Friday, February 12, 2010

Murray Milgate and Shannon Stimson, 2009. Review Commentary no 5

Murray Milgate and Shannon Stimson, 2009. After Adam Smith: a century of transformation and political economy, Princeton: Princeton University Press

No 5: ‘The Economic Machine and the Invisible Hand’

[Apologies: my review commentary has been interrupted due to the domestic complications of a triple move of house in Edinburgh.]

Milgate and Stimson review in a masterly fashion, the concept on an economy as a ‘machine’ (an ordered social system ‘resembling a machine’), which had some support by analogy with Newtonian mechanics among the participants in the Enlightenment. Language like the ‘market mechanism’ fitted neatly into this vision, and Adam Smith gave attention to such analogies in his essay on Astronomy (1744-).

Indeed, Smith’s central role for his ‘propensity to truck, barter, and exchange’ since deep into pre-history, as a ‘necessary consequence of the faculties of reason and speech’, made it the driving force for the sustained operation of social exchange among humans, leading eventually, through ‘very slow and gradual consequences,’ to markets, money and prices in ‘improved societies’.

Milgate and Stimson locate the driving force of the economic machine in competition (Smith) and these thoughts attract the attention of modern economists in the gravitation of market prices towards natural prices, a distinction that appeals to a sense of order, and a basis for a seemingly ‘scientific’ analysis (Books I and II of Wealth Of Nations), but which did not survive to the end of the 19th century.

This wasn’t quite ‘perfect competition’ – more like an ideal than a reality – and nor was it a reality in 18th-century Britain, with its economy littered with monopolies, statutory regulations, and (purchasable) privileges. The analysis showed what could happen; the analyst’s understanding came from recognising what prevented it happening in its ideal form (Book IV, Wealth Of Nations).

Here, Milgate and Stimson link much of their analysis to the roots of ‘equilibrium’ in economics (J. S. Mill, explicitly) analysis, at once suitable for a mathematical treatment using calculus, as the exponents of this innovation in the later 19th century were to nudge towards.

The authors round off this chapter with a discussion-survey of the invisible hand in economics, much of which is familiar territory for regular readers of Lost Legacy. I blew hot and colder reading this section, ‘hot’ when they leaned towards the ‘hand’ being a metaphor; ‘colder’ when they tended to philosophise, though thankfully they seemed not to buy into those who see in the invisible hand something divine at work.

Partly, I detected a misreading of the invisible hand of Jupiter in Smith’s essay on Astronomy, a failing, in my view, of such authors as Macfee, one of the first to notice this early use of the metaphor by Smith (though not cited in the bibliography). Smith discussed the role of superstition among savage societies and lists how the irregular events of nature (eclipses, lightning, earthquakes, and other frightening events) lead to invoking the anger of invisible gods as weird explanations for them. The ‘invisible hand of Jupiter’ (the Roman god, replicated in statuettes and on some coins) was believed to fire thunderbolts at enemies of Rome.

Milgate and Stimson ascribe to Smith that Jupiter’s invisible hand (remember, he too was invisible) the same status as the ‘invisible’ ‘gods, daemons, witches, genii, fairies’ thought to be the cause of the irregular events. Now Smith knew his classical mythologies and the differences between the superstitions about the ‘gods, daemons, witches, genii, fairies’ and the religious beliefs about Jupiter (his large statue stood on the Palatine hill overlooking Rome) in which he was not a myth to believers; he was all too real to those who sacrificed and prayed to him in fear.

I agree with our authors that the metaphor of ‘an invisible hand’ was used as a metaphor to help explain something readers may not understand when they read his explanation (which he gives on both occasions before he uses it in Moral Sentiments and Wealth Of Nations). A metaphor in Smith’s considered view, as expressed in his Lectures in Rhetoric and Belles Lettres (1763), is used to offer ‘in a more striking manner’ a link between the metaphor and its object.

In the first case (Moral Sentiments, 1759) the metaphor ‘explains’ what drives ‘the rich and unfeeling landlord’ to feed the thousands whom he employs – if he didn’t feed them from the harvests they produce, they would starve and the means by which the landlord was rich would perish too. The ‘invisible hand’ captures this absolute necessity to feed his people, though Smith has already explained what happens beforehand.

