Monday, July 22, 2013

Adam Smith on "An Invisible Hand"

  DR. ROBERT L. HEICHBERGER posts in The Observer HERE
Smith’s principles endure today”
“His idea of an "invisible hand" which guides supply and demand is among his key ideas. This reflects the concept that working persons help to create the best outcome for all, including the desire to share altruistically. "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest," Smith wrote.
By selling products that the people want to buy ... the butcher, brewer and the baker ... hope to make their income. As Adam Smith saw it, if they are effective in meeting the needs of their customers, they will see financial gains. While they are engaging in their enterprises of earning an income, they are then also providing products that the people want. Such a system, Smith argues, creates wealth not just for the butcher, brewer, and baker, but for the nation as a whole when that nation is populated with citizens who desire to better themselves and their families.”
[Dr. Robert L. Heichberger is professor emeritus at the State University of New York at Fredonia and distinguished professor at Capella University in Minneapolis, MN.]
Of course, as readers of Lost Legacy will know, Adam Smith said nothing of the sort as Robert L. Heichberger has written in the first paragraph above.  I have no wish to be disrespectful of a senior colleague, but he really deserves to know better.  He honestly believes what he has read and been told by other senior colleagues about Adam Smith’s so-called invisible hand, and repeated daily across the media and in the scholarly press. 
The best remedy for this error is for Robert L. Heichberger to read the first ten paragraphs of the relevant chapter in Wealth Of Nations (in Book IV, chapter 1, paras 1 to 10, pages 452-56 (Oxford University Press, 1976).  In these paragraphs there is no mention of “an invisible hand” that guides “supply and demand”, or “prices”, or “markets”, or any other of the imagined associations attributed to Smith, including “nascent ideas of general equilibrium” or “Pareto’s welfare theorem”.
If Robert L. Heichberger reads carefully he will note that Smith writes of a merchant (not all merchants) who is concerned bout the risks to his capital if he sent it abroad to invest. He was less sure of the honesty of the people he would rely upon to look after his interests, he was not sure of the foreign legal systems if it became necessary to seek justice, and he could not personally supervise his business prospects (apart from piracy and shipwrecks). 
Hence his motives “led” him to prefer to invest his capital locally. If he did so, Smith noted the unintended consequences of his motive for doing so.  His locally invested capital added to the capital in “domestic industry” and domestic output would be higher by that arithmetic amount.  This added to “domestic revenue and employment” and in consequence they were a “public benefit”.
Now smith used a metaphor to “describe” this process in a “more striking and interesting manner”.  That metaphor was “led by an invisible hand”.  Smith describes the role of metaphors as “figures of speech” in his “Lectures on Rhetoric and Belles Lettres” (1762-3) delivered at Glasgow University from 1751-64.  See Smith, LRBL, 1983, Oxford University Press, p. 29.
From that use (one of only three uses in all of Smith’s writings) the metaphor has been promoted into something it never was meant to be, initially from late 19th-century and then mainly from 1948 (Paul Samuelson).  It was not mentioned in any role by any of his contemporaries, or anybody else until 1875, when a handful of scholars began to give it new, modern meanings, such as asserted by Robert L. Heichberger, and many other modern economists, who have merely repeated what others say, sadly without reading Smith’s text for themselves carefully.


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