Kaushik Basu's New Book a Must Read

I am reading a most interesting and, from the point of view of Lost Legacy, a most significant book. I refer to Kaushik Basu’s new book, published this month by Princeton University Press, “Beyond the Invisible Hand: groundwork for a new economics” (ISBN 978-0-691-13716-2; see Amazon).

What makes it so interesting to me is its approach. It accepts, indeed celebrates, the Adam Smith ‘myth’, namely the one created by modern economists from the 1950s, that Adam Smith’s use of the metaphor of the “invisible hand” was a “great idea” directly linked to the modern derivation of the Welfare Theorems embedded in mathematical theories of general equilibrium (Arrow, Debreu, etc.). Basu does this without in any way realising or accepting that this myth is itself a myth.

Basu’s interpretation is a misreading of what Adam Smith wrote, as shown countless times on Lost Legacy. The modern myth creates an edifice without foundations. Smith never said what the modern myth requires him to have said – it is a backward projection of modern ideas onto a text that does not support them.

He also presents his version of the modern myth with a startling admission: “it is sobering to recall that [Smith’s] theory of the invisible hand would remain a conjecture for close to two centuries after the appearance of his classic, An Inquiry into the Nature and Causes of the Wealth of Nations, despite the copious writings by Smith himself and his successors in political economy” (p 9). This fact, which is endlessly reported on Lost Legacy, is challenged by modern economists, such as Daniel Klein and David Friedman to mention two distinguished scholars who have appeared on this Blog, and many others at the seminars I have addressed since 2005.

By interpreting what Smith ‘really meant’ or ‘implied’, such critics can and have loaded Smith with the burden of their imaginative assertions about Adam Smith’s meaning, mainly from later authors, but not with definitive evidence in Smith’s texts. Basu adds: ‘It took mathematical economics, and the research of Kenneth Arrow, Gerard Debreu, Lionel Mackenzie and others for it to be given formal shape and proof’. This is roughly where Samuelson introduced the first of his 4½ millions readers of his popular textbook, Economics (1948, p 36: McGraw-Hill), to an early version of the modern myth, and has repeated in through its 19 editions.

Basu also observes that: ‘it is surprising to most contemporary economists who have not read The Wealth of Nations to learn that the invisible hand theory is not central to Smith as it is made out to be” (p 10). Absolutely true, but from which observation Basu draws precisely the wrong conclusions. He suggests that the 19th-century ‘orthodoxy’ (his name for the modern consensus) of “John Stuart Mill and John McCulloch” (to which names he could add Malthus, Ricardo, Marx and almost all other writers after Smith) saw the role of the market absent an invisible hand guiding it.

Basu, however, is correct to note that the 19th-century treatment of Smith as a fundamental ‘free market’ ideologue (laissez-fare, night-watchman state, and all that), was false and so is the claim that the ‘proof’ of his so-called Invisible hand theorem, was a ‘mathematical vindication’ of his alleged ‘belief’ (p 11).

You can imagine my excitement as I read Kaushik Basu’s most promising book (I shall continue reporting on it for more posts on Lost Legacy and I encourage readers to obtain a copy and read I with me).

Its author has stepped towards my criticism of the modern myth, albeit without accepting my position on it, by showing that the modern myth has misled economists into confusing their models with reality (the economy does not function as their maths appear to indicate) and by re-drafting what is closer to what really happens (which “entails a leap of imagination”), he will show where the “Invisible Hand Theorem” ceases to hold, and why. I shall report on how he sets about this, because Basu’s book is the first serious study of the modern myth related to the ‘Invisible Hand’ I have seen anywhere.

I understand the political benefit of not attacking everything about modern economics to get a fair hearing from the profession – and I thereby excuse Basu’s intentions as stated in the first chapter – and I wait to read how he goes about his reconstruction of the welfare theorems for my final judgements.

A Political Scientist Mostly Right on the Invisible Hand and General Equilibrium Theory

Jonathan Schlefer writes (10 April) in Harvard Business Review “There is no invisible hand” http://blogs.hbr.org/cs/2012/04/there_is_no_invisible_hand.html?utm_source=twitterfeed&utm_medium=twitter

A short extract below but follow the link and read the whole post. He says useful things about general equilibrium theory.

“One of the best-kept secrets in economics is that there is no case for the invisible hand. After more than a century trying to prove the opposite, economic theorists investigating the matter finally concluded in the 1970s that there is no reason to believe markets are led, as if by an invisible hand, to an optimal equilibrium — or any equilibrium at all. But the message never got through to their supposedly practical colleagues who so eagerly push advice about almost anything. Most never even heard what the theorists said, or else resolutely ignored it.

Of course, the dynamic but turbulent history of capitalism belies any invisible hand. The financial crisis that erupted in 2008 and the debt crises threatening Europe are just the latest evidence. Having lived in Mexico in the wake of its 1994 crisis and studied its politics, I just saw the absence of any invisible hand as a practical fact. What shocked me, when I later delved into economic theory, was to discover that, at least on this matter, theory supports practical evidence.

Adam Smith suggested the invisible hand in an otherwise obscure passage in his Inquiry Into the Nature and Causes of the Wealth of Nations in 1776. He mentioned it only once in the book, while he repeatedly noted situations where "natural liberty" does not work. Let banks charge much more than 5% interest, and they will lend to "prodigals and projectors," precipitating bubbles and crashes. Let "people of the same trade" meet, and their conversation turns to "some contrivance to raise prices." Let market competition continue to drive the division of labor, and it produces workers as "stupid and ignorant as it is possible for a human creature to become."

Comment
The sorry invisible hand myth owes more to imagination and hope than it does to economics from Adam Smith. Its modern form really began its take off with Paul Samuelson’s successful textbook, “Economics: an analytical introduction”, McGraw-Hill 1948, and continued through to edition 20 in 2010. It had an earlier oral presence at Chicago (where Samuelson was an undergraduate) and Cambridge, England (A. C. Pigou). Even Oscar Lange postulated (1938 and 1947) a rival and “better” invisible-hand role by socialist planners. The Soviet planned economy challenged capitalism from the 1930s and in Cold War rivalry, with large communist parties and social-democratic in Western Europe, the myth asserted the innate superiority of capitalism with its “invisible hand”. Since the current recession, increasing questions appeared about its existence. Warren Samuel’s last book, “Erasing the Invisible Hand, essays on a elusive and misused concept in economics”, 2011 (Cambridge) exposes the modern history of the mythical “invisible hand” since its heyday from the 1960s through to the late 1990s.

Jonathan Schlefer's last sentence on the division of labour is woefully wrong as representative of Adam Smith's meaning. See my criticism of Chomsky's allusions to the same misreading,

The Very Visible Role of Prices in Markets

“No asking price, no deal, say house hunters” HERE

“Sellers who don't list a price for their property are putting off the vast majority of potential buyers.

New research from PRDnationwide has shown that properties without a listed asking price deter buyers. A poll from the company has indicated 75% of potential buyers say they are "greatly" deterred by properties without an asking price, while another 20% said they were "slightly" deterred. Only 2.5% of respondents claimed they were not deterred by properties with no asking price.

PRDnationwide research director Aaron Maskrey said vendors and agents should take note of the results when listing properties.
"Ultimately, you could be missing out on potential purchasers by not advertising a selling price or giving a range," he said.

"According to the poll, estimating a sale price ensures every opportunity to maximise viewings and competition," he said.”

