Saturday, February 25, 2012

So Close to Being Nearly Right

Steven Saus, a nuclear medicine technologist living in Dayton, Ohio. Having spent time in both military and civilian medical sectors, he is pursuing further studies in economics and sociology and staying current in the field of nuclear medicine) posts (24 February) on ideastrash HERE

“Have you ever really looked at the Invisible Hand, man? I mean, really looked at it?”

“It's tempting, with any issue about trade and business, to appeal to the "invisible hand" of the marketplace. To simply say "The invisible hand will take care of it" and stop worrying.

The free-trade folks - who you might notice are almost always the people profiting from the business practice being criticized - talk about Adam Smith's quasi-thought-experiment as if it were some kind of magical spell shoving wages, prices, and stock options around. Many pundits (again, those profiting from or paid by those profiting from deregulation) refer to the "invisible hand" as a force inside markets.

Nothing could be further from the truth.

The market's "invisible hand" is actually extremely visible. The "invisible hand" is the sum of every action by every person that impacts buying and selling decisions. Every last one of them.

I remember hearing about a Fortune 500 company's board meeting where one of the board members said "Oh, the invisible hand will take care of that." The CEO replied, "You idiot, we are the invisible hand."

But it goes much deeper than that.

So if you changed any of your purchasing habits because of Occupy Wall Street, that's the invisible hand at work. Stop buying gas at BP during that last big spill in the Gulf? Invisible hand. Decided to buy "fair trade" anything? Invisible hand. Buy a book directly from an author rather than from a big box store? Invisible hand. Switch web browsers for any reason? Invisible hand.

I'd go so far as to say that Occupy Wall Street is itself a product of the "invisible hand". It is a market force, created by market forces. The same goes for any union, any protest, anything that impacts trade. All of those things are part of the invisible hand.

Including you.

So when you hear about something - a business practice (perhaps this one by Amazon will do it for you) that ticks you off, do something about it. Say something. Change a buying habit. Tell others. Complain.

When you act, so can [be] the invisible hand

Steven Saus seems to be an honest student of sociology and economics, so perhaps we can help him sort out where he is right and where he is just, so far, misinformed. He is so close to unraveling the misuse of the IH metaphor, at least as Adam Smith meant it, he could touch it.

Yes, modern economists often parrot lines about the “invisible hand of the marketplace”. Fair enough, if that is what they believe, but such a presentation has absolutely nothing to do with Adam Smith. He never spoke of the ‘invisible hand of the market’. He only mentioned the IH metaphor once each in his two main published books, Moral Sentiments (1759) and Wealth Of Nations (1776), and once only in his posthumously published long essay on the History Of Astronomy (1795). None of his references were about ‘markets’.

And it is true that there are daily references to “Adam Smith's quasi-thought-experiment as if it were some kind of magical spell shoving wages, prices, and stock options around. Many pundits (again, those profiting from or paid by those profiting from deregulation) refer to the "invisible hand" as a force inside markets.” But the attribution to Adam Smith is false. It was popularised in modern post-WW2 economics, largely as a result of the widespread influence of Paul Samuelson, mainly through his own prestige as a brilliant mathematical economist (Noble Prize Winner), but also from his popular textbook, ‘Economics: an introductory analysis’, McGraw-Hill) 1948, through 20 editions to 2010. McGraw-Hill claimed 4.5 million sales, to which we can add about half again from the used-book market, multiple translations, and resulting ubiquitous media references to the IH metaphor.

Steven is nearly right. This is illustrated by his assertion that “The market's "invisible hand" is actually extremely visible”, which can become absolutely right if it is re-written as: “Markets are extremely visible”, and reference to the “invisible hand” is dropped. No market can operate without visible prices! Buyers and seller respond to visible prices – there is nothing invisible to respond to.

For Adam Smith, the IH metaphor was used on the three occasions only that he used it as a metaphor in English grammar. Smith taught rhetoric to university students from 1748-64 and we have a student’s report of what he said regarding the use of metaphors. All metaphors refer to their objects ‘in a more striking and interesting manner”, and in the 17th-18th century the IH metaphor was a popular figure of speech among theologians, authors of poetry, plays, and novels, and politicians. Adam Smith did not ‘coin the invisible hand’ figure of speech’. He used what was common parlance among his contemporaries, and known to his readers. That’s probably why nobody noticed or commented on his use of it while Smith was alive, nor for long afterwards until a few mentions after 1875. Then Paul Samuelson opened the flood gates in 1948.

Today, tales of actual invisible hands running our lives are widespread. Post WW2 academics, battling for ideas in response to the Cold War challenges of Soviet Central Planning and claims for the ‘superiority’ of ‘scientific socialism’ over ‘anarchic capitalism’, clung to the idea of a so-called ‘invisible hand’ of free markets under capitalism, once Samuelson drew it to their attention, and also, they anointed it with miraculous powers. Markets in the democracies were manifestly superior to the very evident dictatorial state controls of a Soviet economy (and still are).

Warren Samuels’s book, ‘Erasing the Invisible Hand: essays on an elusive and misused concept in economics’, 2011, Cambridge University Press, should settle arguments about the non-actuality of the IH metaphor (see my review of this important book in this past week on Lost Legacy). Meantime, Lost Legacy will continue its campaign against the nonsense of their being ‘an invisible hand’ of the market.



Blogger Sven said...

Hello, your blog is very interesting.
I understood the Invisible Hand differently though, as the individual exchanges benefitting society since, according to Smith, and exchange only happens when both parts consider it profitable. And the way I see it this benefit would be increased with each related exchange and production step of a good, as the pencil example in Leonard Read's 'I, Pencil'

9:34 pm  
Blogger Gavin Kennedy said...

This came in today (18 July, 2016) in reference to a post I made in February 2012, Scroll through the Lost Legacy archives to read it.
Sven’s understanding of Adam Smith’s use of the metaphor of “an invisible hand” is dfferent from Smith’s. For accuracy, Sven must read Adam Smith’s single use of it in his Wealth of Nations (1776). {WN IV.ii.1-10, pp. 456).
Smith said nothing about the IH consciously ‘beneftting society’. He specifically referred a merchant preferring to invest locally rather than send his capital abroad because he was concerned about the honesty of those he would rely upon in a foreign country, with different laws and a different legal system.
His self-interest was in the security of his investment. However, by investing locally the merchant unintenionally added his capital to ‘domestic inventment and employment’. His intention was to secure his investment soley to benefit himself, and not to benefit society, but unintentionally by investing locally, he also arithmetically increased domestic investment, which was a public benefit.
This was never a general rule. Many merchants lobbied governments to impose tariffs and outright prohibitions on foreign imports to reduce competition and enable them to raise prices and their profits. Such common activities by mercants were not public benefits. Hence not all exchanges and production were for the general good. That is a misreading of Adam Smith’s use of the invisible hand metaphor.
The sequence is that a merchant was motivated by his insecurity to intentionally invest locally and the invisible hand metaphor referred to that intentional action led him unintentionally to public benefits. His motivated action leads him to the unintentional consquences of his motivated actions (his security).
The ‘invisible hand’ is not a miraculous nor mysterious force in markets, as believed (even preached) by modern economists, particulary since Paul Samuelson presented the IH incorrectly in his popular textbook since 1948. (Samuelson’s textbook was the course textbook when I was a 1st year undergraduate in 1965; see also my article: Gavin Kennedy, “Paul Samuelson and the Invention of the Modern Economics of rhe Invisible Hand”, History of Economic Ideas», vol. xviii. 2010).
Gavin Kennedy

2:13 pm  

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