ON DEMYSTIFYING ADAM SMITH ON THE "INVISIBLE-HAND"

Demystifying the Invisible Hand

Nathan Goodman posts on “Students for Liberty” HERE

[Students For Liberty has grown into the largest libertarian student organisation in the world, which includes over 800 leaders that support over 1,350 student groups representing over 100,000 students on all inhabited continents.]

“The phrase “invisible hand” can easily evoke fanciful imagery of invisible hands magically manipulating the world. So it’s no surprise that many critics of laissez-faire, particularly on the left, misconstrue the concept as a form of magical thinking or religious fundamentalism. For example, Neil Douglas and Terry Wykowski allege that “market fundamentalists imagine that the market magically transforms market participants into moral agents who mitigate self interest through the ‘invisible hand’ as described by Adam Smith.”

But economists don’t argue that markets produce moral outcomes as a result of “magic.” Rather, they argue that the institutions associated with markets produce incentives and those incentives guide self-interested individuals towards socially beneficial actions. As Peter Boettke explains, Adam Smith did not argue “that the pursuit of self-interest will automatically translate into public benefits.”  To the contrary, Boettke points out:

The Wealth of Nations actually has plenty of examples in which the pursuit of self-interest can lead to socially undesirable options.”

[Boetttke quotes Smith’s comments on the poor teaching he expperienced in Oxford (1740-46)  compared to the lively teaching he received in Glasgow (1737-1740)].

“Boettke uses this emphasis on institutions to rephrase Smith’s invisible hand proposition as follows: “Individuals pursuing their own self-interest within an institutional setting of property, contract, and consent will produce an overall order that, although not of their intention, enhances the public good.” Under these conditions, social cooperation emerges that is a result of human action but not of human design.”

Comment

This a step forward from the Paul Samuelson's version in his famous textbook, “Economics: an analytical introduction”, 1948, and 20 editions to 2010, McGraw-Hill, which popularised the “Invisible Hand” metaphor used by Adam Smith to assert that  Smith identified “public benefits”  came from “selfish actions, which I regard as absurd, because nobody reading Adam Smith could come to that conclusion. 

Boettke also points out that “The Wealth of Nations actually has plenty of examples in which the pursuit of self-interest leads to socially undesirable options.”  I have regularly tried to quantify this statement by reporting over 60 instances in Wealth Of Nations in Books, I, II, and III where Smith specifies the cases where ‘self-interested’ actions have led to negative outcomes for the public good.  I have added on occasion that the whole of Book IV of WN is, what Smith himself described in a letter to a correspondent, as his “violent” attack against the mistaken ideas of mercantile political economy.  Nobody who reads Book IV could possibly be misled on this point, yet so few senior economists, including Nobel Prize-winners, draw the appropriate conclusion that Smith never, ever, asserted that public benefits depended on the selfish intentions of people in markets.  Public benefits may arise from certain selfish motivated actions ('proud and unfeeling' landlords in one case he gives - in the very long run - but most cases in which motives initiate actions for intended consequences are  in the daily activities of the business of life that have morally neutral unintended consequences.

The longest journey to the truth is travelled in small steps and I am grateful for signs of movement, led by Nathan Goodman quoting the talented Professor Boettek (see his textbook, Living Economics, 2012).

I am not “leftist” on Adam Smith; not am I “rightist” either. I do not buy the “laissez-faire” myth. 

Smith never mentioned “laissez-faire” once. It is also has a dubious history from the start: the french merchant who uttered the words “laissez nous faire” on behalf of his merchant colleagues, said nothing about laissez-faire for his customers.  Indeed, when mill and mine owners in 19th-century England campaigned for “laissez-faire” they were trying to stop parliament from legislating against the employment of young children in factories with rapidly moving machines that took their limbs off in accidents, and, later, for free-trade in corn to reduce prices so employers could lower wages.  Smith favoured “Natural Liberty” that applied to everybody, not just employers.

Nozik came at the “Invisible hand” controversy with the less perverse idea of “invisible-hand explantions”, related to “unintended consequences”, which Smith also articulated upon. The roots of the Nozik’s ideas are found in 17th-century ideas from Cromwell, onwards through to Adam Ferguson, a contemporary of Smith’s, who wrote: “every step and every movement of the multitude, even in what are termed enlightened ages, are made with equal blindness to the future; and nations stumble upon establishments, which are indeed the result of human action, but not the execution of any human design.”

I have observed before that the Ferguson (Nozik) passage fits neatly with Smith’s on the “invisible hand”.  Both are about the consequences of the actions of people. 

Let me explain.

Smith used the “invisible-hand” as a metaphor from his teachings on metaphors from 1748-62 (see his “Lectures on Rhetoric and Belles Lettres”). He spoke of the motives of the merchant who avoided sending his capital abroad because of his perceived risks from doing so.  His motives (hidden from view to others) “led” him to an action: invest locally.  His action had intended consequences, specifically the security of his capital (he mentions this motive four times).  In so far that his investment safely adds to his profit, his intended consequences are realised.  However, his actions may also have unintended consequences which played no part in his risk-averse motives for his actions, but neverless those actions may also cause unintended consequences.

In the merchant’s case, his actions contribute to “domestic revenue and employment”, raising both for the public benefit. (higher domestic revenue and higher employment).

The merchant did not intend this outcome, but it happened neverthess, though it was not by his “design”.

Similarly in Theory of Moral Sentiments” (TMS IV.1.10: 184-5), the “proud and unfeeling landlord” cares nothing for his labourers (serfs, slaves, tenants or whatever), but he is neverthess motivated to feed them from part of the produce they produce for him from his land. His motives are selfish in the extreme and violent overseers makes sure their master’s wishes are met. The labourers are motivated to work his land by the overseers' violence, but mainly by the need to eat, without which they and their families would starve. Thereby the motives of the landlords and of the labourers coincide in their actions.  Without food the labourers cannot work the fields and without the labourers working the fields, the “unfeeling”  landlord’s “proud” greatness would terminate and everybody would be thrown in starvation

However, their actions have intended consequences (landlords have high living standards and power; the labourers have food for their families).  Smith’s use of the “invisible hand” metaphorically “describes in a more striking and interesting manner” its “object”, namely the hidden motivations of the parties for their resultant actions.  Neither has nor needs to have any views on the unintended consequences of their actions, but nevertheless those actions have unintended consequences, because their actions “advance the interests of society, and afford means to the multiplication of the species” (TMS IV.i.10: 185).

Now I have been explaining all this on Lost Legacy since 2005, so far with moderate results. Both “Leftist” and “Rightist” friends, readers, correspondents, and listeners at seminars on the History of Economic Thought and contemporary scholars have been unimpressed so far, to say the least. But I shall carry on because I am encouraged by small signs that some scholars are moving independently towards loosely similar conclusions.

I regard Peter Boettke as moving slightly in the proper direction, i.e., towards Adam Smith’s perceptions on untended consequences.