Monday, January 23, 2012

Even the Left(ish) Buy the Myth

Dadepfan post in Reverse Spin HERE

"American Political Myths – The “Invisible Hand”

As the theory goes, in a free market, each individual strives to maximize his or her own gain, and in doing so is “led by an invisible hand to promote an end which was no part of his intention.” The end that is promoted is “to render the annual revenue of the society as great as he can.” As explained by Investopedia: “Smith assumed that individuals try to maximize their own good (and become wealthier), and by doing so, through trade and entrepreneurship, society as a whole is better off. Furthermore, any government intervention in the economy isn’t needed because the invisible hand is the best guide for the economy.”

Well, this makes some sense and does seem logical, at least on the surface. I believe that the “invisible hand” does have the
postulated effect, but certainly NOT to the magical extent claimed by free market advocates and anti-government zealots.

Dadepfan does not have to accept any vestige of the "invisible-hand" myth. Adam Smith was not responsible for the modern myths, largely invented in American academe in an oral tradition (possibly emanating from Cambridge, England), which gained traction after Paul Samuelson published his popular best-selling textbook, 'Economics: an introductory analysis', 1948.

For Adam Smith, it was a useful metaphor, popular in his days in theology, sermons, plays, and novels. Smith used in only twice in his published works, and hardly any notice was take of it until the late 19th century, and then rarely before Samuelson gave it a boost in his 5- million best seller and graduates taught what they had read.

Smith used it as a metaphor for the behaviour of some, but not all, traders who felt the "foreign trade of consumption" was too risky and therefore, preferred to invest only "domestically", which on the arithmetic rule that 'the whole is the sum of its parts' increased domestic 'annual revenue and employment", the latter of which Smith considered an public benefit, given the dire circumstances of the 18th-century poor, and the former raised capital available for new investment. Their "insecurity" was the object of the IH metaphor - all metaphors have "objects" which metaphors "describe in a more striking and interesting manner" (as taught by Smith in his "Lectures on Rhetoric and Belles Lettres", 1763, and in the Oxford English Dictionary, 1983).

Smith mentioned nothing about all 'self-interested' actions benefiting the public - indeed, he gives over 70 examples of malign 'self-interested' actions that hurt the public in Books I, II, and III of Wealth Of Nations. Today, we could give many more. Tariffs, protectionism, prohibitions, monopolies, mistaken government policies, and poor education were among his targets. He used the IH metaphor only once in Wealth Of Nations and not in connection with markets.

[I tried to post this as a comment on the Reverse Spin Blog to no avail.]



Blogger airth10 said...

The Economist also seems to have gotten the idea of the "invisible hand" wrong in its Special Report on "The Rise of State Capitalism". It, like many others, interprets Adam Smith's idea of an invisible hand as being about free markets.

Alexander Hamilton was appointed by George Washington as America's first treasury secretary. The Economist writes "Hamilton had no time for Adam Smith's hidden hand. American needed to protect its infant industries with tariffs if it wanted to see them grow up."

Obviously Hamilton wanted to protect America's infant industries from the ravishes of the invisible hand and free trade. But he got the ravishes of the invisible hand somewhat twisted, not understanding that it was really about a 'domestic bias'. In away, then, Hamilton was enforcing the true meaning of Smith's invisible hand with the implementation of protective tariffs. As a result Hamilton was coercing investment moneys to remain at home by legislating the domestic bias and the true meaning of Smith's invisible hand.

10:04 pm  
Blogger Unlearningecon said...

I'm wondering if you've read or heard of Duncan Foley's book 'Adam's Fallacy', where he discusses the fact that nobody has ever proven rigorously that private self interest leads to public benefit.

Naturally, you'd take issue with the title and term, but I think the fallacy is highly prevalent in economics regardless of whom it is attributed to.

12:46 pm  
Blogger Gavin Kennedy said...

Thank you for your comment. I read Duncan Foley’s book and commented on it HERE
and HERE
Foley's Fantasies Exposed by David Warsh
(I reviewed it earlier in 2006, but I do not have the date to hand). I called it Foley’s Folly.

It might not matter in the great scheme of life who developed the modern misrepresentation of Adam Smith on the “invisible hand”, but it does matter in the history of economic thought.

Given the policy advice that flows from the modern misrepresentation – ‘remove government from regulation of an economy, do nothing, leave everything to something called the ‘Invisible hand’, and everything will ‘be alright’ because Adam Smith said so’ – and the possible negative consequences of such a policies, including fraud, pollution, poverty-driven, uninsured risks, and widespread poverty, it may be that judicious regulation is preferred (as Adam Smith actually suggested).

Adding Adam Smith to an assertion gives it an undeserved credibility.


3:25 pm  
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10:50 am  

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