Loony Tunes No. 66

1

Jim's Mailbox « Jim Sinclair's Mineset

By Jim Sinclair HERE http://www.jsmineset.com/2012/09/22/jims-mailbox-1048/

“What Does the Invisible Hand Already Know About The Final End Game?”

“Accumulation of US Treasury bonds by the invisible hand during the sharp selloff as part of a weak to strong hand transfer would suggest trouble in 2013.”

2

The scream

PakistanToday.com.pk  Anonymous, who is “a faculty member at Services Institute of Medical Sciences, Lahore” HERE 

“Distraught, agitated, confused, we forget the way forward, and instead start to self destruct in a hysterical fury, and are reduced to rubble once again, much to the satisfaction of the invisible hand.”

3

Aaron Rodgers sacks himself (VIDEO)

Yahoo! Sports (blog) Maggie Hendricks HERE 

“It certainly looked like an invisible hand tackled him.”

Bloomberg TV Runs Story About Panmure House

Nicholas Phillipson, author of "Adam Smith: an enlightened life", 2010 (Yale) speaks to a very short video of several shots inside and outside Panmure House from Bloomberg TV HERE
http://www.bloomberg.com/video/adam-smith-s-home-gets-business-school-revival-byl368j8Sii~TiQiBHwEyw.html

If you have not yet seen Panmure House, which is to be restored and renovated by Edinburgh Business School (Heriot-Watt University), take a few moments to watch it.   You will get an idea of the immensity of the task and the historic value of Panmure House, where Adam Smith lived from 1778-90 and where he socialised with the leading figures of the Scottish Enlightenment.  He completed the 6th editions of Moral Sentiments and Wealth Of Nations in Panmure House.

Blowing One’s Own Trumpet?

My recent paper, for the 44^th Annual Conference of the History of Economics at Keel University:

Kennedy, Gavin, Adam Smith and "The Myth of the Invisible Hand - A View from the Trenches" (September 6, 2012), has become, if only for a week or so (from past experience), in its Top Ten (free) downloads (99 searches, 32 downloads to date).

The full paper is available at Social Science Research Network (SSRN) HERE

It is not quite ‘viral’ yet (?), but it is moderately encouraging, given my inability to travel to Keele, due to a sudden hospitalisation.    

Visits to the Lost Legacy Blog have also slightly increased.  Again, also not yet a stampede. 

So I shall keep a sense of decorum.  But it is encouraging, nevertheless, as are the emails from readers who asked me for copies before it appeared on SSRN.

So, yes, I am blowing my own trumpet (a metaphor: I, er, don’t own a trumpet, but regular readers will know the proper role of metaphors from Adam Smith’s legacy, to describe in a “more striking and interesting manner” its “object” in Smith, Lectures On Rhetoric and Belles Letters, 1763, page 29).

Society and Moral Sentiments

 Jacob Jefferson Jakes posts in Political Mind (‘the science and psychology of Politics”).  He has written a short essay HERE on the subject of  

“Democracy and Capitalism in Adam Smith’s Mutual Sympathy and Sociability”.   

“I continue to slowly wend my way through Adam Smith, both The Theory of Moral Sentiments and The Wealth of Nations, with the help of James R. Otteson (Adam Smith’s Marketplace of Life) and Ryan Patrick Hanley (Adam Smith and the Character of Virtue). I’m finding it fascinating that Adam Smith’s views on human psychology, as it impacts morality, seem so modern. About a quarter of the way through his book, Otteson summarizes Smith’s psychology of morality. There are two features which describe Smith’s views, the notion of mutual sympathy; and sociability, the idea that humans are made to live in society.

We desire mutual sympathy, as Smith puts in the TMS (13); “nothing pleases us more than to observe in other men a fellow-feeling with all the emotions of our own breast; nor are we ever so much shocked as by the appearance of the contrary.” Through this mutual sympathy, we attempt to win praise and avoid blame; but more importantly, Smith believes, we seek to be praiseworthy and blameless. “Nature, accordingly, has endowed him, not only with a desire of being approved of, but with a desire of being what ought to be approved of; or of being what he himself approves of in other men.” (TMS, 117) If we want to be what we approve of in other men, it is not that other men can appear praiseworthy even when they are not; it is that we want to be praiseworthy like them.

