Socialism and Capitalism Are Quite Different

Andy Logar posts (19 November) in American Thinker HERE

“Socialism's Fundamental Flaws”

“In the Soviet model the state owned the means of production thus all workers were employed by the state -- essentially each working for everyone else, the collective, but not directly for themselves. This was effectively a compulsory altruism which, because not being a primary human drive, introduced a fatal systemic flaw to an economy so bereft of incentives as to engender the famous Russian quip: ‘We pretend to work and they pretend to pay us.’

“As if one were not enough, the second fatal flaw was the elimination of the free market and its replacement by the planned economy -- where supply and demand were in the hands of technocrats and not the invisible hand of free-market capitalism.”

Comment
Be clear, I have no sympathy for the ‘socialism’ practiced in the Soviet Union or elsewhere, of which criticism by Andy Logar I broadly agree, but I have no confidence in his characterization of the pre-Soviet economy as ‘the free market”, nor as replacing “free market capitalism”. It was largely a pre-capitalist continent, dominated by a repressive oligarchy and a semi-feudal countryside.

Stark contrasts between two extreme poles of description, as is usual in such ideological posts, do not help clarity in the argument that Logar’s post purports to make. He even makes an unfortunate and questionable statement in describing the Soviet model of state ownership as: “essentially each working for everyone else, the collective, but not directly for themselves”. It was the French, 18th-century Physiocrat, Mirabeau, who correctly commented that in markets, each individual thinks they work for themselves, but in actuality they ‘work for others’. How true!

In seeking to realise our self-interests we unintentionally serve the self-interests of others in the mediation that necessarily is the voluntary exchange process. No market would function if people tried to work only ‘for themselves’; their voluntary exchange behaviours must necessarily take account of the self-interest of others (see Adam Smith in Book 1, chapter 2, Wealth of Nations: ‘address the self-love of others, not your own’). That is what free markets bring about. In contrast, in Soviet Socialist Systems everybody in fact worked, under direct compulsion, for the State that decides what they and everybody else gets in return. This is the essential difference between markets and socialism.

Turning to Andy Logar’s sentence: “the planned economy -- where supply and demand were in the hands of technocrats and not the invisible hand of free-market capitalism”, we confront another source of Logar’s error.

It was Oscar Lange, the Marxist, pro-Soviet economist-cum-technocrat, who taught at Michigan and Chicago in the 1930s and 1940s, and who penned the notion that what he called the role of Adam Smith’s so-called “invisible hand” in directing market transactions (a wholly invented attribution he learned from an oral tradition in some US universities, as is often exposed on Lost Legacy, viz, there is no actual invisible hand), would be supplanted by the expected, though never realised, superior benefits of a centrally planned economy.

Lange specifically alluded to the invisible hand’s evident failures in the 1930s depression that contrasted allegedly with the far superior prospects of an harmoniously planned socialist economy, then being imposed without harmony by Stalin in Russia, and later on in Poland, in which the planners allegedly replaced the market’s ‘invisible hand’ (see his 1936. “On the Economic Theory of Socialism, Part I.” Review of Economic Studies 4, no. 1: 53–71; 1937 and Part 2, 4, no. 2: 123–142).

Paul Samuelson (Economics: an introduction to economic analysis, 1948, p 36) took up Lange’s challenge to the superiority of capitalism by recasting what Adam Smith actually wrote about ‘an invisible hand’ and invented the general rule that Smith said ‘selfish’ actions unintentionally led to ‘public benefits’, later re-cast as an early prediction of General Equilibrium theory. Unfortunately he attributed that nonsensical myth to Adam Smith, and even more unfortunately, most modern economists believe it, which Lost Legacy fights daily to challenge.

[NB: The ‘selfish’ myth actually came from Bernard Mandeville’s ‘Private Vice, Public Benefits’, Fable of the Bees, 1724 and resurrected by Ayn Rand, and broadcasted in the ‘greed is good’ libel].

In sum, Andy Logar’s pieces in the ‘American Thinker’(?) rightly critiques socialism, without really understanding the difference with capitalism, and, sadly, does not really appreciate Adam Smith’s political economy in Wealth Of Nations, nor his Theory Of Moral Sentiments.