Comment
Thos snippet confirms a basic fact about how markets work, often missed apparently by those spouting the invented myth of “an invisible hand’, which was a metaphor used by Adam Smith to “describe in a striking and more interesting manner” the hidden motive of the insecurity of an individual merchant which led him to prefer domestic to foreign trade.

Nothing in Smith’s use of the metaphor said anything about, or referred in any way, to the very visible role of prices in the workings of markets, nor to the “hand of god”, nor to any “miraculous” forces at work in markets, and none of which Adam Smith mentioned in his singular mention of the metaphor in Wealth Of Nations.

In fact, it is clear that markets cannot work at all on the basis of invisible prices! It is their very visibility that allows markets to work. The idea of “invisible” forces at work is nonsense, and a moment of reflection shows it to be nonsense.

Why modern economists have accepted the myth that “an invisible hand”, rather than mandatory very visible prices, govern markets is a mystery beyond comprehension of the “Emperor is Naked” kind.

Understanding Spontaneous Order

“Understanding Spontaneous Order by RYAN YOUNG on 4 APRIL HERE

“Spontaneous order is one of the most important concepts in the social sciences, and also one of the most maligned. It’s most closely associated with Friedrich Hayek, but it has roots going back to at least the 18th century English and Scottish Enlightenments. Thinkers like Bernard Mandeville, Edmund Burke, Adam Smith, and David Hume all used some kind of spontaneous order framework. They knew that not every design requires a designer.

Nobody designed languages, for example. They emerge and continually evolve on their own, with nobody deliberately directing the process. The economy is also a spontaneous order, even though most people think it has to be consciously directed. Nobody is in charge of food distribution for New York or Paris, and yet those great, farmless cities are still fed every day. It’s an everyday miracle if you think about it.

The reason that a lot of non-economists are skeptical or unaware of spontaneous order is that it’s a difficult concept for the human brain to comprehend. We’re not wired to.

Back in our hunter-gatherer days, the traits that evolutionary biologist Michael Shermer calls patternicity and agenticity had a great survival advantage. Find a pattern in everything, and know that some agent is probably behind it. There’s a rustle in the bush. A hungry tiger must be causing that rustle. Run. Hide. Survive.

Even if most rustles are false alarms, people with strong patternicity and agenticity tended to outlive their fellows who didn’t. We are their descendants, and our brains haven’t changed to match our new surroundings. We think that there are patterns and agents behind everything, even though there aren’t, really. We’re still looking for that tiger, but it isn’t there anymore. …

… Hayek has a well-deserved reputation as poor prose stylist. But he did come up with a very clear way to explain how spontaneous orders can emerge in everyday life:

The way in which footpaths are formed is such an instance. At first everyone will seek for himself what seems to him the best path. But the fact that such a path has been used once is likely to make it easier to traverse and therefore more likely to be used again; and thus gradually more and more clearly defined tracks arise and come to be used to the exclusion of other possible ways. Human movements through the region come to conform to a definite pattern which, although the result of deliberate decisions of many people, has yet not been consciously designed by anyone.

-F.A. Hayek, The Counter-Revolution of Science: Studies on the Abuse of Reason, pp. 70-71.

And when a regulator comes along and tries to design a straighter, more orderly path, the results will rarely be what he intends. In a way, you can blame his hubris on tigers.”

Comment
Ryan Young’s short piece on “spontaneous order” is neat. It’s not self-evident the tiger parable accounts for the phenomenon (not all early humans were vulnerable to tigers, especially where there was none in the African bush). However, we get his point.

I have long been dissatisfied with the word “spontaneous” as the description of non-designed processes. Maybe it is my limited imagination. I agree whole-heartedly with what the word describes; I just do not think it describes situations particularly well.

Such events produce behaviours and ideas (knowledge) about a form of response (‘avoid rustles in the bushes’), which is not planned or initiated by a directing individual, though elders pass knowledge onto children which those who react appropriately (‘run fast away from rustles’) survive to tell their children (as do those who ‘stand and fight and kill the lion’).

In short, I think another word might be better suited than “spontaneous”. Some do not run away or are insufficiently skilled or strong. Mainly, they die. For those who do, is the difference only that they act ”spontaneously”? Or is it that they are more fearful or remember what they were told by elders about dangers whereas those who are killed? Choice may be random; on leaving their night location next day they go left rather than right and nothing rustles in the bushes where they go.

In the case of the informal shorter path that appears to cross an open space instead of using the designed perimeter path prepared for the development, is the diagonal crossway “spontaneous”, or is it explained by people who see a shorter walk from their relative lethargy, or they are carrying heavy shopping bags, or similar such motive. This suggests an action following a motive driving the actor, and their deliberate, not mysteriously “spontaneous” or motiveless, action (and similarly for all those who take the short-cut).

The consequence of these actions, contrary to the intentions of the designer of the longer pathway, is unintentional – nobody intended the informal path to appear; it did appear though, despite the intention of the architects who designed the intended official, but unused path.

An unintended consequence of actions has a long history in economics. Adam Smith identified unintentional consequences in Wealth of Nations when he used the metaphor of “an invisible hand” of the additive affects of individuals who are so concerned with the security of their capital if they sent it abroad to invest domestically and thereby, in consequence, unintentionally add to domestic “revenue and output” (WN IV.ii.9: 456).

This is the famous “invisible hand” paragraph. The grammatical object of this particular metaphor is the “concern for his security” that leads the merchant to invest locally. His insecurity leads him to act in a certain manner. Is “spontaneous” an adequate description for his actions? I am not convinced that it is.

My search for a better word continues …

"The metaphysics in the theory of Adam Smith compared with modern economics"

A graduate student’s posts his Master’s thesis, which from the abstract is probably of some interest to Lost Legacy. The abstract below summarises the thesis, into which the student has put a lot of work, covering the problems posed by “general equilibrium” ((Kenneth J. Arrow, Frank Hahn, and Gerard Debreu) counter-poised to the “self-organizing economy” (Friedrich A. Hayek, Thomas Schelling, and Paul Krugman).

Copenhagen Business School Student Thesis is HERE “The invisible hand: The metaphysics in the theory of Adam Smith compared with modern economics” by Joakim Kromann Rasmussen.

Abstract:
“This thesis shows how the metaphysical foundation in Adam Smith’s theory is reflected in modern economic theories. It is shown that the question of order is the main economic problem for Smith as well as the modern economists. With this question in focus, Smith’s philosophy is synthesized and reinterpreted. Upon this reading of Smith, a comparison is made to two modern economic positions: general equilibrium theory (Kenneth J. Arrow, Frank Hahn, and Gerard Debreu) and theories on the self-organizing economy (Friedrich A. Hayek, Thomas Schelling, and Paul Krugman). In this regard, the thesis is a philosophical interpretation of Smith’s works emphasizing the idea of the invisible hand and the metaphysical foundation in his theory: an interpretation juxtaposed with two stances in modern economic theory in order to unravel how the metaphysics in Smith’s works still finds an expression in modern economic thinking. The analysis falls into three parts. While the two first parts make up the interpretation of Smith, the third part makes up the comparative analysis. In the first part it is shown how Smith deals with the question of order in his works, as when he argues that humans qualifies epistemologically by organizing the events they meet, that humans at a social level strive for the sympathy of others to stabilize the social life, and how the market organizes resources for the common good. While many Smith scholars have interpreted his theory secularly, within the last fifteen years there have been attempts to interpret his theory nonsecularly. Under the influence from this research, a nonsecularized interpretation of Smith finds its way in the second part of the thesis. This part shows that the secular elements in Smith’s theory stand forth more consistent in light of the theological subject of providence. In the third part, Smith’s basic assumptions are compared with assumptions set forth in the two economic positions. This part shows how the question of order has influenced modern economic theory, and further, how the idea of the invisible hand, in a secularized form, still haunts modern conceptions of economic theory.”