Smith also thinks that the characteristic of sociability is innate in human nature. We are born dependent on others to survive, but more importantly, we have a psychological need to be a part of community. It is in society that we are able to exercise of sense of mutual sympathy; we need to be seen by others as praiseworthy and blameless to be psychologically whole. Both the need for mutual sympathy, and the innate characteristic of sociability, lead to the notion of the impartial spectator, where we are able to judge ourselves by recognizing how others judge us, just as we see them doing with us.

Otteson makes one other point about Smith’s views in this summary. He notes that Smith believes that in spite of mutual sympathy and sociability, we care more for ourselves than for others, and more for those closest to us than for those most remote. Man is driven by self-interest, as well as by sociability. Recognizing that others also are driven by self-interest leads to the impartial spectator procedure, since we realize we need to temper our own sentiments so that they are seen as praiseworthy to others, and to give us the grounds to better understand our fellows.

I also continue to listen to the lectures on Political and Economic Thought by Professor Charles Anderson. He describes Rousseau’s “general will” (la volonté générale) as being the means by which individuals can give up some measure of autonomy by joining with a group on a particular issue while still retaining their freedom of thought and action by adopting the group’s opinion and feeling it as their own.

Otteson, noted above, titles his book as the marketplace of life, and uses this idea of humans interacting in the marketplace to describe both the development of our morals and sensibilities as well as our economic life. Prof. Anderson’s describes Smith’s views of individuals creating contracts with each other, but maintaining individual freedom because the contracts are freely chosen. It strikes me as being very close to Rousseau’s general will, individuals giving over some measure of freedom by binding themselves to a contract, but maintaining freedom because they freely choose to do so.

According to Prof. Anderson, the theory of capitalism begins with Adam Smith, specifically with the Wealth of Nations. The year was 1776. We often conflate democracy with capitalism, and our modern political discourse often assumes that the role of the state is to further capitalistic freedom. But the theory of capitalism and Thomas Jefferson’s penning of the Declaration of Independence occurred in the same year; Jefferson could not have been thinking capitalism when describing government and the rights of individuals. Nor can one expect the Constitution to be grounded on a theory of capitalism, so soon after The Wealth of Nations.

Still, democracy feels like the marketplace; individuals come together, interact, form unions, and create government. Prof Anderson notes that individuals coming together in the marketplace gives form to community, society, and government without having to predefine it. Similarly, democracy does not guarantee that we will do the right thing, or the best thing. It is, in a sense, neutral; democracy does not tell us what we ought to do, but rather merely provides the marketplace out of which our politics grows.

Comment

JJ: “There are two features which describe Smith’s views, the notion of mutual sympathy; and sociability, the idea that humans are made to live in society.”

GK:

Humans, of the two surviving species of the speciation from the common ancestor of chimpanzee apes and humans formed their basic characteristics over long periods of time. Basically, that involves a capacity for sociability, which has taken many forms even in our short time in the historical chain.  Humans were not “made for society”, as if a society of humans is something in an unchanging stable form.  It isn’t; it took and takes many forms across history and geography, and can change dramatically throughout an individual’s lifetime. 

What sociability means is the capacity to live in proximity with others, from dependence at birth and infancy on immediate con-specifics, usually the mother or other close relative, which can take varying forms of relationships with others in life.  How relationships change or mature is a measure of the stability or otherwise of the sociability appropriate for that group of people at their time and place.  As a society changes, the form of sociability appropriate for that group also changes.  There are no unchanging contracts, which is why I sense that the notion of a social contract (Rousseau’s “general will”) is unsound.  People persuade or bargain but their agreements are not settled for all time. New bargains are settled, force may be resorted to, circumstances change, new classes form, and individuals act.  The early migrations out of Africa were replicated when Europeans discovered the America’s and migrated in large numbers, and more recently, African migrate to Europe.

 In the forest or bush in early societies, a new society could form by an individual or group of individuals walking off to form a new society elsewhere) such as may have happened more than a few times in the early human migrations out of East Africa (eventually taking their descendants to Australia) or across the land bridge or shallow sea separating East Asia from the Americas – some kept moving over millennia to Terra Del Fuego).

Smith’s Moral Sentiments addresses relationships in 18^th century Scotland. It was not about “capitalism”.  Smith had no theory of “capitalism” (see previous post).  Professor Charles Anderson is mistaken if Jacob Jefferson Jakes reports him correctly.  Democracy came long after Adam Smith was writing (as late as the 20^th century in the UK with the female franchise) and possibly only after the 1960s with the laggard situation in the “deep south”.  While capitalism is widespread throughout the world it would be hard to “conflate” it with “democracy” in most of the rest of the world.  Liberty is more important than democracy, for without Liberty, so-called “democracy” in many countries is a sham – think Zimbabwe, North Korea, Iran, and much of the Middle-East (the full list is too long to compile).

