Saturday, February 12, 2011

Once More With Feeling...

Writing in the “Ultra-Bourgeoisiology” Blog (HERE):

Smith appears to make some questionable assumptions in offering the theory of the invisible hand. The following passage encapsulates the problem:

'Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.' (IV.2.4)

Assuming, however, that individuals are nonetheless predominately motivated by the particular configuration of self-interest that Smith has in mind, it is unclear whether the “society” to which advantage accrues is necessarily the immediate and “entire” society to which the individual belongs. It seems quite plausible that the benefits thus obtained might be concentrated in very few hands within a society. Do these beneficiaries represent the interests of society in general? Smith clearly privileges the total sum of “benefits,” but in this case there seems to be some ambiguity in the meaning of “benefit,” especially when some elements within society may actually experience substantial “losses” in the process.

… If Smith is right that society receives the greatest benefit even when every individual works to advance his own advantage, and if such a theory informs this egocentric modality, it seems that maximizing the public good is precisely the goal—why must it be hidden?”

I made the following comments on the Ultra-Bourgeoisiology” Blog:

“Adam Smith did not have a "theory" of "an invisible hand". That was an idea invented by modern economists from the 1950s. Smith used '"an invisible hand" as a metaphor in Wealth Of Nations (Book IV, chapter 2, p 456) for some, but not all, merchants, who were concerned with the security of trading with foreign countries or the colonies, and, therefore, preferred to trade "domestically".

It was their concern for their own security that 'led them' to invest in "domestick" industry, which Smith correctly noted added to "domestick annual revenue and employment" - a purely limited arithmetic outcome (the whole is the sum of its parts) - which Smith believed was a public benefit. The idea that this was a general benefit across all participants to the same degree was invented by, among others, Paul Samuelson in his Economics text, 1948, p 36, and in theories of General Equilibrium.
The author quoted a few lines from paragraph 9 and missed the particular and limited meaning Smith gave to it, as well as ignored the previous 8 paragraphs in which Smith makes clear his meaning. Metaphors express "in a more striking and interesting manner" their "objects" (see Adam Smith's own "Lectures in Rhetoric and Belles Lettres" [1763] 1983, p 29.”

I should have added that market prices are not invisible – it evident that they are very visible – and the metaphor cannot therefore refer to a “theory of markets”. The relative insecurity of market participants is invisible, which, on this occasion, is the object of the metaphor.

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