A LITTLE KNOWLEDGE IS MISLEADING

Philipp Gassner writes (29 Mar 2014 ) in Business Mirror (Philippines) HERE  “Nature’s invisible hand: Simply complex”

“Marveling the resourcefulness of nature’s incredibly ludicrous and squandering inventions, one cannot help but wonder: what’s the point and how is this even possible? By sheer chance? Surely not.

Scottish economist and moral philosopher Adam Smith offers an answer. Exactly 238 years ago, on March 9, 1776, he published The Wealth of Nations.

In this fundamental work in classical economics, he illuminates how our incredibly complex, inventive and powerful economy works and developed—a similarly puzzling mystery to nature’s rich biological diversity.

In a nutshell: each enterprise is doing its best to prosper, yet without the “benefit” of a centralized planner. Something very simple—individual competition—results invisibly to our eye in something very complex—an efficient economy.

But how can Smith’s famous metaphor of the invisible hand of the self-regulating market explain our rich natural biodiversity? English naturalist Charles Darwin wondered too, and coined the term “Economy of Nature,” according to which life on Earth evolves without the guidance of a designer. Instead, in his book Origin of Species he explains the “invisible hand” of nature, better known as evolution.”

COMMENT 

ADAM SMITH AND CHARLES DARWIN’S ideas from different perspectives have much in common.  We know Darwin read “Wealth Of Nations” (he refers to it and it was taught at Edinburgh while Darwin was a student there).  Smith did not develop a theory of how commercial entities were guide by an IH, nor did he develop a theory using the metaphor of an “invisible hand” that performed a co-ordinating role, including a ‘designer’, in a parallel fashion to “evolution”.  Back projecting such ideas to Smith are anachronistic wishful thinking.

The IH metaphor referred to something else entirely and that such an idea is used today as an analogy for Darwinian evolution is, well, sad.  In fact the entire economics discipline suffers from a category 1 error in regard to the IH metaphor.

Briefly, Smith taught Rhetoric as well as Moral Sentiments at Glasgow University.  He defined metaphors as describing their “object” in a “more striking and interesting manner”, giving examples to his listeners (see Adam Smith’s “Lectures on Rhetoric and Belles Lettres”, 1762-3).  The “object” is what is described by the metaphor.

Smith only used the IH metaphor 3 times throughout his entire published works, and his definition is confirmed still today in the Oxford English Dictionary, as well as most other English language dictionaries, not often read by economists.

In no case did he use the IH metaphor in reference to “competition”, individual or combined, or as a “co-ordinating role” or in a “complex economy”.  

His first reference in his History of Astronomy (posthumous 1793 - written 1744-58) was to the belief of credulous Pagan Romans that their invisible God, Jupiter, fired thunderbolts at non-believers and enemies of Rome in, ironically, very visible and noisy, thunderstorms.

His second reference in Theory of Moral Sentiments (1759) was to “proud and unfeeling landlords” who fed their serfs, slaves and peasantry, with food from their landlords’ fields. With no other source of food, the serfs would soon expire from starvation and excessive labour; moreover, the landlord’s source of greatness would disappear without labourers. This exchange of food for work to produce more food arrangement enabled the landlords’ economy to function, on which their rule depended.

His third reference 0n Wealth Of Nations, (1776), was to those merchants who avoided trading abroad for fear of losing their capital to unscrupulous foreign traders and therefore they preferred to invest it locally in their “domestic industry” and thereby added to domestic output.  Their “insecurity” helped to grow the economy.

The philosophical point Smith was making had to do with what agents (those who acted) were “led” to do. by their motives.  He started with the plausible but invisible motives of the actors - we cannot see into the minds of other people. In these 3 cases the ‘credulous’ Romans, the ‘unfeeling’ landlords and the ‘insecure’ merchants.  He then identified the (plausible) visible actions that followed: the ‘credulous’ cowered in fear during thunderstorms and remained at home; the ‘unfeeling’ landlords shared some portion of ‘their’ crops with their fieldworkers, and the ‘insecure’ merchants, invested their capital which necessarily added to the capital available to the domestic economy.

The actors’ motives “led” them to their chosen actions and were intended to produce their intended consequences - loyalty to Rome, sufficiently-fed labourers to undertake heavy field work, and to secure the profitable use of the merchants’ capital.

However, Smith added another set of consequences from the actions, which is important enough to be remarked upon by Smith, because this time the intended consequences of their initial actions also had “unintended consequences” from the agents’ motivated initial actions.

Superstitious Romans remained loyal to Rome, therefore this added to intended political stability from fears of lightening strikes (and also fewer Romans died from lightening strikes by their staying in doors than those careless enough to venture outside); field labourers laboured more effectively with regular food, which had ‘unintended consequences’ over the long run from continuous procreation of the species, and GDP was maintained at a higher level, long term. 

Of course, unintended consequences were not always positive.  If conspirators moved freely in defiance of the credulous beliefs about lightening strikes being other than random, they could, perhaps catch a garrison by surprise and seize power in a rebellion as happened in far away parts of the Empire (also see Shakespeare’s “Julius Ceasar’); if “unfeeling landlords” disregarded the quality of the serfs’ food or its amount, then health losses could cause labour shortages and a relative decline for an individual landlords’ “greatness”; and if domestic-focussed merchants also prevented any imports with lobbying for tariffs, they could slow GDP growth and weaken the economy, not strengthen it.

Now you do not get such analysis from modern economists who have invented wholly spurious interpretations on Adam Smith’s use of the “invisible hand” metaphor, worse they have invented a mythical entity that does not exist to be at work in an economy.

Visible prices play the co-ordinating role in economies.  No economy can work without visible prices. Simple, eh?