Rafi Amir-ud-Din & Asad Zaman Expose the False Claims of Modern Economists That Adam Smith Originated Neoclassical Myths of the Invisible Hand

“6.  Against Adam Smith*: recent vintage of Invisible Hand.”        

[The reference is to a list of six suppositions about the modern use of the IH metaphor, in this case the use of Adam Smith’s name to give neoclassical claims an undeserved legitimacy.  The downloadable paper is HERE]  

“The main goal of this section is to show that the modern interpretation of the invisible hand is relatively recent. The idea that Manikiw (together with other modern economists) itings. In fact, modern writers borrow the authority of Adam Smith to provide weight to a very dubious idea of recent coinage.We first note that modern interpretation is radically different from any interpretation of this concept that existed before the second half of the 20th century. There is a growing body of literature (e.g. Grampp 2000, Minowitz 2004) which insists that the metaphor used by Smith was never meant to be anything more than a metaphor, and that the meanings infer their own interpretation of economic policies. Kennedy (2009) shows that three leading modern contribution of Adam Smith. Nonethless, their interpretation of the term and its significance is not supported either by Adam Smith or by readers of Adam Smith until the late nineteenth century.

In a corpus of over a million words, the terms invisible hand appears only twice in the economic writings of Adam Smith. It is used only once in the Wealth of Nations in very limited and narrow context. Rothschild (1994) analyses the controversy surrounding the meaning of joke. Blaug (2007) also shows that Adam Smith cannot be blamed for these ideas. He cites other references which state that: "Some economists regarded the Arrow-Debreu results [on the existence of general equilibrium] and the fundamental theorems of welfare economics as the Adam Smith would be surprised at selfish behavior is praiseworthy, is bound to pay, or necessarily promotes the best. The metaaphor is not about general equilibrium theory: its purpose is to explain why merchants would continue to buy British products even if tariffs were removed". Ashraf, Camerer, and Loewenstein (2007) make a detailed analysis of Smith’s work The Theory of Moral Sentiments repeated transactions and material gains to the unwarranted understanding of the invisible hand metaphor as a sanction for selfish behavior, Smith explains that justice is in fact only a rational behavior. Fear of retribution is likely to deter the people from committing injustice. He says: "Nature has implanted in the human breast, that consciousness of ill-desert, those terrors of merited punishment which attend upon its violation, as the great safe-guards of the association of mankind, to protect the weak, to curb the violent, and to chastise the guilty." See Smith (1759, pp. II, ii, iii, 125). Realizing the crucial role of justice, especially in ensuring just behavior, he believes that justice is the "main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society . . . must in a moment crumble to atoms." Fairness and justice have only recently attracted the attention of economists as providing justifications for many observed human behaviors in conflict with standard utility maximization theories; see Karacuka and Zaman (2012) for a brief survey.

As further evidence against the attribution of the modern interpretation of the Invisible Hand to Adam, there are 60 instances in Books I and II of the Wealth of Nations in which Smith discusses malign consequences of self-interested actions (Kennedy, 2009). Why a passing metephor justified selfishness and greed, qualities held in low esteem from ancient time, requires a separate explanation, furnished later. Zaman (2013) documents the historical conditions which led to the adoption of obnoxious moral defects like selfishness and greed as the basis for collective wellbeing.

The attribution of the modern interpretation of the Invisible Hand to Adam Smith is in fact related to the unique position of Smith as a pioneer and founder of the discipline of economics. Smith is by far the most influential thinker in the history of economic literature. As in many fields of knowledge, relating modern claims to seminal works of the pioneers adds to credibility. Similarly, claims of modern economic theory acquire the aura of authenticity if it is traced back to Adam Smith himself.

7. Conclusion        

Contrary to the generally taught in economic textbooks (that self- interested behavior leads to best possible outcomes), norms of generosity, fairness, kindness, reciprocity and justice produce far better social outcomes. In the aftermath of the Great Depression, it became clear to nearly all economists that the free market does not provide the best possible outcomes. We have discussed several cases where transitions to free market led to disastrous economic outcomes. In contrast, the visible hand of planned government interventions can drive economies to perform well and even "miraculously". Given such obvious and clear failures of the invisible hand, what accounts for its current popularity, and indeed, its central role as a core concept of modern economic theory? We provide two brief answers.

One is that laissez-faire is a theory which is tremendously favorable to the rich and powerful. power structures are sustained to support them. The idea that all are free to act as they please has the appearance of equality and fairness to all in reality, the poor and oppressed have no choices. They are only free to sell their labor on the open market, and become wage slaves of the rich. Many authors have commented on tremendous inequality hidden within the apparently egalitarian proposition that capitalists bring their capital and laborers bring their labor to the same market. Empirically, the operation of the free market has led to great and widening gulf between the bottom 99% and the top 1%. The tremendous costs to society of this divide have been documented by Stiglitz (2012)in his book, the Price of Inequality.

The second is that there has been an active campaign to promote the idea of laissez faire, since it favors the rich. Details of the campaign are available in Alkire and Ritchie (2007). Some of the key elements involved creating and providing moral and financial support to intellectual communities favoring free market ideology. Also, fostering talent by different types of educational programs, and engaging on the political front were crucial factors in its eventual success. The impact of free market ideas on shaping the history of the twentieth century is detailed in a brilliant study by Naomi Klein (2007). A deeper and more fundamental analysis is presented by Polanyi (2001), who considers the emergence of free market ideologies as a necessary accompaniment of the victory of market economies over other more traditional ways of organizing economic affairs.”

Comment

[Apologies for sudden breaks in the text. They seem to be caused internally in the original when downloaded for some reason.]

However, the above is a taster of a thorough examination among contemporary economic texts by two authors Rafi Amir-ud-Din & Asad Zaman, of the International Islamic University of Islamabad: ‘Failures of the “Invisible Hand”’. 

It is downloadable from the Social Science Research Network [very worthwhile for readers to bookmark because it covers a wide range of writings from established and new researchers; you takes your pick to suit your interests] HERE

I am impressed with their approach.  I recognise many of the recent works they quote from, plus a few I shall follow up.

This source, plus the previous one from Scientific American, makes this a good week for Lost Legacy’s lonely campaign since 2005 against the modern myth of the “invisible hand” that is still prevalent in the economic professions, and not just those economist affiliated to the neo-classical paradigm.