Thursday, September 02, 2010

Some Interesting Background to the Invisible-Hand Controversy

I was sorting through some books in my library in France, prior to returning to Scotland, tomorrow, Friday, when I had a look inside Pigou’s Economics of Welfare, [1920] 1929, and while looking for his references to Adam Smith, I came across this interesting passage:

Certain optimistic followers of the classical economists have suggested that the “free play of self interest”, if only Government refrains from interference, will automatically cause land, capital and labour of any country to be so distributed as to yield a larger output, and, therefore, more economic welfare than could be attained by any arrangement other than could be attained by any arrangement than that which come about ‘naturall”. Even Adam Smith himself, while making an exception in favour of State action in “erecting and maintaining certain public works and certain public institutions, which it can never be in the interests of any individual, or small number of individuals to erect of maintain,” lays it down that “any system which endeavours either by extraordinary encouragements to draw towards a particular species of industry a greater share of capital of the society than that which would naturally go to it; or by extraordinary restrains to force from a particular species of industry some share of the capital which would otherwise be employed in it … retards, instead of accelerating, the progress of the society towards real wealth and greatness, and diminishes, instead of increasing, the real value of the annual produce of its and and labour.” [WN, IV.ix.3rd para from end] It would, of course, be unreasonable to interpret this passage in any abstract or universal sense. Adam Smith had in mind the actual world as he knew it, with an organised system of civilised government and contract law’.

(Pigou, A. C. The Economics of Welfare, 3rd edition, 1929, Macmillan, London Part II; Chapter 1: ; 'introduction: the size of the national dividend and the distribution of resource among different uses, pp 130-1)

Interesting that Pigou does not cite the, now famous, ‘invisible- hand’ metaphor in support of the assertion about ‘certain optimistic followers of the classical economists’, presumably referring to the oral traditions in the political economy department at Cambridge University, where Pigou was its professor.

Read carefully, surely the modern attribution of the invisible-hand metaphor as a ‘doctrine’ of Adam Smith (his so-called ‘theory’, most important idea’, even a ‘paradigm’) was ‘made’ for Pigou’s reference, if it had an substance to it?

However, it isn’t used by Professor Pigou in the passage above, even though in the ‘invisible-hand’ passage itself, Smith refers to precisely the very topic to which Pigou’s introduction refers, namely, the ‘size of the national dividend’, or as Smith put it, size of the ‘annual revenue and employment’, which is increased by the unintentional consequences of the ‘security’ concerns of those merchants who invested their capital in ‘domestick industry’.

On the way towards Paul Samuelson’s 1948, attribution of greater meaning to Smith’s use of the metaphor than Smith’s Wealth of Nations supports or justified, Chicago’s oral tradition apparently had confused verbal assertions with the textual integrity of what Adam Smith actually wrote, which might explain why Samuelson's report of them (p 36) was so woefully inaccurate.

[My Edinburgh copy of Pigou's Welfare Economics is an earlier edition and I shall check further for variations in his text.]



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