Wednesday, July 13, 2005

Gary North on Smith's Invisible Hand

Gary North published an article on rhetoric in war and peace (in makes several interesting points. Adam Smith, whom he quotes later in the article, taught Rhetoric in Edinburgh during 1748-51 and Glasgow College (University) during 1752-64. In Lecture XVII he said:

“When the design is to set the case in the clearest light; to give every argument its due force, and by this means persuade us no farther than our unbiased judgement is Convinced; this is not to make use of our Rhetorical style. But when we propose to persuade at all events, and for this purpose adduce those arguments that make for the side we have espoused, and magnify these to the utmost of our power; and on the other hand make light of an extenuate all those which may be brought on the other side, then we make use of the Rhetorical style.” (Smith, Lectures on Rhetoric and Belles Lettres, ed. J. C. Bryce, Liberty Fund, p. 89) (spelling modernised).

Gary North says: “Most people most of the time are self-interested. This perception was Adam Smith's great legacy to the modern world. Or, rather, it was Bernard Mandevelle's legacy by way of Smith, who officially opposed Mandeville's Fable of the Bees.”

Smith’s criticism of Bernard Mandeville is given on pages 308-13 of his “The Theory of Moral Sentiments” (edited by D. D. Raphael and A. L Macfie, Liberty Fund). North says he ‘officially opposed” Mandeville’s presentation; what exactly does he mean? Smith specifically rejects the idea that human behaviour is singularly motivated and he stood a long way off from Mandeville’s interpretation of private vice – public virtue. In fact, North gets closer to Mandeville’s moral philosophy with his attribution of the “invisible hand” to the working of markets. I shall come back to that assertion in a moment.

North writes: “In peacetime, men pursue their self-interest. There are few joint endeavors that command both loyalty and self-sacrifice. Husbands and wives are tied to a treaty of mutual support. But the concentric circles of jointly bound people become progressively less influential the further out from the family they are.”

A significant point is appropriate here. Smith’s model of a society that holds together, allowing for quite wide variations in the degree of disharmony a particular society could experience before succumbing to total disorder (“there is great deal of ruin in a nation”; Correspondence of Adam Smith, ed. E. C. Mossner & I. S. Ross, Liberty Fund, p.262,n.3), involves more than the notion that the ‘concentric circles of jointly bound people’ within the notion that beyond the family, there are declining interest in first friends, then acquaintances and finally strangers. He saw these concentric circles, as North phrases them, overlapping in highly complex patterns – strangers on the outside of your circle are family, friends, or acquaintances of others. More than that, in “Moral Sentiments” (page 86) we find the revealing statement:

“Society may subsist among different men, as among different merchants, from a sense of utility, without any mutual love of affection; and though no man in it should owe any obligation, or be bound is gratitude to any other, it may still be upheld by a mercenary exchange of good offices according to an agreed valuation.”

Set this along side the “fundamental error”, as I call it (G. Kennedy, 2005. Adam Smith’s Lost Legacy, Palgrave Macmillan, chapters 21-25), that Smithian political economy was based on self interest (George Stigler called it a “stupendous palace erected upon the granite of self interest”, 1975) and we get a misreading of Smith. He did not see the exchange transaction as one based solely on your self interest. It was based on the other party’s self interest; you serve your own interest best by serving the interests of the other party. Read the famous reference in “Wealth of Nations” describing the transaction between you and the “Butcher, the Brewer and the Baker” and note the words carefully:

“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 to their advantages.” (WN I.ii.2: p. 26-27)

Here “Wealth of Nations” aligns itself with the “mercenary exchanges” of “Moral Sentiments”. It is in these trillions of exchange transactions every day among billions of people, sometimes on matters of friendly discourse (“Life is a great bundle of little things”, O. W. Holmes) and social intercourse, sometimes in markets, that social harmony and stability becomes possible. Break into these transactions on racial, religious, political, emotional and fanatical grounds, and the harmony within them is strained, perhaps broken.

