Monday, November 01, 2010

Peter Kinder Discovers the Truth About Adam Smith's Use of the Invisible-Hand Metaphor

Peter Kinder in The Bell Blog writes on “Adam Smith’s ‘Invisible Hand’ & Today’s Need for Protectionism”, HERE:

At one time I thought the phrase referred to the Deists’ notion of God. It certainly can’t refer to ‘the market’. For one thing, Smith doesn’t use the word within pages either side of his immortal phrase. And, he’s not talking about the merchant’s competitors or customers.

Rather, Smith answers his own question about why a merchant in his own self-interest will favor domestic over foreign goods, all things – presumably including quality as well as price – being about equal. Smith equates self-interest with that of the merchant’s society. Therefore the hand in question is much more likely that of an inner witness.”

Congratulations to Peter Kinder for getting closer to the truth about what Adam Smith meant by his use of the invisible-hand metaphor. I agree with Peter Kinder: the invisible hand metaphor in Wealth Of Nations (Book IV) was not about the market, which Smith detailed his views upon in Books I and II.

The motivation of the traders who preferred “domestick industry” to “foreign industry” was the perceived “security” of their capital, which Peter Kinder denotes as "an inner witness" i.e., subjective and not a mysterious "invisible hand', which was a metaphor, not a real entity leading people externally.

By preferring “domestick industry’ they were led by their insecurity to add to domestic “revenue and employment”, a purely quantitative outcome, which in Smith’s view was beneficial because it spread the benefits of “opulence”, especially to the “poorer majority” (pages 45-56, WN).

This idea , especially after the 1940s, was transformed by modern economists to the market (see Paul Samuelson, “Economics: an analytical introduction”, 1948, page 36, plus 19 editions and 4 million plus sales) into a much wider myth than Adam Smith’s, such that Samuelson transformed the perfectly reasonable unintentional consequence of the merchant's insecurity into even ‘selfish” motives that “benefitted society”, a wholly ludicrous proposition if it came from Smith, a moral philosopher. Such ideas about selfish ends were derived from modern readings of Mandeville (1724), whom Smith considered “licentious” (see Smith’s “Moral Sentiments, Part VII, 1759).

Needless, to say, perhaps, I do not agree with Peter Kinder’s stance of favouring protection. (And neither would Adam Smith).



Blogger entech said...

In his essay "What metaphors mean", the American philosopher Davidson says “Seeing one thing as something else is not the recognition of some truth or fact, and so ‘the attempt to give literal expression to the content of the metaphor is simply misguided’”

Interesting piece by Mr. Kinder, however, he still sees ‘the hand’ as an active agency rather than a side effect of other actions.
“By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”
The idea that things happen which are not intended is mentioned five times in that one paragraph, more than ‘the hand’ in all of his work. This would suggest, to me, that unintended consequences are part of most transactions and that the effects are not always good or bad.

Correct me if I am wrong, I am still learning.


1:55 am  
Blogger Gavin Kennedy said...

You are right. An act has a consequence. As there are 'good' (survival) and 'bad' (pollution) effects of acts, there cannot be all good consequences.

The 'invisible hand' leads who to what? 'Risk-aversion' leads the merchants to invest locally (inside the minds of the merchants), which leads them to invest, which adds to 'domestick investment and employment as a consequence (the whole is the sum of its parts). That is a purely quantative outcome; whether it is a 'good' distribution - however defined - is another matter.

But, not mentioned by Smith (for it was not really relevant to his example of merchants concerned with their 'own security') not all merchants who invested locally (possibly the majority) were not led by 'risk aversion', yet they too added to 'domestick' revenue and employment. Whatever induced them to invest locally also led them to the unintended consequences of them doing so, but the IH metaphor in the example did not 'lead them!

And neither did the IH metaphor apply to all those other merchants who traded abroad - they did not feel as 'risk-averse' or insecure as those who chose to only trade locally.

Generalising from the example used by Smith as if to imply that all merchants (i.e. 'all individuals') were 'led to invest locally, is an error, as the evidence shows. Yet that is how modern economists use the IH metaphor to claim.

My recent discussion on Lost Legacy with David shows this error in spades Friedman.


1:52 pm  

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