Comment
I have downloaded Joakim Kromann Rasmussen’s thesis and I shall read it over the next few days (follow the link).

My comments will follow and my emphasis shall be on offering helpful comments, rather than a robust critique. We can always learn something new, so I have an open mind. Many of my posts on Lost Legacy have covered similar ground.

At present, I am reviewing Daniel B. Klein’s new book, “Knowledge and Co-ordination: a liberal interpretation”, Oxford University Press, which is instructive, as well as stretching, taking me into new areas of discourse. It is too early to say whether I agree or am satisfied with Daniel’s theses. In so far as his book provides a glimpse into Daniel’s deeper thinking, I find that prospect tantalizing, because I find his stance in our earlier debates (2009-10) on Adam Smith's use of the invisible hand metaphor baffling, because he ignores how Smith taught about the role of metaphors in the English language in 1763 (Lectures on Rhetoric and Belles Lettres, Oxford and Liberty Fund).

A Leftist Who Misreads Adam Smith

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Gavin Kennedy

“klukie” posts (17 March) in Democratic Underground HERE and HERE and massages quotations to mis-report Adam Smith on his use “an invisible hand”, a popular 18th-century metaphor (not a simile!) only twice in his published Works while alive, Moral Sentiments, 1759 and Wealth Of Nations, 1776, and once only as a noun, “the invisible hand of Jupiter”, in an Essay on the History of Astronomy, posthumous, 1795.

Adam Smith’s Psychology"

“The founding father of modern free market economics, Adam Smith, is best known for his famous simile in The Wealth of Nations (1776) about the “invisible hand,” which seemed to endorse a dark view of human nature. He wrote: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

However, that’s perfectly OK. “Man…is 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 not 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.”

Comment
In neither case did the metaphor of “an invisible hand”, nor did his example of the nature of bargaining in Wealth Of Nations (Book 1, chapter 2, paragraph 2) “endorse a dark view of human nature”. Klukie has misunderstood Smith’s paragraph on bargaining (a common error among modern neo-classical economists of both Left and Right political stances).

Far from “endorsing a dark view”, his passage reveals an important aspect of seeking one’s self-interests: the necessity for “addressing” the other person’s self-interests, not just your own, if a positive conclusion to your bargaining is to occur. Unless your offer addresses the other’s interests, you will deadlock, which is a common outcome in bargaining between two egotistic parties. Neither wants to move, therefore neither gets what they want.

“… later on in his masterwork Smith even seemed to provide a rationalization for unvarnished greed and a no-holds-barred predatory economy when he commented: “In spite of their natural selfishness and rapacity… are led by an invisible hand to…advance the interest of the society...”.

Comment
Smith in Wealth Of Nations (WN IV.1.10: page 184) discusses “a proud and unfeeling landlord view[ing] his extensive fields, and without a thought for the wants of his brethren, in imagination consumes himself the whole harvest than grows upon them”. He goes on to say that the "unfeeling landlord" is obliged to distribute among those ”who toil in his palace and in his fields (“the thousands whom [the landlords] employ”) “that share of the necessaries of life, which they would in vain have expected from his humanity or his justice”.

Why did the landlords, “in spite of their natural selfishness and rapacity” share their harvests with the “thousands whom they employ”? Clearly, it was from their mutual dependence on those that labour. If they did not feed the labouring poor, and their families, there would be no “economy of greatness” for the landlords. No food meant no labour! No labour meant no food for anyone. Landlords had no choice. Even slaves had to be fed.

This did not mean the “rapacious” landlords ensured that their toilers basked in splendour and a surfeit of full rations; the distribution of food was left to overseers, not known for their humanity, not their gentle kindness (they mimicked their masters. The toilers received the rations their overseers considered sufficient.

The fact that Smith did not spell all this out did not mean he was unaware of the realities of life for the peasantry, and later, tenant farmers (let alone the realities of the “splendours” of Rome, Egypt, Babylonia and Asia for the slaves). Recall that his text of Moral Sentiments (1759) represented his Lectures in Moral Philosophy, Jurisprudence, and Rhetoric delivered to audiences of the sons of landed interests, the aristocracy, merchants and manufacturers, and bright lads on scholarships from Church ministers, legislators and the men of the law (from age 14 to 17).

“Klukie” writes in comparatively free societies, with protections of democratic rights and the law in the 21st century; 18th-century Scotland was not anything like that. I see no signs that “Klukie” is aware of the historical context in which Smith and others worked. Smith pushed out the boundaries of frankness about the realities faced by people in Scotland, and taught in the shadow of the ever-present “zealots” of the Church seeking “subversion” and “heresy” in whatever Professors taught their students. The three previous Professors of Moral Philosophy at Glasgow were all called before the Glasgow Presbytery to answer charges of “heresy”.

I will come back to rest of “Klukie’s” post (follow the links), which is of a similar misleading and partisan perspective of the Works of Adam Smith, ironically, a habit shared by modern neoclassical economists of a contrary disposition to that which “Klukie” would probably be sympathetic.

The 20th Century Myth of the Invisible Hand

Dan Hirschman, a regular reader and correspondent of Lost Legacy, posts on his Blog, A Budding Sociologists Commonplace Sourcebook HERE

“The 20th Century Myth of Adam Smith’s Invisible Hand in Two Graphs”

For obvious reasons, Dan Hirschman's post is worth printing in full (follow the link to see the two graphs), both of which are a remarkable confirmation of Lost Legacy’s arguments regarding the supposed claims that Adam Smith’s use of the Invisible Hand Metaphor shows that the modern myths of its significance, as his major idea in his Works, were pure inventions of the Cold War decades.

“Longtime readers of this blog will know that I am a bit fascinated with the uses and misuses of Adam Smith’s work. For that reason, I am a big fan of Gavin Kennedy’s blog, Adam Smith’s Lost Legacy. Kennedy has been fighting against contemporary misinterpretations of Smith, with a special focus on the “myth of the invisible hand” (for an article-length summary of his position, see here). His work, along with Emma Rothschild, Warren Samuels, and others, has shown that the concept of the invisible hand emerged in 20th century economics, and was not central to Smith’s own writing. Smith used the phrase “invisible hand” just once in the Wealth of Nations, and it meant something more like “unintended consequences” than the harmonious workings of a perfect market. Emma Rothschild goes so far as to call it a “mildly ironic joke,” though I prefer to emphasize that the invisible hand was a common metaphor of the time that had little special significance for Smith. So, when did we start thinking of Smith as being the “theorist of the invisible hand” (and, around the same time, forget all his opposition to strict laissez-faire)? Gavin Kennedy’s historical work places the disjuncture in an oral tradition in England and the US in the late 19th to early 20th century. The myth remained somewhat confined until the publication of Samuelson’s extremely influential undergraduate text, Economics in 1948, which brought the myth to the masses (Kennedy 2010).

One way to see the influence of Samuelson’s publication, and to check the overall plausibility of the Kennedy-Rothschild-Samuelson (K-R-S) account of the myth of the invisible hand, is simply to check how often the phrase was referenced. Thankfully, JStor’s Data For Researchers tool makes this task trivial. Here’s a graph of counts of articles mentioning “invisible hand” over time:

There is a trickle of mentions leading up to the 20th century, with a takeoff following 1950 (and thus, a few years after Samuelson’s text was published).



