Black Pots and Kettles

Critics of people holding to ideological positions, with which they disagree, often make the same mistake that they claim the other side makes in respect of their ideological stances on Adam Smith. Here is a typical case of the pot calling the kettle black.

‘Jon’ (‘raised as an evangelical, biblical inerrantist and political right winger’ who ‘became an atheist and finally left winger later in life’) writes (6 April) on his Blog “Prove Me Wrong”
HERE

“Milton Friedman and the Invisible Hand”

“Milton Friedman claimed to be a big fan of Adam Smith. Here's Friedman explaining Smith's famous ‘invisible hand’.

“So a man seeking his own gain really ends up bettering society as a whole, even though that wasn't his intention. Apply this to neoliberalism. If I can go overseas and get better labor rates I do it really because I want to maximize my own profits, but in doing so I really promote the good of society as a whole.”

Comment
Yes, Jon is right to be unhappy (as I am) with Friedman’s caricature of Adam Smith on the role of the “invisible hand”. Smith was making no such reference to the alleged benefits of “better labour rates” abroad, which, anyway, was not true in respect of the British colonies in North America, where 18th-century labour rates were higher than those in Britain, due to the shortage of labour in these colonies and the plentitude of cheap land. However, Jon goes on to muck-up Adam Smith’s use of the invisible hand metaphor. He continues:

“So I'm listening to a discussion from Chomsky HERE and he makes a rather astonishing claim. Smith does mention the invisible hand. It's within a passage that you might describe as a critique of globalization and neoliberalism.

Comment
Given that ‘globalisation was in its infancy and that neoliberalism’ was unknown, it is a gross exaggeration to suggest that Smith was criticising either phemomenon. For good reasons, Adam Smith welcomed international trade throughout Wealth Of Nations because he considered such trade beneficial to each country’s absolute advantages.

“Apparently” (Jon continues) “the phrase ‘invisible hand’ occurs only once in the whole book. Take a look at it. Search for "invisible hand" then back up a few pages and start reading. What is Smith saying?

A merchant could look to foreign markets and possibly make more profits. But he's not going to do that. He'd prefer to take lesser profits and stay at home. Why? Because he knows that if he employs more people at home this induces further domestic industry, and he has a bias in favor of his own country. By improving the lot of his home country he really seeks the security and betterment of himself. In this sense there is an invisible hand that guides the merchant towards acting in a manner that is for the betterment of the public. He'll stay at home. He won't outsource.”

Comment
This is where Jon goes completely wrong about Adam Smith’s observation. The issue of the comparative profits was not that he felt a patriotic obligation to do so “because he knows that if he employs more people at home this induces further domestic industry, and he has a bias in favor of his own country.” The merchant trader may have been indifferent to such considerations (remember, he did not trade “intentionally”for the “public good”).

He preferred to invest his capital in “domestick industry” because of what he perceived as the greater risks of the “foreign trade of consumption”. These perceived risks are spelt out by Smith three paragraphs before he got to the “invisible hand” and they clearly identify that the merchant’s personal motives are about risk and his insecurity:

“Thus upon equal or nearly equal profits, every wholesale merchant naturally prefers the home–trade to the foreign trade of consumption, and the foreign trade of consumption to the carrying trade. In the home–trade his capital is never so long out of his sight as it frequently is in the foreign trade of consumption. He can know better the character and situation of the persons whom he trusts, and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress. In the carrying trade, the capital of the merchant is, as it were, divided between two foreign countries, and no part of it is ever necessarily brought home, or placed under his own immediate view and command (WN IV.ii.6: 454).

Smith’s point was that the trader’s “insecurity” leads him to stay at home in the ‘domestick trade”, which had the arithmetical, but unintentional, consequence that his capital added to domestic investment, revenue and employment (the whole is the sum of its parts). Smith used the metaphor of “led by an invisible hand” to better describe, as good metaphors do, their objects “in a striking and more interesting manner”. This definition of the role of a metaphor is from Smith’s lectures on Rhetoric. It can be found in a relatively unknown Work of Adam Smith, discovered in 1958 in a house-contents sale in Aberdeen in Scotland, which was published as Adam Smith’s “Lectures on Rhetoric and Belles Lettres”, page 29, given at Glasgow University in 1763, Oxford University Press, 1983. The definition of metaphors by Smith corresponds to that of the standard definition given in the definitive Oxford English Dictionary (see the 1983 edition) and metaphors are still taught in schools.