 The long road to Liberty in human societies began with the Barons at Runnymede and King John and slowly evolved under the rule of law until the beginning of a wider and democratic franchise in Victorian times.  Democracy is not mentioned in Wealth Of Nation, though Liberty is discussed several times.

 I should mention that I consider Jim Otteson’s “Adam Smith’s Market Place of Life” as a path-breaking analysis of key aspects of Adam Smith’s moral philosophy and political economy.  I recommend it to readers.

Department of Spurious Statistics and Silly Diagrams

Patrick James (no affiliation shown) reports on an “animated infographic” HERE 

It purports to show the “spread of Capitalism” as “influenced by the writings of Adam Smith” devised by some “smart folks at Harvard’s metalab”.  Readers are invited to “Watch a Planet slowly grasped by the invisible hand.”

 “This animated infographic shows where, when, and in what language Adam Smith’s Wealth of Nations has been published around the world. Watch a planet slowly grasped by the invisible hand.

You could spend a lifetime debating the qualitative merits and influence of Adam Smith’s capitalism-creating tome, An Inquiry into the Nature and Causes of the Wealth of Nations. But a look at the book’s quantitative history would be a more, well, economical use of your time.

The always-inspired folks at Harvard’s metaLAB have created a map-based visualization of when, where, and in what language Smith’s seminal book has been published. On the Y-axis you’ll see time, beginning with the initial publication in 1776 and moving up through 2001, alongside the total number of editions published prior to that year. Each time the book is published, a red halo emerges on the map near the city of the publishing house. Blue halos tell us when it’s a first edition being published in that city.

Below the map, you can see the distribution of different languages the book has appeared in. What really shines is how all the pieces of information interact with and relate to each other--there’s a harmony to this visual matrix, so no statistic is presented absent its connection to other data.

It’s an elegant way to depict the diffusion of an idea over time, though, because the graphic stops in 2000, it’s certainly worth asking how the last decade or so would alter the map. And of course the spatial distribution of editions inevitably inspires questions of why the book has so little penetration in Africa: Is that a function of lack of publishers, or a lack of excitement for Smith’s ideas. But, as the creator notes: "This map is only a cryptic narrative about the dissemination of ideas, and as such, I hope it will inspire economic historians towards new and interesting projects surrounding Smith and his legacy."

Comment

The infographic is spurious on two main counts.

First, Adam Smith (1723-90) did not ‘invent’ or proselytise or have anything to do with the claimed dependency of the spread of “capitalism” – a word not invented in English until 1854 (Oxford English Dictionary); he wrote about “commercial society”, what he called the “fourth age of man”, which had existed with interruptions since the first towns were founded in association with the “Age of Farming”,  that is several millennia earlier.

Secondly, human societies and their economic nature emerged and evolved independent of any philosophers or book authors.  Those of an Hayekian mindset refer to this process as “spontaneous”, a word I am not too satisfied with because it raises questions of why an event spontaneously appears in some part of the Earth but not in others and in a time span not identical elsewhere to those elsewhere. It could be someone stumbles on some new arrangements that have unforeseen consequences only evident years, centuries or millennia later, and then slowly spread. 

Capitalism and the markets that preceded its various forms were certainly not “invented” nor were they “designed” by anybody; its form was influenced by past events certainly, as those past events were influenced by even earlier events.  

Even humans did not appear “spontaneously”; the species that became them, after the speciation from from the common ancestor of Chimpanzee Apes and proto-prehumans about 6 million years ago, which survive today, appeared via various histories of pre-human species, some of which entered separate evolutionary chains and over several millions of years declined and disappeared.  The modern human species is about 200,000 years old.  In the early decades the human species could have been wiped out by a disease, a natural event, or a wrong "stumble".

Hence, the notion that Adam Smith “caused” capitalism in as absurd as it is ridiculous; its like saying that Isaac Newton “invented” gravity. It follows that Wealth Of Nations did not, never did, and for all time never will be responsible in any way for the forms that what we call capitalism has taken or takes in future.  The “infograph” is spurious. 

