Sunday, December 27, 2009

An Invisible Hand That Claps!

Chris” writes in Mapwatt Blog HERE:

“Copenhagen was about a bunch of politicians getting together so it looked like they were doing something to slow Climate Change (to be fair, I’m sure most of them really wanted to work it out). But a better strategy for solving Climate Change is one that has been around since America declared its independence in 1776: The Invisible Hand. Adam Smith put forth in The Wealth of Nations that when we act in our own self-interest, society as a whole benefits.

“By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he 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 not 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.” [Wealth Of Nations, IV.ii.9: 456]

“So why don’t we start promoting a Clean Energy strategy not as the solution to Climate Change, but as a path to greater prosperity for America? And when America acts in its own self interest to get off fossil fuels, we will also be aiding the climate as a side effect.”

“….As we learned from Adam Smith, society benefits the most when each country acts in its own self-interest, which is what is always going to happen anyway because the International community doesn’t keep politicians in office (and if you don’t believe me, please get off your idealistic high-horse). Instead of trying to convince 190 countries – each with their own culture, industry, and goals – that they all need to agree on a solution (we can’t even get politicians in our OWN country to agree on what to do about Climate Change), let’s show each country that by adopting a Clean Energy strategy and getting off fossil-fuel that the country AND the climate will benefit.”

[And finally:]

“….Once everyone realizes how a Clean Energy (a.k.a. fossil-fuel reduction) strategy benefits their whole country ALONG WITH THE CLIMATE, the invisible hand will start clapping.”

I don’t with to be picky, but there are a number of holes in Chris’s argument, of which I am sure he realises. Let alone that political systems don’t quite work like that in welcoming an idea that assumes that it hasn’t been thought of many times before, and promises in its simplicity to over-ride the disparate self-interests present in societies, large, like the USA (and China, India, Brazil) and smaller, like the UK, France, Germany, and tiny like the Pacific islands.

The price for co-operation in Copenhagen-like jamborees – 15,000 delegates no less – is billions of dollars per year, probably trillions per decade, and still they can’t get agreement. A marketing man’s appeal to a PR campaign on behalf of self-interest, if it worked, would be a wonder to behold. Except that what appeals to the self-interest of Chris may not be in the self-interest, or even the attention span, of others. Even the idea of the self-interest of a country – however defined – may not be perceived as in the self-interest of other countries, making the idea of the self-interest of the whole world, somewhat vacuous.

Moreover, it would not take long for someone to note – a reader of Lost Legacy, perhaps (the author is too modest to say anything) – that Adam Smith did not quite say what Chris (and many others, top economists too) interprets him as saying.

He starts by quoting one of the paragraphs from Wealth Of Nations, disconnected from the previous 8 paragraphs, which directly connect to paragraph 9. Smith sums up an argument about the distorting affects of foreign trade, especially when part of a monopoly trading scheme as existed in the British colonies of North America, policed by the Royal Navy, which diverted scarce capital to Europe and the Americas, and thus reduced the employment generating and economic growth potential of domestic trade and investment in the Britain.

For a moment, let’s look at the merchants engaged in foreign trade, and not the ones, whose concerns for their security (mentioned above) leads them to invest locally, the metaphor for which action, is Smith’s use of the popular, 18th-century metaphor of “an invisible hand”.

Now both sets of merchants, whether engaged in foreign or in local trade, are guided by their self-interest, which happens to be, and is, different in both cases, but the same in one sense: - they both seek to make profit to enhance their capital “by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain”.

What is the greatest value for the foreign trader? Profit from exercising his foreign trade activities, despite the greater risks from doing so (shipping losses, piracy, foreign problems with local traders, fraud and criminality, and his misjudgements about his trading partners probity, honesty, and capabilities). He enhances the value of his capital by such foreign ventures, but it does not enhance his country’s. His capital could remain in the country he trades with and, in the case of the colonies, could be represented by plantations, mansion properties in town, other ships and stores.

