Friday, July 08, 2011

Another False Attribution to Adam Smith

Peter Boettke quotes from Dick Cornuelle in Coordination Problem writes HERE

‘What Does the Market Process Do?’ Dick Cornuelle was a student of Mises before Rothbard, before Sennholz, before Kirzner. He also devoted his work to a wider audience, and to a field not traditionally studied by economists. But he was a market process theorist and he did emphasize the adaptive efficiency of the market economy.’

‘Consider the following from Dick Cornuelle's De-Managing America (1975)

‘The economic process is usually explained in terms of profit motivation and competitive discipline, so we get the impression that the process communicates instructions like "Work hard and don't waste anything." But Adam Smith's invisible hand does much more than stimulate effort and penalize waste. It works as a master arranger or harmonizer of diverse human effort and it works without control. The invisible hand that coordinates the economic process holds neither a carrot nor a stick. It is a signaling hand, important mainly for the kind of directions it provides and the way it communicates them. ...
The free economic process shows each participant how to find his own way into a useful position in the larger mosaic. ... The way this happens in practice is illuminated by the concept of feedback ... (pp. 85-86)


Comment
I have long been uncomfortable with some supporters of the Mises' organization who have bought into the myths of the so-called ‘invisible hand’ as attributed to Adam Smith.

Dick Cornuelle joins my short list of people to be wary of:

But Adam Smith's invisible hand does much more than stimulate effort and penalize waste… The invisible hand that coordinates the economic process holds neither a carrot nor a stick. It is a signaling hand, important mainly for the kind of directions it provides and the way it communicates them.

It does no such thing. It does not exist in this form at all, and neither did Adam Smith say that it did. Markets work by visible price signals.

People in them have many diverse motives and emotions and Adam Smith’s mention of ‘an invisible hand’ shows this latter point clearly on the single occasion in which he used the IH metaphor in Wealth Of Nations (Book IV, Chapter 2, paragraphs 1- 9).

He refers to those merchants who prefer to trade locally rather than risk their capital abroad, which they perceive is more risky than investing it in ‘Domestick industry’. He mentions this inhibition three times in the crucial paragraph 9 in which the ‘IH metaphor’ is mentioned.

It is their insecurity that leads them to prefer the ‘domestick’ to the foreign trade, and he uses the IH metaphor to express this point in a ‘more striking and interesting manner’ (from Adam Smith’s own definition of the role of a metaphor in his Lectures on Rhetoric and Belles Lettres, 1763 [published in 1983].

The failure of generations of economists since 1948, including, sadly, some Nobel Prize Winners, and also many of the brightest of their colleagues, to recognize the simple truth of what Adam Smith actually said is truly remarkable.

Instead a complex myth has grown about the IH metaphor and lumbers our understanding of how markets actually work, adorned with mythical qualities close to the metaphysical agencies of genii and fairies – even the ‘hand of God’.

One critical believer found portents of ‘Adam Smith’s invisible hand’ in the Tamud of 2,000 years ago! Whatever my critic found, it had nothing to do with Adam Smith’s use of a simple, and in Smith’s time, popular 17th-18th century metaphor.

Dick Cornuelle is probably innocent. Sitting at the feet of Mises, he was bound to take his teacher’s words as gospel. It still remains a myth when attributed to Adam Smith by Mises or anybody else.

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