If Adam Smith had never lived – he was a “sickly child”, nursed and indulged by his loving mother - commercial society would have evolved much as it did after he died.   Smith’s influence was profound in an intellectual sense – he helped explain how commerce evolved, and how governments evolved too from absolutist tyranny towards imperfect liberty. (democracy was not yet agenda; an attempt to force is progress ended in Napoleonic tyranny)   On some levels his ideas were accepted and influenced attitudes and, occasionally, public policy, though much of what he wrote about was ignored.   Worse, much of what he did not write about, but which is falsely credited to him (laissez-faire, invisible hands, selectively limited government) became influential among folk misusing his name – that dreaded trivia of Western “celebrity” science – and misguides public policy and the personal beliefs of people who ought to know better, as Lost Legacy tries to point out.

Smith was a pragmatist not an ideologue.  As a moral philosopher, he did not do anything, but observed everything.  He was a scientist, not an evangelist.  He analysed his society as he saw it and as he had learned about its history.  We can learn from his Works and better understand what is happening, but whether more people will listen is another matter.

Surely Some Confusion?

"The Invisible Hand Still Exists” "Economics Beyond the Textbook"

J. J. Jasper (jjasper@samford.edu) who describes himself as “a college student studying finance and economics, with aspirations of making a beneficial difference in the world by being a part of the large, and often times evil financial, sector.” Jasper posts HERE a piece on US military spending, purporting to show that “we aren’t even spending 1% of what we were spending at the end of WWII” when the US fought major wars against the Japanese (involving multiple “D-Day” scale landings in the Pacific) and a major war in Europe and North Africa against the Nazi Germany and Fascist Italy)  by shifting the measure from US (inflated) dollars to units of “gold-value”.

Despite my former specialism in defence economics (example: Duckworth, 1975) I shall not bother to contest this “evidence”.  His piece makes no reference to the existence of otherwise of the “invisible hand” and is therefore in that respect a ‘wild Goose chase’.

In an earlier post HERE  , “What is a Business? The Invisible Hand and the Dismal Science at a Personal Level” , Jasper reports:

“It makes more sense to think of myself as guided by an Invisible Hand to make decisions. To me, such a hand is not the equivalent of greed, but an equivalent to wanting what’s best for everyone.

While taking a microeconomics class in the past year, my professor played a game with us: we’d have one partner who would decide how much of ten bonus points he’d like to share with us. If we thought the offer wasn’t good enough, we would deny the offer. In such a case, no one in the group would receive any bonus points.

When it was my turn, my partner offered me zero. When asked whether or not I’d accept the offer, it dawned on me: the only reason why my partner would make such an offer is because he had so much need for the bonus points. He was guided by the Invisible Hand to ask me if he could have all of the bonus points. He wasn’t being greedy, he was trying to make the grade.

So, I let him have the points. That’s what seemed logical and efficient. I had an A in the class, I didn’t need the help as much. In a weird way, the invisible hand had guided us both to make appropriate decisions, and we met at an equilibrium. Our equilibrium included no bonus for me- no surplus- but a full surplus for my partner.”

Comment

This is a well-known game in elementary behaviourial  economics, known as the “ultimatum game”.   It is claimed to show how people react negatively to what they consider “unfair” demands, by declining the first one-way offer, even at the cost of getting nothing, and declining offers judged to be unfair (99% for me, 1% for you), but settlements can take place when counter-offers approach 30% towards 50% for me, the rest for you.   Supposedly, this shows there is a sense of “fairness” in the outlook of most people, and that overly “greedy” offers or counter-offers tend to be declined.

Jasper’s response was to accept the other player’s offer of ‘nothing for Jasper but everything for me’.   What he learned from this game I am not sure, but it certainly wasn’t worth an “A” in behavioural economics, though perhaps it may be worth an 'A' in Christian theology in a seminary for apprentice Saints.  Though be clear, I am not commenting philosophically here, only in the role of my former required teaching of neo-classical economic theory – basically that from the rational postulate of neo-classical economic theory, people ‘rationally’ would accept even an unfair share-out because ‘rationally’ something is better than nothing.

Jasper seems to operate to the extreme rational postulate of nothing but maximum spiritual satisfaction for me if the other party gets everything – compare with the parable of the “labourer is worthy of his hire”, taken to the extreme – the employer is worthy of everything and the labourers should be grateful even if they get nothing more if the men hired halfway through the working day get a full day's wages …

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.

