The Cult of the Invisible Hand

The triumph of bizarre ideologies in economics, some (such as “trickle-down” and “austerity”) so clearly wrong it is hard to see how anyone can actually believe them after due reflection, and others (like “stability” and “equilibrium”) equally, though perhaps less obviously, dependent on large doses of pixie dust, is perplexing. I am not fond of conspiracy theories, because they often lack proof and depend entirely on inference. As noted in my previous post, John Maynard Keynes at the very end of his magnum opus, while discussing the development of bad theory, rejected the idea of a conspiracy of the wealthy: “I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.” [1] 

But that was nearly eighty years ago, and current economic discourse takes place almost as if his book had never been published. The field of economics is ruled today by the “supply-side” system of thinking that has overwhelmed the heart of Keynesian dynamic theory — namely, his observation that “effective demand” underlies virtually all economic activity. When we speak of “stimulus” we are speaking in Keynesian terms, yet conventional ideology does not think in such terms. In fact, it denies the obvious nature of economic reality: Real, tangible wealth — which consists of the  products we buy and sell and the infrastructure we use — exists as a result of demand for it; and the money offered for it is merely a medium of exchange, an accumulation of debt. It is not the other way around. 

Therefore, unless Keynesian theory was intentionally undermined by “vested interests” seeking to destroy its effective implementation, it is hard to imagine how its basis in this reality could have vanished from the “conventional wisdom.” There must have been at least a virtual conspiracy, if not an actual one, to misconceive the market system for the benefit of “vested interests.”         

Admittedly, the logical infirmity of “supply-side” thinking is not immediately intuitive to everyone. It may not become obvious until one thinks through the implications of “Say’s Law,” which transforms the truisms that every transaction is both a sale and a purchase, and that the aggregate of all sales therefore equals the aggregate of all purchases, into the inference, as Keynes put it, that “supply creates its own demand.” That supposition takes demand out of consideration by the simple device of assuming that there is always enough demand to clear every market. But we know that isn’t true. Recessions, depressions, even unemployment, wouldn’t exist if that were true.

You can see where this is going: Any doubt that a market economy is always at or near optimum performance of its own accord forces consideration of measures to stimulate consumer demand, reallocating income and wealth back into the hands of consumers to increase their demand  for goods and services, which naturally means a reduced share of the pie for the sellers; that is the implication of Keynesian economics. So the suppliers must fight that conclusion if they are to keep the reallocation of income and wealth working in their favor. 

The supply-side perspective, with all of the assumptions of optimum efficiency and performance upon which it depends taken for granted, has provided the ownership class with scholarly ammunition for the battle. It sets the stage for the coup de gras, the assertion that the economy does fine all by itself, thank you very much, without government interference or constraint. Thus, as surprising as it may seem, Milton Friedman’s “Capitalism and Freedom” and the entire economic philosophy of the Chicago School depend in this way upon a tortured system of inverted logic traceable directly back to the fallacy of “Say’s Law.”   

Of course, an ideology this fundamentally wrong cannot survive without an all-out propaganda effort, and perhaps the most blatant and extensive propaganda effort on behalf of laissez-faire capitalism to be found is what I call “The Cult of the Invisible Hand.” It consists of the assertion, or inference, that the father of political economy himself, Adam Smith, understood and taught that market economies automatically achieve optimal outcomes when people are allowed complete freedom to act in their own self-interest. This fanciful proposition is itself virtually nonsensical, and cannot withstand scrutiny. Worse, however, the claim that Adam Smith ever subscribed to such an idea is patently false.

The claim has been made so frequently by people with academic standing, in open defiance of the facts to the contrary, as to raise the possibility of at least a tacit, or virtual, conspiracy. I prefer to look at it this way: If the supply-side perspective was correct, and Keynesian demand-side theory could be directly refuted on its own merits, resort to “The Cult of the Invisible Hand” would be entirely pointless and unnecessary.              

Adam Smith

Wealth of Nations was published in 1776, the year the American Colonies declared their independence from British rule. Despite the great changes that have taken place since then, Adam Smith’s pioneering work in political economy contains fundamental insights still relevant today. 

