SORRY, JAMES OTTESON BUT YOU ARE MISTAKEN ON THE 'INVISIBLE HAND'

James R. Otteson, executive director of the BB&T Center for the Study of Capitalism at Wake Forest University, posts (15 June) 0n Real Clear Markets HERE

Adam Smith: “Widely regarded as the father of modern economics, Smith spent much of this early career in a deep study of study of ethics and philosophy, paying special attention to politics and social relations.

His reputation rests on two great works: The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Numerous Smith biographers, such as E.G. West, have claimed that Smith's "treatise of 1776 struck a mighty blow at the trade walls which had been erected around the nation states of Europe by the traditional protectionist or mercantilist politicians. In particular, the belief of many of the latter that one nation could become richer only if a rival became poorer."

Clearly, not everyone has gotten the message. In the summer of 2016, we are once again debating the merits of free trade and disputing the benefits of globalized commerce. It is very simply a return to the policies of mercantilism, or economic nationalism, that Smith so convincingly refuted in his day.

One of Smith's key insights is that in foreign trade and in commercial society at all levels, both sides gain something in the exchange. These mutual gains from voluntary trade make everyone more prosperous. But to enjoy the full benefits, people must be allowed to trade freely within a framework of laws, but with minimal interference from government planners and overseers. Smith was also unequivocally opposed to special favors for politically connected enterprises, or what we would today call crony capitalism.

Instead, Smith placed his hopes on the genius of the individual-the craftsman, shopkeeper, and early innovators of the Industrial Revolution - who would spur growth and create wealth. To illustrate how these grassroots economic forces could affect such leaps in prosperity, he offered the powerful metaphor of the invisible hand. In this, Smith showed, a business proprietor operating in his or her own niche of the economy could "promote an end which was no part of his intention"-namely, "to promote the public interest."

Regrettably, the elegant invisible hand illustration has been too often poorly understood by those opposed to enlarging freedoms for trade. The invisible hand neither absolves us from building a better society nor provides a justification for a "greed is good" ethic of selfishness.

Smith would have been shocked at such a misinterpretation of his work, and appalled at the accusation that his life's work was a justification for callous greed and the exclusion of the poor. In the rigidly class-conscious society of 18th-century Great Britain, Smith was a tireless promoter of policies that would allow the shopkeepers and tradesman - not the privileged and wealthy aristocracy - a wider participation in the flourishing societies that free trade would bring.

Edmund S. Phelps, the 2006 Nobel laureate in economics, recently observed that "policymakers have no plausible idea about what can be done" about the long running stagnation gripping world economies. Phelps' proposal is to encourage innovation from startups and a "growing number of aspiring innovators toiling in home garages."

Sounds a lot like Smith's faith in the butcher, the brewer, and the baker of his day. Maybe it's time to put The Wealth of Nations back on policymakers' required reading lists. 

Comment

Lost Legacy has praised the published work of James Otteson in reference to Adam Smith. See his Adam Smith’s Market Place of Life, 2002, Cambrige University Press, then an Associate Professor of Philosophy at the University of Alabama. His most recent book is What Adam Smith Knew: Moral Lessons on Capitalism from Its Greatest Champions and Fiercest Opponents (2014) - my paperback copy is on order and my comments will follow when I have read it. James R. Otteson is currently the executive director of the BB&T Center for the Study of Capitalism at Wake Forest University, and a Senior Scholar at the Fund for American Studies in Washington, D.C.

The above is by way of an introduction, partly because what follows i am respectfully critical in parts of James Otteson’s ideas and I do not want to give the wrong impression of my high opinion of the quality of his work on Adam Smith.

The modern press on Adam Smith is often misleading. That the attention span of many commentators on Adam Smith is too short for them having an high premium for their accuracy is well known. Journalists love referring to Smith as the “father of modern economics”. There are some major continuity breaks in the making of ‘modern economics’ from Smith because a great deal of modern economcs is the reverse of Smith’s works, though his name is  used to give modern econonomics credibility, including the assertions of several Nobel Prize winners. 

