Wednesday, November 27, 2013

The "Anti-Dismal" Blog Moves Closer to Adam Smith on the Metaphor of the Invisible Hand

Paul Walker  writes an interesting and informative Blog, “Anti-Dismal (A blog on all things to do with economics and related subjects)” HERE 
I strongly recommend readers of Lost Legacy to bookmark “Anti-Dismal” (I read it most days). Here is yesterday’s post by Paul Walker on a subject that I often discuss on Lost Legacy. 
Regular readers will note that while Paul’s take on the “invisible hand” metaphor, as used by Adam Smith, is fairly close to mine, they will also note that he also differs from my take.
So read my extract below of his post and his response to a comments made by one of his readers, where he outlines his differences with my views:
Paul Walker, Anti-Dismal:
“Use of the metaphor of the ‘invisible hand’”
In the comments section to the previous post on the Foundations of a free society Owen writes, “Shame he mis-quotes Smith. AS never mentioned an invisible hand in reference to markets, in fact he only mentioned it once in Wealth of Nations. Also, AS notion of self-interest was appealing to others self-interest to gain what you wanted, ie mutual trade, nothing selfish about it. I'm not aware of any evidence that markets automatically lead to good outcomes for society, I do think they are the best allocative mechanism though (in most cases).
Butler is not quoting Smith and I'm sure that he is aware of the use Smith made of the term "invisible hand". To quote [Eamonn] Butler, [the Director of the Adam Smith Institute, London] at some length,
Adam Smith is famous for his ‘invisible hand’ idea. Most people take this to mean that our self-interested actions somehow produce an overall social benefit. Our hard bargaining, for example, creates a market system that allocates resources with great efficiency.
In fact, apart from a mention of the ‘invisible hand of Jupiter’ in The History of Astronomy, Smith uses the phrase just twice in his entire output and not really in the commonly presumed sense. The rich make work for the poor.
In The Theory of Moral Sentiments, Smith suggests that the hand of ‘Providence’ equalises economic rewards. The rich can eat no more than the poor. Their only use for most of the food produced by their land is to exchange it with others – those who supply the luxuries, the ‘baubles and trinkets’, that the rich demand. Thinking only of themselves, the rich provide employment to thousands …
These two passages suggest to critics that Adam Smith’s real ‘invisible hand’ concept is far removed from the popular notion of it. In one, the happy outcome of self-interest is attributed to ‘Providence’. In the other, it is a side comment in a discussion about the export trade.
In fact, the critics read too narrowly. The invisible hand idea, as commonly understood, pervades Smith’s work, and would do so even if these two specific references had never existed. For the phrase is a very convenient shorthand for Smith’s idea that human actions have unintended consequences; and that provided a few fundamental rules such as the principles of justice are followed, the self-serving actions of individuals can unintentionally produce a well-functioning and beneficial overall social order.
Or as Craig Smith has point “It is the idea of the invisible hand, or more generally the idea of social evolution through unintended consequences, which represents Smith’s chief legacy to the modern world. The recognition that many of the most important human achievements are, as Smith’s friend Adam Ferguson observed, the results of human action, not the product of human design, is a profound lesson to us all. It is this observation which leads Smith to his deep scepticism towards ‘men of system’ who would organise humanity to achieve noble ends.
As to whether markets automatically lead to good outcomes for society, Butler is not claiming that they do and Smith never claimed that they do. What I think most economists would say is that markets lead to good outcomes for society more often than any alternative method of resource allocation. A system of rules are required to achieve this end - such as competition and a system of justice - but as long as these are in place then markets are a better bet to achieve good outcomes than "men of system".
And below are comments by “Owen”, and alo Paul’s response:
Owen said...
“Whoops, may have jumped to conclusions there a bit!! Im too used to seeing invisible hand = markets. Thanks for the clarification.”
Owen said...
“Further to this, when I first came across the notion that the invisible hand was not what was taught in uni, it was a revelation and I also assumed it was rather the unintended consequences, but reading more im not so sure thats the correct interpretation either eg”
Paul Walker responds:
Yes, Gavin does take a different view. For a detailed discussion of his view see chapter 12 of Gavin Kennedy, "Adam Smith: a moral philosopher and his political economy" 2nd ed., New York: Palgrave Macmillan, 2010. Also read all of Gavin's excellent blog, Adam Smith's Lost Legacy. To see differing views on the "invisible hand" see "Econ Journal Watch", "Adam Smith and the Invisible Hand: From Metaphor to Myth" by Gavin Kennedy, May 2009 and "In Adam Smith’s Invisible Hands: Comment on Gavin Kennedy" by Daniel B. Klein along with "A Reply to Daniel Klein on Adam Smith and the Invisible Hand" by Gavin Kennedy, September 2009. Also Klein and Kennedy do battle again in "Economic Affairs": "In a word or two, placed in the middle: the invisible hand in Smith's tomes" by Daniel B. Klein and Brandon Lucas and "Adam Smith and the role of the metaphor of an invisible hand" by Gavin Kennedy. There are additional comments on the Klein-Lucas paper by other Smith scholars: "A comment on the centrality of the invisible hand" by Craig Smith and "A comment on the centrality of the invisible hand" by Ryan Hanley. All these are in Volume 31 Issue 1, 2011. A reply by Klein and Lucas appears in Volume 31 Issue 2, 2011: "On the deliberate centrality of an invisible hand: reply to Gavin Kennedy, Ryan Hanley and Craig Smith".
