Monday, January 17, 2011

Claims for the Invisible Hand Fail Simple Tests

Piaroh-Cze writes the Words of Cze Blog (HERE):

On many occasions, I have asserted that I no longer believed in Adam Smith’s ‘invisible hand’, arguing that even if it still existed (as I think it does), it no longer acts freely and independently and can be and is being channelled by corporate managers and public policymakers (which subverts the concept entirely). In fact, many a time I’ve made policy suggestions which focus on manipulating Adam Smith’s hand. I might not have articulated it as so before, but the point is that this ‘hand’ is now a ‘visible’ one now….

In Adam Smith’s time, markets ran on the craft economy. Businesses were small-scale, goods and services were produced ad hoc and often with the same craftsman working on every stage of its production. Mass orders did not happen because no one could afford them, the notable exception being the military during a war, and that spawned an entire body of military study on how to manage and mantain arms supplies….

… So for Adam Smith, the whole idea of the ‘invisible hand’ worked perfectly. Small producers, small consumers, weak regulation and lack of information infrastructure made moot by the small reach of the market anyway; if the only folks buying their pots at the ones living in the same small town as you are, word of mouth is generally sufficient to facilitate market activity.”

Does the “invisible hand” exist? Piaroh-Cze writes that “I think it does”.

He adds that “it no longer acts freely and independently” which “subverts the concept entirely”.

So it is a “concept’ (that is, in the mind) either made-up and imagined but not physically present in some sense.

This is a muddle. Best shown by Piaroh-Cze’s construction: the invisible hand’ exists if he thinks it does, but doesn’t if he thinks otherwise.

The muddle begins from his assumption of meaning of the metaphor of “an invisible hand”. Metaphors do not exist in any real sense. They are grammatical constructions of the literary mind.

In so far as Adam Smith used the invisible-hand metaphor (IH metaphor) it most certainly did not exist physically, therefore to say “it no longer acts freely and independently” is physically not possible one way or another. What might change is the imagination of the concept which “no longer acts freely and independently” and that judgement exists only in the mind.

Adam Smith has no confusion about the status of the IH metaphor. He taught his students about the role of metaphors: they are used to “describe in the more striking and interesting manner” their objects (Adam Smith, “Lectures on Rhetoric and Belles Lettres” [1762-3] 1983, p 29).

He only used the IH metaphor in this manner three times in his Works, his Theory of Moral Sentiments (1759), his “Wealth Of Nations” (1776), and in his History Of Astronomy (1795 posthumous, but believed to have been written from 1744-50).

From the context, Piaroh-Cze apparently believes that the IH metaphor has something to do with markets, and is applicable today. This is a fable invented from the 1950s by modern economists and repeated endlessly and widely even today (see Paul Samuelson, Economics: an analytical introduction, McGraw-Hill, 1948, p 36).


His use of the IH metaphor in his History of Astronomy was about the belief on Roman citizens that their (invisible, but represented in stone) god, Jupiter, fired thunderbolts with his invisible hand at enemies of Rome – certainly a ‘more striking and interesting manner’ of expressing its object within, what Smith called, their “pusillanimous superstition”. But nothing to do with markets.

In Moral Sentiments his use of the IH metaphor was about how rich and unfeeling landlords in feudal Europe fed their retainers, serfs and slaves, who, with their families, otherwise would die of starvation and who, then, would work their fields and keep out intruders (and who would keep the poor at bay, and also lordly rivals?) – which meant that the landlords had to share their harvests with their much despised underlings, just as much as servants, serfs, and slaves had to work to get fed). The IH metaphor referred to the consequences of this necessary mutual dependence, policed by the Feudal Lord's power and oppression. But, again, it had nothing to do with how markets work.

In Wealth Of Nations, some merchants, but not all, obviously, traded with and invested in the colonial settlements in North America, the Caribbean, Africa, and India, but others preferred to invest all their capital at home, where it was under their immediate control, rather than risk it by sending it abroad and at the mercy of events (shipwreck, piracy and war) beyond their control. The merchants also distrusted people they did not know and who were not subject to UK justice. Therefore, they invested solely in the domestic economy, but in doing so, unintentionally they added to domestic revenues and employment (public benefits in Smith’s view). He used the IH metaphor to describe ‘in a more striking and interesting manner’ the consequence of their risk aversion leading to this public benefit, without making any reference to how markets work, or to greater ‘harmony’ or to the ‘magical’ distribution of the benefits. It was simply the arithmetic rule that the ‘whole is the sum of its parts’.

In no way can it be construed from these reference that the IH existed or that “for Adam Smith, the whole idea of the ‘invisible hand’ worked perfectly”. The metaphor applied to its object of the insecurity felt by some merchants that "led" them to act as they did. But nothing to do with how markets work.

Hence, the assertion that whether the IH metaphor physically exists or not, in Adam Smith’s thinking, was not and is not dependent on the existence or nature of markets. Piaroh-Cze presents an idealistic picture of markets in Smith’s time that “ran on the craft economy. Businesses were small-scale, goods and services were produced ad hoc and often with the same craftsman working on every stage of its production.” [Incidentally, early craftsmen did work on 'every stage of production.)

