Yet Again on Markets and the "Invisible Hand"

Philippe Narassiguin, a Senior Lecturer in Economics, and PhD in economics from the University of Paris, Sorbonne, posts “Adam Smith and the Principle of the Invisible Hand on Economiqs (“At the heart of the Global Economy”, 6 November HERE: 

“Adam Smith demonstrated the efficiency of the market economy and competition through the principle of the « invisible hand ». His famous sentence is often quoted by economists. « It is not from the benevolence of the butcher, the brewer and the baker, that we expect our dinner, but from their regard to their own interests. We do not extend to their humanity but to their self-love... » To A. Smith, by serving their own interests, the producer is led « by an invisible hand to promote an end which is no part of his intention ... » In other words, according to Smith it is the invisible hand that leads individuals to satisfy the public interest, while they are driven by an individualistic logic. Smith shows that, if we asked people to work for the public interest, they would ironically not do « good things ». It is the pursuit of individual interest that leads to the benefit of the many, thus serving the public interest.”

Comment

Lost Legacy, of course, as regular readers know, regularly refutes the main theme of Philippe Narassiguin’s paragraph, as quoted above: Adam Smith did not have a principle of “an invisible hand”.  It was a single metaphor quoted only once in Wealth Of Nations, which is decidedly not the treatment accorded an important “principle” in a large two-volume work on political economy.  Surely too, if it were a principle, especially and important principle, it would have appeared in Books I or II, where Smith outlines his thoughts on how economics work, whereas it appears once in Book IV, where he writes a critique of mercantile political economy?

The “invisible hand” metaphor was and remains a metaphor.  He used it first in his published Work in Moral Sentiments (1759), where is discusses the behaviours of feudal landlords who feed their peasants from the output of produce from their fields, where the labourers work.  The “rich and unfeeling landlord” in Smith example, feed their labourers and their families, not out of their “Humanity’, but from their poverty of choice – failure to feed them would result in starvation because they had no other source of food.  Moreover, without food they could not labour for long if at all, thereby, the landlords and their families and retainers would also starve, and the landlords’ “greatness, and pride would crumble to dust.  Smith used the “invisible hand” metaphor to describe the landlord’s solution of their predicament (feed their labourers, or no produce)!

Now, metaphors in English (and in French too) are a “figure of speech” that “describe in a more and interesting manner” the “object” of the sentence.  This certainly beyond doubt was the intention of Adam Smith in using the “invisible hand” metaphor. We know this because Adam Smith said so. 

Smith also lectured on “Rhetoric” and we have a student’s verbatim account of these lectures, which had first been given at public lectures in Edinburgh (1748-51) and then throughout his years a Professor of Moral Philosophy at Glasgow University (1751-63).  See Adam Smith, 1763-3. “Lectures on Belles Lettres”, Oxford University Press, 1983. See Lectures 6, 7, 8 and 9.  The short figure of speech quotation above is in Lecture 6, p 29.

Adam Smith also went on to say that as a consequence of the actions of the landlords, their actions inadvertently and unintentionally contributed to the “propagation of the species”.  And described the motives for their actions in feeding their labourers, “in a more and interesting manner” by the metaphor of “an invisible hand”.  It did not refer to these unintended consequences – an unintended consequence cannot be an intended cause!   Misunderstanding this basic grammatical truth has led to today’s utter confusion among economists, who seize on the ‘invisible hand’ metaphor to make a completely different point, which, of course, they may do but not in Adam Smith's name.   I shall come back to this later.

First, I shall deal with Adam Smith’s second use of the metaphor of an “invisible hand” in Wealth Of Nations, 1776.  He follows the same grammatical useage as in his earlier “Moral Sentiments”.  This time Smith refers to a merchant who, of course, has a choice of investing locally, where he can watch more closely the fate of his investments, or take his perceived greater risk and invest in foreign trade.  In acting on his concerns for the security of his capital, the merchant, writes Smith, is “led by an invisible hand” to “invest in domestic industry”.  This has the consequence that his contribution to domestic investment quantitatively adds to the amount of domestic investment, which leads to higher domestic “revenue and employment”, and assuages the felt concerns for the security of the merchant’s capital.   Again, motives for action are described in a “more striking and interesting manner’ by the “invisible hand” metaphor – we cannot see specific motives formed in the minds of individual because motives are invisible. but what individuals do are visible!