The domestic merchant on the other hand, acting from similar self-interest, personal to him, invests locally and, seeking to enhance the value of his capital stock, he enhances the value of the capital stock of his country, which promotes the interests of his country.

The “invisible hand’s” role in all this is somewhat unexplained by Smith. Does it only work for the patriotic, risk-averse, local merchant? But what about the risk-tolerant foreign trader? It isn’t clear is it? And that’s the problem with using metaphors that are unsuitable beyond the exact situation where they are placed.

But, most readers of Wealth Of Nations since the 1950s (it was largely ignored before then) ignore the metaphor’s limited applicability, and generalise from the limited extract to make Adam Smith supposedly say that “an invisible hand” leads all individuals “to promote an end which was no part of his intention”. For here on (roughly beginning in the 1930s at Chicago University) and spreading right across US campuses, until from the 1970s onwards, the metaphor of an “invisible hand”, invariably attributed to Adam Smith, became ubiquitous among modern economists, a mythical status it maintains even today.

Yet all around, in Smith’s time and ours, conflicts of personal self-interest abound. I shall not generalise in detail, but I suggest that this is the flaw in Chris’s well-intentioned advocacy of his solution to what we call “climate change” in common discourse.

Getting from here to there is not going to be achieved by “an invisible hand” – even one that claps!

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Blogger Gevin Shaw said...

But, most readers of Wealth Of Nations since the 1950s (it was largely ignored before then)…

Did the whole book first find an audience in the 1950s, or only certain "convenient" sentences? If Smith's ascendency takes place entirely in the arena of Cold War rhetoric, his influence is very different than if his theories had held a significant place throughout the growth of capitalism.

7:15 pm  
Blogger Gavin Kennedy said...

Hi Gevin

The whole book is very long and as teh decades past after 1790 his book sold well in various editions, but events and economics, as it became, moved on.

The obscure metaphor did not attract much attention compared to other matters - Labour Theory of Value, international trade theory, and public finance - and though editions continued to be published and bought, few major economists continued to read it through.

They relied on secondary references, and Moral Sentiments became ever obscuror in its original.

There was a flurry of interest in Germany in the last quarter of the 19th century 'Das Adam Smith Problem', but it petered out.

Neoclassical economics - more 'scientific' because packed with calculus and Marshalll's text dominated until the 1920s.

In the 1930, the metaphor re-appered in a sense in Chicago, then in 1948, with Samuelson's famous textbook (and another 17 editions.

I am reviewing one excellent account, After Adam Smith, 2009, Princeton University Press. Which doesn't follow my trajectory on what happened but explains a more orthodox history from 1790 to the 1870s. Nevertheless, it recognises that 'something' happened to re-cast Adam Smith as the decades rolled past.


PS Yes, the whole book was largely ignored, except among specialists, and the metaphor became the main-even only - meaning of his work. Sad.

7:52 pm  
Blogger Brian Woods said...

Hi Gavin.

Got ASLL for Christmas! VERY interesting. " ... juvenile 'anti-globalization' .." (p170). I might not agree. Lets see what transpires. The last sentence on p177 is a real 'ball buster'- lovely!

Presumably, it would be useful to read TMS in parallel with WoN? Also, Cantillon is almost 'smithian' in some respects.

Brian P

6:01 pm  
Blogger Gavin Kennedy said...

Hi Brian

Indeed, let's see what transpires.


8:35 pm  
Blogger Unknown said...

This is Chris, the author of the post. My whole point was not to psycho-analyze Adam Smith. I've actually never read "Wealth of Nations" and I'm not an economist; I'm an engineer.

My point was this: Instead of trying to come up with a universal treaty for cutting carbon emissions, let's let each country come up with it's own strategy in hopes that because it is benefiting the whole, it will benefit itself.

If America commits to clean energy, we will sell our technology to other countries; thus lowering worldwide carbon emissions and benefiting America.

By focusing on America first, we help the whole world succeed.

2:01 am  

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