Wednesday, September 24, 2014

READING SNIPPETS OF WEALTH OF NATIONS CAN BE MISLEADING OUT OF CONTEXT

The ‘Invisible Hand’ Is in Your Pocket
Jim Freeman in ‘The New Presence revue’ quotes from Solon HERE 
“In economics, the invisible hand is the term economists use to describe the self-regulating nature of the marketplace. The invisible hand is a metaphor coined by the economist Adam Smith. Once in The Wealth of Nations and other writings, Smith tried to show that, in a free market, an individual pursuing his own self-interest tends to also promote the good of his community as a whole through a principle that he called “the invisible hand.” He argued that each individual maximizing revenue for himself maximizes the total revenue of society as a whole, as this is identical with the sum total of individual revenues.”
Comment
Hold on a minute, Smith did not say that “an individual pursuing his own self-interest tends to also promote the good of his community as a whole”.  He gave many examples of individuals “pursuing his own self interests” who could and did work against the “public interest”, such as when they lobbied legislatures to impose tariffs on imports, or worse, ban certain imports all together, a not uncommon feature of politics in 18th-century Britain (or indeed since).  Such self-interested behaviours worked directly against the consumers’ self-interests, who, as a result of tariffs and prohibitions, faced higher prices of domestic produce and the absence of certain legitimately produced foreign goods altogether.  In fact, the whole of Book IV of Wealth Of Nations is a critique of mercantile political economy, demonstrating the opposite of Jim Freeman’s assertions.
In the case Smith discussed where he used the ‘invisible hand’ metaphor  (once) he discussed the consequences of investing domestic capital in the domestic economy that necessarily added arithmetically to the quantity of domestic investment and that additional domestic investment added to domestic “revenue and employment”, which was a public benefit. If all merchants followed that self-interested advice there would be few imports of goods, perhaps at lower prices than domestically protected prices.  As foreign trade can raise domestic consumption and incomes abroad, it results in slower overall growth of world economies, which curbs innovation and living standards in both economies more than necessary. Book IV if WN is Smith's polemic against the economic consequences of 'mercantile political economy' prevalent in 18th century Europe.
Now the process Smith described by using the famous metaphor is the direct link between the motives of the domestic merchant who feared the risks of sending his capital abroad and losing it because his capital once out of his sight and his direct control in foreign jurisdictions where local business practices were different to those domestically and the people on whom he trusted, were less well-known than his neighbours, it was avoidable by his refraining from foreign commercial ventures, but helped to impoverish the world economy.  
The metaphor of “an invisible hand”, as with all metaphors in English, described the merchant’s private motives of insecurity in a “more striking and interesting manner” (Smith’s “Lectures in Rhetoric and Belles Lettres”, 1762-3, page 29).  The hidden motives (risk aversion) of the merchant led him to his actions of investing locally and those actions had the unintended consequence (driven by the actions led by merchant’s motives) of arithmetically adding to domestic “revenue and employment”, and lowering "world revenue and employment".
Clearly, Adam Smith did not try “to show that, in a free market, an individual pursuing his own self-interest tends to also promote the good of his community as a whole through a principle that he called “‘the invisible hand’.  He had no such a “principle” called “the invisible hand”.  Moreover, Smith did not “coin”  the “invisible hand” neither as a metaphor nor  as a “principle”.  The metaphor was in fairly common use in the 17th and 18th centuries, mainly, though not solely in theological contexts.  It also appeared in Shakespeare, poetry, general fiction (Defoe), political speeches and philosophy.

Jim Freeman, of Solon, should think again and try to cease being influenced by modern 20th and 21st century economics and modern politicians sharing an ideology. His article in Solon is quite long (12 pages +) and it makes similar errors throughout (follow the link to Solon).

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