The Cause of the Invented Version of Adam Smith's Use of the IH Metaphor

Roger Backhouse, a professor of economic history at the University of Birmingham, and Bradley W. Bateman, a professor of economics at Denison University, are the authors of “Capitalist Revolutionary: John Maynard Keynes” and write is the NY Times Sunday Review HERE

“Wanted: Worldly Philosophers”

“This wasn’t always the case. Course lists from economics departments used to be filled with offerings in “comparative economic systems,” contrasting capitalism and socialism or comparing the French, Scandinavian and Anglo-Saxon models of capitalism.

Such courses arose in the context of the cold war, when the battle with the Soviet Union was about showing that our system was better than theirs.”

Comment
Those heady days when economics students were treated to more than passing references to the history of economic thought, sadly, are now long gone.

At Edinburgh University from the 1930s to the 1950s, economics students were treated to a syllabus that included Sir Alexander Gray’s, still fresh today, little volume, The Development of Economic Doctrine, 1931, Longman’s, London. The chapter on Adam Smith was as lucid as his lectures were reported to be even by students who never proceeded beyond first year studies. [*]

From 1948, students across the USA were introduced to Adam Smith with an innocent-looking short reference to Adam Smith’s invisible hand metaphor (Paul Samuelson's Economics: an analytical introduction, McGraw-Hill, New York). This has had calamitous unintentional consequences on economics as a discipline, and worse still, economic policies by governments whose advisors (and lobbyists) breathed in the noxious idea that an actual invisible hand operated in, variously, the ‘miracle’ of markets, close to a divine intervention by God, on the individual decision-makers in the determination of prices, supply and demand, and the providential fortunes of individuals as they exercise their self-interests.

I have explained the timing and driving dynamics that made an major error in understanding Adam Smith’s metaphor over the years by the context in which it burst across the world in Samuelson’s 20 editions of his popular textbook (c.5 million copies of the English edition, and many more similarly from its multiple translated editions) by reference to the context of the time in which McGraw-Hill picked winner.

The notion that Adam Smith meant by the metaphor of ‘an invisible hand’ gradually took its modern shape from the 1930s, after 150 years of relative and striking silence by Smith’s contemporaries, and an almost total lack of interest in the IH metaphor by political economists in the 19th-century, except for a tiny handful most of the first hundred years from Smith’s death in 1790. Only in reports of an ‘oral tradition’ at Cambridge (Pigou 1923) and also Chicago Universities, hint at some passing references (see Samuelson, 1948, p 36).

The impetus that tipped the balance was the burgeoning growth of the threat of the Soviet Union from the 1930s in what was considered to be a difficult time for capitalist economies in Europe and the Americas. Severe slumps, rising unemployment and the growth of communist and socialist parties and their ideas of a terminal collapse of capitalism put ideas of pro-market solutions under strain. Oscar Lange, a socialist academic, published his. “On the Economic Theory of Socialism, Part I and II.” 1936, Review of Economic Studies 4, no. 1: 53–71; 1937, no. 2: 123–142, which extolled the plausibility of a socialist-managed state economy, later expanded in book form in 1947. Interestingly, Lange saw the state planners as replacements for the unreliable invisible-hand of the market with their superior planning directives. Thus, from the start, the myth of the invisible hand was shrouded in myth that Smith meant it to be about a complex notion that it was about the inner-workings of markets, supply and demand dynamics, and price theories, contrary to Smith’s clearly stated notion that it was a metaphor about the consequence on the felt insecurity of some, but not all, merchants when contemplating the risks of sending their capital abroad rather than investing it in the “domestic industry”.

Samuelson, ex-Chicago, then at MIT, was writing his magnum opus, Foundations of Economic Analysis, published in 1947, quickly followed by his introductory economics textbook, published in 1948. In this introductory text, Samuelson extolled the basic soundness and superiority on the ‘mixed’ capitalist economy over a fully state-run economy of the Soviet kind. He also located Smith’s invisible hand as benefiting society as a public good, even when, or more incorrectly, particularly when the motives of individuals were ‘selfish’ (a notion never expressed by Adam Smith).

Samuelson in later editions squared his distorted interpretation of Adam Smith’ singular reference to the IH metaphor in Wealth Of Nations (from which Samuelson included a truncated quotation from the IH metaphor in paragraphs from WN (IV.ii.1-9: 456). First, Samuelson suggested that the IH metaphor had its lauded effects of delivering unintentionally a ‘public good’ only applied to a perfectly competitive economy, not an ‘imperfectly competitive’ economy, which is a serious distortion – apart from Smith never such a distinction in WN that the IH had such an effect in general.

