Saturday, November 05, 2011

More Details on Professor Meeropol’s Critique of the Modern Myths of the Invisible Hand: Worthy of Your Attention Read (Part Two)

Part Two

Professor Meeropol also provides a handy reading list of 10 modern textbooks that misquote Smith on the invisible hand. There are many more (e.g., all editions of Samuelson’s textbook, from the 1st to the 20th, and the selection of textbooks discussed on Lost Legacy from my collection in 2010). The misuse of the IH metaphor is now ubiquitous, but even those few critics of the misreading don’t quite go far enough:

The reference to the businessman’s preference for domestic investment is excised from all direct quotes from Smith and in some instances the earlier quote is run together with the truncated “invisible hand” quote. See for example, N. Gregory Mankiw, Principles of Microeconomics (NY: The Dryden Press, 1998, 145), Joseph E. Stiglitz and Carl E. Walsh Economics (3rd Edition) (NY: W.W. Norton and Company, 2002): 204 and Arthur O’Sullivan and Steven M. Sheffrin Microeconomics: Principles and Tools (3rd Edition) (Upper Saddle River, NJ: Prentice-Hall, 2003): 6. Sometimes there is just a simple statement that “… the invisible hand of the marketplace leads the economy to produce an efficient variety of goods and services, with efficient production methods as well.” Ronald M. Ayers and Robert A Collinge Microeconomics: Explore and Apply (Upper Saddle River, NJ: Prentice-Hall, 2004): 7. See also Karl E. Case and Ray C. Fair Principles of Microeconomics (7th Edition) (Upper Saddle River, NJ: Prentice-Hall, 2004): 67, William A. McEachern Microeconomics (6th Edition) (Mason, Ohio: Thomson Southwestern, 2003): 39, William J. Baumol and Alan S. Blinder Economics (8th Edition) (NY: Harcourt College Publishers, 2001): 67-68, Roger A. Arnold, Economics (4th Edition) (Cincinnati, Ohio: South-Western College Publishing, 1998): 436, Paul A. Samuelson and William Nordhaus, Economics (16th Edition) (NY: Irwin, McGraw-Hill, 1998): 30-31 and especially 201, and Campbell R. McConnell and Stanley L. Brue Economics, Principles Problems and Policies (14th Edition) (NY: Irwin, McGraw-Hill, 1999): 73.“

“... The failure of any Principles text to pick up on Persky’s article, despite the fact that it appeared in the most accessible of the American Economic Association journals represents something akin to pedagogical malpractice. It would be much more accurate, and much more revealing of the true nature of Adam Smith’s analysis if textbook writers would say something like: “Even though Adam Smith used the term ‘invisible hand’ to specifically explain the preference of businessmen for domestic over foreign investment, common usage within the economics profession has transformed that concept into a generalized argument in favor of the idea that pursuit of private advantage when constrained by competition will lead to public benefits

Absolutely true! A trawl through Lost Legacy’s archives shows my continual battle to try to right the wrong done to Adam Smith’s legacy by the modern myths of the IH metaphor, which hijacked his clear, limited and sole use of the IH metaphor to “describe in a more striking and interesting manner” its object (as Smith taught in his “Lectures on Rhetoric and Belles Lettres” [1763] 1983, page 29). In the two instances in which Smith used the IH metaphor its objects were the absolute mutual necessity of landlords feeding their serfs (Moral Sentiments) and the ‘insecurity’ of some, but not all, merchants in (Wealth Of Nations) leading them to add directly to “domestic revenue and employment”.

“… Perhaps it is not too much to hope that textbook writers might be willing to make such a change once the error of their present presentation is pointed out to them. Turning to History of Thought analyses, Blaug’s discussion of the “invisible hand” asserts it is “nothing more than the automatic equilibrating mechanism of the competitive market.” He does allow that Smith’s admitted defects in the “simple system of natural liberty” provide sufficient ammunition … for several socialist orations,” [p. 58] but he does not specifically identify the focus of the invisible hand on promoting domestic investment. Similarly, J. A. Schumpeter’s History of Economic Analysis (NY: Oxford University Press, 1954: see particularly 185-94) fails to mention this specific focus. No reference to the invisible hand is to be found in the index. Robert L. Heilbroner’s The Worldly Philosophers (NY: Touchstone, Simon and Schuster, 1980) identifies the invisible hand as the process whereby the “ ‘private interests and passions of men’ are led in the direction ‘which is most agreeable to the interest of the whole society’.” (52). Emma Rothschild’s Economic Sentiments: Adam Smith, Condorcet, and the Enlightenment (Cambridge: Harvard University Press, 2001) devotes an entire chapter to Smith’s use of the idea of an invisible hand (116-156). Though she carefully quotes both of Smith’s references addressed in this article, she does not explicitly develop the points made here and in Persky’s article (but see below, note 39). The entry in the New Palgrave Dictionary of Economics does includes the entire quote with its emphasis on domestic investments but then fails to remark upon it (Palgrave: 997). For popularizations, consider Milton and Rose Friedman’s best-selling Free to Choose (NY: Harcourt Brace Jovanovich, 1979). Right in the beginning of the book they identify the Wealth of Nations as a statement of how “a market system could combine the freedom of individuals to pursue their own objectives with the extensive cooperation and collaboration needed in the economic field to produce our food, our clothing, our housing. … so long as cooperation is strictly voluntary … an individual who ‘intends only his own gain’ is ‘led by an invisible hand to promote an end which was not part of his intentions … By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it…’ ” (1-2)

The invisible hand is a metaphor for what led “unfeeling” landlords, and the like, to feed their serfs (they couldn’t work otherwise), and led insecure merchants to prefer “domestick industry” to the “foreign trade of consumption”.

The unintended consequence of the minimal-sharing behaviours of the agrarian rulers in distributing some of the food their serfs had produced (!) was that the labouring serfs continued to procreate and increase population and the landlords enjoyed their nascent ‘civilized’ life styles (no food, no labour; no labour, no food); the unintended consequence of the insecurity of some, but not all, merchants was that “domestick revenue and employment” increased in North-west Europe, which, eventually, created the modern capitalist economy – the most successful in developing higher living standards (hundreds of percent greater than the historic $3 a day) in the history of humanity, so far, with, of course, much more to do this century).



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