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the invisible hand: a caricature of a myth

It’s difficult to pin the myth of the invisible hand on the left or right, both sides have perpetuated the false idea that Adam Smith believed that an invisible hand guided each person’s self-interest to the betterment of society as a whole everywhere and always. This brutal caricature of Smith’s work reveals itself often in cutesy commentary by economists/pundits on the left who point out that Adam Smith and his mysterious hand theory was obviously wrong given some recent occurrence, or dolt pundits on the right supporting their opposition of all regulation. ever. for anything. ever. The invisible hand myth is not only unbelievably vexing to anyone who is familiar with Smith’s work and tremendous legacy, but also retards any meaningful dialogue on difficult economic policy/regulation issues.

To be sure, Smith recognized that in particular market economies of his time, self-interest aligned with society’s interests. It is an insult to his legacy to suggest that Smith believed free markets roamed free on the African savanna, however, or that the invisible hand guided the enslavement of peoples, the pillaging of neighbors, or any other ridiculous scenario implied by a invisible hand constantly guiding all mankind to do what was best for humanity simply by following their own self-interest.

Adam Smith was not a fool. The invisible hand reference appears once — yes, once — in “An Inquiry into the Nature and Causes of the Wealth of Nations” (three times in Smith’s writing, total):

…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 the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he intends to promote it.

What precisely, has disproven this fairly innocuous statement? It would appear to me that the past 200-odd years would prove the statement true: there indeed have been massive positive externalities enjoyed thanks to the pursuit of self-interest.  Nowhere here does Smith say that pursuit of self-interest will always promote society’s interests. This would be insane. And no, not because of Goldman Sachs or Gary, Indiana, but rather the thousands of years of meager human existence before the market economy Smith documents even arrived?

(Above, for example, is a wonderful cartoon woefully off-the-mark in its satire. When you read just about any mention of the ‘invisible hand’ in cartoon-form or print, and then what Smith actually wrote, the ‘huh?’ effect is fairly constant.)

But perhaps sticking to what Smith actually said vis-a-vis the ‘invisible hand’ is in someway betraying the greater point about classical liberalism.  Let’s look to F.A. Hayek – surely, he will supply the juicy laissez-faire evangelism necessary to serve as a conservative talking point and liberal tackling dummy:

There is nothing in the basic principles of [classical] liberalism to make it a stationary creed, there are no hard-and-fast rules fixed once and for all. The fundamental principle that in the ordering of our affairs we should make as much use as possible of the spontaneous forces of society, and resort as little as possible to coercion, is capable of an infinite variety of applications. There is, in particular, all the difference between deliberately creating a system within which competition will work as beneficially as possible, and passively accepting institutions as they are. Probably nothing has done so much harm to the liberal cause the wooden insistence of some liberals on certain rules of thumb, above all the principle of laissez-faire. Yet in a sense this was necessary and unavoidable. Against the innumberable interests who could show that particular measures would confer immediate and obvious benefits on some, while the harm they caused was much more indirect and difficult to see, nothing short of some hard-and-fast rule would have been effective. And since a strong presumption in favour of industrial liberty had undoubtedly been established, the temptation to present it as a rule which knew no exceptions was too strong always to be resisted.

But with this attitude taken by many popularisers of the liberal doctrine, it was almost inevitable that, once their position was penetrated at some points, it should collapse as a whole.

No sensible person should have doubted that the crude rules in which the principles of economic policy of the nineteenth century were expressed were only a beginning, that we had yet much to learn, and that there were still immense possibilities of advancement on the lines on which we had moved. But this advance could only come as we gained increasing intellectual mastery of the forces which we had to make use. There were many obvious tasks, such as our handling of the monetary system and the  prevention or control of monopoly, and an even greater number of less obvious but hardly less important tasks to be undertaken in other fields, where there could be no doubt that the governments possessed enormous powers for good and evil; and there was every reason to expect that with a better understanding of the problems we should some day be able to use these powers successfully.

It is important not to confuse opposition against this kind of planning with a dogmatic laissez-faire attitude. The liberal argument is in favour of making the best possible use of the forces of competition as a means of coordinating human efforts, not an argument for leaving things just as they are. It is based on the conviction that where effective competition can be created, it is a better way of guiding individual efforts than any other. It does not deny, but even emphasizes, that, in order that competition should work beneficially, a carefully thought-out legal framework is required, and that neither the existing nor the past legal rules are free from grave defects. Nor does it deny that where it is possible to create the conditions necessary to make competition effective, we should resort to other methods of guiding economic activity. Economic liberalism is opposed, however, to competition being supplanted by inferior methods of coordinating individual efforts.

Remember that Hayek wrote those words in 1944 (“The Road to Serfdom”) the next time someone on the left/right dusts off the old classical liberal scarecrow.

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Filed under: Economic Policy

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