THE NEWS GETS BETTER AND BETTER ON THE "INVISIBLE-HAND' DEBATE

A long-standing Asian correspondent sent to me the details of a new paper published on the Social Science Research Network (SSRN) that builds on recent scholarly criticism (besides my own) of the majority popular interpretation placed on Adam Smith’s use of the “Invisible-Hand” Metaphor”.  
This new paper is by Michael Emmet Brady, of California State University (Jan 24, 2015), aligns neatly with my own efforts since 2005, and takes an aspect of them to a new, higher, level: “Adam Smith, the Wealth of Nations, and the “invisible Hand: a metaphor for Ambiguity-Uncertainty Aversion of Decision Makers”.

The Abstract is reproduced below and the full paper may be found via SSRN below:

Adam Smith, the Wealth of Nations, and the 'Invisible Hand': A Metaphor for Ambiguity-Uncertainty Aversion by Decision Makers

Michael Emmett Brady 

California State University - Department of Operations Management

January 24, 2015

Abstract:      

Smith’s use of the “Invisible Hand,” as pointed out by Gavin Kennedy, is a metaphor provided for the great percentage of readers of the Wealth of Nations whom Smith realized would not be able to grasp the nature of his argument, which was about the ambiguity-uncertainty aversion of the majority of 18th century English business men. Gavin Kennedy has pointed out that the term,” Invisible Hand,” had nothing to do with Laissez Faire, free markets, free trade, Natural liberty, etc., for Adam Smith. Smith’s argument is an application of his very advanced decision theory that regarded the standard mathematical laws of the probability calculus as a special case that had only limited applicability in the real world. In general, applications of the mathematical laws of the probability calculus required a complete information set that was rarely satisfied. Smith realized that probability, nevertheless, had to be taken into account. Smith advocated an interval valued approach to the use of probability under conditions of uncertainty/ambiguity. 

Smith made great use of the concept of uncertainty. Uncertainty for Smith dealt with the quality of the information base upon which the probabilities were being calculated. Smith generally defined risk in the Wealth of Nations as an inexact and/or indeterminate estimate not based on the mathematical laws of the probability calculus. Risk could be calculated exactly only in conditions where there was a very high quality of evidence over which there were no conflicts and/or disputes of assessment regarding the relevancy of the data. 

Smith’s major conclusion in Part IV of the Wealth of Nations is that businessmen are ambiguity and/or uncertainty averse. The quality of the information, data, or knowledge upon which the probabilities, which would be interval estimates, is a second factor that is completely independent of the probability estimates themselves. Only in a limiting case, where the evidence is great, stable, and invariant over time, as in the case of deciding to become a shoemaker, would the probability estimates be point estimates. 

Smith completely rejects the ethics and decision theory of Jeremy Bentham, as well as all approaches built on it, such as the Subjectivist ( SEU-Subjective Expected Utility) approaches of Frank Ramsey, Bruno de Finetti, L J Savage , Milton Friedman .and modern Bayesians, such as Patrick Suppes.

Number of Pages in PDF File: 25

Keywords: ambiguity/uncertainty aversion, Ellsberg Paradox, weight of the evidence, J M Keynes, Adam Smith, Invisible hand

JEL Classification: B10, B12, B20, B22

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2554949

The full paper may be downloaded from SSRN via 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2554949

The Social Science Research Network is a wonderful (free) resource which all serious economics students and research practitioners should bookmark and make use of when papers in their areas of interest are posted.  They may also upload their own papers for others to read and to establish a record of their own original work for others to consult.

I shall comment on Michael Emmett Brady’s paper shortly and also publish my comments on SSRN.