Tuesday, May 16, 2006

New Research on the Invisible Hand

On www.mises.org Mark Thornton publishes a thoughtful paper on the uses and abuses of the invisible hand in modern economics, including several top flight professional economics journals recently. It is an extremely interesting paper and should be read widely.

Below are some preliminary comments of mine. They are not definitive just yet as I need more time to study Mark's analysis and to think about his theme, including to check over Cantillon's Essai which I have with me in France.

Comment (Posted on www.mises.org)
"The Invisible Hand was used as a metaphor by Adam Smith in his ‘History of Astronomy’ (1743-48) in mockery of pagan religious beliefs that invisible gods intervened in human affairs (his mockery may also have been a coded sneer at established religion). It was used as a metaphor in ‘Moral Sentiments’ (1759) similarly to mock the pretensions of the rich landowners because in spite of their ‘vileness’ they ended up doing what the poor would have done for themselves, namely fed, clothed and sheltered their families. It was also used as a metaphor in ‘Wealth of Nations’ (1776) to mock the unintentional local wealth creation of people seeking to better themselves amidst private concerns about the risks (the ‘security’) of their capital moving outside their neighbourhood. ‘Distant sale’ represents a slow, gradual and cautious development of trade practice.

In none of these cases did Smith create a theory of markets. Nor did he need to ascribe anything ‘mysterious’ to how markets worked. The source of ‘wonder’ precedes understanding; ‘admiration’ comes from understanding in Smith’s philosophical method. Once the ‘connecting chain’ is identified and understood the philosopher is no longer in ‘awe’.

The metaphor itself long preceded Smith’s first use of it in the 1740s. It can be found, for example, in Shakespeare (Macbeth, 3:2; 1605): ‘thy bloody and invisible hand’, and in Defoe (The Fortunes and Misfortunes of Moll Flanders; 1722): ‘A sudden Blow from an almost invisible hand, blasted all my Happiness’.

I read and much enjoyed your paper and will take some time to study it and its sources. My initial comment is that modern usage of Smith’s metaphor is to take it far too literally, almost to subject it to metamorphosis, well beyond what Smith intended. Smith lectured and wrote in a rhetorical style, common in the 18th century.

While justly exposing the fallacies of the ten interpretations of the invisible hand, I find your painstaking analysis of them terminating in a another fallacy, albeit brilliantly argued from his links to Cantillon’s Essai. You seem to say Smith started using the metaphor in 1749, and again in 1759, both usages suspected as being just ‘metaphors’, but in 1776, after reading Cantillon’s manuscript in French (there have been suggestions that Smith translated it – I am sorry but my references are at my Edinburgh home and not with me here in France), found a real theory of markets to which the metaphor could be applied and that he used it in this sense in Wealth of Nations, though when he did he was not writing about markets!

If you had confined yourself to establishing a source for Smith’s use of Natural and Market prices and the rewards to land, labour and capital stock, you would have done enough. At his moment I think you went too far in trying to invest his casual use of a mere metaphor with deeper meaning.

Despite this preliminary conclusion, congratulations on a well researched paper."

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