Chomsky goes on to make his familiar criticism of Smith on the division of labour, which I have replied to several times on Lost Legacy since 2007.

Leftist critics of rightist ideologies, use their misinterpretations of Adam Smith as a counter-foil to rightist misinterpretations of Adam Smith, like those made in this instance by Milton Friedman.

I think Adam Smith deserves better from people on both sides of these ideologies, but his Works are unlikely ever to achieve such proper treatment from exponents of either ideology. They have seen their version of the truth and that’s that.

A Largely Agreeable Review of Kaushik Basu on the Invisible Hand

Last year, I reviewed a book “Beyond the Invisible Hand” by Kasuhik Basu on Lost Legacy and noted its author had failed to understand Adam Smith’s use of the IH metaphor, which largely compromised Basu’s critique of the problems that support beliefs in the modern invention of Smith’s actual meaning in using the metaphor because Basu accepts the modern invention without realising that neoclassical economics was a victim of its own false beliefs. Now, a critical review of the same book has been posted and I think a few comments are in order.

Oliver Mark Hartwich, a Research Fellow in the Economics Program of the Centre for Independent Studies in Sydney, Australia, reviews Kashik Basu’s Beyond the Invisible Hand: Groundwork for a New Economics, by Kaushik Basu (Princeton University Press, Princeton, NJ, 2011), pp. 273. HERE . Basu’s review was published in Economic Record (Sydney), Vol. 88, No. 280, pp. 156-158, March 2012.

“The title’s reference to the ‘invisible hand’ of course refers to Adam Smith’s notion, first proposed in the Wealth of Nations (1776), that individuals pursuing their own interests would also achieve outcomes that are beneficial to society at large.

Basu is careful to point out that Smith’s original idea contained qualifiers and warnings, which were left out by later generations of economists building on the concept of ‘the invisible hand’. This is most welcome since it has become commonplace, both by his admirers and his adversaries, to turn Smith into a caricature of himself. Basu recognises that Smith’s theories were far more elaborate and nuanced than perhaps suggested by the metaphor of the invisible hand.

However, having given this initial disclaimer, Basu falls into the same trap by identifying Smith’s original insight too closely with what neoclassical economics had made of his idea. First of all, it would have been worth a discussion of whether there is not in fact a distinction between self-interest and greed. Throughout Basu’s reflections, the two concepts of self-interest and greed seem almost interchangeable.

Second, and more importantly, Basu takes Smith’s concept of the invisible hand, which is very much an evolutionary concept of a dynamic market economy, and deals with it in a static perspective of equilibrium:

If we have a competitive economy, where all individuals choose freely according to their respective rational self-interest, then (given a few technical conditions) the equilibrium that will arise will be Pareto optimal. With a little bit of investment in algebra, this result can be proved as rigorously as any theorem in mathematics or axiomatic geometry. … This formalization was a major breakthrough in economics. (p. 19)

In this way, a metaphor from the colourful, non-mathematical world of classical economics is used as a synonym for the sterile and technical worldview of neoclassical economics. Poor Adam Smith!

What thus makes Basu’s critique of neoclassical economics odd is that the author himself remains locked in precisely the same methodology. Neoclassical economists frequently attempted to design models to render Smith’s ‘invisible hand’ more precise — arguably destroying its dynamic connotations in the process.