Adam Smith Never Mentioned Laissez-Faire

 Jim Sullivan, in Ventura County Star writes HERE 

“An example of a misleading claim about history is the Republicans' use of Adam Smith's term "laissez faire" to justify deregulation of business. Adam Smith used that term in his magnum opus “The Wealth of Nations” (first published in 1776) in reaction to overly restrictive government regulation of business.

What is less well known is that Smith's term "laissez faire" was used to criticize the economic philosophy of mercantilism, which at that time was seen as a way to increase the wealth of nation states, and which involved very heavy regulation of business.”

Comment

Adam Smith never used the words “laissez-faire” in anything he wrote in Wealth Of Nations, or indeed, in anything he wrote anywhere else. 

This is a false attribution to Adam Smith that was made long after he died in 1790, when employers agitated against legislated shorter working hours and any interference in the long hours worked by women and children in pits and mills, and their exposure to dangerous machinery.  Smith was familiar with the words from his visit to France in 1764-66 but he chose not to use them in his political economy and moral philosophy because they did not benefit the consumers who, as a result of them, paid higher prices and because they restricted competition, and people risked serious injuries.

Laissez-fire was never his term.

Also, under mercantile political economy, then dominant in Britain, the pressure for “regulation” consisted of demands from some merchants for tariffs and prohibitions, monopolies in their own interests, and against the rights of labourers to “combine” together to raise their wages.  These regulations generally worked against the interests of consumers and labourers, who were also consumers.

Loony Tunes no. 65

1

A Cold, Lightless Day That Never Ends

Meridethe Day write in Cornell University ‘The Cornell Daily Sun’ HERE

“Movies are supposed to grab your attention but this one felt more like it was reaching out an invisible hand and holding me down in my seat.”

2

Don't Pay Polluters « Real Climate Economics

By James Boyce HERE 

“It's a great example of what economists E. K. Hunt and Ralph d'Arge once called capitalism's “invisible foot”: when polluters are paid to clean up pollution, they create more of it, as if guided by an evil twin of Adam Smith's invisible hand.”

3

Peter Foster in the Financial Post “Biting the Invisible Hand” HERE 

“The Invisible Hand tends to be rejected either because it is inconceivable or unacceptable, but as long as there is any degree of private initiative and voluntary interchange in a money economy, it is always there, waiting to give an invisible slap to interventionist pretense.”

4

Can Adam Smith's invisible hand be arthritic sometimes? -

HERE 

What Good Are Labels If They Are Not True?

Peter Boettke writes HERE  15 September, in Coordination Problem: “What Good Are Labels in Scientific Discourse?”

“In my recent book, Living Economics: Yesterday, Today and Tomorrow (2012) [GK: I recommend that you read Boettke’s book], I urge the reader to recognize the distinction between "mainline" and "mainstream" economics.  Mainline economics, I contend, is defined by the substantive propositions that have been held by economists from at least the time of Adam Smith.  In my characterization, those substantive propositions relate to the rational choice postulate, and the invisible hand proposition (and the reconciliation of rational choice and the invisible hand through institutional analysis).  This is what unites economic thinkers through time from David Hume and Adam Smith, to Mises, Hayek and Buchanan.  As Lord Acton once wrote, it is the traveling of the minds of the men who sit in the seat of Adam Smith that deserve serious attention.

On the other hand, mainstream economics I contend is a sociological designation, and refers to what is currently fashionable in the research and teaching of elite professional economists at any point in time.  Thus, the term mainstream does not reflect any one set of substantive propositions, but shifts constantly depending on what is the current state of the art among professional economists at the elite scientific/scholarly institutions. Sometimes the mainline is the mainstream, but at other times it is not.  It is at this critical junctures when the mainstream deviates from the mainline, that labels become particularly important in aiding acts of intellectual entrepreneurship which attempt to bring the mainstream back into line with the mainline of economic thought.”

Comment

I recommend that you read Boettke’s new book - he is an excellent teacher; it reveals useful biographical background on where he is coming from and of his approach to his teaching of economics.  

The distinction that he makes between “Mainstream” and “Mainline” economics is interesting. It does not surrender credibility only to "Mainstream" economics; nor accept the Heterodox label often thrown at it.   Regular readers will know how I would respond to this definition of “mainline” as economics with the “rational choice postulate, and the invisible hand proposition (and the reconciliation of rational choice and the invisible hand through institutional analysis)”. 