Here’s a similar graph for mentions of “adam smith” AND “invisible hand”:


Mentions of "adam smith" and "invisible hand" in JStor's corpus.

Note that the trickles earlier on drop out – as “invisible hand” was a somewhat common metaphor in Smith’s time, it makes sense that other 18th and 19th century authors invoked it, but they did not appear to do so in reference to Smith. By the 1920s, and especially in the 1950s and after, we begin to see Adam Smith and the invisible hand coming together. A more detailed analysis is also possible in JStor, as we could look at the articles referencing both Smith and the invisible hand to see exactly how authors in the 1920s-1950s understood the phrase, and compare it to uses in articles from the 19th and early 20th century that did not reference Smith. Even in the absence of that more detailed analysis, I think we can safely say that the link between Smith and the invisible hand is a relatively recent creation. The evidence for the K-R-S position is strong.”

Comment
This is more evidence that the message is getting across to a wider audience after nearly seven years of Lost Legacy. I expect that the message will gain traction following publication of Warren Samuel's, Erasing the Invisible Hand (Cambridge University Press, 2011). Warren was a prominent and well-respected scholar in the History of Economic Thought community and his detailed assessment of the claimed significance to Adam Smith of his use of the IH metaphor and its relevance to modern economics are grossly exaggerated. It plays no useful role in modern economic theory.

Please pass on to other Blogs and colleagues Dan Hirschman's post.

Book Review of Warren Samuels' New (and last) book

I have written (21 Feb) a review of Warren Samuels’ new (and last book) for EH.Net for SHOE (the Society of History of Economics) HERE

“Erasing the Invisible Hand: Essays on an Elusive and Misused Concept in Economics”
Samuels, Warren J.; Reviewer: Gavin Kennedy

“Warren J. Samuels (assisted by Marianne F. Johnson and William H. Perry), Erasing the Invisible Hand: Essays on an Elusive and Misused Concept in Economics. New York: Cambridge University Press, 2011. xxviii + 329 pp. $95 (hardcover) ISBN: 978-0-521-51725-6.

Reviewed for EH.Net by Gavin Kennedy, Edinburgh Business School, Heriot-Watt University, Edinburgh (Professor Emeritus).

"Warren Samuels was an American historian of economic thought located at the top of its first division. He started work for this book in 1983 and took 28 years to complete. This was no rushed job and it shows in his meticulous and, therefore, authoritative scholarly account of the now widely quoted “invisible hand” (pp. 20-26). Smith did not “coin” the phrase. It was prevalent in classical times from Aeschylus through to St Augustine, and later, in numerous seventeenth- and eighteenth-century theological texts, sermons, plays (Shakespeare), poems, and novels (Defoe, Walpole), and in political rhetoric (George Washington). 
 
Adam Smith used it only twice as a metaphor in his Theory of Moral Sentiments (1759) and Wealth of Nations (1776), and once in his History of Astronomy (1795, posthumous). After Smith, there was an absence of mentions of the invisible hand metaphor among economists to 1875 and near silence thereafter until it was rediscovered and re-invented into the “founding concept” of modern economics from the 1940s.

Samuels reports Amazon listing 33,888 books discussing the invisible hand (2009). The annual rate of mentions rose from “very low” (1816-1938), but the decade (1990-1999) recorded eight times the level of mentions between 1942-1974 and nearly 20 percent higher than for 1980-89 (p.18-19). In consequence, the invisible hand is now widely believed to be significant, and it has spread to other disciplines. Samuels dissects forensically this phenomenon of belief, though he understates the unique role of Paul Samuelson (from 1948) in popularizing modern notions of Adam Smith’s “invisible hand.”

Samuels discusses Adam Smith’s supposed use of the invisible hand in his political economy. Essay 3 examines the numerous modern identities of the invisible hand and Essay 4 discusses Smith’s argument that philosophical ideas help to “soothe the imagination.” Essay 5 examines conceptual problems associated with “naturalism” and “supernaturalism” in philosophy. Essay 6 examines the invisible hand as a “figure of speech,” which for me is Samuels’ most disappointing essay. Samuels continues with his examination of the invisible hand as “Knowledge’ (Essay 7) within the economic role of government, while Essay 8 addresses misconceptions that Smith was a doctrinaire advocate of “laissez-faire.” Samuels continues in Essay 9 on claims that Smith’s ideas led to the welfare theorem. Samuels’ conclusions in Essay 10 are best summarized by his question: “what is left of the invisible hand” (p. 293) and by his answer: “There is no invisible hand as that term is used in economics. Its continued use must at its base constitute an embarrassment. Almost all uses of the term add nothing to substantive knowledge” (pp. 290-91).
There are two parts to the enigma of “an invisible hand.” There was Adam Smith’s use of the invisible hand metaphor (what did Smith mean?) and second, there is how modern economists use the same figure of speech (what do they mean?). Samuels’ otherwise excellent and thorough account produces an ambiguous answer. He says that his “account clearly does not conclude the conventional view(s) of the invisible hand is (are) wrong, in whole or in part” (p. 295). However, “Conventional views” may well be true, if judged strictly as beliefs. Simultaneously and separately, beliefs in attributions to Adam Smith that assert his complicity in those conventional views are false.

Samuels’ problem is sourced in Essay 6 on “uncertain language.” He identifies “one dozen major responses” to the question of “what is the invisible hand?” plus “some four dozen identities” (p 135). However, his analysis of the role of metaphors is particularly disappointing because, while he provides an authoritative survey of the modern use of metaphors and associated figures of speech, he does not acknowledge Adam Smith’s own teaching on metaphors. Instead, Samuels sources his “conclusions” from eight twentieth-century linguistic authorities (from 1979 and 1993) and Samuel Johnson’s Dictionary (1755), of which Smith published a scathing critical review. Samuels makes no mention in the text nor in the bibliography of surely the prime witness as to what Smith meant by “an invisible hand,” that is, Adam Smith himself!

Smith discussed the role of metaphors clearly in his “Lectures on Rhetoric and Belles Lettres” ([1762] 1983): “Now it is evident that none of these metaphors can have any beauty unless it be so adapted that it gives the due strength of expression to the object to be described and at the same time does this in a more striking and interesting manner” (Smith, LRBL, Lecture 6, p. 29; see also Oxford English Dictionary, 1983).

Smith used the metaphor of “an invisible hand” to “describe in a more striking and interesting manner” their particular objects: it was the absolute mutual dependence of the “unfeeling landlord” on his serfs, servants, and tenants (‘no food, no labour’), and their mutual dependence on him (‘no labour, no food’), which mutual dependence led him to share his crops with them, unintentionally benefiting humanity through the “propagation of the species” (Theory Moral Sentiments, 1759, p. 185); and it was the insecurity felt by some, but not all, merchant traders, that led them to prefer to invest in “domestick industry” (mentioned four times), rather than risk the “foreign trade of consumption” (Wealth Of Nations, 1776, p. 456), also unintentionally benefiting society by adding to domestic revenue and employment. Smith’s use (History of Astronomy, 1795, p. 49) of the “invisible hand of Jupiter” simply states the pagan beliefs of Romans about their god, Jupiter, whom they believed (but never witnessed) cast his lightning bolts at humans. In all three cases, it is evident that for Smith the “invisible hand” does not exist; it is an imaginary figure of speech and an imagined pagan belief. We cannot see, but we can imagine; we may choose to believe or not to believe. The “invisible hand” “corresponds to nothing in reality,” it “contributes nothing to knowledge,” and is a “distraction and a diversion, (Samuels, p. 146).

