The Invisible Hand (upated)

The latest issue of Econ Journal Watch, Volume 6, Issue 2, May 2009, is available. It contains an interesting discussion about Adam Smith's "invisible hand". Gavin Kennedy argues that it was just a casual metaphor; Dan Klein dissents.

Kennedy writes,

References to an ‘invisible hand’ that link it to Adam Smith are ubiquitous in books and articles from scholarly and media sources. This is strange because Adam Smith did not credit the invisible hand metaphor with the importance that authors, from the mid-20th century onwards, give to it. In this paper I discuss what Adam Smith most probably meant by his use of the ‘invisible hand’ metaphor, which is quite different from what has become its modern meaning.

[...]

I shall argue that Smith had no ‘theory’ of invisible hands and that he showed no inclination to treat it as anything more than an isolated, though well-known, 8th century literary metaphor. Significantly, and contrary to the assertions of the modern consensus, he gave the invisible hand no role in his theory of competitive markets in Books I and II of Wealth of Nations. Such roles given to it since the 1950s rely solely on assertions and interpolations by modern economists, which are not supported by Smith’s texts.

Klein replies,

Peter Minowitz (2004, 411) concludes his essay, “Adam Smith’s Invisible Hands” with the following words: “Centuries after Smith’s death, we are still struggling to fathom a two-word phrase that stands out in a thousand-page book.”

Such struggling has been misplaced, according to Professor Gavin Kennedy. Abstain from the struggling, for the two-word phrase is an incidental metaphor in Smith’s writings; it deserves no currency as tag for the prosaic workings of markets, even less for rarified workings untrue to Smith. In his erudite, plain-spoken, challenging essay, Gavin suggests that the metaphor had no very special significance; that its occurrence in the Astronomy differs irreconcilably from that in The Theory of Moral Sentiments and Wealth of Nations.

Like Peter Minowitz, A.L. Macfie, and legion others, I find great mystery in Smith. Call us romantics. My main message here is simply this: Don’t lay down the struggle! Discover whether the two-word phrase has special significance in Smith, whether the three occurrences can be reconciled, whether the phrase may properly serve as tag for an important idea in natural jurisprudence. Dwell in Adam Smith’s invisible hands.

For me, I think Eamonn Butler summed up what the invisible hand means in the following passage from his book, Adam Smith - A Primer, London: Institute of Economic Affairs, 2007

Smith “. . . realised that social harmony would emerge naturally as human beings struggled to find ways to live and work with each other. Freedom and self-interest need not lead to chaos, but − as if guided by an ‘invisible hand’ − would produce order and concord. They would also bring about the most efficient possible use of resources. As free people struck bargains with others − solely in order to better their own condition − the nation’s land, capital, skills, knowledge, time, enterprise and inventiveness would be drawn automatically and inevitably to the ends and purposes that people valued most highly. Thus the maintenance of a prospering social order did not require the continued supervision of kings and ministers. It would grow organically as a product of human nature.” (Butler 2007: 27-8).

In a paper forthcoming in the Scottish Journal of Political Economy I give the quote above and then write

For economists, the 200 years following Smith involved a search for conditions under which the price system would not descend into chaos.

The formal model that arose from this search is one which abstracts from any form of centralised control in the economy.6 It is a model delineated by “perfect decentralisation”. Authority, be it in the form of a government or a firm or a household, plays no role in coordinating resources. The only parameters guiding decision making are those given within the model − tastes and technologies − and those determined impersonally on markets − prices. All parameters are outside the control of any of the economic agents and this effectively deprives all forms of authority a role in resource allocation.

The 6 in the paragraph above denotes a footnote which reads,

For Smith, this would be an abstraction too far. Smith knew of the importance of institutions to the proper functioning of the market economy. For a discussion of Smith’s thought see Kennedy (2005, 2008).

Of course, whether this is what Adam Smith meant is another matter ..... So read Kennedy and Klein.

Update: James Otteson, author of Adam Smith's Marketplace of Life-a book worth reading-has a brief comment on the debate here. He writes

I am of the school that believes that the concept of the invisible hand, if not the phrase itself, is of central importance to understanding Smith's enduring contribution to social science.