Adam Smith’s Famous Metaphor

31 March 2009 at 11:41 am 4 comments

| Peter Klein |

The indefatigable Gavin Kennedy explains, for the umpteenth time, that Adam Smith was ambivalent about market capitalism and that the famous metaphor of the “invisible hand” was not meant as a generalized defense of the market. As Gavin points out, Smith’s detailed analysis of the market economy appears in Books I and II of the Wealth of Nations, while the invisible hand metaphor appears only once, in Book IV, where Smith defends British merchants who, despite mercantilist export subsidies, preferred to keep their capital invested at home, to the benefit of the British economy. Notes Gavin:

So inconsequential was [Smith’s] use of The Metaphor that neither he, nor anybody else until the late 19th century, commented upon it. . . .

Moreover, it was only in Chicago in the 1930s that The Metaphor was generalised into Smith’s so-called “law” of markets. Paul Samuelson (1948, 1st edition), in his famous textbook, Economics (16 editions), publicised this invention with the inevitable affect on modern economics, as tens of thousands of his readers took it on trust as true.

To be sure, the relevant passage in Smith also includes the famous lines, “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good,” and the remark that “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.” But Smith’s statements need to be understood in context; he is discussing the specific problem of trade monopoly, arguing against trade and industrial policies that subsidize particular markets or industries.

Entry filed under: - Klein -, Classical Liberalism, Jargon Watch, Myths and Realities, People. Tags: .

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4 Comments Add your own

  • 1. michael webster  |  31 March 2009 at 2:05 pm

    I am a big fan of Gavin’s, comment on his blog regularly, and hope that his message rides of the metaphor “invisible hand” for how markets work.

    If the market was run by invisible hands, what the heck is Alvin Roth and his co-workers doing “designing markets”?

  • 2. Rafe  |  31 March 2009 at 8:04 pm

    How helpful is the invisible hand idea anyway? It violates MI for a start. I always wondered how it achieved such a high profile as a summary of the book when Smith only mentioned it in a passing comment.

  • 3. paolo mariti  |  1 April 2009 at 3:24 am

    It is important to note that Smith uses the adverb “frequenlty”, i.e. “not always”. Some authors quote the above sentence omitting the adverb.

  • 4. spostrel  |  1 April 2009 at 8:44 pm

    If you go back to any classic work you’ll find lots of differences between the author’s emphasis and the parts of the book that resonated with readers, critics, non-reading referrers, etc. (For example, try Polanyi’s Personal Knowledge for a mind-blowing experience–tacitness vs. articulation isn’t the main point of that book.)

    This phenomenon seems perfectly normal, since the author’s judgments of what matters most are unlikely to be correct in all regards. I’m just happy when people don’t get things reversed (e.g. the eponymous Ugly American is actually the culturally sensitive hero of that book rather than the insensitive boor usually assumed).

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