QUICK BITS no. 21

A Reader responds to a 2012 post on Lost Legacy:

“Hello, your blog is very interesting. I understood the Invisible Hand differently though, as the individual exchanges benefitting society since, according to Smith, and exchange only happens when both parts consider it profitable. And the way I see it this benefit would be increased with each related exchange and production step of a good, as the pencil example in Leonard Read's 'I, Pencil' on So Close to Being Nearly Right” (25 February, 2012)

Comment

This came in today (18 July, 2016) in reference to a post I made in February 2012, Scroll through the Lost Legacy archives to read it.

Sven’s understanding of Adam Smith’s use of the metaphor of “an invisible hand” is dfferent from Smith’s. For accuracy, Sven must read Adam Smith’s single use of it in his Wealth of Nations (1776). {WN IV.ii.1-10, pp. 456).

Smith said nothing about the IH consciously ‘beneftting society’. He specifically referred a merchant preferring to invest locally rather than send his capital abroad because he was concerned about the honesty of those he would rely upon in a foreign country, with different laws and a different legal system. 

His self-interest was in the security of his investment. However, by investing locally the merchant unintenionally added his capital to ‘domestic inventment and employment’. His intention was to secure his investment soley to benefit himself, and not to benefit society, but unintentionally by investing locally, he also arithmetically increased domestic investment, which was a public benefit.

This was never a general rule. Many merchants lobbied governments to impose tariffs and outright prohibitions on foreign imports to reduce competition and enable them to raise prices and their profits. Such common activities by mercants were not public benefits. Hence not all exchanges and production were for the general good. That is a misreading of Adam Smith’s use of the invisible hand metaphor.

The sequence is that a merchant was motivated by his insecurity to intentionally invest locally and the invisible hand metaphor referred to that intentional action led him unintentionally to public benefits. His motivated action leads him to the unintentional consquences of his motivated actions (his security). 

The ‘invisible hand’ is not a miraculous nor mysterious force in markets, as believed (even preached) by modern economists, particulary since Paul Samuelson presented the IH incorrectly in his popular textbook since 1948. (Samuelson’s textbook was the course textbook when I was a 1st year undergraduate in 1965; see also my article: Gavin Kennedy, “Paul Samuelson and the Invention of the Modern Economics of rhe Invisible Hand”, History of Economic Ideas», vol. xviii. 2010).