Home > Uncategorized > What would Smith say?

What would Smith say?

from Peter Radford

Sometimes I pity poor Adam Smith. I really do. He’s an accidental icon of all that’s wrong in economics. And let’s face it that’s a lot of wrong to be an icon of. How many times have we all been reminded that his metaphorical reference to an invisible hand performing some wild and strange magic is the root of most modern economics? And how often are we reminded that he used those words just once in a book of over eight hundred pages?

The invisible hand was just not that important to Smith. He didn’t mean to launch economics into a century or more of quixotic and ever more bizarre search for something that he meant as a passing reference to the superficial order he saw around him.

Smith spent no more time on the invisible hand metaphor than he did on other phrases that are much more concrete. How about this one:

Regulation is in support of the workman, it is always just and equitable.”

Where in the corpus of mainstream economics is this phrase worked up into a fully fledged and extended effort in the manner that the throwaway reference to the invisible hand is?

Well we don’t need to explain much further: economics was and is an extension of politics. It is politics waged by other means. It doesn’t exist as a coherent entity, it exists as variations to be deployed preferentially to support some other argument. And that other argument is usually political.

So early economists latched onto the magic of the invisible hand to explain why state interference was a ‘bad thing’. They worked away at establishing what looked like a scientific explanation of what they called the ‘market system’ or the ‘price mechanism’ and why those magical and, I must admit, mythical phenomena produce an ‘order’ that cannot be improved upon by government intervention. The conclusion of their epic trek into the intellectual desert was that any form of government intervention is perverse, no matter how well intentioned.

Take that you regulatory fools!

Except they could just as easily have started with that other quote I gave above. They could, had they been so disposed, have started with the magic of regulation and its unchallengeable efficacy in the ‘regulatory system’. At least I think so. The real economy is so darned complex and inscrutable that pretty much any grand theory can be created to explain it. There’s sufficient evidence to support all sorts of wild and contradictory ideas. That’s why the economy is so much fun to talk about. It’s an intellectual playground. The only way you can ever actually ‘prove’ a theory is to take a look at its plausibility and especially at the foundational assumptions upon which it stands.

Which brings me back to poor Adam Smith: the ultimate end point of that trek into the market magic desert and the quest for a ‘proof’ of the invisible hand’s status as the ultimate allocator-in-chief in an economy is the edifice known as General Equilibrium. The great crescendo of work that ended up with Arrow-Debreu is nothing short of stunning. It is architecture of the highest order. It is an analytical tour de force. And it proves beyond reasonable doubt that there is no such thing as general equilibrium. The restrictions economists have to place on the world in order to arrive at their hold grail totally destroy its relevance and utility. They have proved the trek was worthless.

Not that they stopped. Economists rarely do. They are too proud of their efforts. Even if those efforts were in vain.

So, having invested so much effort into such an elaborate fiction, and no doubt so embarrassed by its utter futility, they plod on as if nothing happened. They use general equilibrium as if it is indeed general and as if indeed there is such a thing as an equilibrium. Whilst the world around us suggests that neither is remotely a plausible explanation  an actual economy.

But never mind: it keeps economists employed. And it provides useful input for another of my pet peeves about mainstream economics. Which is that marginal productivity theory must be bogus. The employment and remuneration of economists is disproof of it.

Anyway I am plunged into this dishumor by the spectacle of economists ranging far and wide over the current presidential election and, in particular, pronouncing that the reform of the rotten American health care system and its replacement with some form of a single payer system is ‘impractical’.

The evidence from around the world suggest this is not true. Indeed, on the contrary, the evidence suggest it is overwhelming probable.

So why are so many of our leading economists lamenting want they call the ‘misleading’ and ‘impractical’ quest for a single payer system here? What would Smith say?

That they are referring to the political practicality. They are referring to various cultural and institutional rigidities that apparently channel our economy down a path that other economies do not follow. They are, in short, announcing that they believe the economy is deeply and profoundly influenced by its historical and institutional setting.

