A Tale of Two Bottles

Dennis Behreandt writes in Moral Liberal HERE:

‘Congressman Paul Ryan Sips Wine, Liberals Are Outraged’

‘As a result, to paraphrase Adam Smith, though in each case the people engaged in any given transaction only seek to improve their own lots in life, the “invisible hand” of the economy works through these transactions to improve the lives of countless others.’

Comment
Before this paragraph, Dennis Behreandt writes a brilliant dissection of the moral outrage of fellow diners, one of them an economist, no less, who are outraged that Congressman Paul Ryan (GK: Who is he?) and two friends consumee two bottles of imported French wine at $350 a bottle while there are poor people in the USA not present at the restaurant. But the ‘outraged’ economist and her partner are also present in the restaurant! (But drinking water though presumably eating the expensive food).

I have no quarrel with Dennis Behreandt’s dissection of the economics of the purchase of expensive imported wine – a classic reminder of the real benefits to society of such production processes and trade between countries.

However, I balk at the assertion – wrapped in a ‘paraphrase’ – that the “invisible hand” of the economy works through these transactions to improve the lives of countless others.’ Economies work to that end, not ‘invisible hands’!

Also, that is not what Adam Smith actually said. In his single example in which he used the metaphor of ‘an invisible hand’ in Wealth Of Nations (see Book IV, chapter ii, paragraphs 1-9, pp 452-6), he described how some, but not all, merchant traders preferred to invest locally in ‘domestick industry’ rather than send their capital abroad in the ‘foreign trade of consumption’ and that it was their ‘concern for their own security’ (today we call it their ‘risk aversion’) that led them to do so. That insecurity was the object of ‘an invisible hand’ leading them to act thus!

Now metaphors, taught Smith, are used to ‘describe in a more striking and interesting manner’ their objects (i.e, what they are metaphorically representing). It was their ‘insecurity’ that led them to invest locally, not the ‘economy’ that ‘led them’, because multiple motives are at work on individuals in an economy - not everybody is ‘insecure’ to the same degree and many of them do engage in foreign trade (hence, the French wine bottles in fancy in DC restaurant at $340 a bottle).

The economy exists and ‘insecurity’ exists in the perceptions of the insecure merchants – THERE IS NO ‘INVISIBLE HAND’ IN THE ECONOMY. To assert that there is an invisible hand misreads Smith’s meaning.

It is also nonsensical of Smith’s meaning because the economy consists of myriad people, not all of them sharing the same ‘insecurity’ of the example provided by Smith! Many merchants did and do invest abroad, despite the insecurity felt by some others. What ‘invisible hand’ leads them to contradictory actions? Where is the term for the invisible hand in any of the equations of the mathematical models of modern economists?

Merchants, of all kinds, act from many motives not because of invisible hands but from their noting the very visible prices that are absolutely necessary (and, indeed, absoliutely sufficient) for a market to form and do its work.

There is no mystical invisible hand at work. It is not the ‘hand of god’, etc., that drives markets. Prices are sufficient, and Adam Smith outlined a plausible analysis of how prices work in an economy (albeit wrapped in the fairly cumbersome language of ‘natural’ and ‘market’ prices) through ‘supply’ and ‘effectual demand’ in Books I and II of Wealth Of Nations, without mentioning anything about ‘invisible hands’.

Most modern economists dismiss concerns about their misrepresentation of Adam Smith’s use of the invisible hand metaphor. They have adopted an invented ‘useful’ meaning to the restricted meaning that Smith applied, and they ignore not only what metaphors mean, but also what Smith actually confirmed in Book IV of Wealth Of Nations and what was the role of metaphors in literate English (and ancient Latin and Greek) in his Lectures on Rhetoric and Belles Lettres, [1763], 1983, p 29).

But still, read Dennis Behreandt’s interesting piece (follow the link). It does not need a myth about invisible hands to be an excellent exhibit for the benefit of markets.

