Adam Smith Means to Say


It is embarrassing that our culture still wants to believe that Adam Smith’s message was that markets always produce good outcomes for society when we act in accordance with our self-interest.  Because he never said it and in fact argued against it.  It has become our folklore to our own demise, and our ignorance has been exploited by policymakers ever since its invention (i).

The historian Warren J Samuels helps here by giving us an appreciation for the sophistication of Adam Smith.  I underscore sophistication because either a selective reading of primary sources or a biased selection of secondary sources will result in a lopsided and shallow understanding of the very nuanced, and at times contradictory, arguments that Adam Smith presents (ii).

However much ideological filtration may have distorted and emasculated Smith’s analysis, his was a first-rate intelligence and his was a brilliant accomplishment – one that has been infrequently attempted and even more rarely achieved. [14]


What Economists Mean to Say

There are some distinctive qualities about Smith’s writings to admit to regardless of our political leanings.  Smith most certainly stood for self-interest, but not selfishness (iv), and free enterprise, as noted below, but that doesn’t mean his ideas didn’t come with caveats.
Let there be no mistake about acknowledging the obvious: Adam Smith most distinctively stood for private enterprise, private property, self-interest, voluntary exchange, the limited state, and the market. [14]

But economists generalized the original meaning based on their fancy for the concept of self-interest.  Gavin Kennedy, a historian of economics, explains how this generalized idea is not in line with what Adam Smith said.

It was a post-war invention that Smith’s “self-interested behavior by individuals leads them to the social good, almost as if orchestrated by an invisible hand”, especially that it is formulated by Kaushik Basu (and Samuelson, et al) as “selfish” behaviour , which is an idea antipathetic to Smith’s moral sentiments. [7]

Jonathan Schlefer, a political scientist, explains how the content of Adam Smith’s idea was redacted.  This was then presented in the text “Economics” by Paul Samuelson in 1950 and is known to be what made neoclassical economics a science.

Paul A. Samuelson and William D. Nordhaus concocted a typical variant of Smith’s actual remarks. They pulled them from the midst of a paragraph hundreds of pages into The Wealth of Nations, presumed to streamline the prose by chopping and splicing without using ellipses, and elevated the result into the theme of Smith’s entire thousand-page book. [16]


What Adam Smith Means to Say

If we don’t understand what Smith means to say, instead of what we mean to him to have said, then we repeat the narrow interpretation of neoclassical economics. The most common way we mean him to have said is that ” markets always harness individual self-interest to produce the greatest good for society as a whole.” [3]

He was far too savvy to make an absurd generalization like that. Whether any individual’s actions when “pursuing their own interests” would have beneficial outcomes for “society at large” would entirely depend on the consequences of their actions. [7]

When we look at what Adam Smith says in both “Wealth of Nations” and “Theory of Moral Sentiments” – where “invisible hand” is mentioned only once in each book – we see how he argued against self-interest for certain cases.

Whether actions motivated by greed (Mandeville, Ayn Rand, and others), were “beneficial” depends on circumstances. Indeed, Smith gives over 70 examples of non-beneficial outcomes for society from the actions of self-interested individuals in Books I, II, and III, of Wealth Of Nations and book IV is a detailed (and “violent”) polemic against the self-interest actions of “merchants and manufacturers’ that were decidedly non-beneficial for society at large. [7]

The metaphor specifically addresses the tension of his day felt amongst merchants when sending domestic capital abroad (iii).  But Adam Smith’s claim is nothing more than a statement about GNP, and it is neither synergistic nor magical.

Smith’s example of the “invisible hand” (in his case, the “insecurity” felt by traders for foreign trade) adds to what we call GNP – the whole is the sum of its parts, that’s all. [7]


Notes:

i) This was not a conspiracy on the part of neoclassical economics.  Economists redacted and simplified Smith’s arguments in a way that favored the role of self-interest, intentionally or unintentionally, is anyone’s guess.

A discipline was then built based on the axiomatic idea that man maximizes his utility (self-interest) – a half-truth theory on human behavior.  So self-interest gets centerstage and caveats are suppressed.

This is a problem because our culture understands the “invisible hand” in an all-encompassing way – as a law of nature and of markets – and policymakers take advantage of this.

ii) I did not “wrestle” with the primary sources because I have chosen an even distribution of both “left” and “right” leaning economists, historians, and political philosophers who have devoted their lives to this very topic.

iii) Most specifically, the benefits that Smith claims when he says “led by an invisible hand to promote an end which was no part of his intention” is the merchants’ unintentional “adding to domestic capital and employment”. [7]

These were the public benefits mentioned by Adam Smith as an unstated consequence of the simple quantitative rule that the “whole is the sum of its parts”. [7]

iv) “Smith never proclaimed in favor of ‘selfishness’, nor did he describe the actions of merchants as ‘selfish’; he always recognized ‘self-interest’, which he never confused with ‘selfishness’, an attribute of Bernard Mandeville’s philosophy (Mandeville 1988), which smith regarded as ‘licentious’ (TMS, 306-14).” [7]


References:

[1] Foster, Peter.  Biting the Invisible Hand: An Interview with Peter Foster.  FEE.org.

[2] Foster, Peter. Why We Bite the Invisible Hand: The Psychology of Anti-Capitalism . Pleasaunce Press.

[3] Frank, Robert H.. The Darwin Economy. Princeton University Press.

[4] Friedman, Milton. Capitalism and Freedom . University of Chicago Press.

[5] Friedman, Milton. Free to Choose: A Personal Statement. HMH Books.

[6] Goodwin. Harris. Nelson.  Microeconomics in Context.  Fourth Edition.

[7] Kennedy, Gavin. Adam Smith and the Invisible Hand: From Metaphor to Myth. Econ Journal Watch 6(2): 239–263.

[8] Kennedy, Gavin. “A Reply to Daniel Klein on Adam Smith and the Invisible Hand”. Econ Journal Watch 6(3): 374–388.

[9] Klein, Daniel B. In “Adam Smith’s Invisible Hands: Comment on Gavin Kennedy”. Econ Journal Watch 6(2): 264–279.

[10] Klein, Daniel B. Economists Misplaced Faith in the Invisible Hand.  FEE.org.

[11] Lucas, Brandon, Klein, Daniel B. In a Word or Two, Placed in the Middle: the Invisible Hand in Smith’s Tomes. George Mason University Department of Economics Research Paper No. 09-02

[12] Meeropol, Micheal. Another Distortion of Adam Smith: The Case of the “Invisible Hand”.  Research Gate.

[13] Optiz, Edman. Adam Smith and the Invisible Hand.  FEE.org.

[14] Samuels, Warren J. Erasing the Invisible Hand . Cambridge University Press.

[15] Schlefer, Jonathan.  There Is No Invisible Hand.  Harvard Business Review.

[16] Schlefer, Jonathan.  Today’s Most Mischievous Misquotation.  Adam Smith did not mean what he is often made to say.  The Atlantic.

[17] Skousen, Mark. Adam Smith Reveals His (Invisible) Hand.  Foundation for Economic Education.

[18] Ullmann-Margalit, Edna.  The Invisible Hand and the Cunning of Reason.  The Johns Hopkins University Press.

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