Tuesday, December 20, 2011

Adam Smith On "Invisible Hands" and Banking Regulations

Louis René Beres, educated at Princeton (Ph.D., 1971) is Professor of Political Science at Purdue University writes in OUP Blog HERE

“Occupy Wall Street, Adam Smith, and the Wealth of Nations”

“Famously, in an assessment that remains fashionably au courant with most present day conservatives, Smith claimed to have discovered an “invisible hand”, a critical convergence of satisfactions whereby the unstoppable compulsions of individual self-interest, and the equally insistent needs of an entire nation, might somehow seamlessly coincide.” …

... “In his Theory of Moral Sentiments (1759), Adam Smith first noted that human beings are not made happier by their possessions, but that the rich, in seeking the “gratification of their own vain and insatiable desires”, may still advance the “interest of society”. With remarkable originality, Smith explained, the wealthiest members of the nation, without ever intending any such generalized benefit, “are led by an invisible hand” to bring forth reductions in social inequality.”

This is a well-written and thoughtful assessment of the Occupy Movement in New York, as expected from a Professor of Political Science. There is, however, a major flaw in Professor Beres’s characterisation of Adam Smith’s moral philosophy and political economy. This can be explained, if not excused, by Professor Beres’s almost certainly innocent appreciation of modern economics, including its myths of Adam Smith’s use of a well-known 17th-18th century metaphor of an “invisible hand”. Smith used the metaphor two occasions only in his published works, once in his Moral Sentiments, 1759, and once only in Wealth Of Nations, 1776. [A third instance occurred in his posthumously published essay on the History of Astronomy in 1795, written from 1744 -c.1750, where he clearly used it as a noun, not a metaphor, referring to a belief in a pagan superstition about the Roman god, Jupiter.]

In Moral Sentiments (1759), Smith referred to a “rich and unfeeling landlord”, who, despite his illusion that he consumed everything in his many fields, was “led by an invisible hand” to feed his servants, retainers, overseers, serfs and labourers, from the same crops in the same fields. In doing so, he distributed the basic “necessaries” of life and unintentionally assures the “multiplication” of the species (TMS IV.ii.10: 185). However, he is “led” by necessity to behave in this manner, not by his fellow-feelings or compassion for the “thousands whom he employs”, but by his obvious dependence on them, as they are on him, – no food, no labour and no labour, no food. The metaphor describes this mutual dependence. It “describes in a more striking and interesting manner” this mutual dependence by the metaphor of “an invisible hand”. See Adam Smith on the role of metaphors in his “Lectures on Rhetoric and Belles Lettres” [1763] 1983, p 29).

In Wealth Of Nations, Smith refers to some, but not all, merchants, who are concerned about the security of their capital if they send it abroad, which leads them to prefer to invest in “domestick industry” rather than in the “foreign trade of consumption” (WN IV.ii.9: 456). He states the object of the metaphor of an invisible hand, namely, their insecurity, by describing it “in a more striking and interesting manner”. He mentions their relative feelings of insecurity (three times in the relevant paragraph and also several other times in the previous eight paragraphs).

Whether this metaphor is about “reductions in social inequality” in Moral Sentiments or “a critical convergence of satisfactions whereby the unstoppable compulsions of individual self-interest, and the equally insistent needs of an entire nation, might somehow seamlessly coincide” is very much open to debate, especially if it is asserted that all self-interested actions, including selfish self-interest, lead to benign outcomes. They most certainly do not. Many domestic merchants demand tariffs and prohibitions, contrary to the interests of domestic consumers, but certainly in their own non-benign self-interests.

That is why Adam Smith advised that government should regulate, by direct interference, those banks that issue paper promissory notes in very small amounts (WN II.ii.94: 324), and also those banks that charge usurious rates of interest (WN i.ix.5: 106; 1.iv.15: 357), despite these being contrary to "perfect liberty" These and many other examples, show that Adam Smith was not opposed to regulation on ideological grounds, as claimed by some extreme conservatives.

Professor Louis René Beres, in reporting the alleged views of Adam Smith in today’s debates, ought to recognize that he has assumed certain ideas that Smith never had and that these ideas come from distortions of his Legacy by modern economists and politicos.



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