(For an analysis of Samuelson’s changes to his incorrect original presentation for the ‘selfish’ invisible hand across edition 1 to 20 of his economics textbook, see my article in the Journal of the History of Economic Ideas, “Paul Samuelson and the Invention of the Modern Economics of the Invisible Hand”, JHEI, vol. xviii no 3, September 2010.)

Samuelson ignored the plain fact that Smith’s use of the IH metaphor applied under certain specific circumstances in the British economy, which the 18th century was anything but ‘perfectly competitive’ with its protectionist mercantile policies. In later editions Samuelson developed this ‘get out of jail’ card into wilder associations of the IH metaphor with ideas of general equilibrium economics, from the later 1950s increasingly in vogue, and with Pareto’s welfare theorem.

But recall, all of this invention of a modern IH theory/concept/ paradigm, was aimed at establishing the undoubted superiority of free(er) market economics, guided by an IH Hand, over the manifest inadequacies of dictatorial state management of the Soviet or socialist models.

This line of debate was succinctly summarised by Roger Backhouse and Bradley Bateman in their New York Times piece as arising: “in the context of the cold war, when the battle with the Soviet Union was about showing that our system was better than theirs”.

I couldn’t have put it better myself.

[*] For completeness, I draw attention to the fact that Sir Alexander Gray specifically mentions the invisible hand on six occasions in the first edition of his book, associating it with ‘miraculously harmonising’ the ‘pursuit of gain with the promotion of the public good’ (Gray, 1931, p 146). No mention, contrary to Samuelson, of anything to do with selfishness.

On Learning the Real Lessons of the 1930s Depression

Tom Clougherty (29 July) writes on the Adam Smith Institute Blog (HERE): a revealing and excellent account of the mythical explanations of what prolonged the Great Depression in the 1930s and what actually was its likely cause, contrary to Maynard Keynes’ widely accepted narrative in his 1936, General Theory, and in the post-war teachings of modern universities, up to the 1980s (which I, and members of the post-war university generation of economists took as gospel).

Follow the link and read Tom’s account. I have selected one paragraph from it for comment on the largely ignored side effect of the debate on Keynes’ narrative.

“Debunking the Great Depression Myth”

‘Indeed, Roosevelt was heavily influenced by his 'brains trust', which in turn was influenced by a variety of collectivist ideologies – progressivism, corporatism (of the European fascist variety), and socialism. The common theme was 'scientific' economic management by enlightened central planners, and a rejection of the free market. And, OK, perhaps that went beyond what Keynes himself would probably have advocated.”

Features of this debate are long forgotten but at the time it had some interesting side effects. People debating competing practical policies also rely on (and imply) competing theories. In the 1930s, the presence of Soviet Communism with the first of its 5-year plans’ counter-poised to capitalism, with its supposed ‘laissez-faire’ theories (though not so evident practices – tariffs, etc.,). This was the main political challenge in Europe (from the growth of communist and socialist labour parties) and in the USA (leftish Democrats v rightist Republicans), to which were added rapid military expansion into Western Europe by the Soviet Army and, in China, the seizure of power by Mao's Red Army.

Economists responded to the alleged virtues of state planning with claims for the benefits of markets and this was, perhaps, sourced from the distorting oral traditions in Cambridge, England, and Chicago, of claims for market-superiority based partly on (invented) attributions about Adam Smith’s supposed ‘invisible hand’. Oscar Lange, a Marxist economist (On the Economic Theory of Socialism, 1936 & 1938), asserted that socialist state-planning was a substitute for the market's invisible hand and claimed that socialism would do much better in directing the economy to its most productive uses than the unreliable and uncertain invisible hand:

“The market has, therefore, been compared to that of an invisible hand which produces co-ordination out of the autonomous decisions of many separate units. Not all markets, however, are able to produce such coordination, nor is the coordination obtained always consistent with accepted social objectives. In such cases, planning is used to either reach the co-ordination, otherwise unobtainable or to correct the co-ordination produced by the invisible hand of the market” (Lange 1945, 26).

Paul Samuelson, while an undergraduate at Chicago, was taught that the invented ‘invisible hand’ theory belonged to Adam Smith, and in his famous and popular textbook (Economics: an introductory analysis, 1948, p 36) responded implicitly to the challenge of socialist planning by placing Smith’s alleged theory of the invisible hand as relevant only to a purely laissez-faire economy but not to a post-war mixed capitalist economy. This perpetuated a myth about Adam Smith (he never saw the metaphor of an invisible hand as connected to markets), but the belief that he did, became (and still is) ubiquitous.

