Thursday, June 03, 2010

On the Genesis of the Invisible Hand Myth from the 1950s No. 11

Edwin G. Dolan (with the collaboration of David E. Lindsey), 1977. Basic Economics. Hinsdale, Illinois: The Dryden Press.

The principle of market coordination uses the price system as a source of incentives. Coordination takes place without explicit central control. S Adam Smith wrote some 200 years ago,

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. … Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. … By directing that industry in such a manner as its produce may be of the greater value, he intends only his own gain, and is his in this, as in many other cases, lead (sic) by and invisible hand to promote and end which was no part of his intention

There are large areas of the division of labour, however, which do not depend directly on the “invisible hand” of the market as a means of coordination. Hubcap fitters do not perform the their job in response to market signals, It is not their business to judge that their skills are more profitably employed in fitting hubcaps than running a milling machine in another part of the factory. Instead they fit hubcaps because their immediate boss tells them that is what their job is today. Here we are in the realm of a different coordinating principle altogether, that of managerial coordination’
(p 328).

The two paragraphs Dolan quotes from Wealth Of Nations are over 400 pages apart. The ‘Butcher, brewer, and baker’ quote is from Book I (p 26) and the ‘invisible hand’ quote is from Book IV (p 456). Others have followed this presentation by the same device, without mentioning their separation, thereby spreading the illusion that Smith intended their twin significance.

However, Dolan goes on to say that coordination by the invisible hand is not the sole form coordination by referring to an example of ‘managerial coordination’ and the work of Ronald H. Coase (‘The Problem of Social Cost’, Journal of Law and Economics, 1961).

My copy of Basic Economics was sent to me by the publisher with a view to using it in the first year class but I had moved onto the second year class by then. I did, however, use Dolan’s earlier short book (Tanstaafl [there ain’t no such things as a free lunch]: the Economic Strategy for Environmental Crisis. 1971. Holt, Reinhart and Winston ) as a brief introductory read for the class (many of whom had not done economics before and were interested in something they considered relevant to the themes of the time). It proved popular and even today, 30-40 years later, I still meet former students, who are now in professions and senior jobs, who re-introduce themselves to me with their memories of ‘Tanstaafl’.

I wonder how much the idea of ‘unintended consequences’ influenced Dolan in his reference to the invisible hand was sparked by ‘The Foundations of Modern Austrian Economics’ (1976), which he edited the year before his Basic Economics came out in 1977. Austrian economists tend to be relaxed about the historical inaccuracies of linking “Adam Smith’s Invisible Hand” to modern uses, seeing the former as a progenitor for their enthusiasm about ‘unintended consequences’.

You can read Dolan’s Bog HERE:

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Blogger Ed Dolan said...

OK, OK, so you wait 33 years to correct my quotation--assuming you are right about it, I haven't checked yet!--but better late than never! The same quote still survives in the 4th BVT Publishing edition of the text, published this year. Of course, I will check and correct for the next ed.

In later editions (e.g., the 1993 7th Dryden edition) I had a whole chapter, titled "Inside the Firm," which was about hubcaps and so on, following Coase, Williamson, and others on market vs. hierarchical coordination. Sadly, modern pressures to slim down the book have made it necessary to drop that chapter from the latest edition. (I can send it on request). BTW, the Austrian conference was an outgrowth of my interest in this stuff, not a cause of it.

--Ed Dolan

3:14 am  
Blogger Gavin Kennedy said...

I hadn't meant to 'rude' or even 'mocking' about a 1977 text. I am in France where much of my library is stored and I have just fiinished a paper for Richmond University Summer Institute on the genesis of the modern version of what is called "Adam Smith's Invisible Hand". I was under 'orders' to dispose of surplus books by the family and in the selection process I 'saved' many economic textbooks accumulated over the years.

Hence, the current series on Lost Legacy about the genesis of the myth and my quotation from your 1977 book - I am not surprised that it is still in print; it's better than most from that period and since. It treats its readers as intelligent.

The 'blame', if any is deserved, falls on Paul Samuelson's 1948, Economics: an introductory analysis (McGraw-Hill) (despite his well deserved authority among economists; even a genius in maths can get literary details wrong).

Thanks for clearing up the 'Austrian' connection - some of my best friends ...etc., - and I was ever so slightly teasing you.

Apologies for any unintentional offence.


6:07 am  

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