A Myopic View of Trade

Peter Epp writes (25 November) in The Farmer HERE

"Smith’s ‘invisible hand’ gets slapped"

“It wasn't supposed to be like this. Adam Smith's economic philosophy suggests that society benefits when economies and capital investment are directed by an 'invisible hand'; that is, when self-interest is allowed to dominate economic decisions.
And so when a clothing manufacturer in South Carolina is shut down so that its products can be made more cheaply in China, the Smith philosophy would find this agreeable, because the products are now more affordable for South Carolinians.
Ditto the tool and die worker in Wallaceburg or Windsor. If that work is moved to China or Korea, the Smith philosophy would find this to be a sensible move. The products are made more cheaply, and are thus made more affordable for the customers of those products.

But if workers in South Carolina or in Wallaceburg or Windsor are left without an income, or with an income made lower because of the work of the 'invisible hand', is it surprising that those same workers perhaps can't afford to purchase those goods, now made cheaper but not manufactured with their labour?”

Comment
No, no, no. Adam Smith expressed the general notion that society benefitted from economic growth, which, contrary to most modern economists, had nothing to do with ‘direction by an invisible hand’. This was a metaphor in Wealth Of Nations, used once, in reference to a specific object and not enunciated as a general principle to markets, supply and demand, and so on.

In Smith’s example the metaphor ‘described in a more striking and interesting manner’, how some, but definitely not all, merchants, who were fearful of the risks of sending their capital abroad preferred instead to invest their capital in the ‘domestick market’ (note Smith’s 18th-century spelling, written three times in the same paragraph) describing the object the metaphor of ‘an invisible hand’ (see Wealth Of Nations, Book IV. Paragraph 9. P 456).

He was not making nor suggesting a general statement about the economy. That is a 20th-century invention.

By adding their proportionally small investment to the domestic economy they added to ‘domestick’ revenue and employment (today’s GDP), which was a public benefit, especially for those labourers employed domestically in producing the ‘annual output of the necessaries, conveniences, and amusements of life’, which Adam Smith considered to be the public benefit of investment.
The merchants concerned with the risks of foreign trade and invested domestically also added by their net investment from their profits and added to economic growth.

Of course, the labourers who got paid work, and the merchants led by their risk aversions to invest domestically, were unaware, and did not need to be aware, of the public benefits of their decisions to invest locally.

It was not an ‘invisible hand’ that caused the misery of unemployment or low wages. Metaphors do not exist separate from their objects. Consult an English language textbook on the meaning and role of metaphors in the English language. However, Smith noted that trade made people in the participating countries better off in terms of the ‘necessaries, conveniences, and amusements of life’, just as, on a more local scale, trade between towns and country makes the people in a country better off, for without trade among localities, people would all be worse off – local self-sufficiency would reduce domestic living standards in South Carolina and Wallaceburg dramatically.

If this were not true, Peter Epp is welcome to demonstrate his ‘no trade’ proposition for all states in the USA. Who would he suggest would sell them, or buy from them ‘clothing, tools and die products’? Are there enough purchasers of these products in his local area of South Carolina or Wallaceburg making it worthwhile to manufacture it only locally? The same is true locally, town-wide and state-wide.

Adam Smith wrote about the situation in 18th-century Britain. Trade with China and Korea was not significant, and anyway was dominated by mercantile tariffs protections and prohibitions, and trade exclusion policies with countries with which Britain had trade quarrels (such as wine from France), and in the British colonies of North America they were compelled to buy British goods, and all foreign goods, that had to be shipped in British ships and via Britain, under the Navigation Acts at high monopoly prices, and were only allowed to export from a select and restricted list of goods, for which the monopolising British merchants paid very low prices, a classic double-whammy. We know where that led to in 1776.

The 21st-century problems of US trade relations with China and Korea (both major centres of US foreign investment) have nothing to do with Smith’s use of the invisible hand metaphor.

Another Imaginary 'The End is Nigh'

Bob Burnett is a Berkeley writer. “In a previous life he was one of the executive founders of Cisco Systems.” Well in this life he writes about Adam Smith in a rather juvenile way and asserts there is conspiracy, ‘they’re out to get us all’ type of article (HERE):

"Why Did Capitalism Fail?"

