Friday, May 04, 2012

Daniel Klein on Allegories – Part 2

Each hour, minute, and second, billions of prices are signalled somewhere around the world, most of which are not acted upon (though some complex software reacts automatically with instructions to buy, hold, or sell).  Whether prices actually ‘tell’ anybody “what to do” is perhaps an acceptable first-level suggestion in Economics 101 (not that I would use it), but it is less so in postgraduate discourse, or, most important, in accounts of an actual market. Deciding what to do remains subject to the choices made by entrepreneurs, which is why the rewards and punishments for the choices they make can be so significant.
Moreover, a singular feature of markets is the visibility of prices – which Daniel, in other contexts, tends to play down because he believes, in common with many other modern economists, that Adam Smith’s use of the metaphor of an invisible-hand refers to an invisible entity operating in markets, on prices, supply and demand, and so on, and the choices people make.  This is ironic in that prices are very visible and need to be for markets to work, hence why modern economists insist that Smith referred to markets being “led an invisible hand”, when he didn’t, is difficult to justify.
When Daniel reports what appears to be a direct quotation from Adam Smith using the IH metaphor, he edits the quote to change it from Smith’s very specific reference to read like his general statement of what happens across the world. Smith’s actual statement in WN refers to a specific merchant, not all merchants, who is concerned for the security of his capital if he invests in the “foreign trade” and, who therefore, prefers to invest it in “domestic industry”. Smith mentions this specific merchant several times in the 8 earlier paragraphs in this chapter in WN (Book IV, chapter 2, paragraphs 1-8 and twice in the IH paragraph 9 itself.   There can be no doubt as to Smith’s intention.   But by rewriting it to read as if it was a general statement, applying to all individuals on all occasions, Daniel creates a false impression that self-interested individuals “generally” are “led by an invisible hand” to “promote an end which was no part of [their] intention[s]”, and which somehow always or mostly has public benefits.  There may, indeed, be “many other occasions” where such "invisible hand" outcomes are generated, but the only example of the IH metaphor that Smith gave was demonstrated only once in WN and it followed the strict grammatical rules applying to metaphors that they refer to particular objects, which must also apply to all other occasions when an IH metaphor is applied.  Grammar, said Smith (Lectures on Rhetoric ....), is very precise like the laws of justice and not given to ambiguity or vagueness.
If others want to apply the IH metaphor, in Smith’s sense (and within the laws of grammar), to other cases, they must first identify the IH metaphor’s objects in each case.   We can then judge the applicability of the IH metaphor, to each case by whether it "describes its object in a more striking and interesting manner".  Modern inventions of Smith’s meaning that apply the “invisible hand” to all cases of self-interested actions by entrepreneurs, such as there being a theory of the “invisible hand of the market” that “miraculously” ensures happy outcomes (even general equilibrium) is illegitimate and woefully unSmithian.  Modern attributions, including “selfish” interests having beneficial outcomes (what a license that became for crooks and thieves in business in the 1970s-90s!), as asserted by Paul Samuelson in his influential textbook, Economics: an analytical introduction”1948, McGraw-Hill, has had a wholly negative effect in public discourse.  Graduates leave university and enter public life, taking with them memorable the notions they heard, including fantasies about the “invisible hand”, and whatever other metaphors or allegories proved memorable, into their careers, where they proved influential as careless cliches.   Unfortunately, many brilliant authorities in economics have been and are complicit in this deception.
Modern economists in their teaching of young economists and in contributions to pubic discourse spread the wrong message about the benefits of markets. A moment’s thought about those domestic traders who clamour for tariff protection and prohibitions to “narrow the competition and raise prices”, are hardly led by an “invisible hand” to the “public benefit”; quite the reverse.  In fact, in WN in Books I, II, and III, in which Smith discusses the benefits and the distortions of markets, he gives over 70 instances of the self-interested (and selfish) actions of individuals that do not lead to public benefits and neither does he mention the IH metaphor once in these three books of WN. 
