We Can Explain How Markets Work Without Mythical "Invisible Hands"

On Investopedia this week: HERE  “James Grant, the author of the widely read Grant's Interest Rate Observer newsletter, appeared on CNBC on Thursday after the market close to discuss the Federal Reserve, rising interest rates and plunging gold prices.

“Adam Smith's Invisible Hand”

“Grant argued on CNBC that Adam Smith's "invisible hand," or natural market forces, will inevitably prevail in relation to asset prices despite the near constant intervention and price manipulation employed by the Federal Reserve ever since the financial crisis. …

The risk is that Adam Smith's "invisible hand" will reassert itself, and central bank intervention and manipulation will eventually unleash devastating unintended consequences.”

Comment

Akin to meaningless theological  mantras, the invocation of “Adam Smith’s Invisible Hand” whenever a pronouncement is made by financial experts is like saying “please be to God” or “God Willing” in every sentence. Such knee-jerk nonsense makes a mockery of economic analysis. The invisible hand is meaningless jibberish when used in this manner.  

James Grant is a classic example of linking Adam Smith to an investment report that goes on to explain what is happening in money markets.  He does not need to blow smoke about “invisible hands” to give his account some sort of authority by implying that he understands what the “invisible hand” actually does when he hasn’t a clue what it is. 

His gullible readers may not know that James Grant misquotes Adam Smith on his use of the “invisible hand”, which was never about markets.   Any  “ devastating unintended consequences” won't result from an "invisible hand".  It doesn’t exist.

Metaphors for resemble their "objects", and in the singular case in which Smith used it in Wealth Of Nations (1776) the “invisible hand” referred to the hidden motives (they cannot be seen by observers). Some merchants who preferred to avoid foreign trade were “led”, said Smith, to invest their capital locally.  It was their hidden insecurity that ”led” them to add their capital to domestic industry, a wholly arithmetic conclusion from their actions.  It had nothing to do with “unleash[ing] devastating unintended consequences”.   It merely added their capital to domestic industry and this, Smith regarded, as beneficial for the public good.

For Smith actions from their hidden motives had arithmetical consequence from their hidden motives, which he described by using the “invisible hand” metaphor to describe it in a “more striking and interesting manner”, as you do if you use an appropriate metaphor in grammatical English. Metaphors are not real entities, they do not exist, and neither are they ghostly or worshipful, or miraculous.  Adam Smith knew the role of metaphors in the English language – he lectured on metaphors in his long-running Rhetoric courses (1748-63). We have a student's copy of them from 1762-3.

Indeed, James Grant identifies the unintended circumstances arising from the hidden insecurities felt by some (but never all!) merchants.  Other merchants did risk their capital in foreign trade and ventures, and Smith regarded such actions as beneficial to a country too.  Both domestic and foreign trade raised economic activity (today’s higher GDP and GNP) of great benefit to the public.  Consumption is the purpose of production.  It measures the real wealth of nations!