“Third, global corporations are modern outlaws, living outside the law. There is no "invisible hand" that regulates multinationals. In 1759 Philosopher Adam Smith argued that while wealthy individuals and corporations were motivated by self interest, an invisible hand was operating in the background ensuring that capitalist activities ultimately benefited society. In modern times this concept became the basis for the pronouncements of the Chicago School of Economics that markets were inherently self-regulating.

However, the last five years have demonstrated that there is no "invisible hand" unregulated markets have spelled disaster for the average person. The "recovery" of 2009-10 ensured that "too big to fail" institutions would survive and the rich would continue to be rich. Meanwhile millions of good jobs were either eliminated or replaced by low-wage jobs with poor or no benefits.”

Comment
Adam Smith never said there was an actual invisible hand – it is a metaphor for the hidden motive operating in the heads of nasty landlords in centuries long past that compelled them to feed the “thousands whom they employ” in their castles, fields, stables, and, when needed, in their armies, because without food they could not labour (and they would not labour for long without food) (Moral Sentiments (1759); and in 1776, it was a metaphor for what those merchants who preferred to invest in “domestick industry”, rather than abroad, because they perceived in their heads that this was less risky than sending capital abroad, while others (the majority) were willing to take the greater risks of foreign trade.

The metaphor worked well. The motives of individuals are private and, well, invisible! But using a metaphor, it describes its object in a “striking and more interesting manner”.

The problem is that modern standards of literacy being somewhat less sophisticated than those of 18th-century students and professors, and it became widely believed by graduates and their professors in the 20th century, that Smith’s metaphor (used once each in Moral Sentiments, 1759, and Wealth Of Nations, 1776) was something that actually existed! It doesn’t.

Smith mentioned nothing – absolutely nothing – about “capitalist activities”. He didn’t even know of the word ‘capitalism’ – it was not invented in English until 1854 in Thackeray’s novel, The Newcomes – and modern world capitalism is far different from Smith's world of “the age of commerce’.

As for eliminating “millions” of jobs, employment worldwide is increasing. Of course, jobs disappear – otherwise we would still be using horses or human porters, with living standards and weekly hours of labour to match. That’s the power of creativity – the old is continually being replaced by the new. Stop that process and living standards for everybody would stagnate.

Noam Chomsky Almost Gets Adam Smith on the IH Metaphor

Noam Chomsky’s podcast on Adam Smith’s singular use of the metaphor of an “invisible hand” versus modern versions, which make it mean something entirely different, and which is now ubiquitous, is revealing (HERE):

This short statement – I assume he was speaking from memory - is an interesting and positive development. He makes clear that he has read (but perhaps too quickly) Adam Smith’ singular mention of “an invisible hand” in Wealth Of Nations and appreciates something of its context (which more than can be claimed by most neoclassical economists), though he muddles the full context and the circumstances of some, but not all, merchants who choose not to invest their capital in “domestick industry”, rather than export it abroad to participate in the “Foreign trade of consumption”.

Chomsky errs (unintentionally, I am sure) in consequence from his too hasty read because he misses Smith’s emphasis on the reason why they do so (mentioned several times, in fact), namely and specifically– their feelings for the “insecurity” of their capital once it is out of their sight. Other merchants, perhaps the majority of those investing “domestickly”, invest at home for other good reasons – habit, small scale, position in “domestick” markets, never having been tempted to invest abroad, and unfamiliar with how foreign trade works, and noticeably because they benefit from monopoly their positions in tariff-ridden Britain.

However, it is the former group of merchants of whom Smith specifically writes about. By choosing to invest in “domestick industry” these “insecure” merchants add to domestic “revenue and employment” – the former adds to the “Great Wheel of circulation” and “domestick” growth; the latter set new employees on society’s road to “opulence” (taking, of course, the long view). It is this aspect of the consequence of their behaviour that Smith comments upon as a “public” benefit.

