Monday, January 07, 2013

Credulity Down Under

“Reconciling the invisible hand and innovation”  Eduardo Pol (University of Wollongong, NSW, Australia)
“It is generally agreed that Adam Smith invoked the Invisible Hand to send the message to posterity that a free-market economy is the best form of economic organization. Strictly speaking, the Invisible Hand of Adam Smith is a conjecture about the virtues of a free-market economy. There are three claims in this paper
concerning the interpretation of the Invisible Hand conjecture. First, the neoclassical interpretation engenders a conceptual confusion -identified here as the 'double paradox' of the Invisible Hand. Second, the interpretation of Adam Smith's conjecture on the beneficial effects of the free-market economy cannot -and should not- be confined to the production and consumption of existing products. Failure to distinguish the Invisible Hand Theorem from the Invisible Hand Doctrine distorts thinking about Adam Smith's message, creating the misconception that the Invisible Hand passage excludes business innovation. Third, the central message conveyed by Invisible Hand is to be read in the context of modern evolutionary economics.
[Pol, E. (2012). Reconciling the invisible hand and innovation. Economics of Innovation and New Technology,]
To argue that “Strictly speaking, the Invisible Hand of Adam Smith is a conjecture about the virtues of a free-market economy”, is so absurd as to be embarrassing.  That Adam Smith favoured “a free market economy” is approximately correct.  That he asserted that a free market economy had virtues.  Is also correct.
But that he linked his use of the metaphor to his singular use in Wealth Of Nations (1776 and through six editions to 1790) of the metaphor “an invisible hand” to free-markets is at variance with the textual facts.  Even adding the other use of the IH metaphor in Moral Sentiments (1759 and through six editions to 1790) is of no help at all to Eduardo Pol’s proposition that the IH was “a conjecture about the virtues of a free-market economy”.
Adam Smith did not mention ‘the virtues of a free market economy” in either case where he used the IH metaphor.  How could he?* 
In Moral Sentiments the reference to “led by an invisible hand” referred to the behaviour of landlords since “providence” divided the land (i.e., is from c.10,000 BCE – a very long time ago – through to 18th century Britain), during which the relationships of landlords with their retainers, servants, serfs, slaves, and peasants had little do with “free market economies”.
In Wealth of Nations the reference is to those merchants whose fears for the security of their capital led them to invest domestically and the consequences of them doing so –adding their capital to domestic “revenue and employment” on the arithmetic rule that the ‘whole is the sum of its parts’.  This was 18th century mercantile Britain, not a free market economy, about which Smith described his Book IV, containing the IH metaphor, was a “violent critique of the whole commercial system of Britain”.  This was protectionist Britain, riddled with government chartered monopolies, tariffs, prohibitions, the Navigation Acts, trade with foreign countries which had even more reactionary governments, and British colonies in the Caribbean, North America and India.  Where were the “free markets”?
'Tis a pity because  Eduardo Pol has some interesting comments on commerce and innovation, unfortunately buried in his paper, which the distraction of his nonsense about the IH metaphor obscures. I blame his supervisors.  Like Eduardo, they do not appear have read carefully Adam Smith’s works and seem to be influenced by short quotations and the writings of modern economists.
[*Yes, I know Smith mentioned the "invisible hand" once more in his History of Astronomy (1744-c58), published posthumously in 1795.  This use of the IH was not as a metaphor: he reported on the credulous belief of Roman pagans that their god, Jupiter (Jove) fired thunderbolts from his invisible hand at enemies of Rome.   It appeared on some coins too! Again, nothing to do with free markets!]


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