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.