Tuesday, July 04, 2006

That Pesky Invisible Hand Rides Again - in Virginia

From Greg Mankiv’s blog:

Yesterday I asked, who said this?
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.
The answer:
George Washington in his first inaugural address.If you read the speech, you will find that Washington was referring to God, not to the workings of supply and demand. But then Smith may well have thought of the market's "Invisible Hand" as having a degree of divinity as well.”

Yes, worth reading and following through to Greg Mankiv’s quoted story of a copy of Wealth of Nations held in a US University’s archive’s with George Washington’s signature in it.

However, I must comment for the record, even at the risk of challenging the assertions of one of the big names in US economics (Greg Mankiv, not George Washington!) and a prolific, literate and numerate Blogger to boot.

I doubt if Smith very thought of the invisible hand metaphor applied to markets. He certainly did not mention such a connection in Wealth of Nations, despite the modern almost religious belief that he did (in the USA at least).

There were not mysteries or miracles in markets that required such an allusion to invisible hands or invisible Gods. His statements about markets are perfectly clear and require no elaboration or descent into metaphor. And more importantly, Smith did not do so in near on a million words.

His single reference to the metaphor in Wealth Of Nations was about the unintended consequences of individual motivations. In the case he refers to it was about individuals preferring to keep their scarce ‘stock’ within sight of where they live on security grounds and not send it far away, especially abroad, out of sight and at greater perceived risk. These security fears had the consequence that scarce capital stock was put to work locally, and within national boundaries, thus boosting capital accumulation and the output of goods (the necessaries, conveniences, and amusements of life’) at a greater (though still small) rate than would otherwise be achieved. (WN IV.ii.9: p 456).

Smith had the dreadful example of Scotland's Darien fiasco (1698), as it tried to emulate England's Empire (the two countries were separated until 1707) and which near bankrupted the national economy, to reflect upon, which was instrumental in persuading enough Scottish MPs in the Scottish Parliament (assisted by a jiudicious distribution of bribes and inducements) to vote for Union with England. Scots were more cautious after Darien about foreign investment for much of the 18th century.

Now nobody told them to invest locally; their own regard for their self-interest taught them to avoid Darfien-type risks if they could because the alternative of losing their scarce capital stock would turn them from small traders, artisans and handicraft labourers into the wage earners (if they could find any work) and, in mid-18th century Scotland, probably destitute too. That the local economy grew marginally faster and for longer uninterrupted periods was an outcome of their individual decisions to better themselves and not support for the national interest, but it had the same effect.

What George Washington meant by his use of Shakespeare’s metaphor (Macbeth, 3:2), which play he had probably read, or Daniel Defoe’s Moll Flanders (1722), which he also probably read – part of it takes place in the American colonies – or the other references to invisible hands in the 18th century, I cannot speculate.

But it is a nice link on Independence Day, for all that.


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