Wednesday, February 06, 2013

The IH Metaphor Describes The Cause Not Its Unintentional Consequences

Bob Weeks reports HERE on Professor James Otteson on video from Learn Liberty, a pressure group for Individual liberty, limited government, economic freedom, and free markets in Wichita and Kansas.
The invisible hand and the key to human prosperity”
Additionally, Otteson explains Smith’s idea of the invisible hand, which explains how human beings acting to satisfy their own self interest often unintentionally benefit others.
Professor James Otteson is a talented Smithian scholar who lectures, writes, and records excellent statements on the works of Adam Smith.  I have reported favourably on his work on Lost Legacy in the past few years. 
However, although I have noticed James Ottesons’ standard modern economists’ mistaken presentation of Adam Smith’s use of the IH metaphor (well covered on Lost Legacy in most weeks of the last seven years).  Thankfully, James Otteson, in the above quotation, presents the IH myth without the usual falsity that Adam Smith wrote of “selfishness” somehow serving a “public benefit”, as asserted wrongly by Paul Samuelson who did so much to spread the IH myth from 1948.  Samuelson’s assertion spread in the 60 years since he first claimed it in his bestselling textbook, “Economic: an introductory analysis”.
However, James is still incorrect after sidestepping the Samuelsonian myth of “selfishness”.  Smith was clear that humans are social beings, living in their societies with other human beings. Each individual has self-interests but though this condition is widely reported, the essential Smithian condition is that individuals pursuing their own self-interests must take account of the other humans with whom they transact, even communicate. 
Given the human propensity to exchange one object, or understandable sentence, with other humans, it is a basic requirement that in doing so they transact and communicate in an acceptable manner to each other.  The basic requirement if individual self-interests are to be mutually realised is by the mutual mediation of the self-interests of each pair of humans.
This requirement for mutuality is universal and repeated across all human cultures.  We achieve our self-interests (food, clothing, and shelter) by mutual mediation to reconcile the different self-interests of ourselves and other people. 
In Smith’s famous “butcher, brewer, baker” example at the beginning of his Wealth Of Nations, it is a clear example of the absolute need for those potential buyers seeking the ingredients of their dinner to address the self-interests of the sellers, and, of course, vice versa - the sellers must address the self-interests of the buyers.  If both do so, they mediate their separate individual self-interests to arrive at prices acceptable to both parties to the transaction.  Should either party seek its own self-interests at the expense of the other party, it is likely that no transaction will be agreed.   Given the existence of competition among buyers and among sellers, egoistic, selfish, greedy, individuals who seek to serve only their own self-interests are likely to go hungry as potential buyers and remain without revenues as potential sellers.
Now for the record, let us be clear that the invisible hand metaphor in Smith’s use of it had absolutely nothing to do with explaining “how human beings acting to satisfy their own self interest often unintentionally benefit others”.  Smith’s used the metaphor in Book IV.  He said nothing about the IH in Book I, where he gave the “butcher, brewer, baker” example.
Moreover, in Book IV, where he uses the IH metaphor only once, he referred to the felt insecurity of some, but not all, merchants who preferred to address their own interests in the security of their capital by not investing it in foreign trade but investing it in “domestic industry”. 
It was their insecurity that “led” them to invest domestically, and Smith described their insecurity as leading them to invest locally, as them being “led by an invisible hand”.  An unintentional consequence of them investing locally was the arithmetic addition of their capital “to domestic revenue and employment”, which not only alleviated them from their anxieties, but also benefitted the “public good”.  
The IH metaphor “described in a more striking and interesting manner” (Adam Smith: Lectures in Rhetoric and Belles Lettres, 1763) the cause of their behaviour; it did not explain its “unintentional consequences”.    


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