[Note that Smith uses the words ‘necessary’, ‘necessarily’, ‘naturally’, and ‘natural’, 16 times, spread in eight paragraphs either side of the metaphor. How many times makes a hint?]

In the second case (Wealth Of Nations, 1776) the metaphor explains what drives some, but not all, merchants to prefer to invest locally rather than invest abroad. He also explains very clearly before he deploys the metaphor why these merchants chose to do so – it is the concern for their own security, a not inconsiderable concern when the risks of foreign trade are greater than trading locally. Smith specifies the nature of those risks – foreign countries have less well-known legal systems, the people you deal with at a great distance are less well known to you, their probity is less certain, and you may not see your investment again, apart from the dangers of loss from the sinking of ships across the Atlantic.

However, those that invest locally experience lower risks, and, unbeknown to them, their local investments add to the total investment locally and provide employment, all of which adds to what we would call GDP. This outcome is unintended – the individual is concerned with his own profit not the benefit to society, and doesn’t need to be concerned. If the analysis is too difficult to follow, the metaphor of being ‘led by an invisible hand’ expressed the analysis in a more ‘striking manner’, which I what Smith taught his students was the metaphor’s purpose.

Moreover, the consequence of increasing local investment – the arithmetic rule that the whole is the sum of its parts – is to increase the local availability of the annual output of the ‘necessaries, conveniences, and amusements of life’. Interestingly, and as with the associated words either side of the ‘invisible hand’ reference in Moral Sentiments, Smith deploys the word ‘conveniences’ many times around the same metaphor in Wealth Of Nations.

Is Smith’s arrangement in this manner accidental or intentional? Milgate and Stimson arrive at a similar conclusion to mine above but by a different route. The invisible hand metaphor:

provides a comprehensive, coherent and attractive image’ … ‘that will be familiar and comfortable to its intended audience, and framed in terms compatible with communally accepted standards of propriety” (p94).

I agree with their conclusion and commend it to readers.

Milgate and Stimson conclude with some interesting observations, again close to the treatment I have been offering on the metaphor of an invisible hand among modern economists such as: the apparent absence of comment by economists on Smith’s sparing use of the metaphor in his lifetime contrasted by the almost ubiquitous use of it ascribed to Smith by modern economists since the middle of the 20th century, a view challenged by Daniel Kline in debate with me (Econ Journal Watch, May and September, 2009).

They also quote from Samuelson’s 1948 first edition of his famous textbook (p 36) (quoted on Lost Legacy earlier in 2009), in which he noted that faculty at Chicago in the 1930s referred orally to Smith’s invisible hand metaphor and in which he also cautioned readers in too general a reliance on it. In subsequent editions, Samuelson continued to refer to the invisible hand, linking it to perfect competition, while continuing his cautions, and deprecating the idea (now widespread) that modern markets are close to the perfectly competitive, Pareto optimal, constructs also taught in undergraduate courses.

From no mentions as far as I can ascertain in the 18th century while Smith was alive and from 1790 after he died, there is a long gap until the late-19th century before the metaphor is mentioned as linked to Smith. There is an extended footnote extract, without comment on the metaphor from Wealth Of Nations in Dugald Stewart’s Lectures in Political Economy [1809] 1856.

There are score of examples of the use of the metaphor throughout the 17-18th centuries (and earlier into classical times) by numerous authors, but not in reference to economics; so many, in fact, that the invisible hand metaphor was well-known and popular in Smith’s time, particularly with theologians and in Sunday sermons (hence some today, but not me, see Smith’s use of it as having theological significance; see my “The Hidden Adam Smith in his Theology”, 2009).

Milgate and Stimson’s comments on Smith’s use of the invisible hand metaphor, move the debate some ways towards what I have been arguing since 2005 when I began blogging on Lost Legacy. I am much encouraged by that and by the prospect that they will influence their readers of their excellent book in such a direction.

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