posts (19 January) in e-International Relations
(“the world’s leading website for students of international politics") HERE
In doing so she repeats the false exposition of Adam Smith's use of the metaphor of “an invisible hand” and repeats the modern economists’ myth that this metaphor is related to several ideological (i.e., not founded on facts) assertions about how Smith considered economies functioned. The result is a misreading – and by the aims of e-international relations – a false presentation of Adam Smith’s views for ‘students of international politics’.
“The Goldman Sachs Abacus 2007-ACI Controversy: An ethical case study”
“The 21st century economic landscape is a reflection of the philosophy and ideas set forth by Smith and his contemporaries. Among Adam Smith’s works, two stand out as his most influential; the Theory of Moral Sentiments published in 1759 and Wealth of Nations published in 1776 (ibid). The Wealth of Nations, in part records what Smith considered to be the benefits and potential problems of a market economy, and lays the foundations of the modern economic system. What many consider to be his most important contribution to economics is his theory of the “invisible hand”, which recognizes the benefits that can be derived from allowing people to follow their self-interest (Smith, 1776). He analyzed the way in which a market system could combine the freedom of individuals to pursue their own objectives “with the extensive cooperation and collaboration needed in the economic field to produce our human needs” (ibid).
Adam Smith’s economic theory claims that when individuals are granted the “natural liberty” to pursue their own interests, they also end up promoting the interests of the greater good (Bruni and Sugden 2008). His famous theory of the ‘Invisible Hand’ states that if consumers are given the opportunity to freely choose what to buy, and producers are allowed to freely choose what to produce and sell, the market will settle on a “product distribution, and prices that are beneficial to all the individual members of a community, and hence to the community as a whole” (Keller 2007). This “invisible hand”, or the market, consists of self-interested suppliers on one side and self-interested buyers on the other. It is each parties self-love which Smith considered to be the best motivator for fair pricing and quality production in the markets (Smith 1776). The harmony of these individual pursuits which “often produce social and economic good” creates a “self-constraining system” (Werhane 2006). Thus, the “invisible hand” which governs market transactions, functions as a regulator of self-interests, and simultaneously promotes economic growth and well-being. In the Wealth of Nations, Smith gives several examples of how this mechanism works, and how it gives rise to the division of labour. He states that “it is by treaty, by barter, and by purchase, that we obtain from one another the greater part of those mutual good offices which we stand in need of” (Smith 1776).
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Some questions of fact: where does “his theory of the “invisible hand recognize “the benefits that can be derived from allowing people to follow their self-interest”?
Smith never had a “theory” of “an invisible hand”. He mentioned it twice, once each, in his two published works (Moral Sentiments and Wealth Of Nations). It was a metaphor, not a theory. It became a “theory” because modern economists claimed that it was a “theory”, and from the 1940s invented content to demonstrate that it had one.
The theory of “natural liberty” was promoted by Grotius and Pufendorf, and taught at Glasgow University (and other Scottish Universities) in the Moral Philosophy courses, but it had nothing to do with the metaphor of an “invisible hand”. Not did Smith assert that it had any connection.
The “invisible hand” was never a synonym for “the market”. Smith discussed how markets operated in Books I and II of Wealth Of Nations, without mentioning anything about the presence of “an invisible Hand”. It is mentioned only once in Wealth Of Nations (in Book IV) as a metaphor for the ‘insecurity’ of some, but not all investors, who, from their insecurity, were led to prefer to invest in “domestick industry” rather than the “foreign trade of consumption” (WN Book IV, chapter 2, paragraph 9: 456). Modern economists generalized that single (and singular) mention of the invisible hand into a “theory” about something else entirely.
They also, apparently, did not know about the role of a metaphor in English grammar, though Smith did. Smith taught Rhetoric each year from 1748 (his public lectures in Edinburgh to 1751 and at Glasgow University from 1751-64). We also have a set of student lecture notes for 1762, which were found in a house-clearance sale in Aberdeen in 1958 and published as Adam Smith, ‘Lectures in Rhetoric and Belles Lettres’ in 1983. Lecture 6 is devoted to metaphors and figures of speech. On page 29 he defines a metaphor as: “describing in a more striking and interesting manner its object”. Clearly, concerns about the security of an investor’s capital (the object) are brilliantly described in a “more striking and interesting manner” by the metaphor of “an invisible hand” leading the investor to act in this manner because of his “insecurity”. Everybody remembers the metaphor, but few – too few – remember, or even recognise its object, namely their insecurity, mentioned 6 times by Smith in the paragraphs leading to the metaphor of "an invisible hand".
Smith never claimed, or mentioned the “invisible hand” as “govern[ing] market transactions,” or “function[ing] as a regulator of self-interests” that “ simultaneously promotes economic growth and well-being”. That is pure fiction. Respectfully, Christine Free should read Smith’s original 1759 and 1776 texts rather than rely of second- or third-hand reports by Werhane (2006), Keller (2007), Younkins (2011), and Jennings 2004, and many others since the 1940s. She should also read the authoritative analysis of the modern ‘invisible-hand’ phenomenon by Warren Samuels, “Erasing the Invisible Hand: essays on an elusive and misused concept in economics”, 2011, Cambridge University Press, to locate the ideological source of the errors she relies on and about Smith’s innocent role in the modern “invisible hand” myth.
Turning to Moral Sentiments, Christine acknowledges that “What has been lost from Adam Smith to the neoclassical economists (although his ideas and theirs at first glance seem quite similar) is the basis of morality and control that he envisioned would go hand-in-hand with the markets (Keller 2007)”, (a most controversial statement) and she wriggles to maintain the “invisible hand” theory”, asserting that “it was Smith’s “invisible hand” which laid the foundation for the neoclassical economic ideology”. This is partly true, but not in the manner as she understands it. The so-called “theory” (an invented construction by neo-classical – and, sadly, also maintained by many heterodox economists) is at ”the foundation for the neoclassical economic ideology”, but it was not put there by Adam Smith! Neo-classical ideologues back-project their erroneous claims about Adam Smith by misrepresenting his texts.
Christine also misrepresents Smith in Moral Sentiments in presenting Smith’s theories of morality. The separation of an individual from all of the vast anonymous members of the human race, except for a few family and friends, is a fact of life. It is impossible to know everybody in a neighbourhood, let alone on other continents (the world and the people in it beyond Europe were virtually unknown for millennia) The power of the division of labour brought the possibility of peaceful and moral relationships, alas somewhat tarnished by actual experiences of European violence, though, hopefully, not excluded as a more peaceful relationship in the very long run.
However, Christine misreads the old canard that Smith stated in Moral Sentiments that “a man would ultimately have more distress over the loss of a finger than hearing the loss of millions of lives in some distant land”. This is not a quotation from Mortal Sentiments; it is a misleading summary of what the 1759 passage actually said. I suggest that Christine reads it again. It is an easy mistake to misread Smith here (I did, until Sandra Peart, Dean at Richmond University in Virginia, kindly pointed out my error). Smith, after setting up the counter-point of a man preferring his little finger over the lives of “a hundred millions of millions of his [Chinese] brethren”, then excoriates (to put it mildly) any person who actually acts in that manner, his language unrestrained, and his moral tone deafening (Moral Sentiments, Book III, chapter 3.5. para 4: 136-7). Remember, Smith was teaching young teenage boys and used such devices to maintain their attention.
Readers of Adam Smith do best by paying attention to what he says, unadorned with modern interpretations and inventions.
Labels: Adam Smith Use of Invisible Hand metaphor, Rhetoric