Samuels simultaneously announces that “designating something – for example, the market, the price-mechanism, an entrepreneur, or anything else” – as the function ostensibly performed by something called “the invisible hand” literally adds nothing.

Warren Samuels has written an authoritative, detailed and mainly original contribution to scholarship, ably assisted by his collaborators, Marianne Johnson and William Perry."

Gavin Kennedy, professor emeritus, Heriot-Watt University, Edinburgh (gavinK9@gmail.com), is the author of Adam Smith: A Moral Philosopher and His Political Economy, second edition, (Palgrave, 2010) and www.adamsmithslostlegacy.blogspot.com/

Copyright (c) 2012 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (February 2012). All EH.Net reviews are archived at http://www.eh.net/BookReview.”

[PLEASE PASS ON TO READERS INTERESTED IN THE HISTORY OF ECONOMICS, AND TO GENERAL ECONOMISTS INFLUENCED BY THE MODERN MYTHS ABOUT ADAM SMITH AND THE IH METAPHOR].

Worth A Look?

If you are interested in some work undertaken recently on applying some of Adam Smith’s ideas on political economy, using techniques familiar to modern economics graduates, a working paper may be of use to you.

The author is not listed (at least I did not find one), and they want $80 for it to subscribe (they probably have a long lis of other papers; might be worth a browse.

Follow the link HERE 14 February

“Complexity, competition and growth: Key ideas from Adam Smith, modeled using agent-based simulation

This dissertation uses agent-based simulation to study markets in ways that depart from the Walrasian tradition, and to vindicate Adam Smith’s beliefs about the power of the division of labor to enhance productivity, which mainstream economics has neglected because Walrasian equilibrium is incompatible with nonconvexities such as fixed costs.

The first article, “The Invisible Hand, Reloaded,” studies a market in which firms in a commodity market try to maximize profits by estimating demand via an OLS regression, while customers choose the lowest-price firm, but face random firm-specific transactions costs. I call this “empiricist competition.” Near perfect competition emerges with very few firms (e.g., n＝3), and the result cross-applies to the free entry case, to U-shaped average costs, and even to (gently) falling average costs, in which case empiricist competition gives rise to a downward-sloping supply curve .

The second article, “The Division of Labor is Limited by the Extent of the Market,” vindicates the thesis of Chapter 3 of The Wealth of Nations by building a market of decentralized retailers, following Howitt and Clower (2000), and then equips agents with avoidable-cost production functions, taste-for-variety utility functions, and techniques to sift through hundreds or thousands of corner solutions to find the optimum behavior when they face buy-sell price spreads and stockout and “jobout” constraints on what they can buy or sell at each price. This gives rise to endogenous specialization, which is compatible with competition yet causes GDP per capita to rise indefinitely with population growth or with the accumulation of “capital” (foregone consumption, subject to diminishing returns and depreciation, which augments labor). What emerges is an interpretation of technological change, not as new discoveries a la Romer (1990), but as the exploration of an already-known technology space which requires sufficient labor-cum-capital to explore. Unlike Romer (1990), this interpretation of technology is a candidate to explain the wealth and poverty of nations.

The third article, “Bayesian Skill Reputation Systems, presents a model where agents are endowed with skills whose quality is unobservable and opportunities arrive each turn which can only be exploited by certain skills, I show how agents can use Bayesian updating to derive pretty accurate knowledge about the quality of skills. However, the Bayesian skill reputation system quickly fails when agents can conceal past failures, which suggests a reason why, as Granovetter (1983) showed, networks of “weak ties” are so important for finding jobs, and why employers are suspicious of gaps in resumes.”

A Psychologist Writes On Adam Smith

Peter Corning posts in Psychology Today, “The Fair Society: Adam Smith’s Psychology: His “invisible hand” was only part of the story; so was morality!”
HERE

He demonstrates in the use of his evidence to support his analysis of Adam Smith’s psychology at a standard (sadly) somewhere below that expected of a former faculty member of Stanford University.

[Before critics jump in with charges of an ‘ad hominem’ fallacy, they should note that I am attacking the quality of Dr Corning’s methodology on this occasion, not his undoubted worthiness as a person or his proficiency as a psychologist].

He writes (follow the link):

“Man...is led by an invisible hand”

This implies Adam Smith made a general statement about all or most men; he didn’t. In Wealth Of Nations (Book IV, chapter 2, paragraph 9), on the only occasion that he used the IH metaphor in that Work, he spoke of a specific group of merchant traders, but clearly not all, who were concerned about the security of their capital (he specifies this group four times) and who chose, therefore, to invest in “domestic industry” rather than take extra risks in the “foreign trade of consumption”.

It was this merchant alone who was `’led by an invisible hand” to invest locally, and it was the result of his “insecurity” that caused “domestic industry” to be higher than it would otherwise have been; specifically it produced a higher “domestic” annual “revenue and employment” (simply”, the arithmetic whole is the ‘sum of its parts’), and, because increasing employment benefitted the poor, Smith regarded this consequence as a public benefit.

“In spite of their natural selfishness and rapacity...[men] are led by an invisible hand to...advance the interest of the society..."

Here, Peter Corning quotes from Moral Sentiments (Part IV, chapter 1, paragraph 10) and, for too trusting readers, he obscures the fact that Adam Smith is not referring to “men” in general but only to “a few lordly masters”, for whom “Providence” divided the earth unequally. He specifically refers to a “proud and unfeeling landlord” viewing “his extensive fields” without a thought for the wants of his brethren”, and who in his “imagination” he consumes the “whole harvest that grows upon them”. Beyond the little that he consumes himself” - “ the capacity of his stomach bears no proportion to the immensity of his desires”, he “receives] no more than that of the meanest peasant”

Crucially, because of this physical fact, “he is obliged to distribute among those, who prepare in the nicest manner, that little which he himself makes use of”. The “rich” landowners as a group act similarly and they distribute the “produce of all their improvements” to all the others who are dependent upon them, as they too are dependent on their labourers. Now Smith is clear the nature of the benefit to society, specifically, over the generations since the “land was divided” by Providence (c. 10,000 years ago since the discovery of farming): it affords the “means to the multiplication of the species”.

Adam Smith was very specific about the benefits from each of the cases. Far from being a general outcome, the IH metaphor is a localized outcome in which Smith uses a popular 17th-18th-century metaphor (not a simile!) to “describe in a more striking and interesting manner” their specific case-objects. In TMS, the mutual dependence of the “proud and unfeeling landlords” on the dependent “thousands whom they employ” (no food, no labour and no labour no food), had nothing to do with “charity”! In WN the IH metaphor describes the ‘insecurity’ felt by some, but not all, merchants – [See Adam Smith’s (1762) “Lectures in Rhetoric and Belles Letters’, p. 29, where he describes the role and purpose of metaphors.]

The generalization from two cases into a general theorem is a modern invention (from the 1940s). Dr Corner criticizes a pure invention that has nothing to do with Adam Smith’s use of the metaphor. It serves an ideology and has no scientific basis. The invisible hand does not exist: see Warren Samuels, 2011, Erasing the Invisible Hand: essays on an elusive and misused concept in economics”, Cambridge University Press.

“More important, many of Smith's modern acolytes seem unaware of his cautionary warnings, especially in his earlier work, The Theory of Moral Sentiments, where (as a Stoic and a Christian) he stressed the fact that everything in a free market depends on a moral foundation of trust, honest dealing and, as he himself put it, "justice".