I am disappointed by Boeetke’s implied praise of the “rational choice postulate” and even more so by “the invisible hand proposition”, because the former does not explain actual behaviour, unless you accept the “MaxU” proposition (Deirdre McCloskey) which is a theoretical presumption and is not supported by evidence in the real world – it is an “ought” not an “is”.  It probably reflects his “Austrian” economic background.   Nor am I impressed with his linking the “the invisible hand proposition”, as he understands it directly to Adam Smith.  It was wholly invented following careless remarks by modern (Post-1948) neo-classical economists, for example by Paul Samuelson (see: Kennedy, G. 2010: “Paul Samuelson and the Invention of the Modern Economics of the Invisible Hand”, History of Economic Ideas. Vol. xviii, no. 3, pp 105-19;), and seized upon by both neo-classical and ‘Austrian economists (see Kennedy, G. 2012: “The Myth of the Invisible Hand – A View from the Trenches” HERE 

Boettke cont.: But the character of mainstream economics as Samuelsonian in form was never displaced.  Mainline ideas that could be readily adapted to the language of Samuelsonian economics had greater traction than those that did not easily fit into that form of scientific/scholarly argument.  Thus, we have a slightly separate debate that must be waged --- which has its own labels which must be understood.  And that is the debate underlying the claim to the mantle of science --- the deep waters of epistemology, methodology of economics, and the philosophy of science.  Methodology matters because it shapes not only the questions pursued by scientists/scholars, but even more importantly determines what is considered a good answer to those questions.   Without a shift in perspective over what constitutes the scientific enterprise in economics, various teachings of the mainline of economic thought will be dismissed scientifically even as they get a nod to their wisdom and good sense.

In fact, I have used throughout scientific/scholarly, but in the modern methodology of economics the goal is to be rigorously scientific, the scholarly quest for human understanding is dismissed as insufficient.  Thus, the way that the mainstream understands the teachings of the mainline of economics is through an act of translation of the rational choice postulate and the invisible hand proposition into a language which would make those core teachings incomprehensible to the leading practitioners of mainline economics in the 18th, 19th, and early 20th century.  Methodology matters.

But remember my point that we want to do Good Economics, and have as wide an impact on our scientific peers as possible.  Fidelity to a label should be the least of our concerns, but truth in economics should be the utmost of our concerns.  We need to think clearly, write clearly and speak clearly. And our thinking, writing and speaking should be about the mainline teachings of economics and political economy as passed down through the ages by the Scottish Enlightenment Moral Philosophers, the French Liberal Poltical Economists, the British Utilitarians, and the Austrian School Economists (and the subsequent development of economic thought in the second half of the 20th century that drew on these various traditions).  To accomplish this task of providing sound theory and clarity of exposition, we rely on exact theory (pure logic of action), institutionally contingent theory (comparative institutional analysis), and empirical analysis (history, policy applicaiton, statisitcal work, ethnography, etc.).  Each step in a complete social scientific analysis has different epistemological problems to be addressed and methodologies of analysis.  Confusion results when we fail to remember the distinctions and in the looseness of language blur the distinctions.  But that we need the skills of critical reasoning to do sound theorizing, and the skills of empirical analysis to do history should never be doubted.  The master economist and political economist does both theory and history.  

Mainline economists sought to produce sound argument (not just valid), and thus theory aligned with real world relevance.  The mainline economists from Smith to Hayek, did not produce free floating abstractions that were tested against momentary concretes.  That was the mistaken path that mainstream economics embarked upon in the second half of the 20th century and continues to plague the practice of economics to this day.  So if those of us who find the arguments of mainline economics persuasive want to impact the mainstream of economics and pull in the direction of the mainline teachings of economics and political economy we must engage in methodological debate.  We cannot ignore these issues. There is no such thing as philosophy free science, there is only science guided by an articulated and defended philosophy or science guided by an inarticulate and undefended philosophy."

Comment

Meritorious objectives indeed, but a historical perspective that recognizes that “The master economist and political economist does both theory and history”, surely ought to be based on an accurate account of the very roots of what “Smith actually said and not be based on an anachronistic transfer to Smith of modern ideas about invented attributions about what he supposedly said that conveniently gives unjustified credibility to those same modern attributions.

Follow the link to read Peter Boettke’s post on the “Coordination Problems” Blog.

