Wednesday, October 03, 2012

An Antidote to the Modern Economists Nonsense About Adam Smith's Use of the Metaphor of "An Invisible Hand"

John Cook quotes George Gilder HERE .
"Capitalist creativity is guided not by any invisible hand, but by the quite visible and aggressive hand of management and entrepreneurship."
George Gilder (no citation given, but it sounds right)
Absolutely right.
So much wasted ink would be put to better use if most economists stopped romancing the myth of there being “an invisible hand”, as if one actually existed and if they realised that Adam Smith used the “invisible hand” metaphor as a metaphor and not as anything more.  Only recently (after 1945) modern economists took the “invisible-hand” metaphor up as something tangible in the working of markets; worse they credited it to Adam Smith.
Smith knew what a metaphor was in English grammar.  It was a “figure of speech”; it always referred to its object and described that object in a “more striking and interesting manner” (A. Smith, “Lectures on Rhetoric and Belles Lettres” delivered at the University of Glasgow in 1763; first published in 1983 by Oxford University Press).
The metaphor was widely used in the 17th and 18th centuries, particularly by theologians as a metaphor for the “hand of God”, itself an imaginary idea.  Smith used the metaphor only twice: once only in Moral Sentiments he used it to “describe in more striking and interesting manner” how a “proud and unfeeling landlord” was “led” to feed the “thousands whom he employed” by “an invisible hand” of necessity – they laboured in his fields in return for their and their families subsistence, for without food they could not labour – and nor could the landlord enjoy his subsistence and conveniences without his labourers labour. They were led by their necessity and not by an actual entity that existed except as metaphorically described as “an invisible hand”. This transaction - no food, no labour; no labour, no food - had the unintended consequence of propagating the human species, which over the generations manifestly was a public good.  You cannot see the wind, but you can feel it, nor can you see the invisible motivations that led landlords to provide their labourers with food, but you can see their effects when labourers turn up for work each day.
The only other time Smith used the metaphor was once only in Wealth Of Nations to “describe in more striking and interesting manner” how some, but not all, merchants were “led” by their felt insecurity for their capital when it was sent abroad, so they kept it at home for use in the “domestic” economy, thus adding to the arithmetical total of domestic capital (the whole is the sum of its parts).   They were led by their insecurity and not by an actual entity except as described as a metaphoric invisible hand. This addition to domestic capital had the unintended consequence of increasing domestic “revenue and employment”, which were public goods. You cannot see the wind, but you can feel it.   Nor can you see the merchants’ invisible insecurity but you can see the effects of their insecurity because domestic revenue and employment are larger, taking one year with another.
Hence, George Gilder was right: “Capitalist creativity is guided not by any invisible hand, but by the quite visible and aggressive hand of management and entrepreneurship.”    Without entrepreneurs, there would be no capitalist markets.  Their role is decisive.  Kill them, as the communists did, then the absence of entrepreneurs and the visible effects of their absence were clear – famines in Russia and China, low living standards, and tyranny.  Step aside and let entrepreneurship visibly flourish and living standards will rise, with an affordable public sector within the rule of law and taxation.
A final thought.   This does not mean that egoistic and selfish “self-interest” necessarily leads to the public good – a wholly perverse conclusion attributed by Paul Samuelson to Adam Smith (Samuelson, P. 1948, Economics: an analytical introduction, p 36, McGraw-Hill).
A moment’s thought would remind even the least attentive reader of Adam Smith’s Wealth Of Nations, especially Book IV in which he used the “invisible hand” metaphor and where he wrote what he himself called a “violent attack” on the “whole commercial system” of Britain because of the self-interested, greed and selfishness of those merchants and farmers who promoted legislation to impose tariffs, protectionism, and prohibitions on foreign imports.  These legal regulations had the effect of allowing the “narrowing competition and raising prices” to the detriment of the self-interests of consumers, and most decidedly it was not a “public good”.  The notion that this led to social harmony and betterment, etc., is patently absurd.
Thank you George Gilder for your insight in this instance.


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