Thursday, January 19, 2012

Pay Attention to What Adam Smith Actually Says

Christina Free posts (19 January) in e-International Relations (“the world’s leading website for students of international politics") HERE

In doing so she repeats the false exposition of Adam Smith's use of the metaphor of “an invisible hand” and repeats the modern economists’ myth that this metaphor is related to several ideological (i.e., not founded on facts) assertions about how Smith considered economies functioned. The result is a misreading – and by the aims of e-international relations – a false presentation of Adam Smith’s views for ‘students of international politics’.

“The Goldman Sachs Abacus 2007-ACI Controversy: An ethical case study”

“The 21st century economic landscape is a reflection of the philosophy and ideas set forth by Smith and his contemporaries. Among Adam Smith’s works, two stand out as his most influential; the Theory of Moral Sentiments published in 1759 and Wealth of Nations published in 1776 (ibid). The Wealth of Nations, in part records what Smith considered to be the benefits and potential problems of a market economy, and lays the foundations of the modern economic system. What many consider to be his most important contribution to economics is his theory of the “invisible hand”, which recognizes the benefits that can be derived from allowing people to follow their self-interest (Smith, 1776). He analyzed the way in which a market system could combine the freedom of individuals to pursue their own objectives “with the extensive cooperation and collaboration needed in the economic field to produce our human needs” (ibid).

Adam Smith’s economic theory claims that when individuals are granted the “natural liberty” to pursue their own interests, they also end up promoting the interests of the greater good (Bruni and Sugden 2008). His famous theory of the ‘Invisible Hand’ states that if consumers are given the opportunity to freely choose what to buy, and producers are allowed to freely choose what to produce and sell, the market will settle on a “product distribution, and prices that are beneficial to all the individual members of a community, and hence to the community as a whole” (Keller 2007). This “invisible hand”, or the market, consists of self-interested suppliers on one side and self-interested buyers on the other. It is each parties self-love which Smith considered to be the best motivator for fair pricing and quality production in the markets (Smith 1776). The harmony of these individual pursuits which “often produce social and economic good” creates a “self-constraining system” (Werhane 2006). Thus, the “invisible hand” which governs market transactions, functions as a regulator of self-interests, and simultaneously promotes economic growth and well-being. In the Wealth of Nations, Smith gives several examples of how this mechanism works, and how it gives rise to the division of labour. He states that “it is by treaty, by barter, and by purchase, that we obtain from one another the greater part of those mutual good offices which we stand in need of” (Smith 1776).

[Follow the link HERE to appreciate Christine Free’s essay in full. ]

Some questions of fact: where does “his theory of the “invisible hand recognize “the benefits that can be derived from allowing people to follow their self-interest”?

Smith never had a “theory” of “an invisible hand”. He mentioned it twice, once each, in his two published works (Moral Sentiments and Wealth Of Nations). It was a metaphor, not a theory. It became a “theory” because modern economists claimed that it was a “theory”, and from the 1940s invented content to demonstrate that it had one.

The theory of “natural liberty” was promoted by Grotius and Pufendorf, and taught at Glasgow University (and other Scottish Universities) in the Moral Philosophy courses, but it had nothing to do with the metaphor of an “invisible hand”. Not did Smith assert that it had any connection.

The “invisible hand” was never a synonym for “the market”. Smith discussed how markets operated in Books I and II of Wealth Of Nations, without mentioning anything about the presence of “an invisible Hand”. It is mentioned only once in Wealth Of Nations (in Book IV) as a metaphor for the ‘insecurity’ of some, but not all investors, who, from their insecurity, were led to prefer to invest in “domestick industry” rather than the “foreign trade of consumption” (WN Book IV, chapter 2, paragraph 9: 456). Modern economists generalized that single (and singular) mention of the invisible hand into a “theory” about something else entirely.

They also, apparently, did not know about the role of a metaphor in English grammar, though Smith did. Smith taught Rhetoric each year from 1748 (his public lectures in Edinburgh to 1751 and at Glasgow University from 1751-64). We also have a set of student lecture notes for 1762, which were found in a house-clearance sale in Aberdeen in 1958 and published as Adam Smith, ‘Lectures in Rhetoric and Belles Lettres’ in 1983. Lecture 6 is devoted to metaphors and figures of speech. On page 29 he defines a metaphor as: “describing in a more striking and interesting manner its object”. Clearly, concerns about the security of an investor’s capital (the object) are brilliantly described in a “more striking and interesting manner” by the metaphor of “an invisible hand” leading the investor to act in this manner because of his “insecurity”. Everybody remembers the metaphor, but few – too few – remember, or even recognise its object, namely their insecurity, mentioned 6 times by Smith in the paragraphs leading to the metaphor of "an invisible hand".