Daniel’s assertion that the “prudent ship master” is a “miniature of the metaphor of the being whose hand is invisible” is an example that stands on shaky ground. The “simile” Daniel quotes was not a metaphor nor a simile at all, nor was it an allegory.  It describes a regular and factual occurrence on ships in the 17th-18th century (and on an Apollo mission in the 20th century), which Smith knew of from his intimate social contact with Glasgow ship owners and their captains serving the tobacco and sugar trades from the British colonies in North America and the Caribbean, and, I might add, from several books in his library about Captain Cook’s voyages to the Pacific Ocean and of several voyages before Cook. Smith also, as a youth, the son of a customs officer, in the busy port of Kirkcaldy, was familiar with local ship’s captains and seamen, and would have heard stirring accounts of the hardships of life at sea (see Ian Ross, The Life of Adam Smith, 2nd edition, chapter 2, 2010, Oxford University Press).
In my biography of Captain William Bligh (Kennedy, “Captain Bligh: the man and his mutinies”, Duckworth, 1989), I discuss how and why Bligh adjusted his own and the crew’s diet in the relatively unknown Pacific ocean, thousands of miles from the nearest European settlements (he also ordered extra allowances on special occasions).  Later, from a determined urge to survive, he ordered drastic cuts in the already tiny daily allowances for everybody with him in the Bounty’s 23-foot launch, after he was put into it by the mutineers, and undertook the overcrowded and dangerous voyage with 20 loyalists for 3,900 miles from Tofoa to Timor.
Daniel’s example of the “prudent ship’s captain” had nothing to do with “an invisible hand” as a metaphor, and neither is Daniel’s example of it an allegory, defined by Daniel as “an expressive style that uses fictional characters and events to describe some subject by suggestive resemblances; an extended metaphor”.  Therefore, Smith’s example  said nothing about “fictional characters and events” at all; it was regular and well-known factual occurrence at sea and does not fit Daniel’s association of it with his definition of allegories, by which he attempts to give substance to his own use of the invisible-hand metaphor, and to bolster his views by introducing from his recent explorations of allegories an interesting device to breathe life into his views on his extended meaning of the IH metaphor.
He opens this new line of intellectual argument with reference to Edwin Canaan, an early 20th-century scholar of some repute among historians interested in Adam Smith’s scholarship, who put forward in 1902 a typically original allegorical example of “an omniscient and omnipotent benevolent Inca”, whom Daniel adopts, calling her “Joy”, and whom Canaan assures us “issues instructions, or requests, to each market participant spelling out “the right thing” to be done”.  Into this allegory, Daniel introduces “Bridget”, an entrepreneur, who does whatever “Joy” tells her to do. This allows Daniel, if I may say so, to smuggle into what he asserted at the start of his article about an alleged “meeting of minds”, allegedly missing from what others call market price signals. Bridget, allegedly, “is sensible to Joy’s benevolence and ethical wisdom and feels entrusted to advance what Joy finds beautiful”.  Yet, remember that “Joy” telling Bridget “to take actions rather like the actions that the market signals lead her to take in the actual world”, is pure fiction.  In any case, if market signals “lead her take” actions as in the “actual world”, what on earth does the fictional “Joy” bring to Daniel’s imaginary party? 
I am bound to say, given that there is no “Joy” in reality, and that in the real world Bridget is simply left to get on with it for good or ill, what exactly does the fictional “Joy” add to our (and our students’) understanding about how markets work in the real world? However, I see where Daniel wants to take us with the idea that he tries to smuggle into his non-Smithian theories about “an invisible hand”.  
First, we must not forget that in the actual world, price signals do not “tell” entrepreneurs what to do (nothing and nobody tells them anything). Entrepreneurs observe, receive information, create ideas in their receptive minds about what they may or may not do, or generates beliefs that they should or could do this or that, which may include doing nothing other than what they have done each day.  This may raise a number of possibilities about what they may do, but it is just as possible that entrepreneurs may do what they ought not to do in response to them.  We should inform our students of these actual possibilities and not tell fairy stories about a mythical “Joy” who allegedly knows exactly what Bridget should do, and tells her too.   This is counter-factual and is misleading, if believed by students and faculty.