Smith specifically says of this group that they are “led by an invisible hand” using a fairly common 17th-18th century literary metaphor to “describe in a striking and more interesting manner” the object of the metaphor, namely the “concern of these merchants for the “security” of their capital leading them to do act from choice in this way.

In short, it’s a metaphor; the “invisible hand’ describes what causes there merchants to behave as they do (you cannot see inside their heads – their motives are invisible; but it does not actually exist as a visible entity – that is: there is no “invisible hand”. The merchants’ “insecurity” of course, is invisible – it operates in their heads; the consequences are visible when they place their capitals in “Domestick industry”.

Hence, neoclassical theorists with their fantasies of “invisible hands” of markets, supply and demand, maximising “utility” functions, and so on are disingenuous. They clutch a flimsy straw and manufacture a mental image to explain the wonders of markets - which Smith did in Books I and II of Wealth Of Nations without mentioning the IH metaphor – even finding a miraculous “equilibrium” in this best of all worlds, when in fact it is probably only the least worse of all possible worlds (itself a positive achievement in this Vale of Tears, in my humble view).

Except, these imaginary inventions of modern, neoclassical, economics, had nothing to do with Adam Smith and his use of the IH metaphor, nor of the invented simile that Noam Chomsky brings into being when he undermined in his half-right version of Smith’s use of “led by an invisible hand”, by adding the wholly invented words “as if” to Smith’s own pristine words, “led by to invisible hand”, thereby making it a simile.

Now, we can be sure that Chomsky knows the difference between a simile and a metaphor (after all he is highly distinguished linguist). Ironically, Chomsky uses Smith’s metaphoric use of “led by an invisible hand” in order to chastise neoclassical theorists for their Cold-War inspired inventions of the magical properties of markets to show them superior to Soviet planned economies, from the 1930s, which anyway became disasters on their own account. Chomsky, of course, believes markets are also a capitalist (neo-con) disaster.

Oscar Lange, a Marxist, and a proponent of socialist planning (1936, 1938, 1945) was countered, first by Paul Samuelson in his famous textbook, Economics: an analytical analysis (1948), who claimed (absolutely wrongly) that Adam Smith said that the “invisible hand” meant “selfish” (he did not) behaviours were transformed (“miraculously”) into social benefits through markets (and repeated over the following 19 editions to 2010). This nonsense was widely disseminated to its to over 5 million readers and became the neoclassical orthodoxy (it still is) though its provenance is a compete invention, as is Chomsky’s “as if” insertion into Smith’s usage.

Lange, Chomsky, Samuelson, et al were all veterans of the Cold War. The “invisible hand” episode is a minor unintended consequence of the larger events wrapped in that global confrontation of yester decades. But the ideological confrontation continues in the functionality of markets, and Adam Smith’s legacy continues to be dragged into it despite the very obvious and glaring error in the counter-factual – specifically that very visible prices determine everything important needed for markets to work; there is no mystical invisible hand at work – nor needed.

The meaning of the metaphor lies in its “object” – see Adam Smith on the role of metaphors in his Lectures On Rhetoric and Belle Lettres ([1763] 1983, page 29, Oxford University Press). I am sure that Chomsky knows all about Smith’s conventional views on the role of metaphors.

The object of “an invisible hand” in Moral Sentiments was the absolute necessity, so obvious that it is invisible (cannot be seen by others) – that is, not thought about by the “unfeeling landlord” – yet still operates by leading him to distribute basic necessities to his slaves, serfs, peasants, and etc., form the mutual dependence on them (no food, no work) and their mutual dependence on him (no work, no food). In consequence, his dependents survived and procreated, and early agricultural society continued, with interruptions to the initiation of the “Commercial Age” with the Fall of Rome in the 5th century, and emerged again, gradually, after its reconstitution in the rule of War Lords, and then Feudal Lords, a thousand years later.

The object of “an invisible hand” in Wealth Of Nations was the “concern of some merchants for their capital’s security”, which, invisible to others operates in their heads, and leads them to invest in “domestick industry”. In consequence, domestic GDP grew and commercial society continued. The rest, as they say, is history.