Basu attempts the opposite. In his book, he modifies the models in a way so as to show how Smith’s invisible hand fails to produce socially optimal outcomes. In doing so, he operates in precisely the same kind of equilibrium framework. …

If we want society to progress and economic development to occur, we need to nurture our innate sense of social values — such as altruism, trustworthiness, integrity, and a sense of fair play. And if we do not want the world to be fractured and broken up into oppressors and the oppressed, we should try to inculcate these values across all human beings and not just narrow in-groups, defined by race, religion, or nationality. (p. 119)…

… the author remains lost in the methodological framework of those economists he criticises and he only holds utopian dreaming against the perceived failings of a grossly distorted picture of free market economics.”

Comment
Much of Oliver Mark Hartwich critique of Basu’s book I agree with, except I would have been more specific.

“Adam Smith’s notion, first proposed in the Wealth of Nations (1776), that individuals pursuing their own interests would also achieve outcomes that are beneficial to society at large.”

This is not what Adam Smith wrote. It is what selected parts of paragraph 9 from Book IV, chapter 2, are massaged to appear him to be saying. Cutting through all the invented implications, Adam Smith’s point was that a specific set of merchants, but not all, because they felt insecure about sending their capital abroad in the “foreign trade of consumption” (detailed in paragraph 6), they preferred to invest in support of “domestick industry” (repeated thrice in paragraph 9), and in so doing they unintentionally added to domestic capital and employment. These were the public benefits mentioned by Adam Smith as an unstated consequence of the simple quantitative rule that the “whole is the sum of its parts”. Note that if the same merchants joined domestic cries for tariff protection and prohibitions, their beneficial actions would turn negative.

This simple, obvious and wholly sensible statement became, in the hands of modern economists (Paul Samuelson, et al), a general and wholly unwarranted assertion that “individuals pursuing their own interests would also achieve outcomes that are beneficial to society at large”. Adam Smith never said that at all. He was far too savvy to make an absurd generalization like that. Whether any individual’s actions when “pursuing their own interests” would have beneficial outcomes for “society at large” would entirely depend on the consequences of their actions. Whether actions motivated by greed (Mandeville, Ayn Rand, and others), were “beneficial” depends on circumstances. Indeed, Smith gives over 70 examples of non-beneficial outcomes for society from the actions of self-interested individuals in Books I, II, and III, of Wealth Of Nations and book IV is a detailed (and "violent") polemic against the self-interest actions of "merchants and manufacturers' that were decidedly non-beneficial for society at large.

In the specific and only case of "an invisible hand" that Smith gives in Wealth Of Nations, paragraph 9 (Book IV, chapter2), he mentions a particular merchant’s “concern for his security” which "led" him to invest domestically, and he used the invisible hand metaphor specifically to refer to that “insecurity” which "led him by an invisible hand” to “promote an end which was no part of his intention”. It was a metaphor, not a general rule, or reference to anything that actually existed. Smith taught that all metaphors “describe in a striking and more interesting manner their objects” (Smith, Lectures on Rhetoric and Belles Lettres”, ([1763 1983, p 29).

The entire edifice of the so-called, invisible-hand mythology has been erected on a mere metaphor, “striking and more interesting” as it is – always the sign of a good metaphor! Kasuhik Basu does not understand that, nor does the majority of the economics profession, none of whom, brilliant as they undoubtedly are, has ever shown that the invisible hand exists – it does not appear as a term in their superb equations. Like Warren Samuels, we should join him in seeking to “Erase the Invisible Hand”, and “elusive and misleading term in economics” (Cambridge University Press, 2011).

Finally, note well, Oliver Mark Hartwich’s last two paragraphs in his review, quoted above, about the utopian dream of designing major changes to how modern economies work, and bear in mind my Saturday Lost Legacy post on Adam Ferguson’s notion of social arrangements and of society at large being “the result of human action, but not the execution of any human design” (from earlier ideas of Oliver Cromwell and Cardinal de Retz).

So Close to Being Nearly Right

Steven Saus, a nuclear medicine technologist living in Dayton, Ohio. Having spent time in both military and civilian medical sectors, he is pursuing further studies in economics and sociology and staying current in the field of nuclear medicine) posts (24 February) on ideastrash HERE

“Have you ever really looked at the Invisible Hand, man? I mean, really looked at it?”

