Friday, November 04, 2011

Welcome Surprise: Noam Chomsky Understands the IH Metaphor





Gavin Kennedy

Noam Chomsky addresses an Occupy Washington Meeting (3 November) reported HERE

Without going on with details, what’s being played out for the last 30 years is actually a kind of a nightmare that was anticipated by the classical economists. If you take an Adam Smith, and bother to read Wealth of Nations, you see that he considered the possibility that the merchants and manufacturers in England might decide to do their business abroad, invest abroad and import from abroad. He said they would profit but England would be harmed. He went on to say that the merchants and manufacturers would prefer to operate in their own country, what’s sometimes called a “home bias.” So, as if by an invisible hand, England would be saved the ravage of what’s called “neoliberal globalization.”

That’s a pretty hard passage to miss. In his classic Wealth of Nations, that’s the only occurrence of the phrase “invisible hand.” Maybe England would be saved from neoliberal globalization by an invisible hand. The other great classical economist David Ricardo recognized the same thing and hoped it wouldn’t happen. Kind of a sentimental hope. It didn’t happen for a long time, but it’s happening now. Over the last 30 years that’s exactly what’s underway. For the general population -- the 99 percent in the imagery of the Occupy movement --it’s really harsh and it could get worse. This could be a period of irreversible decline. For the 1 percent, or furthermore 1/10th of 1 percent, it’s just fine. They’re at the top, richer and more powerful than ever in controlling the political system and disregarding the public, and if it can continue, then sure why not? This is just what Smith and Ricardo warned about

I am pleased – and surprised – to say that Noam Chomsky has got Adam Smith’s use of the invisible hand metaphor right (almost). From merely repeating the modern invention of the myth of the “invisible hand”, as attributed to Adam Smith by modern economists, following Paul Samuelson (1948) and an oral tradition among some economists (A.C. Pigou) at Cambridge University, UK, and, a later, George Stigler, et la, Chicago (USA), namely that Adam Smith supposedly said that selfish motives led to the public good and equilibrium (he didn’t), Chomsky has correctly identified that Smith supposed that “the merchants and manufacturers in England might decide to do their business abroad” (many of them did).

This is a mighty step forwards in re-discovering Adam Smith’s legacy and I congratulate Noam Chomsky for so doing. It is based on Chomsky actually reading of what Adam Smith wrote in Book IV, Chapter 2, paragraphs 1-9 of Wealth Of Nations, and not just a couple of sentences in paragraph 9, as Lost Legacy has been banging on about (almost to little avail) each week since 2005.

Yes, I know I have been criticising Chomsky on this issue since 2009 – as recently as a month or so back this year – but scholars must adhere to the code that when someone gets it right, instead of like the majority persistently getting it wrong, their correction must be acknowledged among the Republic of Letters (and conversely, errors that come to light must be owned up to at the earliest opportunity).

Smith’s use of the IH metaphor was not a new theory, a new concept, or a new paradigm, nor a discovery of the ‘hand of God’. It was not a game changer, as they say today. It was the statement of a notable fact of life. In re-stating what he did say, I shall make an important non-pedantic adjustment to Chomsky’s initial statement:

he considered the possibility that the merchants and manufacturers in England might decide to do their business abroad, invest abroad and import from abroad.

That merchants and manufacturers “might consider the possibility” of investing abroad, with the consequences that Chomsky noted, was already happening among them since the 14th century, when exports abroad were already significant. Britain is an island and exports and imports were a necessary consequence of its stirring towards commercial society, initially in the form of ‘exports’ and ‘imports’ within the national region (the Age of Commerce cannot develop and remain in an isolated village). Commerce spread out, notably, said Smith, near shippable rivers and the coast, to other regions and, eventually, to foreign coasts (also to move to troops in Europe for incessant wars and pilgrims).

