Thursday, January 14, 2010

Invisible Hand as a Metaphor

James” writes in “Bubble MeterHERE

Adam Smith's "invisible hand" in context

Princeton University economics professor Alan Blinder puts Adam Smith's concept of the "invisible hand" in context:

When economists first heard Gekko's now-famous dictum, "Greed is good," they thought it a crude expression of Adam Smith's "Invisible Hand"—which is one of history's great ideas. But in Smith's vision, greed is socially beneficial only when properly harnessed and channeled. The necessary conditions include, among other things: appropriate incentives (for risk taking, etc.), effective competition, safeguards against exploitation of what economists call "asymmetric information" (as when a deceitful seller unloads junk on an unsuspecting buyer), regulators to enforce the rules and keep participants honest, and—when relevant—protection of taxpayers against pilferage or malfeasance by others. When these conditions fail to hold, greed is not good.”

“Greed is a natural human vice, just like aggression. As much as we may try, we cannot get rid of them because they are part of human nature. But just as sport channels aggression into productive use, free enterprise does the same for greed. Free enterprise is only productive when its goal is to benefit consumers. When it becomes acceptable to screw consumers (or taxpayers) in the quest for wealth, the benefit is entirely lost.

Greed is not good.
It is the productive work and investment we do as a result of our greed that is good.”

A muddle, I am sorry to have to say. Blinder’s point is discussed in a reader’s comment in an earlier post this week.

Adam Smith had no time for espousers of “greed” in their books (such as Bernard Mandeville, 1734, whose ideas he called “licentious” in Moral Sentiments (TMS VII.ii.iv.6-14).

It’s a bit like that modern combination that starts of asserting the cliché of their being only two motives for human action, “fear” and “greed”, and then proceeds to elaborate on some silly “theory” or other. I recently refereed a proposed book applying this to defence economics (my earlier specialty before the fall of communism) and found it projects a prejudicial imperative onto its author’s conclusions.

“Adam Smith's "Invisible Hand"—which is one of history's great ideas” is actually a recent invention among modern economists. It certainly is one of our discipline’s “great” re-defined and heavily promoted metaphors.

Smith’s point was not that “greed is socially beneficial” (please give us a direct quotation from Adam Smith showing that he ever made this absurd assertion!).

What he argued – once only – was that when some, but clearly not all, merchant traders were concerned about risks to their capital (remember, in the 18th century, the alternative to safety and prudence in one’s investments was utter ruin and its associated severe, and perhaps life-threatening, deprivation) they preferred to invest locally rather than invest their capital in riskier foreign ventures.

The greater the number of merchants who invested locally as individuals, the greater would be annual national investment and the greater the consequential national output and employment (always a concern of Smith’s for lifting working people out of their unemployed deprivation), because it’s an arithmetic law that the whole is the sum of its parts. Yes, that’s all it is.

He added, to describe the process by which individuals seeking the most profitable investment of their capital (prudence, not greed!) and to explain the arithmetic consequences to his readers, most of whom were not political economists, that individuals who behaved in this manner were led by “an invisible hand”.

This was not original to Adam Smith . It was never Adam Smith's invisible hand".

It was a popular literary metaphor, widely used by theologians in their sermons (Augustine), political writers in their weighty tomes, playwrights (Shakespeare in Macbeth), fiction authors (Daniel Defoe in Moll Flanders), philosophers (Voltaire) and classical writers from Greece and Rome. The metaphor was easily recognizable among literate readers of Wealth Of Nations.

I have a list of nearly 50 separate uses of the invisible hand metaphor, most of them probably known to Adam Smith, plus scores of other authors using the metaphor in other contexts up to the 20th century.

Smith taught his students that a metaphor should be used to give “due strength of expression” in “a more striking and interesting manner” (see Adam Smith’sLectures on Rhetoric and Belles Lettres”, 29 November 1762, Oxford University press, 1983, p 29).

His use of the metaphor of ‘an invisible hand’ (only once in Wealth Of Nations and once in Moral Sentiments, and once in his ‘juvenile student’s essay) certainly achieved his literary intention. Pity that modern economists from the 1950s burdened Smith’s achievement with a wholly invented content – not that they can agree on exactly what he meant by it, as a perusal of modern interpretations soon shows careful readers.

So James takes one step towards understanding Smith’s legacy and two steps back by obfuscating his literary meaning with the burden of the wholly invented charge of explaining why “greed” might be “good” under certain conditions of perfect competition (another modern idea unknown to Adam Smith).

I received a comment from "James" which since has 'disappeared' after I clicked 'publish';

Here it is:

"Sorry, but no one believes an invisible hand actua... Sorry, but no one believes an invisible hand actually exists. Everyone understands that it is only a metaphor. Your claim that "most campuses teach their students to believe that the metaphor is a real object, that it exists" is just plain wrong. It is not just wrong, it is ridiculously wrong."

Update 2:

James, have you read recent economics 101 textbooks lately, let alone those major ones since the 1970s? Also, scroll through Lost legacy and note the comments I make on references to the 'invisible hand of Adam Smith'.

These are all actual refernces spread across the world and media sources.

Look at the professional, refereed, journals, which with few exceptions pass for publication references to the invisible hand in its many guises.

No doubnt, you can find a few examples that contradict my statement, but they are swept aside by the scores that justofy it.


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Blogger Mark Michael Lewis said...

do you have a link to the "list of 50 references to invisible hand that Smith would have been familiar with?"

That would be a most excellent resource to gain deeper insight into what you are pointing to in this article.

I don't have that context, so I am unclear what you think he meant.

12:45 am  

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