Saturday, April 07, 2012

Black Pots and Kettles

Critics of people holding to ideological positions, with which they disagree, often make the same mistake that they claim the other side makes in respect of their ideological stances on Adam Smith. Here is a typical case of the pot calling the kettle black.

‘Jon’ (‘raised as an evangelical, biblical inerrantist and political right winger’ who ‘became an atheist and finally left winger later in life’) writes (6 April) on his Blog “Prove Me Wrong”

“Milton Friedman and the Invisible Hand”

“Milton Friedman claimed to be a big fan of Adam Smith. Here's Friedman explaining Smith's famous ‘invisible hand’.

“So a man seeking his own gain really ends up bettering society as a whole, even though that wasn't his intention. Apply this to neoliberalism. If I can go overseas and get better labor rates I do it really because I want to maximize my own profits, but in doing so I really promote the good of society as a whole

Yes, Jon is right to be unhappy (as I am) with Friedman’s caricature of Adam Smith on the role of the “invisible hand”. Smith was making no such reference to the alleged benefits of “better labour rates” abroad, which, anyway, was not true in respect of the British colonies in North America, where 18th-century labour rates were higher than those in Britain, due to the shortage of labour in these colonies and the plentitude of cheap land. However, Jon goes on to muck-up Adam Smith’s use of the invisible hand metaphor. He continues:

So I'm listening to a discussion from Chomsky HERE and he makes a rather astonishing claim. Smith does mention the invisible hand. It's within a passage that you might describe as a critique of globalization and neoliberalism.

Given that ‘globalisation was in its infancy and that neoliberalism’ was unknown, it is a gross exaggeration to suggest that Smith was criticising either phemomenon. For good reasons, Adam Smith welcomed international trade throughout Wealth Of Nations because he considered such trade beneficial to each country’s absolute advantages.

Apparently” (Jon continues) “the phrase ‘invisible hand’ occurs only once in the whole book. Take a look at it. Search for "invisible hand" then back up a few pages and start reading. What is Smith saying?

A merchant could look to foreign markets and possibly make more profits. But he's not going to do that. He'd prefer to take lesser profits and stay at home. Why? Because he knows that if he employs more people at home this induces further domestic industry, and he has a bias in favor of his own country. By improving the lot of his home country he really seeks the security and betterment of himself. In this sense there is an invisible hand that guides the merchant towards acting in a manner that is for the betterment of the public. He'll stay at home. He won't outsource

This is where Jon goes completely wrong about Adam Smith’s observation. The issue of the comparative profits was not that he felt a patriotic obligation to do so “because he knows that if he employs more people at home this induces further domestic industry, and he has a bias in favor of his own country.” The merchant trader may have been indifferent to such considerations (remember, he did not trade “intentionally”for the “public good”).

He preferred to invest his capital in “domestick industry” because of what he perceived as the greater risks of the “foreign trade of consumption”. These perceived risks are spelt out by Smith three paragraphs before he got to the “invisible hand” and they clearly identify that the merchant’s personal motives are about risk and his insecurity:

Thus upon equal or nearly equal profits, every wholesale merchant naturally prefers the home–trade to the foreign trade of consumption, and the foreign trade of consumption to the carrying trade. In the home–trade his capital is never so long out of his sight as it frequently is in the foreign trade of consumption. He can know better the character and situation of the persons whom he trusts, and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress. In the carrying trade, the capital of the merchant is, as it were, divided between two foreign countries, and no part of it is ever necessarily brought home, or placed under his own immediate view and command (WN IV.ii.6: 454).