“It's tempting, with any issue about trade and business, to appeal to the "invisible hand" of the marketplace. To simply say "The invisible hand will take care of it" and stop worrying.

The free-trade folks - who you might notice are almost always the people profiting from the business practice being criticized - talk about Adam Smith's quasi-thought-experiment as if it were some kind of magical spell shoving wages, prices, and stock options around. Many pundits (again, those profiting from or paid by those profiting from deregulation) refer to the "invisible hand" as a force inside markets.

Nothing could be further from the truth.

The market's "invisible hand" is actually extremely visible. The "invisible hand" is the sum of every action by every person that impacts buying and selling decisions. Every last one of them.

I remember hearing about a Fortune 500 company's board meeting where one of the board members said "Oh, the invisible hand will take care of that." The CEO replied, "You idiot, we are the invisible hand."

But it goes much deeper than that.

So if you changed any of your purchasing habits because of Occupy Wall Street, that's the invisible hand at work. Stop buying gas at BP during that last big spill in the Gulf? Invisible hand. Decided to buy "fair trade" anything? Invisible hand. Buy a book directly from an author rather than from a big box store? Invisible hand. Switch web browsers for any reason? Invisible hand.

I'd go so far as to say that Occupy Wall Street is itself a product of the "invisible hand". It is a market force, created by market forces. The same goes for any union, any protest, anything that impacts trade. All of those things are part of the invisible hand.

Including you.

So when you hear about something - a business practice (perhaps this one by Amazon will do it for you) that ticks you off, do something about it. Say something. Change a buying habit. Tell others. Complain.

When you act, so can [be] the invisible hand.”

Comment
Steven Saus seems to be an honest student of sociology and economics, so perhaps we can help him sort out where he is right and where he is just, so far, misinformed. He is so close to unraveling the misuse of the IH metaphor, at least as Adam Smith meant it, he could touch it.

Yes, modern economists often parrot lines about the “invisible hand of the marketplace”. Fair enough, if that is what they believe, but such a presentation has absolutely nothing to do with Adam Smith. He never spoke of the ‘invisible hand of the market’. He only mentioned the IH metaphor once each in his two main published books, Moral Sentiments (1759) and Wealth Of Nations (1776), and once only in his posthumously published long essay on the History Of Astronomy (1795). None of his references were about ‘markets’.

And it is true that there are daily references to “Adam Smith's quasi-thought-experiment as if it were some kind of magical spell shoving wages, prices, and stock options around. Many pundits (again, those profiting from or paid by those profiting from deregulation) refer to the "invisible hand" as a force inside markets.” But the attribution to Adam Smith is false. It was popularised in modern post-WW2 economics, largely as a result of the widespread influence of Paul Samuelson, mainly through his own prestige as a brilliant mathematical economist (Noble Prize Winner), but also from his popular textbook, ‘Economics: an introductory analysis’, McGraw-Hill) 1948, through 20 editions to 2010. McGraw-Hill claimed 4.5 million sales, to which we can add about half again from the used-book market, multiple translations, and resulting ubiquitous media references to the IH metaphor.

Steven is nearly right. This is illustrated by his assertion that “The market's "invisible hand" is actually extremely visible”, which can become absolutely right if it is re-written as: “Markets are extremely visible”, and reference to the “invisible hand” is dropped. No market can operate without visible prices! Buyers and seller respond to visible prices – there is nothing invisible to respond to.

For Adam Smith, the IH metaphor was used on the three occasions only that he used it as a metaphor in English grammar. Smith taught rhetoric to university students from 1748-64 and we have a student’s report of what he said regarding the use of metaphors. All metaphors refer to their objects ‘in a more striking and interesting manner”, and in the 17th-18th century the IH metaphor was a popular figure of speech among theologians, authors of poetry, plays, and novels, and politicians. Adam Smith did not ‘coin the invisible hand’ figure of speech’. He used what was common parlance among his contemporaries, and known to his readers. That’s probably why nobody noticed or commented on his use of it while Smith was alive, nor for long afterwards until a few mentions after 1875. Then Paul Samuelson opened the flood gates in 1948.

