Sunday, September 23, 2012

Polite Debate Is More Convincing


Economic Historian” posts on “Economics Job Market Rmours”, Here 
This is followed by nine comments exchanging juvenile abuse about “jack offs”.  This sad situation provoked ne to offer a comment.  First, the “Economic Historian”:
I'm tired of hearing the phrase "invisible hand" used as though it refers to so-called "free markets" (as though that phrase is a technical term with a clear definition).
To put it to rest: Smith's argument in the Wealth of Nations is a sociological argument about economic investment. Smith wrote:
"By preferring the support of domestic to that of foreign industry, [a merchant] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention (1776 [1981]: 456)."
In the paragraphs before and after, Smith is arguing that business people prefer to use their capital on domestic rather than foreign trade because they lack familiarity with capitalists in other countries and their legal systems. Thus, a sociocultural preference for one's home country combined with a self-interested desire to increase profits -- which together Smith calls an "invisible hand" -- results in higher employment and growth in that country.
The odd part is that the reality now is the complete opposite of Smith's justification for the "invisible hand." Multinational corporations move investment everywhere, and business people have few sociocultural preferences for their home countries. Thus the "invisible hand" doesn't exist except as a distortion of Smith's arguments.
Your economic historian
Comment
Instead of posting juvenile abuse to each other, I suggest a more mannered discussion would add to the sum of human knowledge.
The"invisible hand" was a metaphor in Wealth Of Nations (1766) for "insecurity" felt by some, but not all merchants, "leading" them to prefer "domestic industry" to their perceived risks of "foreign" trade.  The metaphor of "an invisible hand" described that motivation in a "more striking and interesting manner", as expressed by Adam Smith on the role of metaphors in his "Lectures On Rhetoric and Belles Lettres" (1763, p 29).)
His other reference was in Moral Sentiments (1759) where he used "an invisible hand" metaphor to describe how "proud and unfeeling landlords were "led" to feed enough for the subsistence of the "thousands whom they employed"  (otherwise they could not work or survive and neither could the landlords enjoy their "greatness").  This unintentionally propagated the species. Again the metaphor described this mutual dependence in a "more striking and interesting manner".
In the mid-20th century, Paul Samuelson taught in his popular textbook, "Economics" 1948 (and 20 editions to  2010), that Adam Smith had declared that markets were governed by an invisible hand that led even selfish behaviours to general public benefits, completely contrary to Smith's moral philosophy and political economy.  That is the source of the invented and mythical so-called "invisible hand"  It has nothing to do with Adam Smith.

2 Comments:

Blogger neroden@gmail said...

The perniciousness of Paul Samuelson's textbook has been widely documented. It does speak of something fundamentally broken in the academic discipline of economics -- how did a textbook which got *everything* so *terribly* wrong manage to become the best-selling textbook for 50 years?

12:04 p.m.  
Blogger Gavin Kennedy said...

neroden
I have discussed this many times on Lost Legacy (scroll down for "invisible hand'). I wrote about it for the History of Economic Ideas academic journal in 2011 ("Paul Samuelson and the Invention of the Invisible Hand").
Apart from his invention (1948, p 36), his book was successful because it established new standards in textbooks and was much imitated. His readers spread out into economic teaching (myself included), entered public policy services, including politicians, and the media.
It was timely as the Cold War boosted his book because it challenged Soviet central planning (and events won that debate with the collapse of central planning). Even the Chinese communists prefer markets, albeit under strict central control.
Gavin

2:05 p.m.  

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