Peter Corning is partly right here, except that Adam Smith did not write Moral Sentiments “as a Stoic and a Christian”, certainly by when he prepared and published the 6th edition in 1790. To make that case here would take too much space, so I refer readers to my paper, “The Hidden Adam Smith in his Alleged Theology”, Journal of the History of Economics, no 3, 2011. Unintentionally, I am sure, Peter Corning has swallowed the myths among what he calls, “Smith's modern acolytes”, who purvey them around the Academy and which the media and politics popularises in a vulgar presentation of Adam Smith’s views. On this last point, Adam Smith never used ideas associated with the French Physiocrats of “laissez-faire”.

It is always risky treading into fields outside one’s expertise. I am not damning Peter Corner’s broad points; I am trying to sharpen them to represent Adam Smith’s legacy as the appropriate counter-point to slavish acceptance of myths about his work.

An Evolutionist's View on Adam Smith

Jason Collins (including his quotes from Robert Trivers) writes (7 February) in Evolving Economics HERE

“Trivers on biology in economics”

In The Folly of Fools: The Logic of Deceit and Self-Deception in Human Life (my earlier review here), Robert Trivers asks “Is economics a science?” He answers:

The short answer is no. Economics acts like a science and quacks like one – it has developed an impressive mathematical apparatus and awards itself a Nobel Prize each year – but it is not yet a science. It fails to ground itself in underlying knowledge (in this case, biology).

Trivers notes the cost of this:
[T]he first piece of reality they should pay attention to – and this has been obvious for some thirty years now – is biology, in particular evolutionary theory. If only thirty years ago economists had built a theory of economic utility on a theory of biological self-interest – forget the beautiful math and pay attention to the relevant math – we might have been spared some of the extravagances of economic thought regarding, for example, built-in anti-deception mechanisms kicking in to protect us from the harmful effects of unrestrained economic egotism by those already at the top.

Trivers also has a short shot at the invisible hand metaphor. He notes that biology has hundreds of examples of where the pursuit of self-interest can have dramatic negative effects on group wellbeing. This reflects the recent arguments of Robert Frank.”

Comment
Jason may be relying entirely on modern representations of the co-called Invisible hand, which readers of Lost Legacy will know is (a) attributed to Adam Smith (a fallacy, invented by the same modern economists from the 1940s and now widely believed), and (b) is usually accompanied by another invention that self-interest has the remarkable quality that it always operates to the benefit of the society, irrespective of the other motives of economic agents, including selfishness.

Neither of these beliefs is accurate. Indeed, Adam Smith was never so unworldly as to assert such a ridiculous notion. In Wealth Of Nations (Books I, II, and III) he identifies over 70 instances of malign outcomes from the personal self-interest of certain individuals, which were detrimental to those affected (to which I could add how in Books IV and V, Smith excoriates European powers for their brutal imposition of colonial rule on the Americas and India).

There was never any question of Adam Smith being starry-eyed about the possible detrimental affect of self-interest on others, themselves and the group.

If Jason Collins and Robert Trivers (and, of course, Robert Frank) believe something to the contrary, I would be interested in where Smith expressed such naïve views; certainly not in his Moral Sentiments or in Wealth Of Nations.

As for possible inexcusable assertions to the contrary, there is no direct lineage of view from Adam Smith to modern neoclassical economics.

A Scotsman Ponders the Big Questions

Allan Massie writes (1 February) in The Scotsman, our national newspaper HERE

“There is no such thing as a truly free market”

“THE phrase “the free market” is much bandied about. Capitalism, we are told, depends on the efficient working of the market so that the operation of Adam Smith’s “invisible hand” may make for general prosperity.

Actually, as James Buchan observes in his book on Smith, “the phrase ‘invisible hand’ occurs three times in the million-odd words of Adam Smith’s that have come down to us, and on not one of these occasions does it have anything to do with free-market capitalism”.

The Italian immigrant shoeblack who was asked what he had learned in his 40 years’ shining shoes on Broadway replied: “There is no such thing as a free lunch.” I don’t know whether he required a licence to practise his trade, but he might as well have said: “There is no such thing as a free market.” All markets are regulated to some extent, either by the law or, in the case of illegal markets such as the market in drugs or the market in alcohol in countries where its sale is prohibited, by the gun or the knife.

…… Regulation of the market has always been necessary in the public interest. Everyone recognises this at some point. A few years ago, Gordon Brown was applauding his “light regulation” of the financial services industry. Now it is generally agreed that the regulation was too light, and that regulation must henceforth be stricter. So it is perceived to be in the public, or general, interest that financial markets be less free."

Comment
Adam Smith would have agreed. Despite his attributed reputation as an advocate of “laissez-faire” (words he never used), Smith had a keen sense of the need for regulation of certain functions of banks (lending recklessly) or over-issuing low value promissory notes) and general statutory measuring of weights and measures and of quality-stamping of cloths. Above all, he favoured rule by law to protect people from arbitrary torments and general oppression.

He favoured a general role for state funding from taxation (with the equity balance falling on the consumption of luxury goods, not necessary foodstuffs). He lived in a relatively rich economy, compared to most of the rest of the world, but where the poorest sections of society, who did most of the work to create everything that everybody consumed, were left with the meanest share of the annual product (wealth).

He considered it ‘but equity besides’ that the poorest should receive more in the form of higher wages (this was before notions of a welfare state’ and modern version of a ‘living wage’ were thought about). His modest suggestions were many decades before newer ideas became practicable.

Alan Massie is a thoughtful intellectual in Scottish society. I think the rest of his article wanders off track by equating “free markets” with criminality (follow the link). Markets remain the least worst of the alternatives. Markets are preferred where possible (unavoidable regulations and all). The State is an option where absolutely necessary.

Smith was not, however, a utopian thinker. He did not think it likely that free trade would be implemented in Britain. He dismissed it as a ‘utopian’ idea because in the taxation regimes of the 18th century – there was no income tax as we know it, until after he had died in 1790 – some revenue had to be raised on imports if government (that is, defence, justice, public works, and an assortment of smaller things, each with inevitable larger possibilities) was to function at all. The (mainly avoidable) heavy war agendas of the 18th-century required more sources of government revenue (more so when new French wars threatened bankruptcy) and these new sources of revenue went on to finance imperial adventures in Europe and the rest of the world, not education, health and local government. Smith’s dictum, after the American war of independence, that Britain should curtail its ambitious spending agenda to within the limits of the “modesty of its circumstances” (last lines of Wealth Of Nations), was ignored in creating the world’s largest ever Empire.

‘Tis a pity that the British government stumbled, or bumbled, into this track, and the fault lay with the legislature, and those who influenced it, and it continues to be a cause for regret, given also, that Britain continues to make the same error of judgement, by disregarding the true modesty of its current and prospective future circumstances.

Incidentally, there is 'no such thing as a free lunch' - someone, somewhere pays for it.

Actions Speak Louder Than Mystical Forces

Anonymous writes (27 January) in The Point (Gambia) HERE

“Tolerance in the teaching of the great prophet(s) and in liberalism: A contrastive analysis (Part 2)”

“The humans of today feel that they have reached mature self-sufficiency and are no longer like the children of yesterday who had to hope for an invisible hand to reach out and do something.”

Comment
Nobody ever had to wait for an invisible hand to do anything. It has always required people to act and do something.

Who is Kidding the Good Folks of Nappa Valley?