The reality was quite different. Smith dissected the commercial system in Britain, dominated and distorted, as it was, by mercantile policies against which he launched his “violent attack” in Wealth Of Nations. The Elizabethan Trades Guilds that ran legal monopolies of almost everything sold in towns; the Apprentice Statutes, the Settlement Acts, the Royal Charters granting monopolies across all businesses, plus the tariffs and prohibitions, and Cromwell’s Navigation Acts, inheritance, specially landed estates, of primogeniture and entails, the Combination Acts against labour but not against employers, and the patronage and corruptions of governments at all levels, these , all conspired to paint a different picture that markets “worked perfectly”. They didn’t and still don’t.

Piaroh-Cze’s case fails the historical test of the facts, and also fails any test of reading Adam Smith’s actual Works.

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Blogger Paul Walker said...

"In Adam Smith’s time, markets ran on the craft economy. Businesses were small-scale, goods and services were produced ad hoc and often with the same craftsman working on every stage of its production."

Mokyr (2002: 122-3) summarises manufacturing in the U.K. before the Industrial Revolution by noting that “[ . . . ] large plants were not entirely unknown before the Industrial Revolution. For instance, Pollard (1968) in his classic work on the rise of the factory, mentions three large British plants, each employing more than 500 employees before 1750. Perhaps the most “modern” of all industries was silk throwing. The silk mills in Derby built by Thomas Lombe in 1718 employed 300 workers and were located in a five-story building. After Lombe’s patent expired, large mills patterned after his were built in other places as well. Equally famous was the Crowley ironworks, established in 1682 in Stourbridge in the Midlands (not far from Birmingham), which at its peak employed 800 employees. [ . . . ] In textiles, supervised workshops production could be found before 1770 in the Devon woollen industry and in calico printing (Chapman 1974).” Also chartered companies were well known as witnessed by Adam Smith’s negative assessment of chartered companies in general and the East India Company in particular, contained in the Wealth of Nations.

As an approximation to “anonymous firm” production - that is, fully price-decentralised production - consider the case of rife manufacture in Birmingham, England in the 1860s, “[o]f the 5800 people engaged in this manufacture within the borough’s boundaries in 1861 the majority worked within a small district round St Mary’s Church. . . .The reason for the high degree of localization is not difficult to discover. The manufacture of guns, as of jewellery, was carried on by a large number of makers who specialized on particular processes, and this method of organization involved the frequent transport of parts from one workshop to another. The master gun-maker-the entrepreneur-seldom possessed a factory or workshop. . . .Usually he owned merely a warehouse in the gun quarter, and his function was to acquire semi-finished parts and to give these out to specialized craftsmen, who undertook the assembly and finishing of the gun. He purchased materials from the barrel-makers, lock-makers, sight-stampers, trigger-makers, ramrod-forgers, gun-furniture makers, and, if he were engaged in the military branch, from bayonetforgers. All of these were independent manufacturers executing the orders of several master gunmakers. . . .Once the parts had been purchased from the “material-makers,” as they were called, the next task was to hand them out to a long succession of “setters-up,” each of whom performed a specific operation in connection with the assembly and finishing of the gun. To name only a few, there were those who pre-pared the front sight and lump end of the barrels; the jiggers, who attended to the breech end; the stockers, who let in the barrel and lock and shaped the stock; the barrel-strippers, who prepared the gun for rifling and proof; the hardeners, polishers, borers and riflers, engravers, browners, and finally the lock-freers, who adjusted the working parts.” (Allen (1929: 56-7 and 116-7), quoted in Stigler (1951: 192-3).)

So large scale production was known and even where production was small scale much of it didn't involve "the same craftsman working on every stage of its production." Many craftsman contributed to the manufacture of a given good.

2:46 am  
Blogger Gavin Kennedy said...

A very interesting post. I would add that Dr Roebuck's Carron Iron Works, near Falkirk, which Smith visited (he corresponded and knew Dr Roebuck) was of a size (a 1,000 workers at least. Hume quoted '10,000' but I am sure this is a misprint). Carron forged the famous 'Carronades' for the Royal Navy, which spew out, high in the air, a massive amount of hot metal aimed at an enemy ship's rigging and sails to disable it. It was unpopular among gun crews - a sudden movement of the ship could allow some hot shot to set the gun ship alight too. Carron also made normal ship's guns, which were powerful and accurate.

Ship's guns required old and new gun-making skills
of armourers, founders, reamers, firing mechanics, and explosive trades.

To which we can add skilled trades to build steam engines (James Watt) and Joshua Wordsworth's dainty table-ware manufacture, plus the new Birmingham trades, employing hundreds.

The machines to 'augment' the labour of the 'mindless' operators required maintenance, design and manufacture of ever greater ingenuity and higher skills, including the cerebral skills of maths, chemistry, and metallurgy sciences). See the illustrations in Diderot's Enclyopedia.

One the division of labour became mechanised, advances were made on all fronts. Pin-making was used by Smith to illustrate the rise in labour productivity and the labourer's woolen coat was used ti illustrate the complexity of existing supply chains (Book I). The problem of increasing simplicity is about the absence of education causing problems of social disorder, and not the problem of the division of labour. Education needed to start; the division of labour was unstoppable (book V).

9:40 am  

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