GK: Comment
I agree with Paul broadly on his critique of the popular modern economist’s idea of the “invisible hand”.  I regard Paul’s treatment as a step or two forward in this debate, and praise him for taking it.  In his subsequent comment to “Owen”, Paul kindly refers “Owen” to citations of my published assessments on the IH metaphor from 2008-2011.
However, Paul makes a suggestion also made by my scholarly friend, Craig Smith, several times, including in his excellent book, Smith, C. 2006. “Adam Smith’s Political Philosophy: the invisible-hand and Spontaneous Order”, Oxford, Routledge.  Craig is the Reviews Editor of the “Adam Smith Review” (International Adam Smith Society), and a co-editor (with Chris Berry  and Maria Paganelli “Handbook on Adam Smith”, 2013, Oxford University Press. Neither Paul nor Craig fully agree with my interpretation of the significance to Adam Smith of his use of the “IH” metaphor, though they both are disturbed with modern interpretations of it to an extent.
Nevertheless, they present an alternative view to mine (argued on Lost Legacy since 2005).  In their presentations they agree in effect: “The invisible hand idea … is a very convenient shorthand for Smith’s idea that human actions have unintended consequences; and that provided a few fundamental rules such as the principles of justice are followed, the self-serving actions of individuals can unintentionally produce a well-functioning and beneficial overall social order” (Paul) and: “generally the idea of social evolution through unintended consequences, which represents Smith’s chief legacy to the modern world” (Craig).
I am pleased to see that Paul and Craig both are further away from the post-Samuelson (1948) invention that conflates Smith’s use of self-interest as “selfishness” that “miraculousy” has the effect of creating a “public” benefit. 
I can agree with Paul and Craig in so far as they reject the invention, which is a step forward.  However, I do not think that they have shown that Smith used the IH metaphor “as Smith’s friend Adam Ferguson observed, the results of human action, not the product of human design”.  The phrase was indeed used by Adam Ferguson, and in Smith’s case it is true that Smith also referred to ‘unintended consequences” in the (long) IH paragraph, but Smith's statement says: [The merchant who invests domestically]generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it. By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. (WN IV.2.9: 456).
To argue from the above that the IH metaphor is about “unintended consequences I suggest misreads the sense of Smith’s paragraph.  Smith Lectured on Rhetoric in Edinburgh and 1748 (privately sponsored public lectures) and at Glasgow University from 1751 to  1763 as a member of the Glasgow faculty and the Professor of Moral Philosophy). He was also fluent in Latin and Oxford English grammar.  He was therefore most unlikely to make grammatical errors.  He taught about the grammar of metaphors as figures of speech, for which we have student notes: Smith. [1762-3] 1983. “Lectures on Rhetoric and Belles Lettres”, Lectures 6, 7, 8 and 9. Oxford University Press.
Smith refers to the “objects” of metaphors, which in this case refers to the specified objects in each of the two cases in which he used the IH metaphor to “describe in a more striking and interesting manner” its “object”.
In the two (only) cases he mentioned, first in Moral Sentiments (the actions of the “proud and unfeeling Landlord” feeding his serfs, labourers, servants, and overseers, which was an absolute necessity – no food meant no labour!).  It was that necessity that led the landlord to feed those employed on his estate – described by Smith that he was “led by an invisible hand”.  In the second case, mentioned in Wealth Of Nations, the merchant who felt too insecure to send his capital abroad, hence he invested in “domestic revenue and employment”.   It was the “merchant’s insecurity that led him to invest locally – described by Smith of him being “led by an invisible hand”.
In short, the IH metaphor refers to the motives of the landlord and merchant that LED them to act as they did.  It was NOT the IH that separately intentionally led either of them to create the “unintentional consequences of their actions.  The IH describes their actions. That is why the consequences of their actions were “unintentional”!
To argue otherwise makes no-sense of Smith’s use of the grammar of metaphors (still exactly the same as defined in today’s Oxford English Dictionary, 1983, as Smith described it in 1762-62).
Moreover, Paul and Craig imply a theological interpretation of his use of the IH metaphor – what, whomsoever, or whatever, leads an “IH” to cause the “unintentional outcomes”?   (see Kennedy, “Adam Smith on Religion”, Handbook on Adam Smith, Oxford UP 2013, or shorter, earlier version, Kennedy, 2011. “The Hidden Adam Smith in his Alleged Theology” Journal of the History of Economics, no 3, 2011).
An action has motives which actions may have consequences, but unintended consequences do not have intentional motivated causes!


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