It helped cement Keynes’ narrative of the Great `Depression’ – he referred to the alternatives of democratic governments’ demand management as an alternative to laissez-faire, classical 'do nothing' policies that allegedly were believed and advocated by ‘classical’ economics as best way to respond to crises. Keynes created a narrative of the causes of the 1930s depression that is now widely accepted along with its (not Smith’s) failures of ‘an invisible hand’, which is heard often in today’s debates on the current recession. Some politicians that it was the alleged absence of 'regulation' and state intervention –and a belief in 'laissez-faire' - that led to these crises in the first place and they advocate, instead, more regulations and more state stimulation by ‘quantative easing’, ‘subsidies’ and even ‘more borrowing’ (after the state’s credit cards are already ‘maxed out’!).

As the real lessons of the 1930s depression have not featured much in today's debate (and Tom Cougherty post is an excellent place to start) it might help clarify what is needed by paying close attention to it.

[Disclosure: I am a Fellow of the Adam Smith Institute.]

History of the Myth of the Invisible Hand

Over lunch at the Bank of England [in April, 1946, just days before Maynard died], Keynes is claimed to have told Henry Clay (a professor of Social Economics and Advisor to the Bank of England) of his hopes that Adams Smith's "invisible hand" can help Britain out of the economic hole it was in after the Second World War with a near-exhausted British economy, deeply in debt to the USA:

"I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago."

Comment
This one of those unverifiable statements attributed to Keynes, interesting in itself, and also for what it leaves unsaid about the history of this modern myth of 'an invisible hand'.

But of more interest historically, it is some confirmation of the existence of an oral tradition at Cambridge University that articulated ideas about the meaning Smith was supposed to have attributed to his use of the ‘invisible hand’ metaphor. Sometime, since Alfred Marshall dominated economic teaching in British universities and A.C. Pigou, his immediate heir, had carried on in his teachings, and, in his case, had published the same ideas from the oral tradition in his early editions of Welfare Economics – largely to undermine the ‘invisible hand’ of the economy with his academic case for the government using intervention by taxation to achieve welfare objectives that were allegedly immune to the beneficial activities of ‘an invisible hand’.

The oral tradition was necessarily an heavily massaged version of Adam Smith’s limited usage of the metaphor (only twice in all his published writings) and in no way did Smith use it in reference to the workings of markets. The assertions of Henry Clay in 1946 mark the mid 1920s as when Keynes said he had "tried had to eject [the IH metaphor] from economic”.

This is in line with Paul Samuelson’s claim that he had heard the oral case linked to Adam Smith, at Chicago when he was an undergraduate there in the early 1930s, which fits the similar use of the ‘invisible hand’ by Oscar Lange (a Marxist) as a feature of capitalist economies (in his The Economic Theory of Socialism 1936 and 1938). In these publications, Lange saw the community state substituting planning for the so-called "invisible hand'.

To Paul Samuelson goes the dubious honour of popularising these myths of “Adam Smith’s invisible hand” across US academe through the 20 editions of his successful textbook, Economics: an introductory analysis (McGraw-Hill) 1948 (2010).

It is in the nature of oral traditions to leave no traces of them and they die out with the passing of the perpetrators – and it is only when oral assertions and pass into print (or, today, online) that we pick up hard evidence.

It is remarkable that only a few economists either drew attention to the oral tradition of the (mis)use of the IH metaphor or integrated the myths into their own works until the explosion of mentions of the myth began to appear in the decades following Samuelson’s references to it. Now it is ubiquitous, and in too many case also plain silly ('the invisible hand kicking people in the behind', etc.,).

Certainly, few, if any (I would say ‘none’ did, but you never know if something may turn up – and Lost Legacy readers are always a useful source of snippets that I will follow if any emerge), of Smith’s contemporaries considered the IH metaphor of any importance or relevant to Smith’s works, and precious few – a handful, not all of them economists – ever mentioned Adam Smith and the metaphor until the late 19th century and the beginning of the 20th century.

My searc continues.

A Market Oracle Miss-Speaks

Garry North wrtes in The Market Oracle Blog (HERE)

“Because the Lord helps those who help themselves, the hard-working person is seen as part of a productive economy. This economy rests on the combination of God's providence and hard work. While Adam Smith's famous invisible hand persuaded some intellectuals for a century or so, 1776–1875, the general public assumed that there really is an invisible hand guiding the process of productivity. This legitimized every man's labor.”

