Tuesday, March 10, 2009

Folly Of Relying on Poor Teaching

estherbintliff writes in The Filtnib’s Progress Blog (HERE):

The idea that individual greed might help boost wider economic conditions and thus wider society too, was first suggested by the great Scottish economist and philosopher Adam Smith in his Wealth of Nations in 1776:

“By directing that industry in such a manner as its produce may be of the greatest value, (the individual) intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it.
By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

Alas, this recipe has recently gone a bit wrong. Given free rein, the invisible hand of the market didn’t allocate resources quite as accurately as expected

Readers familiar with this quotation will know that it is truncated from several pages of argument which ‘estherbintliff’ is either suppressing to make her argument stronger or, more likely, is unaware of, and therefore comes to the conclusion that suits he argument. The full analysis containing the quotation runs across pages 453 to 457 in Book IV of Wealth Of Nations, chapter 2.

First, Adam Smith never endorsed a policy of, or the behaviour of, greed. That is to confuse Adam Smith with Bernard Mandeville, author of the Fable of the Bees, 1734 (written over the years 1704 to 1737), who made greed a private vice but a public good. These views had nothing to do with Adam Smith, who described Mandeville’s theories as ‘licentious’.

Second, in the quotation esther has made (she claims to have done A-level economics), Adam Smith was talking about the influence of risk-avoidance on the decision of some merchant traders not to engage in foreign trade, even though it was more profitable, and to confine their activities to their domestic country of residence.

Meanwhile, other merchant traders traded with foreign places (largely with the British colonies in North America) because the higher profits of this monopoly trade compensated them for the risks of the Atlantic voyages, uncertain legal decisions, piracy, and fraud.

So Smith was not making a general point about self interest being always beneficial; it clearly wasn’t – he gave over 50 examples in Books I and II of Wealth Of Nations of self-interested actions which led to sub-optimal, as we say today, outcomes for society.

On the example, he quoted above, the outcome of risk-avoidance was that the local society’s annual output was higher than it would otherwise be (the whole is the sum of the parts), which is hardly a stunning conclusion in these circumstances. The metaphor of ‘an invisible hand’ is not of general applicability and neither did Adam Smith say it was.

I am sorry to say that brief encounters with a ‘leftwing teacher of A-level economics’ is not a safe source for the real views of Adam Smith.



Blogger michael webster said...

Not sure if you saw this, from A.K. Sen in the New York Review of Books.


12:06 am  
Blogger Gavin Kennedy said...

Thanks Michael

Yes, I saw Sen's article. On target as is usual for him. He writes a lot of good sense, which is Smithian to the core.

I have been so busy writing my new paper that I decided not to review Sen's article, which has attracted a lot of positive comments across the Blogsphere.

7:18 am  

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