This brings me back to the ‘invisible hand’, perhaps the most widely misapplied metaphor in Smithian political economy. Gary North writes:

“It takes long chains of reasoning to defend the free market as a means of coordination. Most people cannot follow these long chains of reasoning. Adam Smith invoked the rhetorical image of the invisible hand. That was an effective tactic. It worked because Western intellectuals in the mid-eighteenth century associated this image with providence. Of course, this image would not work well in tribal animist societies. They would conclude that free trade is good because, if you don't adopt it, the Hand will get you.”

Smith did not apply the invisible hand metaphor to the working of markets. In US academe the market and the invisible hand have become almost synonymous. The facts are quite different. I would go so far to say that the invisible hand was not dealing with markets at all. It was dealing with the unintended consequences of human motives.

Smith used the metaphor three times only in three separate books, i.e., only once in “Wealth of Nations”. He first used the metaphor in an Essay published posthumously in 1795: “The Principles which lead and direct Philosophical Enquiries illustrated by the History of Astronomy” in Essays on Philosophical Subjects, ed. W. P. D. Wightman and J. C. Bryce, Liberty Fund. The invisible hand in this early ‘juvenile’ essay (1743-48?) refers to pagan superstition: “the invisible hand of Jupiter” (the Roman God, not the planet). It had nothing to do with markets.

The second reference to the invisible hand is in “Moral Sentiments” (TMS IV.i.10: p. 184 - 1759). This time it refers to feudal lords in Europe, who when distributing the necessities of life (food, materials, shelter) to their retainers and serfs they “are led by an invisible hand to make nearly the same distribution” which would have occurred if the land was divided equally among every family. Again this had nothing to do with markets.

The third and final reference is in “Wealth of Nations” (1776) in reference to what today we call ‘GDP’. Smith is arguing that every person seeks the best use of his capital (which in his day referred to the skills, tools and a little money of the tradesman and not the vast capitals of today – “capitalism” was a hundred years away when Smith was writing). He draws attention to the intentions of such individuals – their own security – when they contemplated whether to invest their time, effort and capital in the locality where they lived or to invest the same in a distant country. They chose the local one and this had the consequence that the benefits of their activity were retained locally and helped to make the national product higher than it would have been if they had preferred a distant country. He “intends only is own gain, and he is in this, as in many other cases, led by an invisible hand to promote the end which was no part of his intention” (VI.ii.9: p. 456). This is only very indirectly related to markets, if at all.

The mechanism of the invisible hand is solely related to the intentions of the person and the outcome of those intentions. This definitely has nothing to do with how markets work. It is not the invisible hand of the market at work but the invisible hand of the law of unintended consequences. And this ‘law’ operates for good or ill. The person seeking to keep costs down does not intend to poison the water supply when he dumps waste chemicals into a nearby stream; ‘slash and burn’ farmers does not intend to start soil erosion and turn a rain forest into a desert; the employer who hires juveniles under 10 does not intend to cripple them before their teens with overwork, dust in their lungs, without education, and so on. We could as easily say that in “these and many other cases” they intend only “their own gain” and are ‘led by an invisible hand to promote an end which was no part of (their) intention”.

That is Smith’s meaning of the invisible hand. It was not intended by Smith to represent metaphorically the inevitable benign outcome of markets because intentions can lead unintentionally to malign outcomes. Smith did not accord to markets that wholly unjustified licence. He described the operations of markets in detail in respect of what we now call supply and demand and the relationship between “natural” and “market” prices in “Wealth of Nations” (Book I, Chapters V. VI and VII) without any reference or mention of the metaphor of the invisible hand.

The invisible hand has been hijacked by modern commentators to rhetorically associate it with markets and it is called “Smithian” out of respect for the man they call the “Father of Capitalism” (a word and a phenomenon Smith never knew or used). But the invisible hand was not Smith’s, it belongs to Shakespeare in Macbeth: “and with thy bloody and invisible hand” (Act 3. Scene II.48). (I don’t think Shakespeare was thinking of markets either.)

I enjoyed the rest of Gary North's article.


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