Note that Edwin Canaan, an “ardent Smithian” says Daniel, “suggests that the market conduces to socially beneficial actions much as a benevolent system of superior knowledge, communication, and cooperation would.”   Hold on, says I, what Canaan has actually done is smuggle into economics, with Daniel’s approval, the teleological assertion that “The free-enterprise system leads to patterns of activities somewhat like those that would please a benevolent being in an allegory”. Recent events in some markets show the system can produce patterns of reckless activities by some individuals that in total can bring the system into debt, bankruptcy, and recession.  But the real world of entrepreneurs is not an allegory. Nor are such “patterns of activity”, allegedly pleasing to “a benevolent being” (which one?), or the defining characteristics of what is possible in the real world. If what we want is not possible, we have to put up with something less than perfect, which would likely not be in general equilibrium, as believed by neo-classical economists. This “best of all possible worlds” should be risible among those trying to explain the real world.  
Daniel concedes to the evidence:  “It is true that the economy entails myriad instances of cooperation, but it also entails myriad instances of noncooperation. It entails myriad instances of competition and rivalry. It entails myriad instances of rather impersonal exchange that, as cooperative moments, usually are only tiny and often ambivalent. It also entails myriad instances of deception and misrepresentation. It entails a lot of things, not just instances of cooperation.”  For the deceived believers in “Joy”, when do we tell them later that there is no “Santa Clause”! How valid then, is our claim that economics should be taken seriously as a subject, and that as tenured professors we should be treated seriously and paid for our advice accordingly. I suggest we study the real world as it is, without misleading, because imaginary, fairy stories and counter-factual allegories.
Markets are not guided by an invisible being with invisible hands, though the proposition that it is so guided was rampant in what Smith described as the age of “pusillanimous superstition” in his “History of Astronomy” (posthumous, 1795).  Smith’s use of the popular 17th-18th-century IH metaphor was hardly commented upon by political economists from 1790, when Smith died, to 1875 and after, and much more so after the 1930s, when it took on a new lease of life from mid-20th century with the invention of a 'theory', 'concept', even 'paradigm' that the invisible hand existed and which guided the economy by its presence.  This assertion was wrongly attributed to Adam Smith, particularly after Paul Samuelson’s textbook, “Economics: an introductory analysis”, 1948, McGraw-Hill, reported on an “oral tradition” in Chicago (p 36). A similar tradition reportedly existed in Cambridge, England, as manifested by A. C. Pigou in his “Welfare Economics”, 1922, as part of his argument for state intervention.  By the 1980s this belief in a mystical force guiding the market economy, with varying degrees of perfection, unfortunately became ubiquitous - see Warren Samuels, “Erasing the Invisible Hand: essays on an elusive and misused concept in economics”, 2011, Cambridge University Press.
So, what can we make of Daniel’s resort to allegory to bolster his admittedly eloquent arguments for the modern mysticism of “invisible hand” theory?   Well, as with the recovery from obscurity of Adam Smith’s purpose in deploying, on two occasions only, the IH metaphor, regularly covered on Lost Legacy (, it is worth recounting Adam Smith’s views on the use of allegories from his “Lectures on Rhetoric and Belles Lettres” [1762], 1983, particularly Lecture 6, Monday 29 November, 1762, pp 25-32): ‘Of what is called the tropes and figures of speech’. [Some archaic spellings corrected.]
Smith sets out case for “expressing” language “perspicuously” so that “your Language has all the Beauty it can have” and “figures of speech contribute or can contribute towards it only so far as they happen to be the just and natural forms of Expressing that Sentiment.  … When [figures of speech] are more proper than the common way of speaking then they are to be used but not otherwise.  They have no intrinsic worth of their own” (p 26).  He reminds his student audience, that “in every metaphor there must be an allusion betwixt one object and another” and “that it is evident that none of these metaphors [which he has spoken of] can have any beauty unless it be so adapted that it gives the due strength of expression to the object to be described and that at the same time does this in a more striking and interesting manner” (p 29).  He also adds that what has been said of the justness or propriety of metaphors is equally applicable to other figures, as Metonymies, Similes, and Allegories, Hyperboles. Metaphors are nearly allied to Metonymies … Allegories are also closely connected to them, insomuch that Metaphors are called contracted allegory and an allegory is named by some a diffused Metaphor” (p 30).  Allegories may be defined as “a story, poem, or picture that can be interpreted to reveal a hidden meaning, typically a moral or political one ... or something similar".
