A New Challenge for Lost Legacy - Accepted
A correspondent asks me about the relevance of my critique of the asserted modern interpretation of Adam Smith’s use of the IH metaphor, which is a fair question.
First two pieces from today’s columns of two papers with the same name: The Guardian, but in different countries, UK and Nigeria. In The Guardian (UK) a columnist lambasts Mrs Thatcher’s premiership with the charge that she led to the triumph of “liberal capitalism” (US meaning) across the Western World and, through its institutions (World Bank particularly) its “Imposition” across “developing countries”. Meanwhile in The Guardian ()Nigeria) HERE DoLapo Ajala writes “No growth, easy money”: “Before the 1930s, Smithsonian Economics held sway - an economic theory, which followed the classical laissez faire approach as propounded by Adam Smith. The summary of this approach is that markets are inherently self-correcting. In essence, if there were ever any disequilibrium in the market, the ‘invisible hand’ would simply adjust the markets and restore it to a state of equilibrium; therefore, there was no need for government intervention or interference in the market. At the outset of the Great Depression in 1929, classical economists assured the world that the invisible hand would come to the rescue. However, the depression persisted into the 1930s. The ‘invisible hand’ did not to show up to help, neither could the classical economic theorists get it to do so. Misery thus persisted. …
… Friedman and his followers denounced Keynesianism and any form of governmental intervention. Friedman himself said “Chicago stands for a belief in the efficacy of the market as a means of organising resources, for skepticism about government intervention into economic affair.” And as such from the mid 70s Chicago School scholars began a neo free market movement, receiving worldwide acclaim by winning the highest number of Nobel Prize in Economics than any other University in the world. Friedman himself won the Nobel Prize in 1976. The Chicago School developed financial models and instruments, thereby creating a new field of financial engineering. …
Thus the global financial crisis of 2008/2009 was ushered in which led to economic turmoil that analysts described as the worst since the Great Depression. “The Chicago School bears the blame for providing a seeming intellectual foundation for the idea that markets are self-adjusting and the best role for government is to do nothing,” says Nobel Prize winner Joseph Stieglitz …
If there are any lessons to learn from this financial crisis, it is that:
• Markets are not efficient, they are never self-correcting and some form of government regulation is needed.
• During recessions, monetary policies alone hardly ever engender growth. It is a combination of moderate expansionary fiscal and monetary policy that works.”
[I recommend readers to follow the link above to read Ajala”s interesting article on 20th century economic history. Sorry, I cannot link to the UK Guardian – I read it this morning in my local coffee shop and did not make a note; it is broadly similar to Ajala’s views in The Guardian, Nigeria, if not in content; Ajala’s has more about trends in economic theory that guided policy practice]
Returning to my correspondent’s questioning Lost Legacy’s focus on the IH metaphor and how modern post-Samuelson’s 20th century interpretations of Smith’s meaning in the 18th century created a misleading myth about how markets work 200 years later.
This is a debate well beyond the confines of economic theory – in the UK, ‘Thatcherism” v social-democracy (Labour Party); in the US, Republican v Democrats; in the BRIC economies: reform of predominant state-managed economies v degrees of liberalisation, summed as “invisible hand” of markets versus “visible hand’ of governments? It is for the participants in that debate that I wish to reclaim the IH from those articulating much shallow thinking written about it (and the so-called “Visible Hand” from e.g. Gordon Brown and Ian Maclean, plus others). Lets debate market v state activities on their merits, as Adam Smith did.
The modern debate is post-Samuelson. The IH authority of Smith is foreground. The trace of the IH across textbooks from the 1980s onwards is evidence(I have examined 46 economics text books since 1948 up to 1992) and show how together the profession spread the IH mantra as a crucial item in the competing policies for political economy. Even the Chinese Communist Leaders read Smith’s supposed contributions on markets. Necessarily, any analysis of the problems of growth in BRIC, the EU, USA involves debates on state v market roles, in which Smith is a player, including beyond the IH debate, in issues such as self-interest (he referred to mediating self-interests in persuasion, bargaining and moral conduct, not “selfishness”). That is a large readership.
Warren Samuels (Erasing the Invisible hand: essays on an elusive the misused concept in economics (Cambridge, 2011) did an excellent job of showing how `’foundational`’ is the IH metaphor among large numbers of important contributors to modern economics. But what he did not do was analyse the actual IH passages in Smith that clearly did not advance anything near the IH propositions that modern economists draw from it.
The IH metaphor was not a “concept” guiding the economy to equilibrium. It was a metaphor for what guided risk-averse merchants (their concerns for security) to invest domestically, to which risk-averse merchants were led to unintended consequences (larger arithmetical GDP). Whether the unintended outcomes from their insecurity led to an overall net public benefit depended on many other influences for which the IH was not a metaphor. Not all domestic investors were risk-averse and led by an IH. Not all private individuals are led by an invisible hand to create public benefits (Smith gave many contrary instances of “merchants and manufacturers” acting against the public interest while pursuing their self-interests - monopolists, etc). Smith also enumerated many instances of where public benefits accrued from public expenditures – it is another myth that he opposed all government spending or denounced any legislative interventions by the state, including specifically he acknowledged where such interventions breached “Natural Liberties”.
Defenders of the IH metaphor as interpreted and used in modern economics vary from theology (Jerry Evensky) to secular (Roger Backhouse, Malcolm Rutherford, Daniel Klein, and many more), but none accept the shallow foundations of their claims for the “invisible hand”. Others, Mark Blaug, Emma Rothschild, and including, modestly, myself for example, have criticised the modern notion. The debate on the IH metaphor is highly relevant to modern economics, both theoretical and in practical economic policies (how much the market/state balance is enough/ too much?) and in the current divisions in politics. The current recession places this ratio centre stage.
I recognise that I have not emphasized enough in my posts on Lost Legacy the relevance for the current divide in economics and political policies. When I have mentioned en passant modern policies I have done so implicitly and not head on. I intend to remedy that weakness from now on.
The IH metaphor debate, in so far as I want to confront it beyond merely something of historical interest to a few scholars interested in Adam Smith’s Works (not all of them by any means even partly agreeing with my efforts since 2005). The remedy for that situation is down to me. I accept the challenge.