Today, tales of actual invisible hands running our lives are widespread. Post WW2 academics, battling for ideas in response to the Cold War challenges of Soviet Central Planning and claims for the ‘superiority’ of ‘scientific socialism’ over ‘anarchic capitalism’, clung to the idea of a so-called ‘invisible hand’ of free markets under capitalism, once Samuelson drew it to their attention, and also, they anointed it with miraculous powers. Markets in the democracies were manifestly superior to the very evident dictatorial state controls of a Soviet economy (and still are).

Warren Samuels’s book, ‘Erasing the Invisible Hand: essays on an elusive and misused concept in economics’, 2011, Cambridge University Press, should settle arguments about the non-actuality of the IH metaphor (see my review of this important book in this past week on Lost Legacy). Meantime, Lost Legacy will continue its campaign against the nonsense of their being ‘an invisible hand’ of the market.

Brief History of a Myth

“Budget austerity works for the rich” Harlan Green writes in Huffington Post HERE

“Their economic thinking is not quite medieval but certainly from the 18th century, when Adam Smith's invisible hand theory was first used to rationalize conservatives' ideology that government is a hindrance to growth. We now know that cutting spending doesn't lead us out of recessions, or worse. It takes budget deficits during bad times to prime the pumps of private employers, until they loosen their own purse strings and begin to invest the trillions from record profits that they have instead used to buy back their stock in order to boost executives' incomes.”

Comment
I am not interested in commenting on the thematic charge that Harlan Green makes against “conservative ideology”. That is politics. I am interested in his/her assertion that “Adam Smith's invisible hand theory was first used to rationalize conservatives' ideology that government is a hindrance to growth.”

As a statement of fact that statement is completely wrong in respect of Adam Smith’s works, Moral Sentiments, 1759 and Wealth Of Nations, 1776. Smith had no such “theory”. His use of the popular 17-18th century metaphor had no status as a `’theory”; it was a plain and simple, albeit brilliant, literary metaphor. It has been accorded the status of theory by those modern economists who re-interpreted (invented is not too strong a word) the metaphor into a "theory”, a “paradigm” even.

For the first 100 years after 1776, Smith’s use of the IH metaphor was virtually ignored, except among theologians, preachers, poets, novelists, politicians and historians. His contemporaries didn’t mention it. Dugald Stewart, the son of Smith’s student friend, Michael Stewart. Father like son, a professor of mathematics at the University of Edinburgh. Dugald swapped chairs and became Professor of Moral Sentiments. Dugald taught political economy (as Smith had taught it in Glasgow) and Wealth Of Nations was one of the texts he used in his published lecture notes. He published a volume on political economy in 1801, which included long quotations from Wealth Of Nations, one of which was a long excerpt from the chapter in which Smith uses the invisible hand metaphor. But Dugald made no comment on the metaphor and it passed unnoticed. If it was a ‘theory’ of Smith’s Dugald would have known from his father's life-time intimacy with Smith and his own close association with him until he died in 1790. Dugald gave the eulogy to Smith at two meetings of the Royal Society of Edinburgh in 1793.

That was virtually it until the 1870s, when some five authors mentioned the metaphor. It became part of an oral tradition at Cambridge in the 1920s and later at Chicago until the 1900s. From the 1940s, its (mis)use began to explode as authors gave it publicity in forms unconnected to anything that Adam Smith actually wrote. Paul Samuelson gave these false attributions a boost in his best-seller, "Economics: an introductory analysis", from 1948 and to its last, 20th edition, in 2010.

Hence, Smith's mythical ‘theory’ of 'an invisible hand' now has traction only in the minds of modern economists and politico’s of left and right today. Any ‘rationalisation’ by ideologues of the liberal or conservative persuasion is based on myth and counter-myth, wholly invented since the 1930s. It is now ubiquitous across media, politics, theology and opinion formers of all shades.

Harlan Green is but one of many, peddling false ideas about Adam Smith’s legacy, which makes his/her comments redundant, however sound his/her criticism of his opponents may or may not be. Sad.