ANOTHER POSITIVE STEP TOWARDS UNDERSTANDING SMITH'S USE OF 'AN INVISIBLE HAND'

John Keller (USA) posts (15 December) on 71 Republic HERE 

Adam Smith – Truly an Invisible Hand?

Although Adam Smith argued and developed the Theory of the Invisible Hand, it is important to note that is not his entire theory.

For decades politicians have quoted Adam Smith’s work, The Wealth of Nations (1776), an essay reaching over 500 pages on economic and political philosophy, that came up with the theory of the invisible hand of the market, with no government intervention and the adaptation of laissez-faire economics to support their political positions, but was Adam Smith truly the free hand economist politicians suggest?

It is true that Adam Smith developed the theory of the invisible hand of the market or the free hand as many will refer to it. He writes in the Wealth of Nations:

“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 not part of his intention.”

Although businessmen don’t naturally intend to develop their community, but rather their own enterprise, they do it as a result of the invisible hand. By improving their enterprise they can buy in greater bulk and lower the cost for consumers (Law of Supply and Demand which Adam Smith also develops in his book), by raising more revenue could invest in employee wages which would, in turn, put more money into the hands of consumers and stimulate the economy. As a result, Smith argued that the government should stay out of spending your earnings:

“The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with most unnecessary attention but assume an authority which could safely be trusted to no council and senate whatever, and which would nowhere be so dangerous as in the hands of man who have folly and presumption enough to fancy himself fit to exercise it.”

Based on these two quotes the idea that Adam Smith is a laissez-faire economist would be a sound and reasonable conclusion making it justified that he is presented in this manner by politicians: but they leave out the second part of his theories contained within The Wealth of Nations, the need to provide social welfare.

No society can surely be flourishing and happy of which by far the greater part of the numbers are poor and miserable.

Yes, Adam Smith is arguing for the Invisible Hand of the market to regulate the economy, but he also deems it necessary for the poor to be taken care of. Society must be measured by the member of suffering and to have a great society the poor must be relieved of their miseries. Adam Smith furthers that for such a measure the wealthier members of society should pay higher taxes, he writes:

“It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

Adam Smith actually argues for a progressive tax code – contrary to the tax plans the Republican party, the most often to quote Adam Smith, support. As a final warning Adam Smith argues to keep businessmen out of office and positions of power:

“The interest of [businessmen] is always in some respects different from, and even opposite to, that of the public… The proposal of any new law or regulation of commerce which comes from this order… ought never to be adopted, till after having been long and carefully examined… with the most suspicious attention. It comes from an order of men… who have generally an interest to deceive and even oppress the public”

Although Adam Smith argued and developed the Theory of the Invisible Hand, it is important to note that is not his entire theory. This article was to dispel the myths and misquotes of Adam Smith and to inform people of the lies and propaganda of many politicians.

COMMENT

John Keller’s post in 71 Republic appears to be in a Libertarian site, which should be praised for its presentation of Adam Smith’s use (just once) of the “invisible hand” metaphor in his Wealth of Nations.

Much of John Keller’s argument is sound, though some parts of it is not. Broadly speaking the “invisible hand” was not a theory, certainly in the meaning of a theory. It was metaphoric. Adam Smith knew the difference because his classes of ‘Lectures on Rhetoric and Bellers Lettres” was his longest running lecture subject from 1748 to 1763. His Rhetoric lectures established his academic reputation, despite his non-graduation when he left Balliol College (Oxford).

Remember he resigned in Professorship in Moral Philosophy at Glasgow in order to research and compose is Wealth of Nations, which took him 13 years to 1776.

Readers should put his singular use of the metaphor of an ‘invisible hand’ in Wealth of Nations into perspective, by realising the fact of his use of the famous metaphor was virtually ignored by all of his colleagues and subsequent readers, including senior academic scholars, who read and commented upon his major Work,both while he was alive (to 1790) and for long afterwards throughout the 1800s to the 1870s. 

Indeed, comments on the “invisible hand” by almost all academic economists remained absent well into the late 1940s when Paul Samuelson published his famous textbook, Economics, in 1948 (19 editions, multiple translations, 5 million sales (plus the used book market). From the 1960s, Samuelson’s version of Smith’s singular use of the ‘invisible hand’ metaphor went unbiquitous - or ‘viral’ as we say today - across the world.

John Keller’s assesssment is close to being accurate in his identifying Smith’s meaning behind his use of the metaphor of an ‘invisible hand’ and he is certainly closer to Smith’s intentions than most interpetations by almost all modern economists. Let us pause just there to elaborate on that statement:

“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 not part of his intention.” (WN IV.ii.9. p 456)

Yes. Clear enough. But what did the merchant do? He invested his capital in “domestic industry”. He hired labour for wages and spent capital on materials, machinery, power, and related processes, operated by waged labour for public sale. What was the relevant consequence of his actions?

Obviously, he unintenionally added his capitla expenditures to domestic investment! Simple! No mystery here! In fact ,so blindingly obvious that Smith did not need to elaborate on his point. Unintentionally, the merchant’s actions ‘promoted an end’ that was ‘no part of his intentions’. The ‘invisible hand’ is purely metaphoric. Adding his capital expenditure to gross domestic expenditure inescapably  is a direct domestic benefit. It is not a theory; it is a fact. 

Domestic capital expenditure is the sum of all such expenditures in all time periods in an economy. In fact, that assertion is inescapably the consequence of all individual expenditures. There are no mysterious ‘invisible hands’ at work in market economies. 

From here it took from 1776 to 1948 for academic economists (post-Samuelson) to discover a ‘theory’ of ‘invisible hands’ supposedly at work in the world’s economies, to which were added elaborations of various complexities into its alleged mathematical roles, plus a sub-set of theological meanings, all missed by Adam Smith and his readers (including Ricardo and such like) in their commentaries throughout the  18th, 19th and 20th centuries to 1948.

Keller writes:

“By improving their enterprise they can buy in greater bulk and lower the cost for consumers (Law of Supply and Demand which Adam Smith also develops in his book), by raising more revenue [they] could invest in employee wages which would, in turn, put more money into the hands of consumers and stimulate the economy.”

Keller believes he is describing Smith’s ‘theory of an invisible hand’. He isn’t. He is describing the consequences of aggregate economic activity. When I was an undergraduate in the early 1960s it was called the ‘multiplier’ by Keynes (then all the rage in micro-economics).

Lastly, and incidently, note these lines from Keller’s essay: 

“the idea that Adam Smith is a laissez-faire economist would be a sound and reasonable conclusion making it justified that he is presented in this manner by politicians: but they leave out the second part of his theories contained within The Wealth of Nations, the need to provide social welfare.”

Adam Smith was never a ‘laissez-faire’ economist. He never used such words, though they were known throughout his life-time. He was a advocate of ‘natural liberty’, as he mentioned in Wealth of Nations. 

Overall, I commend John Keller’s article as a vast step towards improving on the usual ideas of modern economists about Smith’s use of the ‘invisible hand’ metaphor.