However, actions, whatever the invisible motives of those who initiate the actions, have inadvertent and unintended visible consequences, and in this case Adam Smith notes the additional amount of domestic investment contributes to the "public good", evidenced in greater domestic employment that benefits labourers, and in turn their addition to domestic consumption benefits merchants who supply that additional consumption, which is paid for by greater the domestic revenue.

Smith states this explicitly.  As before, in the “proud and unfeeling landlord” case in Moral Sentiments, the motives of the insecure merchants for their actions in preferring to invest domestically, were described  “in a more and interesting manner” by the metaphor of “an invisible hand”.  And as before, the “invisible hand” did not refer to the unintended consequences of their visible actions – an unintended consequence cannot be an intended cause!

The merchant is “led by an invisible hand” [this motive] to promote an end which was no part of his intention” (WN IV.ii.9: 456).   That unintended consequence is the visible quantitative increase in domestic “revenue and employment”.

Again, misunderstanding this basic grammatical truth has led to today’s utter confusion among economists, who seize on the ‘invisible hand’ metaphor to make a completely different point, called by Dr Philippe Narassiguin “the principle of the “invisible hand”. 

He (in common with most others) promotes a new principle that has absolutely nothing to do with Adam Smith.  Of course, should they wish to enunciate a new principle of economics they may do so, but attributing it to Adam Smith is absolutely unfounded.  Moreover, they spread this myth to students each time they teach them, and reinforce by sheer numbers those who believe the myth and inadvertently help entrench the myth by misreading the “Butcher, brewer and baker” sentence in support of their misreading of the “invisible hand” paragraph (WN IV.ii.9: 456):

Smith’s “famous sentence" is often quoted by economists. “It is not from the benevolence of the butcher, the brewer and the baker, that we expect our dinner, but from their regard to their own interests. We address ourselves, not to their humanity, but to their self-love...” (WN I.ii.2: 26-7).

I regularly dissect this sentence on Lost Legacy in pursuit of wholly misleading accounts of Adam Smith on self-interest (twice in this week!). I am currently preparing a paper on this paragraph with a view to publication in a journal, so, briefly the quoted sentence belongs to a most important paragraph as often as not ignored (what has happened to basic standards of scholarship?).

Smith discusses the human individual’s dependence on the “co-operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons” (WN I.ii.9: 26). 

In Smith’s time (even more so in ours) those “great multitudes” also have “self-Interests” and are as attached to theirs as we are to ours.  So the idea that an individual can seek her self-interest solely by demanding that what they want is supplied by the any individual among the “great multitudes”, whom they do not know, nor have friendly relations with us, is of course, ridiculous.  Satisfying one’s self-interest by selfish and greedy versions of self-interest is bound to lead to loneliness, to put it mildly.  Ayn Rand is not your best guided in these matters.

If you want or need something from among those “great multitudes” you must mediate your self-interest in persuading those who can supply what you want or need to mediate their own self-interest.

Smith’s “butcher, brewer, and baker” example describes how this may be done, if we are acquire the wherewithal for our dinners.  Now the butcher, brewer, and baker" supply such ingredients to us subject to a “regard for their own self interest”.  Smith suggests that appealing to their “humanity” is insufficient, especially on a daily basis.  We must instead appeal to “their self-love” (another 18^th-century term for “self-interest”) and we do that best by not talking of our “own necessities, but of their advantages”. By transacting with us at a mutually agreeable price they will acquire some part of the wherewithal for their buying what they need for their own families by transacting with others.

The buyer and seller has to be “other regarding” (in modern jargon).  She has to be in a persuasion mode, not a demanding or bullying mode. 

Smith discusses “persuasion” throughout Moral Sentiments, all of which supports the above reading of the “Butcher, brewer, Baker” sentence. Smith calls this “bargaining”.  It is not bullying, nor egotistic “self-interest”.  Human societies, particularly those characterised by markets, thrive on cooperation with close friends and now universally with the mainly anonymous, “great multitudes”, whom we cannot know personally, but unlike earlier non-market societies, we can share multiple benefits in friendly human co-operation with them in the long-supply chains in markets.