Saturday, July 23, 2011

History of the Myth of the Invisible Hand

Over lunch at the Bank of England [in April, 1946, just days before Maynard died], Keynes is claimed to have told Henry Clay (a professor of Social Economics and Advisor to the Bank of England) of his hopes that Adams Smith's "invisible hand" can help Britain out of the economic hole it was in after the Second World War with a near-exhausted British economy, deeply in debt to the USA:

"I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago."

This one of those unverifiable statements attributed to Keynes, interesting in itself, and also for what it leaves unsaid about the history of this modern myth of 'an invisible hand'.

But of more interest historically, it is some confirmation of the existence of an oral tradition at Cambridge University that articulated ideas about the meaning Smith was supposed to have attributed to his use of the ‘invisible hand’ metaphor. Sometime, since Alfred Marshall dominated economic teaching in British universities and A.C. Pigou, his immediate heir, had carried on in his teachings, and, in his case, had published the same ideas from the oral tradition in his early editions of Welfare Economics – largely to undermine the ‘invisible hand’ of the economy with his academic case for the government using intervention by taxation to achieve welfare objectives that were allegedly immune to the beneficial activities of ‘an invisible hand’.

The oral tradition was necessarily an heavily massaged version of Adam Smith’s limited usage of the metaphor (only twice in all his published writings) and in no way did Smith use it in reference to the workings of markets. The assertions of Henry Clay in 1946 mark the mid 1920s as when Keynes said he had "tried had to eject [the IH metaphor] from economic”.

This is in line with Paul Samuelson’s claim that he had heard the oral case linked to Adam Smith, at Chicago when he was an undergraduate there in the early 1930s, which fits the similar use of the ‘invisible hand’ by Oscar Lange (a Marxist) as a feature of capitalist economies (in his The Economic Theory of Socialism 1936 and 1938). In these publications, Lange saw the community state substituting planning for the so-called "invisible hand'.

To Paul Samuelson goes the dubious honour of popularising these myths of “Adam Smith’s invisible hand” across US academe through the 20 editions of his successful textbook, Economics: an introductory analysis (McGraw-Hill) 1948 (2010).

It is in the nature of oral traditions to leave no traces of them and they die out with the passing of the perpetrators – and it is only when oral assertions and pass into print (or, today, online) that we pick up hard evidence.

It is remarkable that only a few economists either drew attention to the oral tradition of the (mis)use of the IH metaphor or integrated the myths into their own works until the explosion of mentions of the myth began to appear in the decades following Samuelson’s references to it. Now it is ubiquitous, and in too many case also plain silly ('the invisible hand kicking people in the behind', etc.,).

Certainly, few, if any (I would say ‘none’ did, but you never know if something may turn up – and Lost Legacy readers are always a useful source of snippets that I will follow if any emerge), of Smith’s contemporaries considered the IH metaphor of any importance or relevant to Smith’s works, and precious few – a handful, not all of them economists – ever mentioned Adam Smith and the metaphor until the late 19th century and the beginning of the 20th century.

My searc continues.

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