Saturday, June 04, 2011

Nobel Prize Winners No Guarantee that they Speak Accurately on Adam Smith

Chriss Street, Founder of Chriss Street and Company, writes (12 May) in Huffington Post HERE: on how Michael Spence, Nobel Laureate and former dean of the Stanford Business School, has just published 'a rigorous economic analysis' called: The Evolving Structure of the American Economy and the Employment Challenge.

Adam Smith, 18th century English economist, pioneered the concept of the "invisible hand" to describe how capitalism through self-interest, competition, and supply and demand, more effectively allocated resources than the "dead hand" of the state; that levied punitive taxes, adopted restrictive regulations, and enforced monopolies to favor their crony allies. Smith described how English entrepreneurs flourished after their king's feudal dominance of the economy was liberated by adopting the laissez-faire economics that allowed transactions between private parties to be free from the state's coercion. Smith described how new wealth was rapidly created and compounded over time form the productivity gains of the Industrial Revolution that leveraged the value of workers and led to higher wages.’

‘Adam Smith identifies the "entrepreneur" as the invisible hand that shifted economic resources out of lower and into higher productivity activities for and greater reward. If the invisible hand is expected to be busy shifting resources from lower to higher productivity; why has America shifted resources from higher to lower productivity jobs?


Comment
It may be ‘a rigorous economic analysis’ from ‘Michael Spence, Nobel Laureate and former dean of the Stanford Business School’, but it is hardly an accurate representation of Adam Smith’s thought or of his origins in Kirkcaldy, in Scotland not England (please note this historical fact Professor Spense, and the sub-editor of Huffington Post, and the reporter, Chriss Street. If such elementary historical facts are wrong, what trust should we place in what follows?

Sad to say, not much.

Smith never used the metaphor of the ‘invisible hand’ to ‘describe how capitalism through self-interest, competition, and supply and demand, more effectively allocated resources than the "dead hand" of the state'. Has our Noble Laureate ever read Smith’s ‘Wealth Of Nations’, or his earlier ‘Moral Sentiments’? On this evidence I must conclude that the hasn’t.
He scores a D- - for his blunder and he deserves to be sent back to the library to rewrite his essay.

Sure, Smith argued that governments ‘levied punitive taxes, adopted restrictive regulations, and enforced monopolies to favor their crony allies’ but this had nothing to do with the metaphor (never a ‘concept’) of ‘an invisible hand’.

He simply pointed out in Book IV, chapter ii, of WN that some but never all, merchant traders because of their concerns about the risks to their capital, preferred to invest locally in ‘domestick industry’ rather than send it abroad to Europe or to the British colonies in central and north America, thereby unintentionally adding to ‘domestick revenue and employment’ (the whole being the sum of its parts – hardly heavy maths) and making it greater than it otherwise would be.

These particular merchants were ‘led by an invisible hand’, but specifically from their insecurity (in modern parlance, their risk aversion), which ‘expressed in a more striking and interesting manner’ (see Adam Smith’s ‘Lectures in Rhetoric and Belles Lettres’, [1763] 1983, p 29) on the objects of a metaphor.

Cleary, the metaphor was needed, because even generations of economists, including distinguished winners of Noble Prizes from Paul Samuelson (1948) onwards, have managed to ignore Smith's specifying the object of the metaphor he used once in Wealth Of Nations (in this case the object was risk aversion of some but not all merchants) in favour of their invention of a new meaning to that metaphor alone, to which these modern economists have credited (invented is not too strong a word) a far more complex meaning to it than Adam Smith ever credited it with.

Adam Smith certainly ‘described how new wealth was rapidly created and compounded over time’ (though not necessarily ‘rapidly’, more inexorably gradual) in the form of leveraging ‘the value of workers' which 'led to [real] higher wages’ (certainly of clear benefit to the poor labourers), but he did not say that this compounding had anything to do with ‘the productivity gains of the Industrial Revolution’, as suggested by Professor Spence. The ‘industrial revolution’ did not get conspicuously under way until after Adam Smith’s death in 1790, when power-driven machinery spread out into the manufacturing economy in the early decades of the 19th century. Admittedly, this is an area of some controversy among historians, as is the very retrospective name of an ‘industrial revolution’.

The question of ‘If the invisible hand is expected to be busy shifting resources from lower to higher productivity; why has America shifted resources from higher to lower productivity jobs?’ is best directed at those modern economists who invented the myth of Adam Smith’s so-called ‘invisible hand’ and not laid in any manner as a question that Adam Smith’s Writings have a responsibility to explain.

Finally, no actions by any king solely ended the ‘feudal dominance of the economy’ by liberating the rising commercial economy and certainly not ‘by adopting the laissez-faire economics that allowed transactions between private parties to be free from the state's coercion.’ The commercial economy grew, Smith showed in Wealth Of Nations, from the insatiable greed of feudal landlords for luxury products from merchants, for which they bargained away their temporal powers of resistance to and intimidation of successive kings (Smith called it for a for 'mess of potage'). Mercantile political economy was slowly dismantled in some respects, but the governments of the kings (and Queen Victoria) ignored Smith's main advice for more competition; in fact he never mentioned the words laissez-faire – these were promoted by some of the French Physiocrats and attributed to Smith, without textual authority by the 19th-century economist, J. B. Say, and by spokespeople for 19th-century mine and mill owners anxious to prevent Factory Inspectors implementing modest legislation limiting daily hours of work and the employment of women and children in mills and mines. Interestingly, the first advocate of ‘laissez-faire’, the French merchant, a M. Le Gendre, in 1680, sought laissez-faire for his fellow merchants, but not, please note, for their customers. At least he knew his self-interest vis a vis his customers still subject to local monopolies!

The 16-18th century policy of Mercantile Political Economy was replaced in the 19th century by new mercantile policies of restricted trade and also a new and larger colonial empire was established, incorporating Canada, the Caribbean and central and south America, Africa, India, Australia and New Zealand, replacing the lost colonies of the new United States, and all governments of the day ignored Adam Smith’s admonition, in the very last paragraph of the Wealth of Nations, for Britain to turn away from ambitions of Empire and 'endeavour to accommodate her future views and designs to the real mediocrity of her circumstances'. The history of Britain since and up to now has certainly be that of a protective economy (as has that of the United States, and Europe) far, very far, from laissez-faire, and the politicians of Conservative, Labour and liberal views (like US Democrats and Republicans) might reflect on Smith's words.

I found Professor Michael Spence, Nobel Prize not withstanding, is not too good on Adam Smith or on history, showing why economics in universities should be taught with courses on the history of economic thought.

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1 Comments:

Blogger Hugh Small said...

hello Prof
Congratulations on the book. I wonder if you know when and where the phrase 'invisible hand of the market' first appeared in print? I tried running it through Google Ngrams and I found ... well, you can see what I found in my review of Joyce Appleby's 'Relentless Revolution' on Amazon.
Regards, Hugh Small
PS is it a good idea to use frames? Does blogger insist? When I try to post a comment it tells me the content can't use frames and I have to open a new window. Offputting.

8:58 pm  

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