Smith never claimed, or mentioned the “invisible hand” as “govern[ing] market transactions,” or “function[ing] as a regulator of self-interests” that “ simultaneously promotes economic growth and well-being”. That is pure fiction. Respectfully, Christine Free should read Smith’s original 1759 and 1776 texts rather than rely of second- or third-hand reports by Werhane (2006), Keller (2007), Younkins (2011), and Jennings 2004, and many others since the 1940s. She should also read the authoritative analysis of the modern ‘invisible-hand’ phenomenon by Warren Samuels, “Erasing the Invisible Hand: essays on an elusive and misused concept in economics”, 2011, Cambridge University Press, to locate the ideological source of the errors she relies on and about Smith’s innocent role in the modern “invisible hand” myth.

Turning to Moral Sentiments, Christine acknowledges that “What has been lost from Adam Smith to the neoclassical economists (although his ideas and theirs at first glance seem quite similar) is the basis of morality and control that he envisioned would go hand-in-hand with the markets (Keller 2007)”, (a most controversial statement) and she wriggles to maintain the “invisible hand” theory”, asserting that “it was Smith’s “invisible hand” which laid the foundation for the neoclassical economic ideology”. This is partly true, but not in the manner as she understands it. The so-called “theory” (an invented construction by neo-classical – and, sadly, also maintained by many heterodox economists) is at ”the foundation for the neoclassical economic ideology”, but it was not put there by Adam Smith! Neo-classical ideologues back-project their erroneous claims about Adam Smith by misrepresenting his texts.

Christine also misrepresents Smith in Moral Sentiments in presenting Smith’s theories of morality. The separation of an individual from all of the vast anonymous members of the human race, except for a few family and friends, is a fact of life. It is impossible to know everybody in a neighbourhood, let alone on other continents (the world and the people in it beyond Europe were virtually unknown for millennia) The power of the division of labour brought the possibility of peaceful and moral relationships, alas somewhat tarnished by actual experiences of European violence, though, hopefully, not excluded as a more peaceful relationship in the very long run.

However, Christine misreads the old canard that Smith stated in Moral Sentiments that “a man would ultimately have more distress over the loss of a finger than hearing the loss of millions of lives in some distant land”. This is not a quotation from Mortal Sentiments; it is a misleading summary of what the 1759 passage actually said. I suggest that Christine reads it again. It is an easy mistake to misread Smith here (I did, until Sandra Peart, Dean at Richmond University in Virginia, kindly pointed out my error). Smith, after setting up the counter-point of a man preferring his little finger over the lives of “a hundred millions of millions of his [Chinese] brethren”, then excoriates (to put it mildly) any person who actually acts in that manner, his language unrestrained, and his moral tone deafening (Moral Sentiments, Book III, chapter 3.5. para 4: 136-7). Remember, Smith was teaching young teenage boys and used such devices to maintain their attention.

Readers of Adam Smith do best by paying attention to what he says, unadorned with modern interpretations and inventions.

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Blogger chris sivewright said...

You say Smith mentioned 'invisible hand' twice. Nope, three times. Only in The History of Astronomy (written before 1758) Smith speaks of the invisible hand,"to which ignorants refer to explain natural phenomena otherwise unexplainable:
Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters"
Smith, A., 1980, The Glasgow edition of the Works and Correspondence of Adam Smith, 7 vol., Oxford University Press, vol. III, p. 49

11:52 pm  
Blogger chris sivewright said...

You say: " It is mentioned only once in Wealth Of Nations (in Book IV) as a metaphor for the ‘insecurity’ of some, but not all investors, who, from their insecurity, were led to prefer to invest in “domestick industry” rather than the “foreign trade of consumption” (WN Book IV, chapter 2, paragraph 9: 456)."

The full quotation is:

"By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it"

It was Smith's belief that when an individual pursues his self-interest, he indirectly promotes the good of society. Self-interested competition in the free market, he argued, would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services.(As Free says)

Thus if we aggregate the individual lead by an invisible hand to take actions for his/their own benefit we have market forces.

So, each of us, acting in our own self-interests, generates a demand for goods and services that compels others to deliver those goods and services in the most efficient manner so that they may be able to receive compensation from others and make a profit in doing so. In this process, resources are allocated in the most efficient manner, in contrast to a process that relies on a centrally planned system.