To ensure readers understand that Smith was not at variance with the established use of English, we may note that shortly after Smith left Edinburgh for his own professorship in Glasgow, Hugh Blair, a Church of Scotland minister, and later the UK’s first university professor of English, took over the Rhetoric lectures sponsored by Lord Kames.  He also discussed the role of metaphors, finding them “figures founded entirely on the resemblance which one object bears to another”.  His examples include: “When I say of some great minister” that “he upholds the state, like a pillar, which supports the weight of the whole edifice, I fairly make a comparison; but when I say he is the pillar of the state, it is now become a metaphor” (Hugh Blair, “Lectures on Rhetoric and Belles Lettres”, 1827. 3 vols. VI. p 343, London).
Daniel turns to what he regards as the problem with allusions to co-operation in economics, exemplified in the writings of Hayek and other authors, who “suggested that the economy was a system of cooperation”.  Daniel has a problem with this suggestion. I also have a problem with it because it is more idealist than accurate from the common thinking found among modern economists, which does not take account of the messiness of actual economies, nor of the necessary anonymity of how market economies and models of “general equilibrium” are unrepresentative of them.  Daniel acknowledges that: “It is true that the economy entails myriad instances of cooperation, but it also entails myriad instances of noncooperation. It entails myriad instances of competition and rivalry. It entails myriad instances of rather impersonal exchange that, as cooperative moments, usually are only tiny and often ambivalent. It also entails myriad instances of deception and misrepresentation. It entails a lot of things, not just instances of cooperation. We should face the fact that it is wrong to say that you have cooperated, in a literal sense, with the myriad people who contributed to the production of your pencil or woolen coat.”  If that is the problem, the response should be, simply, to drop the assertion by Hayek and the other gentlemen, and provide a better suggestion. This makes Daniel’s case for using allegory remarkably weak.
Let me say, to start, that co-operation is a poor allusion for how economies work.  It is overly idealist beyond the most elementary level.  I prefer Smith’s approach in WN to highlight what we may call passive involvement to remove the idea that people in markets consciously co-operate across the whole market economy.  I have long argued that Smith’s ‘pin factory’ example in WN is interesting but by no means the last word on the importance of the division of labour to commercial societies.  I suggest that Smith’s other example of the production of the day labourer’s woolen coat, in chapter 1 in Wealth Of Nations, is more important for our understanding of how market societies raise productivity, improve existing products, create new products (Schumpeter’s ‘perennial gale of creative destruction’) that lower unit prices and raise wages, which in turn improve living standards, as we know happened in 18th-19th-century Europe and North America, and is happening now in China, India, and Brazil 
Smith refers in his example, not to an imaginary allegory or a metaphor, but to the “people of whose labour  [is] a part but a small part” to procure for the labourer his coat which “exceeds all computation” to produce this basic product.  I recommend that you study it, not just as an illustration of the extent of an 18th-century division of labour, but also as an illustration of today's inter-sectoral division of labour across all the sub-operations in the products produced elsewhere by distant unconnected masters and operators, who do not know of those who might eventually use what they produce in later links in the supply chain.  Their consciousness of co-operation with anonymous others effectively is close to zero.
