Friday, April 20, 2012

A Case for Reading Warren Samuel's Last Book

Matt McCaffrey (currently a PhD candidate in economics at the University of Angers, and the editor of Libertarian Papers) writes (19 April) in the International Business Times HERE
“ Market Will Solve It”
Again, the problem often stems from loose metaphors. Take Adam Smith's famous "invisible hand," for instance. Try explaining to the passers-by that we don't need legal restrictions on market activities because there is an invisible hand that will sort it all out. You're far more likely to inspire your own commitment to the local mental health center than social change. This is why it is necessary to constantly remind ourselves exactly what it is we mean when speaking in such metaphors.
Smith wasn't positing the existence of some all-seeing economic force which would magically solve problems. All he meant was that the division of labor (and thus, the market) makes it in everyone's interest to serve the interests of others. So even when we talk about competition in the market, we're really talking about a powerful form of social cooperation.”

There I was thinking that Matt McCaffrey was doing great in his article criticizing the over-use by modern economists of ‘loose metaphors’ like the invisible hand, when he added “all he (Adam Smith) meant” was ….etc., and went off the rails.
True, Matt didn’t add the usual nonsense among modern economists about “selfishness leading to public benefits”, which is an improvement, but his reference to the “division of labour” is quite out of place, though I understand what he meant.
The metaphor used by Smith was confined to the specific case of a merchant trader who felt insecure trading abroad, hence for that reason he traded “domestically”, and this had the consequence that domestic capital investment increased by the amount of his capital (i.e., the whole is the sum of its parts). He only intended his own security, but this intention, was metaphorically defined by Smith as the merchant being “led by an invisible hand” (we cannot see inside his head), but its consequence was that it added to ‘annual revenue and employment”, which in Smith’s view was a public benefit.
Metaphors describe their objects in a “more striking and interesting manner’ and the object of Smith’s use of the IH metaphor in this case is clear; it is the merchant’s insecurity. The “invisible hand” as a metaphor does not exist in reality. There is no “invisible hand”!
All modern (post 1940) attempts to explain the “invisible hand” as a metaphor for markets, supply and demand, the division of labour, the price system, and any of a dozen other assertions are pure inventions, as are their attributions to Adam Smith. He mentioned the IH metaphor only once in Wealth Of Nations in Book IV when dealing with “mercantile political economy”, and never mentioned it in Books I and II where he covered in detail how markets and the division of labour, etc.
Recent frustrations with modern claims for the invisible hand notwithstanding, there is no substance to these assertions in relation to Adam Smith. The recent, and last, work of Warren Samuels “Erasing the Invisible Hand: essays on an elusive and misunderstood concept” (Cambridge University Press, 2011) documents in detail the dead-end that belief in the existence of an invisible hand became for modern economics after 1948. I recommend to Matt McCaffrey that he consult it.


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