False Prospectus for "An Invisible Hand"

Peter Foster in the Financial Post “Biting the Invisible Hand” HERE 

“Adam Smith’s concept involves co-ordination beyond comprehension

The increasing clout of Chinese state-owned enterprises (SOEs) and of other nations’ sovereign wealth funds (SWFs) has led to a good deal of speculation about whether some new model of “visible hand” is about to replace Adam Smith’s invisible, free-market version. The immediate focus of Canadian interest is Chinese oil company CNOOC’s proposed $15-billion acquisition of Calgary-based Nexen. However, whatever corporate model CNOOC represents, it has no choice but to operate in the world of the Invisible Hand, a term widely used, little understood and all too often condemned.

Put succinctly, the Invisible Hand refers to the money-mediated “natural order” through which markets promote the efficient use of resources, reward innovation and service to the consumer, and co-ordinate vast amounts of commercial activity without a central plan. The metaphor has always been an object of vicious attack by statists, who fully realize, or subconsciously intuit, that its ministrations are fatal to their loudly trumpeted ambitions to control society for the public good.

Adam Smith in fact uses the term only once in The Theory of Moral Sentiments and once in The Wealth of Nations. In the former he notes how the rich tend to spread the wealth despite themselves, and, in the latter, to suggest how businessmen promote a good that is “no part of their intention.” Neither reference appears particularly celebratory. However, the term subsequently came to be identified more broadly with the evolved — and ever-evolving — system that Smith outlined.

The Invisible Hand has two paradoxical characteristics: it turns the pursuit of self-interest into social good, as exemplified by the services of Smith’s famous triumvirate of the butcher, brewer and baker; and it can’t be fine-tuned by government policy, although it requires a legal — and again naturally evolved — substructure.

It also involves co-ordination beyond comprehension. Smith noted that to feed, clothe and accommodate the average labourer of his own day required an amount of co-operation that “exceeds all computation.” Just look, he said, at the worker’s plain woollen coat, which “as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen.” Smith enumerated all the parts of the wool industry, all the merchants and carriers, all the elaborate machinery — from ships and mills to looms and furnaces — that were involved in the coat’s production.

Comment

Let’s examine some of Peter Foster’s assertions: “the money-mediated “natural order” through which markets promote the efficient use of resources, reward innovation and service to the consumer, and co-ordinate vast amounts of commercial activity without a central plan.“  These assertions give an authority to his claims.

The notion that there is a “natural order” is controversial (which ‘natural order’? – nothing real stands still, everything changes as it evolves).   That “markets promote the efficient use of resources” is controversial (they probably do a better job that is be more successful - than their alternatives – central planning springs to mind). Efficiency is a relative term in the real world, though not in equations (‘the best laid plans of mice and men, gang aft aglay’, said a wise Scottish poet.  That “innovation” is “rewarded” is controversial (patent offices hold more innovated ideas than those that were ever rewarded with even a penny). That they “service the consumer” is controversial (ever read consumer magazines on the many disasters in consumer good and services?). “Coordinate vast amounts of commercial activity” is controversial (perhaps in mathematical theory it works but less so in practice –‘coordination is an overly used word among some economists, Hayekians included; it is an unwarranted assertion about perfection, associated with the striving for perfection in the Eldorado of  “general equilibrium” and is not necessary for the real world).

To be fair, Peter Foster is only repeating what theoretical economists claim for their beliefs, bolstered by the very visible failings of many government-inspired intentions, financed by taxpayers and from borrowing in their name.  More modest claims can be made in safety – markets are ‘better’ in the main than state-sponsored activities, hence I assert: “markets where possible, the state where necessary”).

Peter Foster: “Adam Smith in fact uses the term [invisible hand’] only once in The Theory of Moral Sentiments and once in The Wealth of Nations. In the former he notes how the rich tend to spread the wealth despite themselves, and, in the latter, to suggest how businessmen promote a good that is “no part of their intention.”

Comment

PF: “how the rich tend to spread the wealth despite themselves” and how “businessmen promote a good that is “no part of their intention.” These are hardly adequate as an account of Smith’s uses of the popular 17^th-18^th century ‘Invisible-Hand” metaphor. 