In my “Adam Smith: a moral philosopher and his political economy”, 2010, 2nd edition, Palgrave Macmillan, I show in Table, 6.1, ‘Manufacture of a Common Labourer’s Coat’ (page 58) 17 direct trades that manufacture the coats, 4 indirect trades in the carrier business, 5 trades supplying tools, and a further 19 indirect trades supplying the skills used in manufactures related to coat output, as mentioned by Smith in his practical example.   I would also recommend consulting Alwyn Young’s 1928 paper, published in The Economic Journal, where he brings Smith’s example up to the early 20th century, and shows its implications for increasing, NOT decreasing, returns, the latter of which dominated marginal analysis in the 19th and 20th centuries, and which is still taught in growth theories in Economics 101 today. Smith’s actual example (not an allegory) represents the division of labour that produced a simple coat in the 18th century, the implications of which were not drawn out in the famous ‘pins’ example, which is about as far as most students are taken through Wealth Of Nations by their tutors. 
Brad Delong, however, compared the income gap of Yanomamo stone age, hunter-gatherers along the Orinoco River in South America with modern New Yorkers along the Hudson River.   That gap was $90 for the Yanomamo and $36,000 for the New Yorkers.  Comparing the difference in product availability (using notional Stock Keeping Units) the gap is several hundred for the Yanomamo, to ‘tens of billions’ for New Yorkers.  This significant difference indicates that while the Yanomamo hunter-gatherer economy provides what is available within the tribe, the New York tribe depends on the availability of billions of products in long, complex, and inter-dependent product and service chains from across the globe, where participants do not know, nor need to know, those involved more than a link or two along the supply chains. Understanding how product and service linked chains function, both autonomously and under state regulations, is a focus of modern political economy, for which Smith’s insights are of lasting value. 
One insight is that separate productivity and product changes all along the linked, but disparate, supply chains alter costs and product availabilities for all those businesses involved, who do not know, and do not need to know, nor can they know in practise, the input and output of businesses more than a few links away, and this is accomplished without any overall supervisory management control.  This is the real power of markets in raising living standards for billions of modern consumers. 
The difference between Adam Smith and Karl Marx boils down to fact that Smith understood the power of free markets to manage the apparent anarchy of complex, linked supply chains better than any known alternatives, such as expecting the Sovereign and his ministers making what are now billions of decisions a day (which knowledge clearly is beyond them), while Marx believed that states could manage complex linked supply chains better than markets.  The Soviet experiment showed they couldn’t.
Hence, Smith’s philosophy can be summed for a modern complex economy as “markets wherever possible, state intervention where necessary”.
Daniel says “it is good to declare the allegory. By unfolding it we come to many interesting questions and insights. But if we deny allegory, we either cut off that inquiry or we edge into it only tentatively and confusedly, not really recognizing and admitting what we do.” Daniel gives several negative instances of the consequences of denying allegories:  “If we deny allegory we play into the hands of those who paint us as unattuned to the social … Declaring the place of allegory and an ethic of universal benevolence does not put us on a slippery slope to statism. … If we deny allegory we relinquish it to others, notably those who are inclined to take it in illiberal directions. Liberals should counter illiberal allegory, not with denials of allegory, but with liberal allegory. … Finally, perhaps allegory can help to answer, in an enlightened way, the yearning for meaning and connection—perhaps by affording spiritual comfort in the part one plays in the “immense cooperation, in the contributions one makes to universal benevolence, and also perhaps by teaching one where not to look for such meaning and connection.”
Yet, modern versions of Smith’s actual inter-linked supply chains used to produce a day-labourer’s coat showed a clear account of the actual world without metaphors or allegories, or "spiritual comfort" and without the negative consequences Daniel warns about from denying students and others access to the fiction of allegories.  Why the world would turn away from liberalism” if the day-labourer’s coat, or more modern examples of 21st-century products, were reported in real terms and not by allegory, is beyond my understanding. 
I would have thought that analysis in the real world of what happened and happens when our students are shown the real world of economics without myths of actual “invisible hands”, fictions embedded in allegories and mathematical theories of “general equilibrium”, would be more likely to ensure the future for the liberalism that Daniel seeks.

