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.