Wednesday, July 31, 2013

Gavin Kennedy on Daniel Klein and Adam Smith

Kennedy picks up a comment of mine at Coordination Problem on the Invisible Hand and then goes on to talk about Daniel Klein's allegorical discussion of the idea. He finds Klein's argument "beyond comprehension". I have to confess I have a hard time with a lot of this work from Klein too. He's made the case that the Invisible Hand is pivotal because it's at the physical center of both Wealth of Nations and Moral Sentiments. He's also done a lot with musical metaphors. I guess the latter is interesting from a lit crit kind of perspective but I have a hard time understanding how this is really getting at Smith's economic thought.

My view of the Invisible Hand, which I expressed in the comment, is that Kennedy has really done a great service of bringing attention to the fact that the passage in the Wealth of Nations is really not what it's purported to be. It's an odd little passage about decisions by manufacturers to invest domestically out of risk aversion, which Smith considered to be a good result.

However, where I differ with Kennedy is on the practical consequences of this mix-up. No, the Invisible Hand is not used as people say it was used - however, pretty much every element that people mistakenly ascribe to the Invisible Hand is stated clearly and far more prominently in the first three chapters of the book! So I have a hard time worrying too much about the casual use of the phrase so long as people aren't mistakenly interpreting the passage itself. The metaphor has outgrown Smith himself, in other words. It's OK, for me, if we're using it as a metaphor as long as we're not making a specific history of thought claim about the home bias of manufacturers (and in almost all cases, people are not making that history of thought claim).

In the first three chapters we have arguments for why, given a reasonably extensive market, people with a propensity to truck, barter, and exchange will engage in the division of labor to produce a surplus to sell - not for the public good - but for their own interests. Nevertheless this whole process results in a public good even if that wasn't the intent of the trucking butchers, bartering brewers, and exchanging bakers.

That's all put quite eloquently in the beginning as the organizing idea of the whole book. And that's what people mean by the Invisible Hand. So I can't see the problem with suggesting that Smith had the perspective that is attributed to him today.


  1. When people think about "the invisible hand" they probably think of something like "under free trade people strive to serve their self-interest but end up also serving the common good"

    Seems like Smith's passage about "decisions by manufacturers to invest domestically out of risk aversion, which Smith considered to be a good result" is an example of this at work (at least in Smith's eyes.) It just isn't a very compelling example to modern readers.

    What is precisely that Kennedy objects to in seeing it this way ?

  2. I like to not that in that passage, Smith explicitly agrees with some goals of those who oppose laissez faire in international trade - to prohibit the free flow internationally of finance capital. He just doesn't think government regulations are necessary. The goal will be achieved "naturally".

    I think it is worth noting that those who wear Adam Smith ties generally reject his policy recommendations. (It is debatable whether Smith was advocating policy for capitalist or pre-capitalist countries. How fully did Smith perceive the capitalism that was emerging when he wrote?)

    Another example I like is Smith recommendation that interest rates be capped by law. He argues for this conclusion based on asymmetric information. Stiglitz explicitly cites this Smith in his AER article on receipt of his "Nobel" prize. And Stiglitz thinks his work overthrows propertarian advocacy fairly comprehensively.

  3. Speaking of Dr. Adam Smith and Gavin Kennedy...there is a recent working paper that I found on the SSRN that might be of interest to others.

  4. Do seemingly chaotic systems result in order? Yes. Do interventions in this system disrupt this mechanism of order? Yes.

    Simple. Stop nuking it.

  5. The Invisible Hand follows OMB guidelines and reports only domestic benefits!!


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