Smith’s point was that the trader’s “insecurity” leads him to stay at home in the ‘domestick trade”, which had the arithmetical, but unintentional, consequence that his capital added to domestic investment, revenue and employment (the whole is the sum of its parts). Smith used the metaphor of “led by an invisible hand” to better describe, as good metaphors do, their objects “in a striking and more interesting manner”. This definition of the role of a metaphor is from Smith’s lectures on Rhetoric. It can be found in a relatively unknown Work of Adam Smith, discovered in 1958 in a house-contents sale in Aberdeen in Scotland, which was published as Adam Smith’s “Lectures on Rhetoric and Belles Lettres”, page 29, given at Glasgow University in 1763, Oxford University Press, 1983. The definition of metaphors by Smith corresponds to that of the standard definition given in the definitive Oxford English Dictionary (see the 1983 edition) and metaphors are still taught in schools.

Chomsky goes on to make his familiar criticism of Smith on the division of labour, which I have replied to several times on Lost Legacy since 2007.

Leftist critics of rightist ideologies, use their misinterpretations of Adam Smith as a counter-foil to rightist misinterpretations of Adam Smith, like those made in this instance by Milton Friedman.

I think Adam Smith deserves better from people on both sides of these ideologies, but his Works are unlikely ever to achieve such proper treatment from exponents of either ideology. They have seen their version of the truth and that’s that.

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Blogger Unlearningecon said...

You know it's a shame that the three most influential thinkers are generally misinterpreted.

Keynes' main policy prescription was never counter cyclical fiscal policy (he didn't say anything along the lines of 'run a surplus in the good years and a deficit in the bad ones', and, of course, he did not use sticky prices and wages to explain AD driven recessions.

And from reading what I've read of Marx, I'm inclined to agree with Joan Robinson that I found things neither its proponents or opponents would lead me to believe.

Smith: well, you know.

2:10 pm  
Blogger Jon said...

Thanks for the commentary Gavin. I may be an ideologue, but I also genuinely appreciate constructive criticism and corrective. I'm no expert on Adam Smith and only posted that entry because I heard the claim from Chomsky and checked it and to me it looked correct. But if not I'll be glad to know. I do admire Chomsky, but I've judged him to be wrong before and he may be wrong again.

Still looks correct to me though and I've replied to your comments at my own blog. But I really will make this argument tentatively because for me Smith is not easy reading and it's possible I've missed it.

3:15 pm  
Blogger airth10 said...

Noam Chomsky pointed out the irony and contradiction of the IH metaphor, that though it is viewed to be a neoliberal by the likes of Friedman it is really anti-neoliberalism in the way Adam Smith meant it.

I am thinking of economics under communism. The invisible hand didn't exist there. But if it did it wasn't one that encouraged businessmen to invest at home because there were no independent businessmen under communism. But if anybody under communism did have money they sure didn't invest at home but abroad. It wasn't wise to invest at home under communism because it would not remain an individual's money, but would be taken by the state. So in a sense those communists who had money and bought goods abroad were really neoliberals, who worked against Adam's meaning of the invisible hand and the best interest of communism and its citizens.

But when Smith thought of the invisible hand as representing a bias in businessmen to invest at home he hadn't imagine the world of the Mature economies we have today, where Mature economies grew complacent and uncompetitive. Under those circumstances any smart business investors would probable, and have, looked elsewhere to invest. In other words, the stodgy and stagnant economies at home - the Mature economies, have driven businessmen to look abroad in order to get a better return on their money. To my way of thinking this is the new invisible hand, the anti-invisible hand, if you will, like the comparison between matter and anti-matter.

However, the invisible hand turning neoliberal as it has is not necessarily a bad thing. It really is still working in the best interest of the home team. By taking business abroad it has forced economies in Mature countries like the US and Britain to look inward and reinvent themselves so to again become viable and competitive. The old domestic invisible hand, so to speak, became tired. It needed to be revamped by its OTHER, the neoliberal invisible hand, the more youthful one, the one that lives abroad in places like Japan, China and India. Overall, though, the two invisible hands are working in tandem, in the best interest of the world and Civilization, by bringing people together in work and play. The invisible hands are also leveling the world, making it more the same for everybody, in order to keep the peace.

6:25 pm  

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