That is, in theory, i.e. invisible hand theory.

In The Theory of Moral Sentiments, he uses the invisible hand to describe the conditions that allow for economic justice. This natural aesthetic love of systems leads people to manipulate the system of commerce, but this interferes with nature’s plan:

The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. (TMS IV.1.10)
In this passage, Smith argues that “the capacity of [the rich person's] stomach bars no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant” (TMS IV.1.10).

Thus, because the rich only select “the best” and because they can only consume so much, there ought to be enough resources for everyone in the world, as if an invisible hand has divided the earth equally amongst all its inhabitants.

That is, in theory i.e. an 'invisible hand' theory.

12:19 am  
Blogger Gavin Kennedy said...

Hi Chris
Thank you for your observation.
I think you should also pay attention to what I write My statement about Smith only mentioning "an invisible hand" is correct. This was how he expressed it in TMS and WN. His reference in the History of Astronomy is to "the invisible hand of Jupiter", i.e, "the IH" not "an IH". The distinction is important. The definite article "the" is attached to the IH making it a noun. The indefinite article, "an" attached to the IH makes it a metaphor.
Smith taught rhetoric from 1748 (Edinburgh) and in Glasgow (1751-64). He was a grammarian in English and Latin.
The reference in HofA is to credulous Roman pagans who believed that their god, Jupiter, protected Rome by his use of thunderbolts fired from his invisible finger. As pagan gods were invisible to humans though very real in fact the IH of Jupiter was a noun not a metaphor.
Hence Smith referred correctly to "the IH" not"an invisible hand", which is a metaphoric figure of speech, referring to its "object" (absolute necessity to feed their serfs, who without food would starve and be unable to work -TMS or merchants to invest locally not abroad from the "insecurity" - WN).

7:04 am  
Blogger Gavin Kennedy said...

Hi Chris
"and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention". "he is" refers to the insecure merchant who invests locally, thereby adding to "domestic revenue and employment" (an arithmetic consequence from the 'whole is the sum of its parts') a public benefit in Smith's view.
Your write: "It was Smith's belief that when an individual pursues his self-interest, he indirectly promotes the good of society. Self-interested competition in the free market, he argued, would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services.(As Free says)".
However Smith did not say that "self interested competition in free markets" tended to "benefit society". Self-interested actions could have detrimental outcomes for society. Monopolists compete by limiting competition. People can act in their self-interest also with negative affects. Smith gives over 70 instances of this in WN.
There was no "IH theory" in AS. Modern economists claim there is such a theory. No term for the IH is evident in mathematical theories of general equilibrium, nor in Pareto's welfare theorem. They have invented its origins in AS.

7:18 am  
Blogger chris sivewright said...

My comment is right...and wrong.

The key line is:

"You say Smith mentioned 'invisible hand' twice. Nope, three times. "

I am right in saying 'invisible hand' is mentioned three times, as you confirm.

I was wrong in saying 'You say Smith mentioned 'invisible hand' twice because what you actually wrote was 'an invisible hand'.

So when you say 9in reply):

"My statement about Smith only mentioning "an invisible hand" is correct. "

I did not post in disagreement.

I disagreed with something that I mistakenly thought you said; I did not disagree with what you actually said.

2:12 pm  
Blogger chris sivewright said...

You say he did not say: "Self-interested competition in the free market, he argued, would tend to benefit society "

I had a further three words "as a whole".

Which is why when you refer to detrimental outcomes, these are covered by the 'as a whole' comment.

2:21 pm  
Blogger Gavin Kennedy said...

I think this discussion is getting into a quibble and away from the substance of Smith's meaning both in his overall thinking and from his clear expertise in English grammar and rhetoric. He defines what a metaphor is and related it to the object it describes in a "more striking and interesting manner", and in both TMS and WIN he identifies the object which the IH metaphor refers.
You agree with the post-Samuelson attribution of the IH to meanings (markets, supply and demand, price theory, or general equilibrium) which are not related to Smith's simple use of grammar, but are consistent and convenient set of neoclassical economics, which have political meanings that may or may not be true, but they have nothing to do with Adam Smith.
I am not convinced that our discussions are going anywhere. You may read many entries on the IH metaphor as used by Smith throughout Lost Legacy. Should you wish to send me an article explaining your views on the IH, I shall publish it without censorship.

10:06 pm  

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