Which, seems to me, to be a considerable blow to their mainstream thought that economics is somehow independent of such trivia. In fact, were I so bold, I would argue that their own argument against the impracticality of single payer is an admission that their entire mainstream enterprise of so-called ‘positive’ economics unconstrained by mere politics, history, and so on is a farcical and dangerous illusion. It is so dangerous to the commonwealth – now there’s a thought – that it ought to be heavily regulated.

Regulation! What was Smith saying about that? …

  1. Tom Welsh
    February 25, 2016 at 1:48 pm

    Well said! It’s all true. Here is another set of utterly destructive criticisms of “classical” economics:

    ‘Benthamite economics, as developed in the 19th century, assumes that people are “individuals” in the literal sense of social atoms which interact somewhat like Newtonian molecules – in other words, in a highly abstract, simplified manner. According to John Stuart Mill, economics ‘does not treat of the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging of the comparative efficacy of means for obtaining that end. It predicts only such of the phenomena of the social state as take place in consequence of the pursuit of wealth. It makes entire abstraction of every other human passion or motive’.

    ‘The last sentence is of the greatest importance. As Norman adds, “… much of modern economics still arises from three basic simplifying assumptions about human nature: that individuals are perfectly rational; that they maximize their utility, benefit or profits; and that they act independently of each other, on the basis of perfect information”. Granted those assumptions, a massive apparatus of exact mathematical formulae has been erected. Unfortunately (to my mind) none of the three – actually, four – assumptions can safely be made without departing from the real world. Indeed, I would say that all of them are false in general. We don’t even know what rationality is, still less perfect rationality. We don’t really understand to what extent people’s decisions are rational. They certainly don’t always maximize their utility, benefit or profits (which, by the way?) And they most definitely do not act independently – all successful businessmen work closely together. As for perfect information – the very notion is ridiculous. Hence the abstractions of economics are clean, elegant, and exact; but we have no way of knowing if they are true! Not terribly useful, then’.

    – Jesse Norman, “Edmund Burke” (p 244)

    • Larry Motuz
      February 26, 2016 at 7:57 pm

      Well, they are clean, elegant, exact — and untrue if we are not all sociopaths..

  2. February 25, 2016 at 2:24 pm

    Wow! I felt a little squeamish stating my reasons for concluding there is no such thing as equilibrium in this forum of keen intellects.

    There is no way I could have researched into all the writings shared here. I am too small and mortal to read even a small sample of the greatness of humanity. So I still plod along alone as usual and am delighted over the past few years to read your impressions.

    Thank you all for being so kind and willing to share!


    Note: My impression is Adam Smith’s invisible hand referred back to his first book,
    The Theory of Moral Sentiments. Which means, the one little note about an invisible moral observer with a hand is extracted from two major works.

  3. Sig Laser - Canada
    February 25, 2016 at 3:37 pm

    Just asking, is this an unintended double negative that reverses the meaning (“their own argument against the impracticality of single payer…”) ??

  4. February 25, 2016 at 4:14 pm

    I will just say: «Thank you Peter Radford for this article» …

  5. David Chester
    February 25, 2016 at 4:23 pm

    There is so much in this article about which I disagree, that I scarcely know where to start! Adam Smith, for all his faults was the first serious writer to set the subject on right road to being scientific, rather than adopting the current political/emotional style–that is, where almost anything goes. Certain of Smith’s ideas are still very much in used today although many “modern” writers are deliberately trying to continue the absurd business of sowing confusion and foolishly claiming that Smith is wrong.

    His claim about the production process, you know the one about the combined effects of access to land, the employment of labor and the use of durable capital being the only possible factors needed in making goods and supplying services, has not been bettered. And the 3 corresponding returns of ground-rent, wages and interest (or dividends) say it all, in spite of the ubiquitous profit motive being translated into a share of the values contained in the output. To whom does the profit go?–surely it should be properly included in all of these returns too, since everyone who is involved in the process is trying to get out of it more than he or she puts in.

    And that invisible hand (which is doing the grouping subsequently according to Leon Walras!) is the reason why the butcher the baker and the candle-stick maker can manage their affairs in an affable way, with the associated costs and resulting competitive prices then ceasing to create any monopoly. (We have later developments to blame for that, which are not a part of this comment.) This results in a roughly stable situation, which never is perfectly in equilibrium but also which mostly tends toward this happy ideal condition, and about which we should not forget.