Comment
Gary North is quite mistaken. The period from 1776 when Adam Smith used the invisible hand metaphor (IH metaphor) in Wealth Of Nations (only once, though he had also used it before (once only) in Moral Sentiments in 1759), to a century later in 1875, is distinguished by the fact that hardly anybody – intellectuals, ‘famous’ or otherwise – referred to it. We know this because I have challenged several dedicated scholars (of impeccable reputations as intellectuals) to list them and the result has been pathetically few.

They have singularly failed to discover more than a small handful – in fact two only between 1776 and 1856 – and a few in the period confined to the 1780s – 1900. The IH metaphor appeared in the oral tradition at Cambridge (UK) and a few lecturers at Chicago (USA) (according to Paul Samuelson when he was an undergraduate there), but the IH metaphor seldom appeared in print in economics texts or journal articles (but see two prominent examples: Arthur Pigou’s Welfare Economics,1922 and, Alexander Grey’s 1930 text, The Development of Economic Doctrine) until the post-war decades, primarily following Paul Samuelson’s wildly successful Economics: an introductory Analysis (1948 and the 19 editions to 2010).

What Garry North means by the “the general public assumed that there really is an invisible hand guiding the process of productivity”, or when they assumed this is not clear, but if he refers to the period 1776-1875 (or even the period 1875-1960) he is quite wrong.

However, after Oscar Lange (1938 and 1947) and Paul Samuelson (1948) introduced the IH metaphor – labeling it as Adam Smith’s ‘famous’ metaphor – and their works, particularly Samuelson’s – which reached a widespread public as a popular Economics 101 (and Economics 101-plus) university text – which was copied as Adam Smith's metaphor into hundreds of other author's texts, and then, as the millions of graduates spread out into public life, the media, and across the world, so the IH metaphor acquired traction in popular public discourse.

[To sample the modern phenomena of the ubiquitous IH metaphor, take ‘Google Alerts’ for a week or two …]

Gary North might care to rethink his assertion in The Market Oracle.

Using the Invisible-Hand Myth to Bash Markets

Charles Sullivan writes in Bear Market News Blog (HERE) (from something in the Guardian UK newspaper):

“Capitalism, Market Fundamentalism, and the Duplicitous Meanings of Democracy”

“Private ownership of the means of production and the invisible hand of the market are two key components of modern capitalism. In reality, there is no ‘invisible hand’ of the market, as the proponents of free market capitalism contend. If there were, the global banking system would have collapsed long ago. We have only to lift the cloak of secrecy for the human fingerprints of manipulation to become plainly visible. A small cadre of the elite is manipulating everything.”

Comment
This is from a leftish Blog that believes the ‘ruling class’ runs everything, so it is not exactly a recantation from those responsible among academic economists for the myth of ‘an invisible hand’, leading even ‘selfish’ capitalists and as selfish consumers to the wonderful miracle of benefitting society, and to the even more miraculous outcome of perfect harmony between what suppliers supply and consumers want to consume.

The Left does not believe in the invisible hand (at least not since Oscar Lange tried to adopt the idea (circulating in Chicago in the 1930s) in 1938 and 1946 that it was something claimed by Adam Smith for free markets (It wasn’t, but that’s another and longer story), which in Lange’s view could be better performed by socialist planning in the Soviet Union, and in post-war Poland, later taken over by the Red Army.

This was followed by a staunch, rival claim from Paul Samuelson (of Chicago and MIT) in 1948 that the ‘invisible hand’ was Adam Smith’s “central idea”, applicable to perfect-market economies and, later, allegedly proved by Arrow and Debreu in advanced General Equilibrium mathematics.

Since then, the myth of Adam Smith’s ‘invisible hand’ has spread like a meme into the unthinking intellectual apparatus of graduate economists and the media/political/lobbying hordes who pass for informed opinion.

That the invisible-hand does not exist is not disputed on Lost Legacy. It never existed, and Smith’s use of the metaphor had nothing to do with what the post-late 1870s academics made of it.

That the invisible-hand had anything to do with the current crisis in state-managed capitalist economies is disputed. Metaphors do not have operational roles in the real world. Asserting that they do, literally is nonsense and an ideological alibi, in Bear Market News, to bash markets.

