A SMALL STEP TOWARDS SANITY ON THE INVISIBLE HAND

Susmita Dasgupta, Joint Chief Economist, Joint Plant Committee, Ministry of Steel, posts (9 Jan 2016) HERE 

The Great ‘Invisible Hand’

“Nehru believed in mixed economy where the public sector co-existed with the private sector”

“In the absence of Adam Smith’s “invisible hand”(a term used to describe unintended social benefits through individual action) to guide the adjustments of production and the adjustments of production and consumption and given the scarcity and high cost of capital in the country, it was important that industrial licences did the job of making the demand and supply adjustments in lieu of market signals.”

Comment

The first part of the quoted sentence is close to the correct (Smithian) interpretation of Adam Smith’s intended meaning of his use of he metaphor of “an invisible hand”. 

The use to which Susmita Dadgupta puts it, however, is partly questionable. But sticking with the positives, she is right partially in that the IH was used by Smith to “describe unintended social benefits through individual action”. 

In the case Smith describes in Wealth Of Nations he refers to a merchant who is so concerned with the safety of his capital if he sent it abroad that he decided to only invest his capital locally in the country and the economy he lives in and under a legal system he knows well. Such are his motives for intentionally acting so and they  guide his investment actions.

The unintentional consequence of his motivated action result from his intentional actions; obviously he did not intentionally act to secure the unintentional consequences of his actions! Among the unintentional consequences of his motivated actions were, Smith notes, the arithmetical addition of the merchant’s capital to his country’s “domestic revenue and employment”, which, Smith notes, are a “public benefit”.

Smith’s metaphor for the process is the merchant is led by an “invisible hand”, clearly meaning his motives for investing locally (decribed today as his risk aversion). Moreover, the unintended consequences in this case are an arithmetically larger amount of local economic activity (today, a larger GDP) regarded as a public benefit.

There is no mention of economic (general) equilibrium, Pareto Optima, or any of the other modern readings claimed for it, nor for some mystical or magical (even theological) force in the economy that leads to such outcomes. The object of the IH metaphor, to which it describes in a “more striking and interesting manner” (Smith, ‘Lectures on Rhetoric and Belles Lettres”, p. 29, 1762-3), are the private, not expressed, and actually invisible motives, of the risk-averse merchant!

For something so clear, even obvious, modern economists have created a great muddle, a great fantasy, eminently avoidable, out of something Smith wrote so clearly that it represents a Category 1 embarrassment to the profession who continue to defend, which so many of them have become caught up in.  They continue to deny their error (sadly)  through thick and thin.