QUICK BITS no. 16

Alison Acosta Fraser and Michael Tolhurst post (16 June) HERE

Alison Acosta Fraser is managing director of research and policy at the Charles Koch Institute, and Michael Tolhurst is a senior policy and research analyst at the institute.

‘Corporate Welfare, 18th-Century Style’

“His well-known metaphor of how the free market works is that every individual, working for his or her own gain, is ultimately “led by an invisible hand” to make the world better and more prosperous. “By pursuing his own interest,” Smith writes, the average citizen “frequently promotes that of the society more effectually than when he really intends to promote it.” …

…Though Smith first articulated the “invisible hand” of the free market, he also had a healthy dose of circumspection about human nature, noting that whenever people in the same trade or industry get together, they always end up finding ways to raise prices. This was particularly true for groups trying to prevent or limit competition.

As Smith states, “The proposal of any new law or regulation of commerce which comes from this order (business or labor group), ought always to be listened to with great precaution, and ought never be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”

Comments

The above authors show no  signs of irony that their first paragraph on the ‘invisible hand’ is completely negated by their second paragraph about human nature.

Their problem is that Smith did not use the invisible hand to describe universal human nature. Smith was more sensible than that. 

He used the metaphor of ‘an invisible hand’ only once in Wealth of Nations to describe the case of a merchant who was concerned about the additional risks of sending his capital abroad and thereby preferred to invest locally, where he knew whom he dealt with and the legal system’s integrity in case there was a dispute, whereas in foreign trade he knew less about people he had never met and the legal system they lived under. His motives - invisible to others - led him to intentionly invest domestically. However, his motivated actions also had unintentional consequences, in this case adding by to ‘domestic revenue and employment, which was a public benefit. His use of the metaphor of ‘an invisible hand’ describes the public benefits arising from these specific motivated actions, which because he undertakes the actions it leads him to be the cause of the consequential benefits to society.

Clearly, in the other (very commmon) circumstances of a merchant who is self-motivated to seek, say, trariffs - even outright prohibitions - the consequences cannot be said to be publically beneficial. Smith nowhere - and correctly - makes no claim that such selfish motivated actions are described by the metaphor of an ‘invisible hand’. He wrote pages in Wealth of Nations exposing and criticising mercantile interests that were agaist the public interest.

Yet Alison Acosta Fraser and Michael Tolhurst do not make it clear that Smith’s use of the metaphor of ‘an invisible hand’ applies in the one case and others like it, but not in all those other cases where merchants act against the public interest. There is no ‘invisible hand’ of the market. Given the authors’ lack of a distinction they mislead their readers and, as important, undermine Adam Smith’s reputation.