Smith’s political, social and economic views were comparable to those of today’s progressives. He divided the European societies of his day into three classes – the productive class (laborers), the unproductive class (landlords), and proprietors (capitalists), and in his view “freedom” was maximized by maintaining equality among these classes:

It can never be the interest of the unproductive class to oppress the other two classes. It is the surplus produce of the land, or what remains after deducting the maintenance, first, of the cultivators, and afterwards of the proprietors, that maintains and employs the unproductive class. * * * The maintenance of perfect justice, of perfect liberty, and of perfect equality, is the very simple secret which most effectually secures the highest degree of prosperity to all three classes. [2]

This is among the earliest definitive statements of a guiding principle of distribution on record: Smith argued that equality will optimize prosperity. The influence of Smith’s perspectives on how market economies repress labor and contribute to inequality were shared by his successors Say, Mill, Marx, and George, and resemble the views of contemporary economists like James Galbraith, Robert Reich, and Joseph Stiglitz.

In our modern capitalist society, in fact, most of us would likely reject Smith’s ultimate goal of “perfect” equality in favor of Keynes’s position that some inequality is both inevitable and desirable in market economies. Neither Smith nor, so far as I am aware, any other economist ever observed or claimed to believe that “perfect equality,” or even imperfect equality, develops naturally in an economy of its own accord.

Although he was an advocate of free international trade, for the benefit of home industry, Smith was opposed to unrestrained corporate freedom. Similarly, the original meaning of laissez-faire – opposition to 18th Century mercantilist policies – has been replaced by The Free Dictionary with this definition: “An economic doctrine that opposes governmental regulation of or interference in commerce beyond the minimum necessary for a free-enterprise system to operate according to its own economic laws.” [3] That was not, however, the view of Adam Smith.

The “Invisible Hand” 

The false mythology about Adam Smith is that he fully supported laissez-faire capitalism.  [4]  Wikipedia, for example, wrongly describes the invisible hand as Smith’s reference to “the self-regulating behavior of the marketplace.” Likewise, Investopedia wrongly asserts that “the invisible hand is essentially a natural phenomenon that guides free markets and capitalism through competition for scarce resources.” [5]

The most egregious misrepresentation of Smith’s views I have found appears on the back cover of my paperback edition of Smith’s own book, Wealth of Nations.  There, an unidentified author wrote:

What sets this book apart is its statement of natural liberty. Smith believed that “man’s self-interest is God’s providence” – that [if] the government abstained from interfering with free competition, the invisible hand of capitalism would emerge from the competing claims of individual self-interest. Industrial problems would be resolved and maximum efficiency reached. After more than two centuries, Smith still stands as the best statement and defense of the fundamental principles of capitalism. (Emphasis added.) [6]

This cleverly crafted attribution cannot survive even a cursory review of Smith’s actual perspectives. I have found no instance in Wealth of Nations where he attacked governments for over-regulating markets, or “capitalism” as that term might have been applied to the agrarian/mercantile markets of his day. He scarcely mentioned constraints on the operation of markets at all until Chapter 8 and Chapter 10 of Book I.  In Chapter 10 he specified three harmful forms of interference with “perfect liberty,” but allowing markets to resolve “competing claims of individual self-interest” of their own accord was not among his objectives:

[T]he policy of Europe, by not leaving things at perfect liberty, occasions other inequalities [beyond the “inequalities arising from the nature of the employments themselves”] of much greater importance. It does this chiefly in the three following ways. First, by restraining the competition in some employments to a smaller number than would otherwise be disposed to enter into them; secondly, by increasing it in others beyond what it would be; and, thirdly, by obstructing the free circulation of labour and stock [capital], both from employment to employment and from place to place. [7]

None of these were constraints by government on commerce: The first consists of constraints on labor and trade through the “exclusive privileges of corporations;” the second is due to institutional tendencies in his time for over-education in un-prosperous lines of work; and the third is due to “the obstruction which corporation laws give to the free circulation of labour.” [8] Those were different times and societies, but Smith’s views on restraint of economic activity were quite the opposite of those alleged on the book cover: It was restraint and control of the markets for labor and capital stock (tools and machinery) by corporations of which he complained. And, clearly, Smith chose to write about inefficiency in the allocation of labor, not to argue that markets are naturally “self-regulating” or achieve “maximum efficiency.”     

