Tuesday, November 08, 2011

The Cause of the Invented Version of Adam Smith's Use of the IH Metaphor

Roger Backhouse, a professor of economic history at the University of Birmingham, and Bradley W. Bateman, a professor of economics at Denison University, are the authors of “Capitalist Revolutionary: John Maynard Keynes” and write is the NY Times Sunday Review HERE

“Wanted: Worldly Philosophers”

“This wasn’t always the case. Course lists from economics departments used to be filled with offerings in “comparative economic systems,” contrasting capitalism and socialism or comparing the French, Scandinavian and Anglo-Saxon models of capitalism.

Such courses arose in the context of the cold war, when the battle with the Soviet Union was about showing that our system was better than theirs

Those heady days when economics students were treated to more than passing references to the history of economic thought, sadly, are now long gone.

At Edinburgh University from the 1930s to the 1950s, economics students were treated to a syllabus that included Sir Alexander Gray’s, still fresh today, little volume, The Development of Economic Doctrine, 1931, Longman’s, London. The chapter on Adam Smith was as lucid as his lectures were reported to be even by students who never proceeded beyond first year studies. [*]

From 1948, students across the USA were introduced to Adam Smith with an innocent-looking short reference to Adam Smith’s invisible hand metaphor (Paul Samuelson's Economics: an analytical introduction, McGraw-Hill, New York). This has had calamitous unintentional consequences on economics as a discipline, and worse still, economic policies by governments whose advisors (and lobbyists) breathed in the noxious idea that an actual invisible hand operated in, variously, the ‘miracle’ of markets, close to a divine intervention by God, on the individual decision-makers in the determination of prices, supply and demand, and the providential fortunes of individuals as they exercise their self-interests.

I have explained the timing and driving dynamics that made an major error in understanding Adam Smith’s metaphor over the years by the context in which it burst across the world in Samuelson’s 20 editions of his popular textbook (c.5 million copies of the English edition, and many more similarly from its multiple translated editions) by reference to the context of the time in which McGraw-Hill picked winner.

The notion that Adam Smith meant by the metaphor of ‘an invisible hand’ gradually took its modern shape from the 1930s, after 150 years of relative and striking silence by Smith’s contemporaries, and an almost total lack of interest in the IH metaphor by political economists in the 19th-century, except for a tiny handful most of the first hundred years from Smith’s death in 1790. Only in reports of an ‘oral tradition’ at Cambridge (Pigou 1923) and also Chicago Universities, hint at some passing references (see Samuelson, 1948, p 36).

The impetus that tipped the balance was the burgeoning growth of the threat of the Soviet Union from the 1930s in what was considered to be a difficult time for capitalist economies in Europe and the Americas. Severe slumps, rising unemployment and the growth of communist and socialist parties and their ideas of a terminal collapse of capitalism put ideas of pro-market solutions under strain. Oscar Lange, a socialist academic, published his. “On the Economic Theory of Socialism, Part I and II.” 1936, Review of Economic Studies 4, no. 1: 53–71; 1937, no. 2: 123–142, which extolled the plausibility of a socialist-managed state economy, later expanded in book form in 1947. Interestingly, Lange saw the state planners as replacements for the unreliable invisible-hand of the market with their superior planning directives. Thus, from the start, the myth of the invisible hand was shrouded in myth that Smith meant it to be about a complex notion that it was about the inner-workings of markets, supply and demand dynamics, and price theories, contrary to Smith’s clearly stated notion that it was a metaphor about the consequence on the felt insecurity of some, but not all, merchants when contemplating the risks of sending their capital abroad rather than investing it in the “domestic industry”.

Samuelson, ex-Chicago, then at MIT, was writing his magnum opus, Foundations of Economic Analysis, published in 1947, quickly followed by his introductory economics textbook, published in 1948. In this introductory text, Samuelson extolled the basic soundness and superiority on the ‘mixed’ capitalist economy over a fully state-run economy of the Soviet kind. He also located Smith’s invisible hand as benefiting society as a public good, even when, or more incorrectly, particularly when the motives of individuals were ‘selfish’ (a notion never expressed by Adam Smith).

