Monday, April 09, 2012

A Respectful Reply to 'Jon'

Thank you for your helpful response. I am, however, concerned with what Adam Smith wrote in Wealth Of Nations, which is the original dispute that Chomsky expressed in his critique of Milton Friedman, a voice for rightist views in public debate. I observe that both Chomsky and yourself (both ‘leftist’?) also make comments at variance with Adam Smith’s writings, not just about his two references to “an invisible hand”.

You accept that Smith did not write of globalization as experienced in the 20th-21st centuries. You challenge my reading of Smith in Book IV, chapter 2 of Wealth Of Nations, and I am grateful for your observations and comments. Others also quote the paragraphs mentioned by you, for example, David Friedman (no relation?), a libertarian, who posted to me on Lost Legacy a couple of years ago.

In paragraph 1, Smith gives examples of the consequences of ‘Restraints upon the Importation from foreign commerce of such goods as can be produced at home’. That these restraints, Smith says in paragraph 2, benefit domestic industry and employment “cannot be doubted”, but whether that benefits society “is not, perhaps, altogether so evident”. His general proposition is that “general industry” can “never exceed what the capital of the society can employ”, but regulations cannot increase the employed capital; they can only divert it, which may not be as “advantageous to the society than that into which it would have gone of its own accord” (paragraph 3).

He switches to consider the individual exerting himself to “find out” the most advantageous employment for his capital, and this “finding out” process is naturally “most advantageous to society”, even though he seeks his own “advantage” (paragraph 4). He seeks to invest locally “as near home as he can”, which supports “domestick industry”, guided by “ordinary, or not a great deal less than ordinary profits” (paragraph 5). You quote part of paragraph 6 part. The other part, unquoted, says

In the home–trade his capital is never so long out of his sight as it frequently is in the foreign trade of consumption. 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. In the carrying trade, the capital of the merchant is, as it were, divided between two foreign countries, and no part of it is ever necessarily brought home, or placed under his own immediate view and command’ (paragraph 6, lines 3 to 5).

These express considerations of risk in trading outside “domestick industry”, including that of the “foreign trade of consumption” and “the carrying trade”, which were more riskier than distant parts of “domestick industry”. Smith gives over the long rest of the paragraph to give examples from distant foreign trade (paragraph 6, lines 8 – 32). The merchant, to avoid risks and trouble, when engaged in foreign trade, will always be glad to sell his cargoes domestically, and as a consequence will “put into motion a greater quantity of domestick industry [that] gives revenue and employment to the greatest number of people of his own country”. It is this convenience and security (lower risks) that leads to the consequence of “home being the centre, if I [Smith] may say so, round which the capitals … continually circulate”. The “natural” inclination to employ his capital in this manner, driven by risks of foreign or distant trade “gives revenue and employment to the greatest number of people in his own country” (paragraph 6 and 7). he whole is the sum of its parts.

This is clearly a consequential outcome of his risks, concerns and trouble of foreign trade, which also has the necessary consequence of slower turnover of his capital overseas – instead of turning over his capital for profit in months, the merchant may have to wait years (Smith discusses this elsewhere in Wealth Of Nations).

The inhibitions of some, but not all merchants (foreign trade was an increasingly significant element of the British economy from the 14th century) leading them to trade domestically’ is the object of his use of the metaphor of “an invisible hand”, which was a metaphor to “describe in a more striking and interesting manner” the personal inhibitions of traders in “domestick industry” (see Smith’s Lectures on Rhetoric, 1762). The metaphor had nothing to do him preferring to better "his home country' which caused him to be "led by an invisible hand” as an expression of a public benefit. Smith specifically says that he is “led by an invisible hand to promote an end which was no part of his intention” (the betterment of a public benefit), because "by pursuing his own interest (avoiding the risks and trouble of foreign trade) ‘he frequently promotes that of society more effectually than when intends to promote it” (paragraph 9). In short the "betterment" came as a consequence of him being "led by an invisible hand"; it was not the cause of him acting in this manner to avoid risk to the security of his capital. If he preferred to "better his country", it would not be consequence, but the reason for acting thus.

I have tried to persuade “rightist” authors (David Friedman, Daniel Klein, and my friends in the Adam Smith Institute – where – disclosure – I am a Fellow, but so far to no avail) and ‘leftist authors, writing in defence of Chomsky (also, so far, to no avail). My concerns are nothing to do with 21st-century squabbles; they are in defence of Adam Smith and his legacy; I do not take sides in the Cold-War legacy in modern economics, inspired by false attributions, since Paul Samuelson’s 1948 text, Economics: an introductory analysis.

Many thanks, Jon, for your attention and interest.

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Blogger Jon said...

Thanks for your commentary, Gavin.

I assume the David Friedman you mention is the same David Friedman that is the son of Milton Friedman. He has a blog here.

Based on your comments let me re-state Smith's point to try and highlight both Friedman's error and Chomsky's error to see if I understand it properly. Please let me know if you agree with how I'm stating it.

Smith's point is that the merchant prefers to stay closer to home due to risk. He's not particularly interested in improving the well being of people in his home country, but by staying at home out of self interest this has the effect of improving his home society. This is the invisible hand that leads to a public good.

Friedman's error is in taking this to be some sort of advocacy for less trade barriers. Smith may prefer less trade barriers, but that's not the point here. In fact Smith is implying here that staying home is for the good. Chomsky's error (or maybe my error) is in suggesting that Smith believes the merchant has a preference for the betterment of his own people and is inclined to stay home to for that reason. He's really staying home just to manage his own risk, and this has the effect of improving his home country's economy.

4:11 pm  
Blogger Gavin Kennedy said...

Yes, you have got it.

I would insist that in this case (Smith speaks of "and in may others", but he does not specify the others at all), the Invisible Hand' metaphor refers to its object - the perceived insecurity of the merchants about foreign trade, which, of course, is felt by him, but cannot be 'seen' by others. As his capital adds to the domestic capital, it benefits society, because in Smith's view commercial activity creates revenue and employment.


9:22 am  
Blogger Unknown said...

Great clarity, Gavin. I appreciate the discussion. Too bad Chomsky gets Smith wrong. And honestly I don't understand how he manages to do it. I guess Chomsky's too far down his rabbit hole.

9:27 am  
Blogger Gavin Kennedy said...

Thank you Robert
That debate with Chomsky goes back some years and I seem to get references from readers as if there is a course somewhere discussing Chomsky's works.
However, be clear, I am criticising misreadings of Adam Smith's Works, not engaging in discussions of modern politics or modern versions of Adam Smith's ideas, which have been mistreated since, primarily, Paul Samuelson's interventions in his Economics textbook (1948 and thereafter in each edition to 2010).
Smith made a quite simple point when he used the 'invisible hand' metaphor in 1776. Specifically that a merchant acted in his own interest in investing his capital domestically, rather than inviting it abroad. By doing so, the merchant unintentionally and unavoidably added his capital to domestic goal investment and domestic total employment. The merchant 'led by an invisible hand' -specifically his private motivations normally invisible to others- automatically added to gross domestic investment, surely an obvious consequence. This simple arithmetic consequence has been fantasised into a misunderstanding - even a spiritual action, or mysterious forces, when it i intact a simple arithmetic truth- the whole is the sum of its parts!
That is probably why none of Smth's contemporaries, including his intimate family friends, and none of the leading political economists that followed him after he died in 1790, mentioned this use of the invisible hand up to post-1874.
Gavin Kennedy

9:26 am  

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