On Metaphors in Economics

The Irish Economy (HERE), discusses the role of metaphors in recent economic discourse.

The Use of Metaphor in the Irish Economy, A Guest Post by Gavin Kostick (This post was written by John McHale).

John Donne is remembered on the blog by the phrase, “no man is an island” indicating, a good deal before Adam Smith, the interconnectedness of our lives. Donne (1572 – 1631) was the Dean of St Paul’s Cathedral, and a metaphysical poet. He specialized in drawing unexpected comparisons between a theoretical, spiritual or abstract notion and a concrete, palpable object. For example, Donne compared mutual love to a pair of mapping compasses, which, where-ever the points are placed on the surface of the world, lean towards each other and are connected.

The history of language itself is the history of the movement from the concrete to the abstract. Our ancestors had a far larger vocabulary than we do, as they were more particular than general.

The power of metaphor consists in making the abstract once again visceral: philosophy ‘proved upon our pulses’, in Keats’s phrase.

But it is a suspect power as it may not so much illuminate, as rhetorically persuade, or falsify.

The history of political and economic thinking is filled with metaphoric physicalisation of abstract ideas - from Hobbes’s “war of all against all”, Smith’s “invisible hand”, Marx’s “spectre haunting Europe”, right up to Matt Taibbi’s “great vampire squid”, powerful gut images have managed to consolidate a set of ideas, capture the public imagination, frame debate.

Comment
I enjoyed reading this essay on metahors because it illustrates the power of a metaphor to do what ‘it says on the tin’ (to quote an advertising slogan in the UK on a paint for all weathers), and how the metaphor can become meaningless if badly crafted or it is non-applicable (as we have with ‘the invisible hand of the market, etc., when related to Adam Smith). His many other metaphors in TMS and WN are often quite brilliant, and one of two are rather awkward.

Too many economists do not understand metaphors at all, yet many misattribute to Adam Smith (himself an accomplished rhetorician) their interpretation of the IH metaphor as a real entity in itself (they believe that the IH actually exists!), instead of how Adam Smith defined the role of metaphors – and how he used of them in all of his writings – in his Lectures on Rhetoric and Belles Lettres ([1762] 1983, p 29): they describe in ‘a striking and more interesting manner’ their objects (which are explained in his text or are relayed from classical works familiar to all educated readers in his day).

That his use of metaphors describe their objects can be illustrated by his use of a classical metaphor for the relative insecurity of paper money, compared to the solidity of gold because paper money, which is ‘suspended on Daedalian wings’, is liable to lose its value. Smith was not suggesting that there were actual wings of Icarius attached to paper money! Every reader educated in Greek mythology would know what he meant, as they would when he referred to the ‘great wheel of circulation’, and, of course, to the popular 17th-18th-century metaphor of ‘an invisible hand’ (they would hear it spoken in Church sermons, in Shakespeare’s play, Macbeth, or various historical essays, and Defoe’s novels (Moll Flanders and Colonel Jack, and etc.).

Which is probably why no contemporary of Smith’s noted his reference to the IH metaphor, nor did but very few non-contemporaries until the last quarter of the 19th century, and later in the oral traditions of Cambridge (UK) and Chicago universities in the 20th century. What happened to cause the tidal wave (metaphor) of references to he IH from the 1940s and through to today (Google the IH to see the daily flood – another metaphor – across the world)?

I suggest it is related to the current obsession with theoretical equilibrium in markets, of which we can excuse Adam Smith of any complicity in this sorry, to quote YHT, ‘inherent error’.

[Follow the link to see an excellent review of the use of metaphors in the debates among economists and others on the current financial crisis and how it affects the debate in Ireland.]

Great Writing from Dartmouth

W. Simons writes (5 June) in At This Point (The Dartmouth History Blog) HERE

‘On Alan Greenspan, Metaphors, and Allegory (With a Detour to Montaillou)’

There was first of all Alan Greenspan’s op-ed in the Wall Street Journal of March 29, 2011, which contained this gem:
Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s “invisible hand” that is unredeemably opaque. With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.