Beyond these specific concerns, Smith was generally critical of the corporate influence on laws affecting trade and commerce: “It is to prevent this reduction of price, and consequently of wages and profit, by restraining that free competition that would most certainly occasion it, that all corporations and the greater part of corporation laws, have been established,” he wrote, and “[t]he pretense that corporations are necessary for the better government of the trade, is without any foundation.” [9] In short, Smith opposed corporate monopoly power, not government restraint of it.

What Smith Actually Said

With respect to “the invisible hand,” there is no alternative to reading what Smith actually said and understanding the points he was making. Smith used the metaphor only once in Wealth of Nations, and that was in opposition to policies that he regarded as creating artificial monopolies in restraint of trade. The discussion took place in Book IV (“Of Systems of Political Economy”), Chapter II (“Of Restraints Upon the Importation From Foreign Countries of Such Goods as Can be Produced at Home”). Here is that (regrettably lengthy) reference, including the essential portions of the context in which it was used:

By restraining, either by high duties, or by absolute prohibitions, the importation of such goods from foreign countries as can be produced at home, the monopoly of the home market is more or less secured to the domestic industry employed in producing them. * * *

That this monopoly of the home market frequently gives great encouragement to that particular species of industry which enjoys it, and frequently turns toward that employment a greater share of both the labour and stock of the society than would otherwise have gone to it, cannot be doubted. But whether it tends either to increase the general industry of the society, or to give it the most advantageous direction, is not, perhaps, altogether so evident. * * *

The general industry of the society never can exceed what the capital of the society can employ. … [T]he number of workmen that can be continually employed by all the members of a great society must bear a certain proportion to the whole capital of that society, and never can exceed that proportion. No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can only divert a part of it, and it is by no means certain that this artificial direction is likely to be more advantageous to the society than that into which it would have gone of its own accord. [10]

[NOTE – Thus far, Smith has argued that protection of a home industry by tariffs or prohibition against foreign competition will tend to divert a part of the home country’s labor and capital in directions they would not otherwise have taken. Political Economy at that time was not yet able to account for changes over time in productivity, labor/capital ratios, and other factors that would affect production, but under the assumption that everything else remains constant (ceteris paribus), his reasoning is unexceptionable.]

Every Individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view.  But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.

First, every individual endeavors to employ his capital as near home as he can, and consequently as much as he can in support of domestic industry; provided always he can thereby obtain the ordinary, or not a great deal less than the ordinary profits from stock.

Thus, upon equal or nearly equal profits, every wholesale merchant naturally prefers the home-trade to the foreign trade of consumption, and the foreign trade of consumption to the carrying trade. * * * Upon equal, or nearly equal profits …, every individual naturally inclines to employ his capital in the manner in the manner in which it is likely to afford the greatest support to domestic industry, and give revenue and employment to the greatest number of people in his own country.  [11]

[NOTE – Smith continued, presenting reasons why protectionist policies designed to benefit the home society would be unlikely to do so.  Protectionist legislation is entirely unneeded, he implied, because even though individuals do not consciously act in society’s interest, acting in their own self-interest leads them to act as if they were, because they prefer to employ their capital for home consumption, at ordinary profit levels, over the riskier endeavors of exporting their merchandise or engaging in the merchant trade.]

Secondly, every individual who employs his capital in the support of domestic industry, necessarily endeavors so to direct that industry, that its produce may be of the greatest possible value. * * *

The produce of industry is what it adds to the subject or materials upon which it is employed. In proportion as the value of this produce is great or small, so will likewise be the profits of the employer. But it is only for the sake of profit that any man employs a capital in the support of industry; * * * As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is, in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of it. * * *

To give the monopoly of the home market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. (Emphasis added.) [12]

[NOTE – Individuals acting in their own self-interest, Smith said, amounts to attempting to maximize their profit (value), which was to him the obvious point of “employing capital,” with a natural preference for supporting domestic rather than foreign industry. Thus, he concluded, giving a monopoly of the home market to the produce of domestic industry, because it improperly encourages potentially excess domestic investment and production in the preferred industries, “must, in almost all cases be either a useless or a hurtful regulation.”]