    Without this concept of equilibrium and the nature of economic stability, or the tendency toward it, we could never manage to justify our present state of overall general steady progress, even though it can be slow, and which (due to the adverse forces I have said I will not mention) sometimes causes a temporary disruption in this progress. So I believe that Adam has done us proud and in fact I find (with the results of my research and the model of our social system to which I sometimes refer), it is the logic and science to which Adam first introduced us, that holds together our understanding of economics and which is now made clear.

  6. Alan
    February 26, 2016 at 1:54 am

    Good question.

    Elsewhere in the social sciences and humanities there are people who are not enamored by neoclassical economics and read Smith’s work very differently to the way he is ‘read’ by mainstream economists e.g. Kennedy, Rothschild, Evensky, Fleischacker, Gregory. Kennedy runs a blog debunking the never-ending abuse of the invisible hand metaphor. He dates its widespread reference to the appearance of Samuelson’s textbook in the late 1940s and notes there is very little empirical evidence of people paying much attention to Smith’s metaphor until at least 100 years after the publication of Wealth.


    …early economists latched onto the magic of the invisible hand to explain why state interference was a ‘bad thing’….

    On this matter Rothschild makes an important point (also covered in Fleischacker) that their focus on the state is selective:

    The objects of Smith’s obloquy are not only the institutions of national government; they are also, and even especially, the oppressive government of parishes, guilds and corporations, religious institutions, incorporated towns, privileged companies. One of the most insidious roles of national government is indeed to enact, or confirm, the oppressive powers of these intermediate institutions. The criticism of local institutions with their hidden, not quite public, not quite private powers, is at the heart of Smith’s politics. (p.108)

    The issue isn’t state interference, rather it is powerful institutions (the church, large companies, guilds, etc.) collaborating with or acting with the approval of the state against the public to create a system that favors their factional interests. The issue isn’t regulation or no regulation; it’s regulation of what, to what end, and for whom? Markets operate within an institutional and legal framework. Sometimes that framework works to promote the interests of the few and sometimes the interests of the many. Book IV of Wealth, in which the invisible hand reference appears, is a frontal attack on a institutional framework, mercantilism, geared to the benefit of the few, a system epitomized by the East India Company.

    IV.2.43 To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it. Were the officers of the army to oppose with the same zeal and unanimity any reduction in the numbers of forces with which master manufacturers set themselves against every law that is likely to increase the number of their rivals in the home-market; were the former to animate their soldiers in the same manner as the latter enflame their workmen to attack with violence and outrage the proposers of any such regulation, to attempt to reduce the army would be as dangerous as it has now become to attempt to diminish in any respect the monopoly which our manufacturers have obtained against us. This monopoly has so much increased the number of some particular tribes of them that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature. The Member of Parliament who supports every proposal for strengthening this monopoly is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists.

    The economic system is very different now but not much changes when it comes to money, power and influence (thinking of you, Hillary). A few years back some academic had an article in the New Yorker claiming that the banking crisis invalidated Smith’s ‘theory of the invisible hand’. Apparently, he’d hadn’t gotten beyond Greenspan and company’s wild imaginings about the wonders of banking deregulation and bothered to read Smith:

    II.2.94 To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.

    So much for the invisible hand of the market.

    • Larry Motuz
      February 26, 2016 at 8:04 pm

      Wonderful comment, Alan. Thank you.

      All too many forget that it was the evils of mercantilism and factionalism that Adam Smith was decrying … most of which were largely supported or licensed as monopolies by the government of his day.

      • Alan
        February 26, 2016 at 11:24 pm

        Yes, the institutional framework and the extent to which it limits or neutralize factionalism is important. No surprise that Smith influenced Madison’s deliberations on the matter (for some discussion see this paper by Fleischacker). I suspect, if we were to resurrect Madison so that he might judge our present state of affairs, he might think he had not been entirely successful.

      • February 27, 2016 at 4:57 pm

        Thank you for this reference which I’d never heard of.