Smith, asserts James, ‘struck a mighty blow at the trade walls which had been erected around the nation states of Europe by the traditional protectionist or mercantilist politicians.’  Really? I would ask for some examples from James. Trade was not much changed in Europe regarding tariff barriers after Smith, indeed policies on tariffs across Europe, for a long time before and later continued as policy serving the hostile intentions to beggar their neighbours. In short, tariffs were part of the hostilities of economic warfare. No blows were struck. Smith was simply ignored.

Otteson is right: ‘It is very simply a return to the policies of mercantilism, or economic nationalism, that Smith so convincingly refuted in his day.’  But nobody actually changed their policies! It is true that ‘mutual gains from voluntary trade make everyone more prosperous’ but the point of foreign policy in the 19th century was not to make ‘every one prosperous’; quite the reverse it was to make one’s own country prosperous and to do their best beggar their neighbours (an example includes the English Navigation Acts introduced in Cromwell’s times and continued thereafter.

James writes: ‘the powerful metaphor of the invisible hand. In this, Smith showed, a business proprietor operating in his or her own niche of the economy could "promote an end which was no part of his intention”- namely, "to promote the public interest’. On the ‘invisible hand’ metaphor, James and I disagree. He misunderstands, along with numerous others, Smith’s use of the now infamous misreading of the invisible hand. Yet it is quite clear in Wealth of Nations, providd you also understand about the role of metaphors. The latter is discussed by Smith in his Lectures on Rhetoric (1762-3) so there is no excuse for error. Incidently, Smith’s Lectures on Rhetoric and Belles Lettres were first given by Smith in 1748 and were his longest running lecture series to 1764, when he embarked for his tour of France with the young Duke of Buccleugh. Of course, even fewer modern economists (those post 1948) have read his Rhetoric Lectures and the few who have actually read Wealth of Nations! 

A metaphor ‘gives due strength of expression to the object to be described and at the same times does this in a more striking and interesting manner’  (Smith on ‘Rhetoric’, p. 29). Applying Smith’s firm definition of a metaphor we can unpack his meaning when he used ‘an invisible hand’.

In Wealth of Nations he gives and example of a merchant who prefers the home trade to foregn trade because of the greater security of the former than sending his capital abroad:

But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestick industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it. By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the publick good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. [WN IV.ii.Para 9, page pp 455-5]

Reading this paragraph carefully, we can see what Smith was on about and to what the ‘invisible hand’ metaphor was describing:

First: it was about the moivation of the merchant for his actions - supporting domestic in preference to foreign industry because of the greater security of his capital when he invested locally - he knew the people ‘by face’ (a legal term) when compared with people he had never met on the other sides of the world. He knew the local legal system and the probity of its personnel better than he did those who ran legal systems abroad, and these aspects were dominant in his motives, and it was from those motives that he acted.

Second, bringing in the metaphor of an invisible hand, Smith refers to the merchant’s actions being ‘led by an invisible hand’ - which are his motives for acting! - thus ‘promoting an end which was no part of his intention’. Clearly there is no mystical or miraculous ‘invisible hand’ consciously intervening to serve the ‘public good’ - it is not a force operaitng in an economy. It is not ‘an invisible, disembodied force acting in markets - it is a metaphor that gives ‘due strength of expression to the object to be described and at the same time doing ‘this in a more striking and interesting manner’. 

For some reason generations of modern economists have singulalry failed to understand or have just ignored the role metaphors which they were presumably taught at junior school. They may have simply become confused by an avoidable illiteracy and apparent ignorance of what metaphors do or contribute to literacy, or by the stature of the economists who present a different role for metaphors, implying an actual force operating in markets, viz. the ‘invisible hand’ of the market, despite markets operating by means of visible prices - they cannot operate without them. There is nothing invisible in market pricing! 

I am sorry to be so blunt but the disease of not understanding the role of metaphors is widespread and endemic now among economists. It corrupts so much of economic discourse - try google alerts for ‘Adam Smith and invisibe hand’ for a week and see just how many you get daily from across the world - I reproduce several examples in Lost Legacy’s Loony Tune’s feature.

As James says: ‘Maybe it's time to put The Wealth of Nations back on policymakers' required reading lists’. Agreed, if we also put as well Smith’s Lectures on ‘Rhetoric and Belles Lettres’.