the exact same rhetorical purpose as is under discussion, wherever he felt he needed to reinforce a less clear object.

For example, when discussing the 'judicious operations of banking’, he referred in a ‘more striking and interesting manner’ by expressing how banks could ‘convert’ a ‘great part of its highways into good pastures and there by to increase very considerably the annual produce of its land and labour’, using, as he put it: ‘if I may be allowed so violent a metaphor, as a sort of wagon-way through the air’ (WN II.ii.86: p 321).

He also referred to the less secure basis of paper money, because paper, ‘as it were’ was ‘suspended on the Daedalian wings of paper money’ rather than ‘the solid ground of gold and silver’ (Ibid).

Smith’s reference to "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest", which is often associated with the metaphor of an ‘invisible hand’ by some modern economists (not always making clear it is from Book I not Book IV and on a different subject) does not require a metaphor to enhance its meaning (though theological critics of markets are given to making assertions about it showing Smith’s ‘greed’ and ‘selfishness’, but they misread it too). Both parties to the transaction act from their self-interests, and Smith specifically advises that each should address the self-interests of the other and not their own, to lay the basis for a bargain: ‘Give me that which I want, and you shall have this which you want.’ It does not require an invisible hand to lead them; only their self-interest in acquiring what they need (dinner for the customer, wherewithal for the sellers).

I shall ignore the invented assertions about ‘“Smith was in favor of home and motherhood and against the man-eating sharks”. I am a Fellow of the Adam Smith Institute (UK) and Trustee of the David Hume Institute Scotland) and I am not short of good reasons for preferring markets to state management and liberty to tyranny. Lost Legacy is an academic site dedicated to the defence of Adam Smith’s legacy. It avoids politics, particularly in countries where I do not vote, hence my avoidance of commenting generally on Stiglitz’s policies.

Lastly, I have long been skeptical of ‘laissez-faire’ from its origins in France, which was not about free markets for consumers. M. le Gendre was a ‘plain spoken’ merchant wanting freedom for merchants from Colbert’s Interference in 1690, but said nothing about consumers. Merchants can only be contained by vigorous competition. Laissez-faire does not provide that; the law can. I think this was why Smith did not endorse it; he preferred natural law and liberty. But that leads us to another discussion, namely moral sentiments.

[I am grateful for David for taking time to debate these issues and hope they help elucidate these important issues.]



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