Thursday, July 22, 2010

Five Sociologists Misled by their Adoption of the Neoclassical Myth of the Invisible Hand

The “Invisible Hand”: neoclassical economics and the ordering of society’, Alan Finlayson, Thomas Lyson, Andrew Pleasant, Kai Schafft and Robert Torres in Critical Sociology, 2005, vol. 31, no. 4: 515-536.

Still, much of the conceptual cure of classical economics was preserved including the primary metaphor for the meta-function of the market – the “invisible hand.” First spelled out in An Enquiry into the Natures and Causes of the Wealth of Nations[.] Adam Smith wrote: (the invisible hand paragraph from Book IV, ii.9: 456 follows).

There is no discussion of the context in which this metaphor was used by Smith. It certainly had nothing to do with the ‘the primary metaphor for the meta-function of the market’ – there is no evidence that our authors have any idea about Adam Smith’s use of metaphors: see Adam Smith: Lectures on Rhetoric and Belles Lettres’, Oxford University Press, 1983, p. 29). Briefly, metaphors express in a ‘more striking and interesting manner’ their ‘’objects’. Context shows that the object of the metaphor, invisible hand’ had nothing to do with markets, which were discussed in Book I and II, without mentioning the invisible hand.

The context, should our authors, be bothered to do their research, was the behaviour of some, but not all, merchant traders, to prefer domestic investment to foreign investment because of their concerns for their ‘own security’ (risk-aversion; see Book IV, ii, 1.9). By behaving thus, the domestic investments of these particular merchants added to national investment, with consequent increases in domestic investment and employment, that had, in Smith’s view, beneficial consequences for society, particularly among the labouring poor and their families.

In sum, the ‘invisible hand’, in this case, complied with the arithmetic rule that the whole is the sum of its parts’, and
this process had nothing to do with the ‘existence of well-functioning market that efficiently distribute labor, resources and wealth’ (p 518). The latter idea was an invention of modern economists, and was popularised, particularly, by Paul A. Samuelson in his text, ‘Economics: an introductory analysis’, 1948, p. 36, and the developed in the following 18 editions 2010.

The ‘core of classical economics’ was NOT ‘preserved’ in the ‘meta-function of the market’ as the ‘invisible hand’. Our authors would be hard pressed to find a reference to the ‘invisible hand’ in the works of Ricardo, J S Mill, or Karl Marx, or indeed, almost any contemporary or near contemporary of Adam Smith. In fact, Smith only mentioned it once in Wealth Of Nations. His friend, Dugald Stewart, quoted the passage without comment in his Principles of Political Economy in 1801. And from Smtih’s death in 1790 to the late 19th century hardly anybody mentioned it at all, until 1920 (Pigou) and in the oral tradition at Chicago in the 1930s (Oscar Lange, 1938, Keynes1930s).

Our authors consider the ‘invisible hand’ as being about ‘power’ That is more an assertion from their sociological analysis of modern capitalism and from their passive adoption of the neoclassical appropriation of its invention of the wider use of the metaphor from the 1950s, and the inevitable, but completely unjustified, attribution of its modern meaning to Adam Smith’s quite different uses in both Theory of Moral Sentiments, 1759, (once only) and Wealth Of Nations, 1776) (and, just for the record, once only in his Essay on Astronomy, posthumous, 1795).

In all three cases, Smith was not referring to competitive markets – hardly so because ‘rich landlords’ were not in a competitive market economy, nor were 18th-century merchants in mercantile Britain, and nor were credulous Roman citizens who believed that their god, Jupiter, fired thunderbolts at enemies of Rome.

These elementary misunderstandings undermine our Authors’ case against neoclassical economics, the broad aims of which I would normally have sympathies. But scientific criticism must be based on facts, not fallacies, including those perpetrated by neoclassical economists.



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