In Moral Sentiments, Smith was not glibly crediting “the rich” with “spread[ing] the wealth despite themselves”.  The plain fact was that the “proud and unfeeling landlords” had absolutely no choice but to share their crops with the landless labourers as their sole source of basic subsistence because without food neither the labourers  nor their families would survive a week – they had no other source of sustenance – and without food the labourers could not work and their families would not grow up to replace them, and the landlords would also starve. It was this dependence on their labourers which “led” them to order that they be fed, metaphorically expressed as the landlords being led by an invisible hand”. Moreover, given that agriculture, upon which societies depended and had done so since it was introduced 11,000 years ago as humans left the forests, their distributions of food, which had continued through many regimes, mostly tyrannical, were managed by the landlords’ overseers, not noted for their humanity.  Of the accumulated wealth of the rich – basic conveniences and dressage of their castles – next to nothing was shared with the poor.

In Wealth Of Nations, the blanket term, “businessmen” also hides an important point made by Smith, namely the fact that he was referring to the specific case of some, but not all merchants, who were characterised by their felt insecurity for the fate of their capital if they sent it abroad.  Instead, this sub-set of all businessmen, were “led” by that insecurity, metaphorically expressed as “an invisible hand” – insecurity in the man’s head could not be seen, i.e., it was “invisible” – to do what they chose to do out of their fears.  By so doing, unintentionally they were led to add to the arithmetical size of national “revenue and employment”, which was a public good.

In both cases, the immediate cause of their doing a public good (the propagation of the species and an addition to the arithmetical total of “revenue and employment”) was metaphorically described by Smith as them being “led by an invisible hand”.  He made no claims to nosense that there was an actual “invisible hand” present and working miraculously in “markets”, through “supply and demand”, the “price system”, “general equilibrium”, or any of the other nonsense wromgly in his name.

Smith taught rhetoric from 1748-1764 and he knew what a metaphor was for and how it worked in literature, both in classical Greek and Latin, and how it worked in English (see the Oxford English Dictionary).  He defined the role of metaphors in one of his lectures on “Rhetoric and Belles Lettres” (1763): a metaphor “describes in a more striking and interesting manner its object” (p29).  And in both cases where he used it, the object of the metaphors can be seen from their contexts –the total dependence of the labouring poor (variously throughout history including slaves, serfs, and peasants) on their landlords and the dependence of their landlords on them –‘no labour, no food, no food no labour’) and those insecure merchants who avoided international trade and favoured domestic trade instead. 

Smith also taught how self-interested individuals could act in disregard of the consequences of their actions, for which he gives over 80 examples in Wealth Of Nations, which did not add to the public good.  Self-interest also led merchants to favour tariffs, prohibitions, and ‘jealousy of trade’

Smith’s reference to the manufacture of the Labourer’s common woolen coat is indeed an illuminating example of the long supply chains involved in its production (in my view of greater importance than the fairly trivial example of productivity in pinmaking which he took from Diderot’s Encyclopédie 1751-77).   The application by other economists of diminishing returns from land led to the downplaying of increasing returns from manufacturing and their growth inducing roles.

[PF]: Moralists meanwhile invariably claim that the Invisible Hand is invalid because it is motivated by “greed” and leads to inequality. It is, at best, an instrument by which “private vice becomes public virtue.” Businessmen, too, inevitably dislike the idea of doing a good that is “no part of their intention,” and so flock to “corporate social responsibility” as a means of cleansing their hands of the sin of self-interest.’

Comment

It is clear that Peter Foster confuses Adam Smith with Bernard Mandeville, whose teaching Smith described as “licentious” in Moral Sentiments.   And so it is.  When Foster writes: “private vice becomes public virtue” he is directly quoting (almost) from Mandeville 1724 (and echoing Ayn Rand), but definitely not the Adam Smith born in 1723 in Kirkcaldy.

To parade the nonsense that “The Invisible Hand gives you the iPhone and the boom in shale gas and oil” while “The visible hand gives you the eurozone crisis and the Chevy Volt” is nonsensical.  There is no “invisible hand” to “give” you anything. 

Nor is there, I venture to suggest, a “visible hand” of the State.  That is a metaphor too far.  Who knows what politicians and public servants are thinking when they work, usually in secret, to legislate or to block legislation in their State systems?  Transparency is a recent “buzz” word, but even people who attend these meetings give different accounts of what happens, usually wildly at variance with each other’s recollections and in wildly differing presentations of their motives.

I am not a “Statist” nor am I a passionate believer in the myth of the “invisible Hand”. 

Foster is right in so far as he writes the “Invisible Hand, a term widely used, little understood and all too often condemned“, however he seems not to understand Smith’s use of the “invisible hand” metaphor and its meaning, nor the origins of its wholly modern invention, post-1950s, of a new meaning, and what it became by the early 21^st century.