Next Major Project: modern use of the invisible hand

Background:

I have completed my response to Daniel Klein’s (“In Adam Smith’s Invisible Hands: comment on Gavin Kennedy” HERE: response to my article: “Adam Smith and the Invisible Hand” (HERE): My final response will be published next week in Econ Journal Watch (September 2009) HERE:

It is now time to move on to my next project (larger in scope and more ambitious): To consider the role played by the use of the invisible hand metaphor by modern economists. Yes, I shall name, though probably not shame, them.

My main charge against them collectively, is that they wrongly attribute their allusion to the invisible hand by name to Adam Smith – because the modern (post-1930s) (miss)use (miss)associates the metaphor with their quite different meanings – and they imply and, in many cases they directly claim, that Smith have said things about markets that he never did. I shall also offer an alternative explanation for the ubiquity of the invisible hand in modern discourse.

I suspect, somewhat cheekily, that many modern economists have never read Wealth Of Nations, nor do they realise how limited was Smith’s use of the popular 18th-century metaphor (once only in Wealth Of Nations, 1776, once only in Moral Sentiments, 1759, and once only in his short, posthumous essay on the History of Astronomy (1744-58), no one of which was connected conceptually to the others.

To date, I have collected some preliminary research materials on the modern usage of the invisible hand (some of which go well beyond its use as a metaphor; some authors believe that there is an actual entity of ‘an invisible hand’ operating in markets, some of them attributing the entity to the invisible God.

Until now, I have waited before embarking on my own assessments for Warren Samuels, a distinguished Smithian scholar, to publish his considered analysis of the modern uses to which the invisible hand metaphor has been put. His 2008 article: Adam Smith’s Invisible Hand, in The Street Porter and the Philosopher: conversations in analytical egalitarianism, edited by S. J. Peart and D. M. Levy. Ann Arbor: Michigan University Press, was the initial article I awaited, but I was advised that another article by Warren Samuels, is to be published in Jeffrey Young’s, (editor), forthcoming Elgar Companion to Adam Smith, Cheltenham: Elgar Publishing, in October 2009.

From private conversations, I understand this is a formidable piece of work and out of respect for Warren's work, I have held back to see to what degree his analysis of modern usage conforms to mine. I understand that he may also reply directly also to my Econ Journal Watch paper.

Where does this take us? Well, my hypothesis for the new project tests my assertions from time to time, that the invisible hand metaphor is a relatively modern adaptation of the 18th-century metaphor purporting to show the presence of an invisible hand in modern market capitalism, seen almost daily in the world media, and more importantly, as asserted in refereed journal articles and authoritative pronouncements in academic texts.

If its usage was confined purely to popular media, it could safely be ignored, but when Nobel Prize Winners and respected authorities from our discipline elaborate on the modern theory of ‘the invisible hand’, we need to separate ideology from analysis. The robust criticism I occasionally encounter of my counter-thesis suggests an investment in emotional subjectivism on the part of some economists.

Any help readers offer to me during this research project will be graciously accepted.

I have been tracing the early beginnings of the discipline’s interest in applying the metaphor to modern economies, starting with late 19th-century economists, some of whom were identified by Daniel Klein and others in correspondence with myself. I am particularly interested in early 20th-century exponents from Chicago University in the 1930s and thereafter.

For example, from Paul Samuelson (Economics, 1948: p 36) I noted that he reported, somewhat critically, on the oral tradition at Chicago which included ideas about the invisible hand operating in market economies. Among the first reference to this use of the invisible hand, I was directed to Oscar Lange’s article in The Review of Economic Studies (vol 13, 1945-46, p 19-32). Lange was at Chicago during the 1930s (as was Samuelson).

In his 1946 article Oscar Lange writes:

“The market has, therefore, been compared (by Adam Smith and others) to that of an invisible hand which produces out of the autonomous decisions of many separate units” (p 26).

What did he mean “by Adam Smith and others”? Who were the “others”?
Any information would be welcome from readers, including references, sources, and biographies. Though retired, I have access to a good library at a University and can probably follow up even vague references or books titles.

Thank you in anticipation of any help received.

Markets and Panglossian Invisible Hands

John Markley writes “Review of Economics for Real People” at ‘Suite 101’ HERE

“Gene Callahan Provides an Excellent Introduction to Basic Economics”

“Next, Callahan expands from a single person to a group, bringing in the essential subject of exchange. With exchange come concepts such as specialization, division of labor, and comparative advantage. He also explains how market prices provide information that guides buyers and sellers and makes coordination possible without centralized direction of control, creating the famous “Invisible Hand” of Adam Smith.”

