JEFFREY MADRICK'S QUITE WRONG ACCOUNT OF ADAM SMITH
Jeffrey G. Madrick is a journalist, economic policy consultant and analyst. He is editor of Challenge: The Magazine of Economic Affairs
“How Adam Smith’s Invisible Hand Was Corrupted by Laissez-Faire Economics
“If read correctly, Smith's invisible hand shows the limits of laissez-faire”
Jeff Madrick, from his book, ‘Seven Bad Ideas’ on “The beautiful idea of the Invisible Hand enraptured economists as well as many political thinkers for more than two centuries. But it is not an idea with the power of, say, the Copernican discovery. It is more a loose metaphor for the way markets may work than an ironclad law. The Invisible Hand is believed by economists to demonstrate that markets where goods and services are freely exchanged will result in the greatest benefit to buyers and sellers alike, and as noted direct investment where it is most useful, enhancing the rate at which the economy can grow. All of this takes place without any outside government intervention.
Orthodox economists have made the Invisible Hand the basic foundation of their work. They grudgingly agree that sometimes government intrusion in the market is necessary. Usually, though, government efforts are seen as harmful. Most extraordinary, many economists claim that just as the market for cornflakes is self-adjusting, so, too, is an entire economy. Supply and demand automatically adjust to a “general equilibrium” that satisfies as many people as possible. In a recession, prices, wages, and interest rates will fall. More goods will be demanded, and production will rise again. Excessively rapid growth will result in higher prices, which dampen demand and will perhaps create a recession that lasts until the economy readjusts. A recession will only be temporary, as will excessive growth.
Unlike the Copernican revolution, however, the Invisible Hand is an assumption, not a scientifically based law. Its obvious limitations have not prevented its supreme influence. The alllure of the Invisible Hand is its elegance. The profound weakness is that it is not nearly as complete a model of markets as many economists insist it is. Its underlying assumptions—that people have material preferences that don’t change, that they are rational decision makers, and that they have all the price and product information they need—are extreme. The Invisible Hand is thus a limited proposition, elegant but impure.
It especially draws theorists toward the laissez-faire model of governing, which holds that government intervention should be minimized. Indeed, the free market, not government, is accepted as the dominant organizing mechanism of society.
Smith used the term “Invisible Hand” just once in The Wealth of Nations and only once in his earlier work, The Theory of Moral Sentiments. The historian Emma Rothschild, in her book on Smith and the Marquis de Condorcet, two towering Enlightenment scholars, argues that Smith was more ironic than serious about the Invisible Hand, always assuming an active role for government in creating the rules and regulations of society and fully conscious of the need for compassion and community, which he outlined rather beautifully in The Theory of Moral Sentiments.
But Smith took the Invisible Hand very seriously, I’d argue, even as he assumed a large role for government. He was a complex thinker, breaking new ground in many areas, and too much time has been spent trying to make his abundant ideas consistent with one another. He could believe in limiting government in some ways but expanding it in others. Even though he explicitly mentioned the Invisible Hand only once in The Wealth of Nations, elsewhere in his masterpiece he addressed it at length.
Smith was formally a moral philosopher at the University of Edinburgh, and he had come to believe that individuals could often make their own decisions without help from a higher authority, a staple idea of the Enlightenment that was rapidly gaining cultural acceptance. A market undirected by government fit this philosophical disposition very well. Smith was determined to show that such self-oriented behavior on the part of individuals led to a common good. “Man has almost constant occasion for the help of his brethren,” he famously wrote, “and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love.” And then follows his most quoted line: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”
Described as a journalist, Jeff Madrick, is so much more when it comes to economics. His article is a long one, so I shall take it in thin slices, with much more to come as I comment upon his ideas.
“But it is not an idea with the power of, say, the Copernican discovery.”
The reason for the ‘invisible hand’ not being comparable to the ‘Copernican discovery’ (or for that matter Newton, or any other science-based ‘discovery’), is the difference between scientific statements and rhetorical metaphors. The laws of science are true everwhere in the universe; metaphors are only ‘true’ in the context for which they are used, and then only if they are truly metaphorical (Smith defined the role of metaphors in English in his, less well-known - and even less well-read - “Lectures on Rhetoric and Belles Letttres”, 1762/1978). Moreover, while atoms and such like are subject to the laws of physics and can be expressed mathematically, the behaviours of human beings cannot be so described, at least in a meaningful scientific sense.
The “invisible Hand enraptured economists as well as many political thinkers for more than two centuries”.
Really? Surely Jeff Madrick has not checked his facts. During Smith’s life time I have found only one reference by his contemparies to Smith’s use of the ‘invisible hand’ had metaphor, in respect of a passing reference by Rousseau. Otherwise his contemporaries ignored Smith’s reference to the IH (once only in Moral Sentements, 1759, and once only in Wealth of Nations, 1776). The rest ignored it, though they probably heard preachers referring to the ‘IH of God’ in their Sunday sermons, since the 17th century.
Only after 1870 did the first (6) comments on the IH begin to appear and a few others before the 1930s. Hardly evidence of economists being “enraptured” by the metaphor for two centuries! Only, after Paul Samuelson misrepresented Smith’s use of the IH metaphor in his famous textbook, Economics, 1948 (McGraw-Hill), did its use spread throughout the discipline, and beyond into politics and journalism, from Samuelson’s c.5 million sales to 2010.
Madrick correctly notes that “The Invisible Hand is thus a limited proposition, elegant but impure”. Madrick summarises: “Even though he explicitly mentioned the Invisible Hand only once in The Wealth of Nations, elsewhere in his masterpiece he addressed it at length.”
I shall address this weak if not false assertion by Madrick in my next response to his essay.
Meanwhile, I shall leave Lost Legacy readers with a comment on the following false assertion by Jeffrey Madrick:
“Smith was formally a moral philosopher at the University of Edinburgh.”
What happened to the legendary fact-checkers that used to be common in journalism? Adam Smith was never at the University of Edinburgh. In fact, he was not even describable as a “moral philosopher”, when he taught private (fee paying) classes in the city, not the university!) of Edinburgh. Moral Philosophy came later.
In these public classes, to which members of the public paid fees to attend, he taught Rhetoric, and later, Jurisprudence. He earned £100 a winter session, each year from 1748 to 1751. His audience also included, on the same private fee paying basis, some students from the Law and Theology faculties of Edinburgh, as well as the general public, including professors from St Andrews, Edinburgh and Glasgow universities. Only after Smith was at Glasgow University (1752-64) as the Professor of Moral Philosophy, did he teach moral philosophy, publishing his book on “Moral Sentiments” in 1759.
Oh, and incidently, Adam Smith never mentioned ‘laissez-faire” in his entire writings.