Monday, August 01, 2011

The Unintentional Misleading Consequences of Part Quotations

Robin Amlot, Managing Editor of “CPI” writes on “Unintended consequences” (HERE):

I did some reading up on unintended consequences as a result of a newspaper story I read the other day. The concept was popularised in the last century by the sociologist Robert Merton in a paper he wrote in 1936 but it actually goes back to our dear old economic chum Adam Smith. Mind you, he mostly focused on the positive aspect with his ‘invisible hand’. Smith maintained that each individual, seeking only his own gain, “is led by an invisible hand to promote an end which was no part of his intention,” that end being the public interest. “It is not from the benevolence of the butcher, or the baker, that we expect our dinner,” Smith wrote, “but from regard to their own self interest.”

“Sadly it is usually more common for the law of unintended consequences to highlight a negative or perverse impact of legislation and/or regulation

“Yes, but”. As we often say to students, who do not quite get a concept correctly. Regretfully on this occasion we must say it to Robin Amlot. He has taken part of a sentence written by Adam Smith in a specific context over nine paragraphs and generalised it almost into a theorem, which was not part of Smith’s intention (thus, at once and, ironically, demonstrating “unintended consequences).

In this specific instance, Adam Smith was discussing the behaviour of some, but certainly not all, merchants, in a particular, but certainly not, all contexts where physically they invested their capital. In this specific case, he referred to those merchants who preferred to invest locally in the British economy rather than send their capital abroad to Europe (or to the British colonies in North America) because of their felt insecurity (risks to) their capital compared to less risky investments in their locality – where they knew the probity of the people with whom they were dealing, and the legal system that they operated within. They preferred, he noted, to keep their capital within their sight, rather than see it it disappear over the horizon.

But by investing locally they added to “domestick industry” and this added to “annual revenue and employment”, which he regarded as a positive benefit. However, and of course, some British merchants were major players in foreign trade – they had less “risk aversion”, as we say today.

The validity of his proposition about these merchants who acted because of their relative insecurity was purely arithmetical – the whole is the sum of its parts. It was not a general theorem. The metaphor of “led by an invisible hand” expressed the behaviour of some merchants and its consequences in “a more striking and interesting manner”, as metaphors are used in English literature and grammar. Indeed, this is precisely what Adam Smith taught his students from 1748 (his Edinburgh public lectures) and from 1751-64 (his Glasgow University Lectures) and we know this because student notes of his “Lectures On Rhetoric and Belles Lettres” in 1763 were found in 1955 and published in 1983 by Oxford University Press (see p29).

The “end” unintended outcome of all the behaviours of merchants is not necessarily always benign, which is precisely what Smith taught and wrote extensively in his polemics against mercantile political economy. Their lobbying by “domestick industry” for tariff protections and outright prohibitions of large numbers of foreign imports were anything but benign, as far as the interests of consumers were concerned (see Book IV of Wealth Of Nations), and constituted what he described as his “very violent attack” on the commercial system of Britain.

Hence, to generalise to all merchants his specific remarks about a small set of specific merchants as unintentionally being in “the public interest” is misleading.

Robin Amlot is not responsible for the near universal ascription of Smith’s supposed assertion that actions by all players in the economy (often presented as applying even when their motives are “selfish”) are unintentionally beneficial is quite wrong. Yes, there are unintentional consequences, many of which can be beneficial and many of which can be non-beneficial (pollution, harmful, and etc.,).

Robin Amlot also slips in another part quotation that may also be misleading: “It is not from the benevolence of the butcher, or the baker, that we expect our dinner,” Smith wrote, “but from regard to their own self interest.” This is from Book I, chapter ii, page 27 of Wealth Of Nations and is part of Smith’s discussion of bargaining, which, of course, mostly is benign but need not always be so (drug dealers). It is part of his recommendation when bargaining with suppliers that the aspirant purchasers “address” the seller’s interests and not just their own (we can serve ourselves by serving the interests of others (as addressed in Smith's other work, The Theory of Moral Sentiments). Barganing has no connection to his use of the metaphor of “an invisible hand” in Book IV and while Robin does not make that connection explicit, he could not if he tried. But his emphasis of selected parts of quotations can be misleading to an author and his readers.

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