….This is why, to come back to my point of departure, I do have a certain amount of sympathy for Greenspan’s formulation, droll as it might seem at first. With all his linguistic prowess and educated in a world that was blessedly Google-free, he at least had the wisdom to remind us of Adam Smith’s old metaphor, the invisible hand. It has been used and abused in the past, sure enough, and Greenspan himself stretched it to absurd limits, so to speak. And yet, his op-ed may have succeeded in breathing new life in the metaphor. We can now once again contemplate the key question: whose invisible hand exactly is this, anyway?

Comment
I’ve had my problems with Dartmouth people in the recent past (see earlier Lost Legacy posts and comments this year) but I have to say this extract is among the very best pieces I have read recently. Well written, erudite and informative, from an author well versed in a good literary style (if only I could write nearly as well). The author is in the Dartmouth History department.

I recommend heartily that readers follow the link and enjoy good writing seldom found nowadays (at least outside the History department of Dartmouth College).

I shall pass over the references to the metaphor of an invisible hand – Simmons’s focus is on what Greenspan made of the metaphor when he ‘stretched it to absurd limits, so to speak’. Read the rest of the essay on ‘allegories’ and ‘metaphors, and the Detour to Montaillou!

Sergio Cremaschi Shows Smithian Thought Alive and Well in Croatia

A reader of Lost Legacy, new to the Blog, wrote to me from Croatia, with a number of titles of academic papers he had written, showing him to be an accomplished and rounded Smithian scholar, unknown to me. What a find he has proved to be! One of his essays particularly caught my eye immediately: “Metaphors in the Wealth Of Nations” by Sergio Cremaschi, published in S. Boehm, Ch. Gierke, H. Kurz, R. Sturm eds. Is There Progress in Economics?, Cheltenham: Elgar, 2002, pp. 89-114.

It is the first paper that I have read, or been aware of, containing a scholarly treatment of the role of metaphors, including the invisible hand metaphor, in Smith’s works (all three of Astronomy [1795], Theory of Moral Sentiments [1759], and Wealth of Nations [1776]).

His references pointed me to several other authors of whom he quotes and comments upon (Vernon Foley, 1976, The Social Physics of Adam Smith, Purdue University Press; Philip Mirokowski, More Heat then Light: economics as Social Physics, Physics as Nature’s Economics, Cambridge University Press; Vivienne Brown, 1994, Adam Smith’s Discourse, Canonicity, Commerce and Conscience, Routledge; Deidre McCloskey, 1998, The Rhetoric of Economics, University of Wisconsin Press, and several others in the Journal literature). Of these I have read Vivienne Brown’s book, but not (yet) the others. An omission I intend to remedy just as soon as I am mobile again or perhaps seek them on Amazon, if in funds.

His assessment of the invisible hand in Wealth Of Nations is a literary analysis, within the context of general and his own literary theory. It is more sophisticated than my efforts as an economist but broadly places metaphors, as Smith expressed them in his Lectures on Rhetoric and Belles Lettres, [1762-3] 1983, Oxford University Press.

Two other articles from Sergi Cremaschi are as follows:

'Merchants, Master-Manufacturers and Greedy People' [review-essay of D.N. McCloskey’s, "The Bourgeois Virtues. Ethics for an Age of Commerce"], History of Economic Ideas, 15\2 (2007), pp. 143-154
and
Newtonian Physics, Experimental Moral Philosophy, and the Shaping of Political Economy, in R. Arena, Sh. Dow, M. Klaes eds., Open economics, Oxford: Routledge, 2009, pp. 73-94.

I hope this talented scholar finds new readers in the English-speaking part of the international band of scholars. His work could prise open the rather closed minds of those smitten with the invented myths of Adam Smith’s lost legacy.