Bill Dyer writes to Napa Valley Register HERE

"Unchecked free markets risk unfair playing fields"

“Adam Smith believed there is “an invisible hand” that regulates free markets, but we have found that without some fair-minded regulation to level the playing field, we have to watch out for the invisible fingers getting into our wallets.”

Comment
What does “an invisible hand” add to our understanding of markets?

Why not try checking very visible prices?

Adam Smith never said anything about “regulating markets”, other than by price competition.

Regulations may be necessary for safety (banking, fire risks, quality stamping, and such like) but these regulations can never be invisible for them to apply, and no "invisible hand" implements of initiates them.

Even the Left(ish) Buy the Myth

Dadepfan post in Reverse Spin HERE

"American Political Myths – The “Invisible Hand”

As the theory goes, in a free market, each individual strives to maximize his or her own gain, and in doing so is “led by an invisible hand to promote an end which was no part of his intention.” The end that is promoted is “to render the annual revenue of the society as great as he can.” As explained by Investopedia: “Smith assumed that individuals try to maximize their own good (and become wealthier), and by doing so, through trade and entrepreneurship, society as a whole is better off. Furthermore, any government intervention in the economy isn’t needed because the invisible hand is the best guide for the economy.”

Well, this makes some sense and does seem logical, at least on the surface. I believe that the “invisible hand” does have the postulated effect, but certainly NOT to the magical extent claimed by free market advocates and anti-government zealots.

Comment
Dadepfan does not have to accept any vestige of the "invisible-hand" myth. Adam Smith was not responsible for the modern myths, largely invented in American academe in an oral tradition (possibly emanating from Cambridge, England), which gained traction after Paul Samuelson published his popular best-selling textbook, 'Economics: an introductory analysis', 1948.

For Adam Smith, it was a useful metaphor, popular in his days in theology, sermons, plays, and novels. Smith used in only twice in his published works, and hardly any notice was take of it until the late 19th century, and then rarely before Samuelson gave it a boost in his 5- million best seller and graduates taught what they had read.

Smith used it as a metaphor for the behaviour of some, but not all, traders who felt the "foreign trade of consumption" was too risky and therefore, preferred to invest only "domestically", which on the arithmetic rule that 'the whole is the sum of its parts' increased domestic 'annual revenue and employment", the latter of which Smith considered an public benefit, given the dire circumstances of the 18th-century poor, and the former raised capital available for new investment. Their "insecurity" was the object of the IH metaphor - all metaphors have "objects" which metaphors "describe in a more striking and interesting manner" (as taught by Smith in his "Lectures on Rhetoric and Belles Lettres", 1763, and in the Oxford English Dictionary, 1983).

Smith mentioned nothing about all 'self-interested' actions benefiting the public - indeed, he gives over 70 examples of malign 'self-interested' actions that hurt the public in Books I, II, and III of Wealth Of Nations. Today, we could give many more. Tariffs, protectionism, prohibitions, monopolies, mistaken government policies, and poor education were among his targets. He used the IH metaphor only once in Wealth Of Nations and not in connection with markets.

[I tried to post this as a comment on the Reverse Spin Blog to no avail.]

No, Tristan, A thousand Times No!

Tim Worstall writes (21 January) on his Blog HERE
a repudiation of the latest nonsense about Adam Smith’s use of the Invisible Hand metaphor:

“Can I call Tristram Hunt a Twat?”

“Or should I use the more obvious word?

“It is a tradition of redistribution, intervention and socialism equally as compelling as Adam Smith’s “invisible hand” (which, one should remember, was a satirical attack on laissez-faire morality, drawn from Shakespeare’s Macbeth).’

It’s got bugger all to do with laissez faire morality. It’s about how the merchant (read, capitalist, for the word had not been invented in Smith’s time) will, despite the greater profits of the foreign trade, find himself still likely to invest at home.
The most important modern result of which is that even if we have perfect theoretical capital mobility it still isn’t true that labour bears all of the incidence of corporate taxation.”

Comment
Tim Worstall is a lively blogger. See Tim’s regular contributions to the “Pin Factory” Blog of the Adam Smith Society (HERE)

Scroll through Tim’s Blog (where he doesn’t take prisoners). Read some of his long-running contra-temps with Richard Murphy, a left-of-centre chartered accountant.

Tim’s economics are usually spot on for accurate presentations of good, common-sense economics. (He is a Fellow of the Adam Smith Institute).

The above is a clear step from Tim towards a correct reading of Adam Smith’s use of the IH metaphor on “an invisible hand”. OK, his robust use of the English language is characteristic of his style on his own Blog (somewhat toned down on the ASI Blog), but he is never boring, nor slavishly mealy-mouthed.

I do not know of ‘Tristram Hunt’, but if Tim’s quote is representative, Tristan writes rubbish on Adam Smith’s use of the IH metaphor.

Small Steps in the Right Direction

James Higham writes for Orphans of Liberty HERE

James covers some of the distorted ideas about Adam Smith, especially about markets and morals. He picks up the distortions of Smith in the “concept” of the invisible hand and the claims of Ayn Rand (and her mentor, Bernard Mandeville, 1724, in “Private Vice, Public Virtue”, today known as the “greed is good” school of mindless radicalism.

“Adam Smith”

“Thought this a most significant take on Adam Smith who, like all great ideas people who’ve influenced humanity, has been partly read and misread as has been people’s wont and their own prejudices:
Smith saw economics as a branch of moral philosophy, and he saw capitalism as an ethical project whose success required political commitment to justice and freedom, not merely an understanding of economic logistics.
The notion of classical liberalism certainly embraces economic freedom but it also embraces that pesky bit “unless/until it is to the detriment of others”. Cue the moral dimension.

A great deal of contemporary (neo-classical) economics can be understood in terms of translating Smith’s Invisible Hand metaphor into a systematic theoretical form, with a particular emphasis on the economic efficiency of perfectly competitive markets.

However the popular view of Smith that has resulted from this emphasis is twice distorted.

Firstly, it is based on the narrow foundations of a few select quotations from The Wealth of Nations (WN) that are taken in isolation as summing up his work (Smith only mentions the ‘all important’ Invisible Hand once), and secondly these quotations have been analyzed in a particularly narrow way.

Both selection and interpretation have been driven by contemporary economists’ interest in justifying orthodox economic methodology and their peculiar (Mandevillian) assumption of the selfish utility maximising homo economicus.

And that’s the nub of the matter.

But anyone who cares to read Smith’s Wealth of Nations for themselves will find an economics discussed and justified in explicitly moral terms, in which markets, and the division of labour they allow, are shown to both depend upon and produce not only prosperity but also justice and freedom, particularly for the poor.

This is more than just a philosophical nicety and sets it at odds with the Randian dystopic view of freedom, the free market’s motivation and the cold indifference of the amoral “business is business”. This extremist position is a central plank in the platform of the crony capitalists and justifies all the corruption and I’m all right, jack of the Dimons et al.
It has zero to do with classical liberalism. “

Comment
Steps in the right direction are always welcome away from the neo-classical inventions of an Adam Smith not born in Kirkcaldy in 1723, but invented in US academe in the late 1940s (Paul Samuelson) through to today. It was an ideological attempt to defend capitalist market economies from the pressures of the competing Soviet experiment in totalitarian centralised planning, which fortunately collapsed after 1989, before the Cold War turned Hot.

Some erroneous ideas die slowly, some at a glacier-like pace. The ‘invisible hand’ and ‘greed is good’ fantasies are two such erroneous ideas.

Lost Legacy welcomes even the smallest steps away from the largely Chicago Adam Smith.