Samuelson in later editions squared his distorted interpretation of Adam Smith’ singular reference to the IH metaphor in Wealth Of Nations (from which Samuelson included a truncated quotation from the IH metaphor in paragraphs from WN (IV.ii.1-9: 456). First, Samuelson suggested that the IH metaphor had its lauded effects of delivering unintentionally a ‘public good’ only applied to a perfectly competitive economy, not an ‘imperfectly competitive’ economy, which is a serious distortion – apart from Smith never such a distinction in WN that the IH had such an effect in general.

(For an analysis of Samuelson’s changes to his incorrect original presentation for the ‘selfish’ invisible hand across edition 1 to 20 of his economics textbook, see my article in the Journal of the History of Economic Ideas, “Paul Samuelson and the Invention of the Modern Economics of the Invisible Hand”, JHEI, vol. xviii no 3, September 2010.)

Samuelson ignored the plain fact that Smith’s use of the IH metaphor applied under certain specific circumstances in the British economy, which the 18th century was anything but ‘perfectly competitive’ with its protectionist mercantile policies. In later editions Samuelson developed this ‘get out of jail’ card into wilder associations of the IH metaphor with ideas of general equilibrium economics, from the later 1950s increasingly in vogue, and with Pareto’s welfare theorem.

But recall, all of this invention of a modern IH theory/concept/ paradigm, was aimed at establishing the undoubted superiority of free(er) market economics, guided by an IH Hand, over the manifest inadequacies of dictatorial state management of the Soviet or socialist models.

This line of debate was succinctly summarised by Roger Backhouse and Bradley Bateman in their New York Times piece as arising: “in the context of the cold war, when the battle with the Soviet Union was about showing that our system was better than theirs”.

I couldn’t have put it better myself.

[*] For completeness, I draw attention to the fact that Sir Alexander Gray specifically mentions the invisible hand on six occasions in the first edition of his book, associating it with ‘miraculously harmonising’ the ‘pursuit of gain with the promotion of the public good’ (Gray, 1931, p 146). No mention, contrary to Samuelson, of anything to do with selfishness.

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Blogger airth10 said...

Paul Samuelson has been pillared a bit recently, first for his bolstering the use of mathematics in economics and now for skewing the metaphor of the invisible hand. Economics, though, has generally been riddled with superlatives. Perhaps Samuelson's greatest fault is that he set economics on the road of being too analytical and micro rather than macro and metaphysical. (Nevertheless, the invisible hand is more macro and metaphysical.)

Smith may never have directly expressed the notion of 'selfish'. But he did seem to imply it, though it was more in the form of 'enlightened' selfishness. I think the use of selfish is more meant as 'focused' self-interest, a kind of self-survival instinct.

I see the 'invisible hand' as more than a metaphor but as a world-system. Hegel's world-system was based on 'change'. I see a connection between the two. Economics has a lot to do with change, such as the change that is brought about by the consumption of resources and then the replacing of them or the depletion of resources and the renewal of them (the entropy of economics and the shifting of energy). The invisible hand, as the market place, seems to be there working things out.

2:32 pm  
Blogger Gavin Kennedy said...


Thank you for your comment.

Smith not only never "directly expressed the notion of 'selfish'", nor did he "seem to imply it" and definitely not as "'enlightened' selfishness".

Selfishness as a central motive was more, in Smith's words, a "licentious" philosophy, closely akin to the writings of Bernard Mandeville (Fable of the Bees, 1724), heavily criticised by Smith in Moral Sentiments (1759), and widely misidentified today by the 'Greed is Good ' school of modern imaginations.

Smith specifically identifies 'self-interest' as a motivator and makes clear (WN I.ii.) that self-interest requires 'other regarding' in, for example two self-interested parties bargaining over the contents of a dinner. Two self-interested, let alone selfish, bargainers would never read agreement if they remained 'self-regarding'; they each must regard the 'self-love' of the other party and address their remarks to them and not wail about their own interests, if they are to make a deal.

He criticises those who 'jostle' competitors down as not being accepted by the Impartial Spectator. You may apply any metaphor, such as 'an invisible hand' to any subject you wish, but you cannot accurately ascribe or interpret it as something Smith said, when he clearly did not.

You may see 'a connection' between Hegel and Smith; nobody else may agree with you.

Also, there is no 'invisible hand' of the market place, a wholly invented notion among modern economists but not found in anything written by Adam Smith that I know of.


10:18 am  

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