This is a precise, sophisticated argument. Recall that the book cover alleged Smith believed “competing claims of individual self-interest” will “resolve industrial problems” and achieve “maximum efficiency.” However, there is nothing in the actual text pertaining to his mention of “an invisible hand” that supports such a broad interpretation.

These are the supportable conclusions:

(1) The “invisible hand” is merely a metaphor for the profit motive, not, as the image implies, some force with mystical problem-solving powers. Smith did not suggest otherwise;

(2) Smith’s narrow use of the metaphor was limited to his discussion of the effects of restraint of international trade on domestic investment and production; 

(3) Even if Smith accurately identified the influences of trade on labor and capital in agrarian England in 1776, things have drastically changed since then: Today’s U.S. multinational corporations can profit from exporting both their capital and their jobs from the “home” society, so today there is no happy coincidence of their self-interest with domestic social benefits;

(4) Smith did not say or imply that pursuit of the profit motive would achieve “maximum efficiency,” and his discussion (e.g., “every individual … endeavors as much as he can”) shows skepticism in that regard. Market efficiency, a core presumption of Milton Friedman’s free market ideology, was never presumed by Adam Smith; and

(5) The enemy of optimal production by a society, Smith frequently asserted, is monopoly, which he consistently opposed in all contexts, not just this one. 

William D. Grampp of the University of Chicago underscored this straightforward reading of Smith’s meaning in his article “What Did Smith Mean by the Invisible Hand?” (2000):

The invisible hand is not a power that makes the good of one the good of all, and it is not any of a number of other things it is said to be. It is simply the inducement a merchant has to keep his capital at home, thereby increasing the domestic capital stock and enhancing military power, both of which are in the public interest and neither of which he intended. * * *

In my interpretation, the invisible hand is more interesting than it is important.  It is part of an argument for free trade. … [I]t has become a rhetorical device in the polemics over economic policy, … * * *

Does what he said matter? It should. If what he meant by the invisible hand is misunderstood, then what it is mistakenly said to mean may be misunderstood also.  [13]

The transformation of this obscure reference to an invisible hand into a symbol for laissez- faire economics may have begun shortly after Wealth of Nations was published. T. R. Malthus, apparently concerned that anti-government sentiments might be pushed too far, took issue with such an idea in the introduction to his Principles of Political Economy (1820), where he made the case for enlightened government:

It may perhaps be thought that, if the great principle so ably maintained by Adam Smith be true, namely, that the best way of advancing a people towards wealth and prosperity is not to interfere with them, the business of government, in matters relating to political economy, must be most simple and easy.

But it is to be recollected, in the first place, that there is a class of duties connected with these subjects, which, it is universally acknowledged, belongs to the Sovereign; … doubts may arise, and certainly in many instances have arisen, as to the subjects to be included in this classification. To what extent education and the support of the poor should be public concerns? What share the Government should take in the construction and maintenance of roads, canals, public docks? * * *

Secondly, every actual government has to administer a body of laws relating to agriculture, manufactures, and commerce, which was formed at a period comparatively unenlightened … To remain inactive in such a state of things, can only be justified by a conviction, founded on the best grounds, that in any specific change contemplated, taken in all its consequences, the balance of evil will preponderate; while to proceed straight forward in the rigid application of general principles … might plunge it into such complicated distress, as not only to excite the public indignation against the authors of such measures, but to bring permanent discredit upon the principles which had prompted them. [14]

These cautionary sentiments were hardly necessary, in light of a fuller reflection on Smith’s views. Smith and Malthus were in agreement on that point.

