Sunday, 17 April 2016

Gavin Kennedy on Adam Smith

Gavin Kennedy is Emeritus Professor at Edinburgh Business School, Herio-Watt University and author of" Adam Smith’s Lost Legacy" (Palgrave) 2005; "Adam Smith: a Moral Philosopher and a Political Economist". (Palgrave) 2008, 2nd ed. 2010. He is interviewed on Smith's life and work at Simply Charly.

At the beginning of the interview Kennedy is asked "What would economic theory and practice be like if Smith had not written The Wealth of Nations?". In part Kennedy responds,
If we supposed instead that Smith had not completed WN in 1776, would it have affected the progress of economic theory, given the course of other people's’ published economic ideas in Europe? Clearly, the details of the history of economics would have been different, but by how much we don’t know. I do not think it would have mattered that much because by Smith’s time, and for many decades after him, there was a wide, even occasionally deep, knowledge of political economy in print in northern Europe.
I would argue that one important point about Smith is that he had a following, Before Smith many people wrote about economic issues but no one seemed to have given rise to an ongoing school of thought. They wrote and were largely forgotten but Smith was not. It is the creation of this ongoing discussion of economic ideas and policy that would be missing if Smith hadn't written. What would have replaced Smith we don't know but I would guess it would have resulted in a very different form of economics today.

At one point Kennedy states,
But markets are driven by visible prices and cannot work without them. There is nothing invisible about markets. Adding to markets an “invisible hand” adds nothing to our understanding of how markets work. It confuses rather than adds to knowledge.
And it is true that we see prices and how they change and charge our behaviour in response to them. But what is invisible to us is the "why" of the price changes. We don't know why prices have changed and what's more we don't need to know. The reason can remain "invisible" to us. Just reacting to the price change we see is enough to allocate resources efficiently. Just imagine what would happen if we didn't use prices. A government official sees that there has been a bad harvest of apples and so the supply of apples is reduced. Without prices he would then have to set about allocating what apples we have to those who want apples. How this could be done is far from clear but without prices some, very inefficient method no doubt, would have to be found. With prices, no problems. The reduction in supply causes prices to rise and consumers of apples make their own decision on what to do. Many will cut back on their consumption of apples and hereby move supply and demand towards equilibrium. Note that with prices the "why" of the price increase, the bad harvest, is not known about by consumers and does not need to be known about for them to adjust their behaviour.

On the importance of the idea of the "invisible hand" Craig Smith has pointed out,
It is the idea of the invisible hand, or more generally the idea of social evolution through unintended consequences, which represents Smith’s chief legacy to the modern world. The recognition that many of the most important human achievements are, as Smith’s friend Adam Ferguson observed, the results of human action, not the product of human design, is a profound lesson to us all. It is this observation which leads Smith to his deep scepticism towards ‘men of system’ who would organise humanity to achieve noble ends.
Eamonn Butler summaries things as
The invisible hand idea, as commonly understood, pervades Smith’s work, and would do so even if these two specific references had never existed. For the phrase is a very convenient shorthand for Smith’s idea that human actions have unintended consequences; and that provided a few fundamental rules such as the principles of justice are followed, the self-serving actions of individuals can unintentionally produce a well-functioning and beneficial overall social order.

1 comment:

Gavin Kennedy said...

I do not see exactly what you object to in my statement that markets work through visible prices. You seem to agree and then bring in Adam Smith’s metaphor of “an invisible hand” participating in the visible prices of the market as if it is a noun.
That it was a metaphor should not be forgotten. But for what was it a metaphor? Certainly not for an unstated force at work - that is to give it a role, commonly used in the 17th-18th centuries, though not exclusively, of theologically divine intervention in human affairs.
Smith of course did not ’coin’ the use of the IH metaphor as claimed by modern economists, following Paul Samuelson in 1948.
The words he used metaphorically were “led by an invisible hand”. What did that mean? It referred to the consequences of the merchant’s actions.
Merchants acted from his/her motives which in this case were/are not visible to others. They exist in the private minds of the merchants and obviously can var across individuals. But by acting, the merchants’ motives have intended consequences, that is why the merchant acts. In WN the intentional motivational concern of the merchant is for the security of his capital, nothing else. But all actions have unintentional consequences. It is the motivated action that leads to unintentional consequences.
The IH metaphor does not describe the unintentional consequence - that would imply that the metaphor describes what it leads to, creating a muddle of intentionally leading to unintentional consequences! The motivated merchant acts and it is his actions that have unintentional consequences, as described by the IH metaphor. There is no IH separate from the mataphoric desciption of the motivated actions of people in markets. The IH is not akin to the ‘hand of God’ (Smith after 1744 was not a believer in revealed religion; see my papers in JHET 2011 on Smith’s lack of religious beliefs and in Berry, Paganelli and Craig Smith, 2013, Oxford Handbook of Adam Smith).
So it comes down to what exactly do modern assertions about Smith’s use of the IH metaphor really add to Smith’s modest use of it (largely almost totally ignored until 1875 and post-1948) add to our understanding of his meaning when he used it? I suggest absolutely nothing.
Gavin Kennedy