Memo to John Kay: read Warren Samuels' new book

John Kay writes (18 January) the “accessible and relevant economics” Blog HERE

“A real market economy ensures that greed is good”

“Adam Smith’s insight about the invisible hand is often interpreted in this way and modern mathematical economists have established that proposition more precisely. But if co-ordination were the only strength of the market economy, a computer could do that job equally well. Computers are very good at processing information.”

Comment
I have known John Kay since he was a student at Edinburgh University in the 1960s and I have followed his impressive career as a top UK economist. However, not unexpectedly, perhaps, for regular readers of Lost Legacy, I do not agree with the implications of John’s assertionoft “Adam Smith’s insight about the invisible hand”, nor the allusions to market economies ensuring “that greed is good”.

The connection between markets and “greed” is a wholly “licentious” idea from Bernard Mandeville (1724), and more recently by Ayn Rand in the 1970s, but not by Adam Smith either in Moral Sentiments or Wealth Of Nations.

Fortunately, Warren Samuels’ new book, “Erasing the Invisible Hand: essays on an elusive and misused concept in economics”, 2011, (Cambridge University Press), is now available to tackle the issues raised in John’s post (probably he would not be satisfied by reading Lost Legacy passim, being the thorough economist that he is).

Samuels would more likely satisfy him from his thorough scholarly exploration of the history of the invisible hand covered in this new book, both from Adam Smith’s time (Smith is shown to be innocent of the attributions made to him for the modern misreading of Smith by modern economists, since the 1940s).

In what manner “modern mathematical economists have established that [invisible hand] proposition more precisely” is not shown. Warren Samuels shows by his exhaustive analysis of the many arguments claiming that “an invisible hand” operates in the economy that no such entity exists nor can add anything to our understanding of how markets work. I suggest, also, that no mathematical terms representing “an invisible hand” appear in any of the mathematical equations of those claiming to show that such a terms exists.

The IH Debate Acquires Scholarly Traction

'Steve J' posts on Radamisto, 6 January, HERE

'AN EARLIER "INVISIBLE HAND" MENTION'

Before Smith and Mandeville, there was Descartes, who in 1645-46 not only described the Invisible Hand but also provided a causal explanation of why it works. From Alexis de Tocqueville : the first social scientist (2009) by Jon Elster, page 53:

In one letter, Descartes merely affirms the existence of an invisible hand:

[It] is difficult to determine exactly how far reason orders us to interest ourselves in the public; yet that is not something in which one must be very exact; it suffices to satisfy one's conscience, and in doing that, one can grant very much to one's inclination. For God has so established the order of things, and has joined men together in so connected a society, that even if everyone related only to himself and had not charity for others, a man would nevertheless ordinarily not fail to employ himself on the behalf of others in everything that would be in his powers, provided he uses prudence."

Challenged by Elisabeth to explain his argument more fully, Descartes replied as follows:

“The reason that makes me believe that those who do nothing save for their own utility, ought also, if they wish to be prudent, work, as do others, for the good of others, and try to please everyone as much as they can, is that one ordinarily sees it occur that those who are deemed obliging and prompt to please also receive a quantity of good deeds from others, even from people who have never been obliged to them; and these things they would not receive did people believe them of another humor; and the pains they take to please other people are not so great as the conveniences that the friendship of those who know them provides. For others expect of us only the deeds we can render without inconvenience to ourselves, nor do we expect more of them; but it often happens that deeds that cost others little profit us very much, and can even save our life. It is true that occasionally one wastes his toil in doing good and that, on the other hand, occasionally one gains in doing evil; but that cannot change the rule of prudence that relates only to things that happen most often. As for me, the maxim I have followed in all the conduct of my life has been to follow only the grand path, and to believe that the principal subtlety [finesse] is never to make use of subtlety.”

Comment
This extract from Descartes’ correspondence (1645-6) is of historical interest. It shows that Descartes was in line with conventional 17th-century theological thinking of what became known as the “hand of God”, without mentioning the IH metaphor.

Professor Peter Harrison (Oxford University) published a detailed summary of mainly theological authors in the 17th-18th centuries, who referred directly to the “invisible hand” of God, from which Peter deduces that Adam Smith thereby used the IH metaphor in a theological sense, an assertion I find unconvincing.

See Harrison, 2010, September, Journal of the History of Ideas, and my own discussion, “The Hidden Adam Smith in his Alleged Theology”, Journal of the History of Economic Theory, 2011, September.

Presently, I am reviewing: Warren Samuelson, Marianne Johnson, and William Perry, “Erasing the Invisible Hand: essays on an illusive and misunderstood concept in economics”, 2011, Cambridge University Press, which is a promising blockbuster of a scholarly work, settling for once and all the much vexed debates we have on Lost Legacy, of which more soon when I have completed it.

Religion and the Invisible Hand

Benjamin H. Mitra-Kahn writes (6 January) HERE on:

“How God, Adam Smith, and the invisible hand changes over time” ([Cross-posted from the History of Economics Playground HERE):

“So with a suitably provocative title I think we can declare 2012 open. And in starting the year I was struck by how words and sentences can change in meaning over time, particularly prompted by this quote:

‘In tendering this homage to the Great Author of every public and private good, I assure myself that it expresses your sentiments not less than my own, nor those of my fellow-citizens at large less than either. No people can be bound to acknowledge and adore the Invisible Hand which conducts the affairs of men more than those of the United States. Every step by which they have advanced to the character of an independent nation seems to have been distinguished by some token of providential agency”

It looks like an elegant statement of policy intent from a finely crafted presidential speech and we all know what it means. And it was exactly that, but the meaning may not be entirely clear when I tell you that the president was George Washington and the words were uttered in 1789. There is a lot of discussion of what the invisible hand means, or doesn’t mean (e.g. Kennedy 2009), but lets stick with Washington and his first inaugural speech to Congress.

Out of context it could have been any current president. With a little bit of context – here the surrounding sentences – it starts to become a very 18th century statement. That ‘Great Author’ or ‘Providential Agency’ is quite definetly a deity of some form, and then it is left to the rest of us to work out how Washington – who had a copy of Smith’s work on the shelves – had read Adam Smith’s expression of an invisible hand (or some previous reference to it). I’m partial to the religious side, but may have been swayed by Andy Denis (2005) – what do you think?”

Comment
But George Washington could have taken the notion of “an invisible hand” from any of a dozen or more books on his shelves from predecessors or contemporaries of Adam Smith. It was a popular metaphor among many authors, particularly among theologians and church ministers in their sermons.

For a list of around forty 17th-18th-century authors using the IH metaphor, see Peter Harrison (an Oxford professor of Theology) in the Journal of the History of ideas, September, 2010). Both Harrison and the memorable Andy Denis (Andy Denis (1999) ‘Was Adam Smith an Individualist?’ History of the Human Sciences 12, 3, August, 71-86), hold the view that Adam Smith was a Calvinist and/or Deist.

I do not share religious interpretations of Adam Smith, for reasons explained in my paper: ‘The Hidden Adam Smith in his Alleged Theology’ Journal of the History Economic Thought, September, Vol 33, no 3, 2011.

For my earlier views on Adam Smith’s use of the IH metaphor, see: Kennedy: 2009: ‘Adam Smith and the Invisible Hand: from Metaphor to Myth’, Econ Journal Watch, vol 6, no 2, May 2009, pp 239-263 HERE

For more my recent statements, see: www.adamsmithslostlegacy.com, passim, 2010-11.