Comment
A promising announcement for educating people about economics, then the inevitable kick in the tail that invents a metaphor into a concept, and spreads the mystical ‘non-explanation’ about how markets work.

The myth about Adam Smith and his use of a metaphor in three quite different circumstances and adds to the substitution of science by mumbo-jumbo’.

Variously, users of the metaphor credit it with semi-conscious powers (quite good for a disembodied invisible hand), affecting all transactions indiscriminately, even when the participants pursue selfish and evil ends – a sort of utopia dominated by naïve optimism, associated with Panglossian ideas, sometimes related to religious ideas about God’s providence.

In the economic theory of general equilibrium – finally proven mathematically in the 1950s – exponents often drift off the mathematics and resort to the metaphor of the invisible hand, which is fine, of course. After all, the metaphor was quite popular in literature in the 18th century (and from long before in classical times), but it often was to do with murderous scenes, interventions by the gods and God, and mysterious things that ‘go bang in the night’.

But it was not Adam Smith’s allusion, particularly. Three references in a million words – none of them to do with how markets work – makes its use and attribution somewhat of an exaggeration, convenient may be, because it gives the prestigious gloss of a renowned figure in the history of economics to a pure. modern theory of an imaginary world without real humans present, but also dangerous, as recent events show leading to a financial crisis.

Remember the context (always remember context!) in the 1930s when Chicago University faculty introduced their oral allusion to the economy being guided by an ‘invisible hand’. This was the decade of the twin scourges of National Socialism and Soviet Communism coinciding with the Great Depression. Capitalism was under challenge and the notion of a superiority of the market dominated USA guided by the peaceful, amazing, and pacifistic “Adam Smith’s invisible hand”, unlike the state-managed systems of Germany and Russia, guided by the bloody fists of Gauleiters and Commissars, was attractive to nationals and refugee immigrants together.

Fast forward to the late 1940s, and Oscar Lange and Paul Samuelson, both from Chicago in the 1930s, each introduced the invisible hand, linked by name to Adam Smith into the literature of economics. Samuelson’s economics 101 textbook, Economics, published in 1948 and then through 18 editions, and translations, became an educational phenomenon across campuses worldwide. Its Keynesian macro-economics exuded confidence in capitalism and markets and responded to the needs of the West during the Cold War years with the Soviet Union.

Hardly noticed too, was the item on page 36 (1st edition), proclaiming, if cautiously to be sure, the metaphor of the invisible hand, which also spread across the discipline and took on a life of it own as each instructor interpreted it to suit. By the end of the century, the invisible hand, transformed from a metaphor into a ‘theory’, ‘ a concept’, even a ‘paradigm’, and was generally believed to be embedded in Wealth Of Nations and to be central to Adam Smith’s analysis of how markets work.

Few economists ever bothered to read Wealth Of Nations for themselves and to see how and where Smith used the metaphor, and in what context. They were taught, and believed, that Smith gave it a major role in markets, and because they were confined to the quotation in which he talks generally of ‘every individual’ seeking to make use of his capital to maximise his profit and how this produces the best result for society, they repeat the connection with disciple-like intensity whenever anybody challenges this interpretation.

Armed with these certainties, they accord to markets powers and consequences which they never had: the power to produce the ‘best of all possible worlds’ irrespective of the intentions, or the limited goals, of entrepreneurs and corporations. Some capitalist econoimies work better than others; some cannot even get started.

Currently, in the present crisis, scores of former-disciples of the invisible hand are rejecting markets (and Adam Smith) with the haste of those woken up to the crash of their illusions and what they have been taught and taught themselves.

Yet, if the went back to Wealth Of Nations and actually read the whole chapter, or even paragraphs 1 to 9 of Chapter 2, Book IV, they would see, perhaps for the first time, that Adam Smith fully explains the behaviours of some – NOT all – traders by their degree of risk avoidance in their decision to invest locally or in foreign trade with the British colonies in North America, or the European continent. Their actions are driven by their ‘own security’; those less insecure than others engaged in foreign trade and those more insecure than others engaged in local trade.

In what way are they ‘led by an invisible hand’ to do what their degree of insecurity compels them to do anyway? I have never had a direct answer to that question in all the years of the Lost Legacy Blog.