Hence, on this occasion, I must express my reservations about Daniel's always interesting and provocative thinking.  This does not affect my respect for his scholarship.

[Please note: I composed the first daft of this post while travelling from France to Scotland and made some editorial corrections at home onSunday.]


Blogger airth10 said...


I am amazed how much you write. The words just seem to tumble (metaphor) out of you. I wish I was so prolific.

There is a cavernous difference between Smith and Marx. I wonder if Marx ever mentioned the invisible hand. The invisible hand is emblematic of 'flexibility'. Marx didn't consider flexibility in economics. He was extremely rigid in his thinking and so in his economics, and personal life.

Perhaps the biggest flaw in Marx's thinking was his lack of understanding the contradictory nature of life and the changes it brings. What he knew, though, is that he wanted his system to eradicate the contractions in human activity. He obviously didn't understand that contradiction is a life force, an engine. "If you do away with contradiction you do away with reality". He believed capitalism would eventually implode due to its internal contradictions and because of its manifesting and enabling them. How wrong he was, though, because as it happens capitalism feeds and grows of/from the contradictions in human nature. And because of this capitalism has remained agile and resilient, because it has learned to balance the contradictory nature of humans.

Economics is itself a fabric of contradictions The discipline came into being to deal with the contradictions of economic life, like the desire to consume as opposed to the need to conserve. Why, capitalism itself is a pragmatic construct forged to deal with economic contradiction, such as the desire for equilibrium and the reality of disequilibrium. Marxist economics didn't take root because it was inherently impossible for it to comprehend or cope with this. Entropy, a constant thorn in the side of economic life, is emblematic of economic contradictions, of juggling depletion with replacement, decay with renewal. Communism was incapable of of addressing or keeping entropy at bay, hence its collapse. It collapsed because it just decayed. It didn't have the contradiction built in that could have helped renew it, the contradiction that comes from opposing forces, the alternatives and experimentation communism thwarted.

As I recall Smith didn't talk about the contradiction in life. However, he was aware of it. But his economic philosophy didn't seem to seriously consider or address it. Yet the economics and free market he expounded on did seem to mesh with it since the market forces he favored would definitely bring together and balance the contradictions in human activity. It was Hegel who identified for us contradiction as being a life force. And it is believed that Darwin in turn got his theory of evolution from Hegel and his idea of change, which is brought on by the competing forces emerging from the contradictions in all living things.

Smith also understood something that Marx didn't, that competition is essential in human life in order to develop, enhance and perpetuate it. Marxism's intention was to eradicate competition from economic life and encourage cooperation only. So Marx wanted to remove a contradictory component that was essential in balancing and progressing human existence, that of competition. Again, he didn't understand the need for both to survive. Capitalism has prevailed because it intuitively understands the need for both in order to continue, like male/female are necessary to prolong life. Capitalism has meshed both opposites of competition and cooperation quite successfully.

We in the developed world live in a dual system of governance - liberal democracy, liberal being the economic branch and democracy being the political one. Both branches contradict each other. But neither could survive without the other. They counterbalance one other. On their own they become authoritarian. They constitute the duality of human nature and the DNA of modern governance. I think Smith was on to this. But Marx wasn't.

5:00 pm  
Blogger Gavin Kennedy said...

You appear very eloquent to me. But thanks for the comment.

I shall return later today to your comment (I've been on the laptop too long already says my wife (eloquently!).


8:19 am  
Blogger airth10 said...

Kant had his allegory: Out of the crocked timber of mankind, no straight thing was ever made. (I think he got the idea from Ecclesiastes) Sounds like something the conservative Edmund Burke would say.

Isaiah Berlin viewed that allegory as a warning against authoritarian governance, governments that were determined to perfect humankind, like Nazism and Communism. He saw that such attempts would end in failure, as they did.

11:29 am  

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