To fully understand how far the ideology of the invisible hand truly strays from Smith’s actual perspectives, we must examine his reference to an invisible hand in The Theory of Moral Sentiments (1790). Smith had no empathy with or sympathy for the wealthy classes. He made no effort to hide his distaste for the landlord class, and he abhorred greed. When he used the invisible hand metaphor in The Theory of Moral Sentiments, he was virtually gloating about the landlord’s inability to consume more food than his laborers:

It is to no purpose, that the proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his brethren, in imagination consumes himself the whole harvest that grows upon them. The homely and vulgar proverb, that the eye is larger than the belly, never was more fully verified than with regard to him. The capacity of his stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. The rest he is obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, among those who provide and keep in order all the different baubles and trinkets, which are employed in the economy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity and justice. * * * The rich . . . consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all of its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford the means to the multiplication of the species.  [15]

This long-winded rant should be more than enough to inform anyone of Adam Smith’s actual views. In his day, the wealthy classes employed thousands in the task of growing and harvesting crops, and were obliged to feed them. It was not with kindness that he observed their contribution to the survival of the species: He described the landlords’ self-interest as “vain and insatiable desires.” Circumstances are much different in today’s modern industrial societies and Smith, we can reasonably assume, would have been appalled by the handling of poverty in the United States today. He certainly would not have advocated leaving such matters to the “generosity” of the wealthy classes and their corporations, whom he said lacked “humanity and justice.”

Smith would have regarded as absurd the claim that corporations, acting in their own self-interest by suppressing wages to poverty levels, or by manipulating government budgets to obtain subsidies at the expense of food stamps or unemployment compensation, are somehow advancing the interests of society.

A Carnival of Ideology

The “invisible hand” is fundamentally a religious idea. It certainly is not an economic idea, although it has been repeatedly treated as one. Mark Thorton, of the Ludwig von Mises Institute, wrote in 2006 that:

A veritable cottage industry has sprung up in recent years to define the true meaning of Smith’s phrase and to capitalize on its widespread recognition and use. For example, Spenser Pack found that the invisible hand leads to increased destitution among the poor and slaves while benefiting the wealthy.  Syed Ahmad offers us four “invisible hands” and William Grampp reviews ten different possibilities.  We are told that the invisible hand derives from Smith’s theology, that it is an important secular device, and that it is an ironic, but useful joke.

Whatever its true meaning, the issue is important enough that the American Economic Review (AER), Journal of Economic Perspectives (JEP), and Journal of Political Economy (JPE) have all recently published articles on the meaning of the invisible hand. Add to that the numerous articles and book-length treatments of the subject—including an entire book of entries from the New Palgraves published under the title The Invisible Hand and you have not only a major debate, but a puzzle regarding the true importance of it all. (Citations omitted.) [16]

The “widespread effort to discover the ‘true’ meaning of the invisible hand,” he suggested, “appears to have muddied the conceptual waters almost beyond recognition.”  [17]       Three years later, however, Thorton opened an article appearing in an Austrian Journal with this:

The invisible hand remains an important foundation of economic analysis, continues to be a source of new analytical and explanatory devices, and is the conceptual basis of a whole class of scientific models throughout the sciences. [18]

He added, though, that “the phrase is an obvious reference to the supernatural powers of God” (p.2) and “the obvious problem here is that the concept remains at least partly mystical and normative and therefore unreliable in a scientific sense.” [19]

How such a scientifically unreliable idea can be “an important foundation for economic analysis,” or have any implications at all beyond its mystical meaning, simply escapes me. Consider the well-publicized response to Grampp’s article, published in Econ Journal Watch, by political philosopher Peter Minowitz. [20] In this article, Minowitz presented a series of disorganized, disconnected arguments, the truth of which he ultimately assumed on the basis of inference and innuendo. This is an excellent demonstration of the anecdotal, non-logical process through which mythology is created. [21]

Thorton, as well, simply assumed his own “trickle-down” conclusion, regardless of scientific analysis, or even of anything Smith wrote:

Cantillon’s model of the isolated estate … takes the reader from the very visible hand of the feudal economy to the invisible hand of the market economy. His model demonstrates that production is maximized and follows the dictates of consumer demand as a result of entrepreneurs following the dictates of the price system and profit and loss. It also demonstrates that while the distribution of wealth on the isolated estate may be completely skewed, i.e. one person owns everything in the world, the distribution of income and consumption will be reasonably equal and the standard of living will improve over time if the estate owner simply follows his self-interest. [22]

Beyond the cult of the invisible hand itself, this dangerous argument simply ignores the relationship between income and wealth. It also implies some sort of natural, automatic “trickle-down,” an idea that has elsewhere infiltrated the modern academic curriculum on the study of classical economics. [23] 

Thorton had, in fact, already assumed his result from the very beginning of his article, with a nifty bit of léger-de-main:

To be fair to Smith, many scholars . . .  have recognized that he invoked this terminology as a rhetorical device meant to convince readers of the merits of the market economy. Despite this understanding of Smith’s purpose, we still require a scientific understanding of the invisible hand. [24]

This clumsily sets up a false issue: Smith meant no such thing, of course, and no “scientific” understanding of “the invisible hand,” or for that matter any other metaphor or rhetorical device, is even logically possible.  Again, such a semantic approach to explaining Smith’s meaning is “required” only where the intent is to subvert the plain meaning of what he actually said.