The Fall of Rome (5th century) disrupted the first spread of the Age of Commerce in the Mediterranean and Western Europe, which was disrupted by the barbarian invasions of vast lands left undefended by Rome’s collapse, said Smith. In the revival from the 14th century, commerce re-appeared. Bulk shipping had not been dis-invented; it was revived with bulk cargoes to match (wool from England for ‘luxuries’, gold, etc. from Europe).

Smith’s point was about some, but not all, merchants considering exporting capital of foreign countries and the colonies in America who were put off by the risks implicit and actual in the “foreign trade of consumption” (of course, many weren’t). Among these risks are those associated with commercial trust in dealings with distant traders in foreign countries, also a real problem when trading locally, but a relatively lesser problem in the home-trade with traders he could meet, with known reputations, and proven creditworthiness.

he can know better the character and situation of the persons whom he trusts, and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress” (WN IV.ii.6: 454).

Smith use of the IH metaphor referred to specific domestic and manufacturers” who were risk averse sufficient to prefer to invest in the “domestick industry” (identified twice) and Smith makes it clear that in so doing he prefers “domestick to that of foreign industry”. This introduced his use of the IH metaphor: “led by an invisible hand to promote and end which was no part of his intention.” (WN IV.ii.9: 456). In short, the ‘invisible hand” was a metaphor for the insecurity of their capital, which by investing locally in “domestick industry” instead, they added to “domestick revenue and employment” (i.e., the whole is the sum of its parts; so every capital invested locally adds to what we now call GDP). [Note: there was no "as if by an invisible hand" mentioned by Smith.]

This was the “public” benefit because domestic revenue adds to growth, while more employment benefits the labouring, jobless, poor. It had nothing to do with the mathematics of welfare, general equilibrium; it was simple arithmetic, Nobel prizes not withstanding.

In sum, with my short qualification, I welcome Noam Chomsky’s step away from merely repeating the modern myths of the IH metaphor. I hope his audience did too.

[Note: I make no comments about the rest of his piece about the ‘Occupation’ of public spaces for peaceful demonstrations of legitimate viewpoints.]

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Blogger airth10 said...

In a way, then, the 'invisible hand' has been globalization.

As I like to think, globalization, like the invisible hand, or providence, has been an inevitability.

If the invisible hand had not spread the wealth globally, as it is still doing, there certainly would be barbarians at the gates. In a sense WW2 occurred because the invisible hand was failing at its task. Japan and Germany felt excluded from providence.

I can imagine how China would be behaving if the developed world shunned it from globalization. After all, the invisible hand brought down communism because of its inefficiencies and inhumanity. So why, then, would the invisible hand not reward China for its enlightenment.

The invisible hand — globalization, has also acted as a rejuvenator. Developed nation were growing lazy and complacent, as is the natural trend. The competition the invisible hand has garnished by going global has help rejuvenate aging economies. saving them from total collapse.

3:14 pm  
Blogger Unknown said...

No, globalization is exactly the opposite of the IH. In other words, Smith erroneously predicted that the IH would be a deterrent to globalization. In other words, indigenous people - the English in Smith's case - would typically have a 'home-bias' and would therefore patronize homegrown goods and services before purchasing imports.

So a more accurate definition would be that the IH is a population's ostensible home-bias, otherwise known as patriotism. This works for soccer and things like the Olympics, but for truly important matters such as one's bank account, one acts in the best interests of his/her greenback. This is another great example of the fickle and untenable phenomenon that is patriotism.

4:01 pm  
Blogger Sean Michael Wilson said...

An excellent exploration of this key metaphor, thank you.
One small, but annoying point for a Scotsman like me, is that Chomsky (who I admire and have worked with on a book called PARECOMIC about participatory economics) almost always refers to the UK as just 'England'. An odd habit that most Americans have, but one that i would have thought the very erudite Chomsky would easily avoid. Since Adam Smith was a Scot and Scotland had already been in a political union with England for 16 years before Smith was born it is factually correct to say that Smith was referring to the economy of Britain/the United Kingdom, and to the British in general.

3:10 pm  

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