        Given the current situation in the U.S., Madison might very well have a sense of déjà vu … and some shock at ‘originalist’ interpretations of the U.S. Constitution.

  7. February 26, 2016 at 2:32 am

    Quote, “His claim about the production process, you know the one about the combined effects of access to land, the employment of labor and the use of durable capital being the only possible factors needed in making goods and supplying services, has not been bettered.”

    Perhaps you have not read Nicholas Georgescu-Roegen’s book, The Entropy Law and the Economic Process? I think it is perhaps the best example of a major improvement in our understanding of the economic process since Smith’s impressive beginning.

    In professor Georgescu-Rogen’s own words, in a section of the book detailing the importance of a correct understanding and usage of stocks and flows in trying to explain the economic process, we read, “No alert economist would nowadays make the same kind of statement as that by which Adam Smith opened his magnum opus: ‘The annual labor of every nation is the fund which originally supplies it with all the necessaries and conveniences of life.’ (p.220) This, of course, is merely a trivial and homey example found in his great seminal book that develops the heretofore missing entropic nature of the economic process.

    I don’t think it is necessary to omit the advances made by Georgescu-Roegen in order to honor the brilliant professor Smith.

  8. February 26, 2016 at 5:14 am

    Economics is indeed political. Its survival is based on its political deal making. But the things that make up economics — axioms, equilibrium, quantification, complex explanations of relatively simple events while missing entirely the really important events — all arise from a misreading (some say total fabrication) of 19th century physics. Simple assumptions meant to ease observation such as there’s no thing as a frictionless plane or a perfect vacuum, are used by economists to justify inventing assumptions that have no counterpart in the activities observed. For example, “utility” invented solely so mathematics can be used; or assuming that decision makers obey axioms which have been shown to have to reference in the actions of economic actors; or basing everything on the impossible fantasy of perfect competition. This creates a story full of half-truths and outright lies, which can’t be checked against observations, since the story would fail. And that’s not the worst of it. If economists stuck with the mis-copying of physics you would think they would at least use the most current version of physics. Instead they are mired in a bizarro version of 19th century physics. Is it possible to be any more screwed up than this?

    • Larry Motuz
      February 26, 2016 at 8:07 pm

      Good rhetorical question … one which I suspect only theologists lined up end to end might answer: each differently of course.

      • blocke
        February 27, 2016 at 6:54 pm

        I think Ken might mean don’t ask theologians, ask historians because they are better at exposing the misapplications involved when mapping systemic thinking based on so-called scientific modeling and the like to the human condition. “Those who cannot remember the past are condemned to repeat it.” (George Santayana)

      • February 28, 2016 at 12:08 am

        Honestly, Blocke, I think he meant that it’s impossible to be more screwed up than this. I delegated the question to theologians because they have even more ‘hands’ than the many-handed economist, and even more ‘answers’.

        Otherwise, I agree with you.

  9. Larry Motuz
    February 26, 2016 at 7:52 pm

    Thank you, Peter Radford.

    What is clear to those who have actually read Adam Smith is the reality that he believed that their was a good-for-us that set the framework for what was permissible in terms of good-for-me ‘exchanges’, and that this good-for-us was bound in our laws, traditions, and culture. This view does not accept the methodological individualism currently at the heart of all mainstream economic theory, micro or macro.

    The onus cannot be what the methodological individualism that the neoclassisists or the Austrians essentialy demand: that individuals qua individuals must always fend for themselves.

    We can and should recognize that the onus cannot not mainly be on individuals’ abilities to ensure that they have decent wages, working conditions, and other benefits, any more than it should be predominantly the job of individuals to ensure that their drinking water, car, or a newly built building is safe.

    Far too many ‘social goods’ are well beyond the resources and financial abilities of individuals to bargain for or attain on their own. Individuals as such can be held responsible for not providing such ‘social goods’.

    When we are told to ‘fend for ourselves’, we should not have to do so with our political arms tied behind our backs. Such ‘individualism’ shackles us from working together in our interests.

    Economics is the study of how we provide for ourselves … and that as a subject cannot be removed from our politics.

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