The Broader Ideological Context

Any further review of the many interpretations of Smith’s use of the invisible hand metaphor would be superfluous. [25] There is, however, one more point that must not be overlooked: Even if Smith had shared Milton Friedman’s ideological faith in the efficiency of markets, or for that matter Richard Cantillon’s alleged faith in some sort of magical trickle-down redistribution, these faulty ideas would have been no more correct in Smith’s day than they are in recent times. We cannot, in the face of overwhelming evidence to the contrary, accept Friedman’s faith in perfect market efficiency, and the notion that capitalism promotes equality is demonstrably wrong.

What makes the invisible hand metaphor especially pernicious, of course, is the elephant in the room, its locus at ground zero in the class warfare between rich and poor.  For anyone interested in promoting the ideas that corporations are good and governments bad – always, and for everybody – no Madison Avenue advertising firm could have come up with a better slogan than “the invisible hand.” It is memorable, it evokes serenity and comfort, and it has appealing religious overtones. Best of all, it is associated with the “father of economics” himself, Adam Smith, a man who can be profusely adulated with little fear that very many people will actually read his books.

In a 2001 article in Journal of Economic Perspectives entitled “No History of Ideas, Please, We’re Economists,” Mark Blaug discussed the value to economists of reviewing the history of economic thought. Here, Blaug identified two important reasons for studying the history of economic ideas:

If we teach the ideas of the great economists of the past with due attention to their intellectual background, their philosophical preconceptions and the institutional context in which they wrote, we end up fulfilling the third of Schumpeter’s reasons for studying history of economic thought: “insights into the ways of the human mind.” But more pertinently, we end up with insights into the ways economics got to where it now is. [26]

The persistent reinvention of the views of early “classical” economists like Adam Smith, and the demonizing of other important economists like J.M. Keynes, Karl Marx, and Henry George, suggest that ideological forays into the history of political economy  like “The Cult of the Invisible Hand” may serve to teach us even more about the “philosophical preconceptions and the institutional contexts” of today’s economists than about the minds of those who got us here.  

JMH – 12/27/2013

_____

[1] John Maynard Keynes, The General Theory of Employment, Interest and Money, 1936, Ch. 24.

[2] Adam Smith, Wealth of Nations, 1776, Prometheus Books, Great Minds Series, Amherst, N.Y., 1991, pp. 448, 454. 

[3] Definition of “laissez faire,” The Free Dictionary by Farlex (here).

[4] The term “laissez-faire” is credited to François Quesnay, a physician and favorite at the court of Louis XV and an early contributor to economic theory. His “Tableau économique” (1758) provided the basis for the theories of the “Physiocrats,” a.k.a. “The Economists” or “the Agricultural School.” Physiocrats maintained that “the wealth of a community was increased not by money, but by an abundant produce from its own soil. Quesnay argued that the right of property included the right to dispose of it freely at home or abroad, unrestricted by the state. This doctrine was formulated in the familiar expression, ‘laissez faire, laissez passer.’” J. Laurence Laughlin, from the introduction to his abridged version of John Stuart Mill’s Principles of Political Economy, 1885 (1848), p. 16.    

[5] “Invisible hand,”Wikipedia (here) “Definition of ‘invisible Hand,’” Investopedia (here).

[6] A very similar statement is found at “Introductory Note, Bartleby.com (here), par. 3; Whether Adam Smith intended to convey, with the idea that “man’s self-interest” is “God’s providence,” a belief in a divine invisible planner, or whether his three references to “an” invisible hand were merely metaphorical, is a trivial question. Smith’s economic ideas were based on observation and reason, so speculation on what his views might have been on divine intervention is clearly beside the point. Further discussion of this trivial issue can be found at “God and the Economists,” by Jerry Bowyer, Forbes, August 17, 2011 (here); see also, “On the Metaphorical Origins of Adam Smith’s Idea of the Invisible Hand?,” Dr. Jan Garrett, rev. March 22, 2013 (here). (I have located only one Dr. Jan Garrett, an orthopedic surgeon from Tyler, Texas; if this is not the same individual, I must attribute the site to anonymous authorship, with apologies to the surgeon.)

[7] Wealth of Nations, supra, p. 126.

[8] Id. at 126, 145. Today, constraints on the size of the qualified workforce available for specific occupations are shared among employers (job requirements for educational and training experience), government (licensing requirements) and labor organizations (required union membership).

[9] Id. at 131, 138.

[10] Id. at 348-349.

[11] Id. at 349, 351.              

[12] Id. at 351-352.

[13] “What Did Smith Mean by the Invisible Hand?,” by William D. Grampp (here), Chicago Journals, Vol. 108, No. 3, June 2000 (here), Journal of Political Economy, 2000, vol. 108, no. 3, pp. 441-2.

[14] Thomas R. Malthus, Principles of Political Economy: Considered with a View to Their Practical Application, 1820 (here), pp. 14-15.

[15] Adam Smith, The Theory of Moral Sentiments, Sixth Edition, 1790, p. 165 (here).

[16] “The Mystery of Adam Smith’s Invisible Hand Resolved,” by Mark Thorton,  Ludwig von Mises Institute, May 15, 2006 (here), reprint (here), pp. 3-4.

[17] Id. at 1.

[18] “Cantillon and the Invisible Hand,” by Mark Thorton, Quarterly Journal of Austrian Economics, Summer 2009; Vol. 12, Issue 2, June 2009, p. 27, reprint  (here), p. 1.

[19] Id.at 3.

[20] “Adam Smith’s Invisible Hands,” by Peter Minowitz, Econ Journal Watch, December 2004, pp. 381-4 12 (here).

[21] For example, at p. 385 Minowitz argues that “a few pages earlier the chapter seems to anticipate the invisible hand with a paragraph that ignores the distinction between domestic and foreign investment;” but Smith’s argument was that self-interest favors domestic to foreign investment, so a discussion that fails to distinguish between the two is irrelevant, and inapplicable.

At p. 454, he argues: “In the paragraph that immediately follows the invisible hand, Smith provides another strongly worded claim that reinforces his commitment to economic liberty;” but the argument that Smith is expressing a general commitment to “economic liberty” in this chapter simply extrapolates from the argument Smith actually makes against a protectionist trade policy to a broader principle, assuming its own result.

And at p. 392, he maintains Smith argues “that mankind has consistently survived and progressed despite pronounced inequality”; the fact that individuals who did not perish from starvation and disease “survived” is obvious, but it glosses over Smith’s expectation of continuing survival at the bare subsistence level for the lower classes; the idea that mankind had “progressed” from that state of affairs by 1776 is Minowitz’s, not Smith’s.

[22] “Cantillon and the Invisible Hand,”supra, p. 4.

[23] In this on-line lecture on Smith’s Book I, Chapter 8, of Wealth of Nations, “Of the Wages of Labour,” (here); in the video (here) a major argument of the lecturer is that Smith believed the “increase in capital stock and wealth is what boosts wages of labor.” Smith did not say that, however, nor to my knowledge did any of the other classical economists. They believed that improved capital stock can increase labor’s productivity, making a higher return to labor possible, but they never contended that higher productivity would likely increase labor’s wages: On the contrary, instead of rising to reflect workers’ higher productivity, they expected wages to tend to sink to the subsistence level wage floor. Incidentally, this tendency is in evidence today in the rapid growth of income inequality since 1980.

[24] “Cantillon and the Invisible Hand,”supra, p. 3.

[25] See, e.g., Craig Smith, Adam Smith’s Political Philosophy: The invisible hand and spontaneous order, Rutledge, London and New York,  (here); “The Treatment of Smith’s Invisible Hand,” by Jonathan B. Wight, Virginia Tech (here).

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