The Invisible Hand and the System of Natural Liberty: Tuesday Focus: February 4, 2014
So this morning I am reading Phil Mirowski’s presidential address to the historians of economic thought, and trying to keep my ire contained…
Mirowski has one good point: that Paul Samuelson, in his Economics principles textbook, started or at least greatly amplified the movement of economists citing Adam Smith’s “Invisible Hand” as his summary statement of his belief in the magic of the market–and that is not what the “Invisible Hand” did in Smith’s writings.[1]
Phil Mirowski: Does the Victor Enjoy the Spoils?: Paul Samuelson as Historian of Economics: “There are a number of articles repeatedly pointing out that Adam Smith intended nothing resembling Pareto optimality or general equilibrium by his use of the [invisible hand] metaphor; but Gavin Kennedy (2010) has demonstrated that it was Samuelson’s 1948 introductory textbook that first ushered us down that particular cul-de-sac…”
But Mirowsky takes off from there and uses that as a springboard to say things that strike me as completely false:
Phil Mirowski: Does the Victor Enjoy the Spoils?: Paul Samuelson as Historian of Economics: “The whole fallacious drive to recast Adam Smith as a proto-neoclassical… was largely instigated by Samuelson….
Adam Smith was, in order:
- An Enlightenment Scottish moral philosopher, a la David Hume…
- A contributor to the existing eighteenth-century literature on “Political Oeconomy”…
- The founder of Economics, and an extraordinarily strong believer in the efficacy, power, and natural justice of the properly-structured and properly-regulated competitive free market.
But when he talked about (3), he used not the metaphor of the “Invisible Hand”, but spoke instead about the “system of natural liberty”.
Thus when Mirowski says that Paul Samuelson erroneously painted Adam Smith as a “proto-neoclassical… [when he actually] intended nothing resembling Pareto optimality or general equilibrium”, it is Mirowski who is wrong, and not Samuelson
Here are five examples of how Smith uses the concept of the “system of natural liberty”–and, yes, it is something that he sees as something like general equilibrium, and something he sees as like Pareto optimality:
(1) Adam Smith: An Inquiry Into the Nature and Causes of the Wealth of Nations, IV 9: OF THE AGRICULTURAL SYSTEMS, OR OF THOSE SYSTEMS OF POLITICAL ŒCONOMY, WHICH REPRESENT THE PRODUCE OF LAND AS EITHER THE SOLE OR THE PRINCIPAL SOURCE OF THE REVENUE AND WEALTH OF EVERY COUNTRY:
Those systems… which preferring agriculture… in order to promote it impose restraints upon manufactures and foreign trade, act contrary to the very end which they propose…. By extraordinary encouragements, to draw towards a particular species of industry a greater share of the capital of the society than what would naturally go to it; or, by extraordinary restraints, to force from a particular species of industry some share of the capital which would otherwise be employed in it; is in reality subversive of the great purpose which it means to promote….
All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.
According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence to any individual or small number of individuals, though it may frequently do much more than repay it to a great society…
Adam Smith: An Inquiry Into the Nature and Causes of the Wealth of Nations: Digression concerning the Corn Trade and Corn Laws:
The dealer who can employ his whole stock in one single branch of business, has an advantage… acquires so easy and ready a method of transacting his business, of buying and disposing of his goods, that with the same capital he can transact a much greater quantity of business…. The greater part of manufacturers could not afford to retail their own goods so cheap as a vigilant and active shopkeeper, whose sole business it was to buy them by wholesale, and to retail them again. The greater part of farmers could still less afford to retail their own corn… so cheap as a vigilant and active corn merchant….
The law which prohibited the manufacturer from exercising the trade of a shopkeeper, endeavoured to force this division in the employment of stock to go on faster than it might otherwise have done. The law which obliged the farmer to exercise the trade of a corn merchant, endeavoured to hinder it from going on so fast. Both laws were evident violations of natural liberty, and therefore unjust; and they were both too as impolitic as they were unjust. It is the interest of every society, that things of this kind should never either be forced or obstructed. The man who employs either his labour or his stock in a greater variety of ways than his situation renders necessary, can never hurt his neighbour by underselling him. He may hurt himself, and he generally does so. Jack of all trades will never be rich, says the proverb. But the law ought always to trust people with the care of their own interest, as in their local situations they must generally be able to judge better of it than the legislator can do. The law, however, which obliged the farmer to exercise the trade of a corn merchant, was by far the most pernicious of the two.
It obstructed not only that division in the employment of stock which is so advantageous to every society, but it obstructed likewise the improvement and cultivation of the land. By obliging the farmer to carry on two trades instead of one, it forced him to divide his capital into two parts, of which one only could be employed in cultivation. But if he had been at liberty to sell his whole crop to a corn merchant as fast as he could thresh it out, his whole capital might have returned immediately to the land, and have been employed in buying more cattle, and hiring more servants, in order to improve and cultivate it better. But by being obliged to sell his corn by retail, he was obliged to keep a great part of his capital in his granaries and stack yard through the year, and could not, therefore, cultivate so well as with the same capital he might otherwise have done.
This law, therefore, necessarily obstructed the improvement of the land, and, instead of tending to render corn cheaper, must have tended to render it scarcer, and therefore dearer, than it would otherwise have been…
Adam Smith: An Inquiry Into the Nature and Causes of the Wealth of Nations: OF RESTRAINTS UPON THE IMPORTATION FROM FOREIGN COUNTRIES OF SUCH GOODS AS CAN BE PRODUCED AT HOME:
Though a great number of people should, by thus restoring the freedom of trade, be thrown all at once out of their ordinary employment and common method of subsistence, it would by no means follow that they would thereby be deprived either of employment or subsistence. By the reduction of the army and navy at the end of the late war, more than a hundred thousand soldiers and seamen… were all at once thrown out of their ordinary employment; but, though they no doubt suffered some inconveniency, they were not thereby deprived of all employment and subsistence. The greater part of the seamen, it is probable, gradually betook themselves to the merchant-service as they could find occasion, and in the meantime both they and the soldiers were absorbed in the great mass of the people, and employed in a great variety of occupations. Not only no great convulsion, but no sensible disorder arose from so great a change in the situation of more than a hundred thousand men, all accustomed to the use of arms, and many of them to rapine and plunder….
The capital of the country remaining the same, the demand for labour will likewise be the same, or very nearly the same, though it may be exerted in different places and for different occupations. Soldiers and seamen, indeed, when discharged from the king’s service, are at liberty to exercise any trade, within any town or place of Great Britain or Ireland. Let the same natural liberty of exercising what species of industry they please, be restored to all his majesty’s subjects, in the same manner as to soldiers and seamen; that is, break down the exclusive privileges of corporations, and repeal the statute of apprenticeship, both which are real encroachments upon natural liberty, and add to these the repeal of the law of settlements, so that a poor workman, when thrown out of employment either in one trade or in one place, may seek for it in another trade or in another place, without the fear either of a prosecution or of a removal, and neither the public nor the individuals will suffer much more from the occasional disbanding some particular classes of manufacturers, than from that of soldiers. Our manufacturers have no doubt great merit with their country, but they cannot have more than those who defend it with their blood, nor deserve to be treated with more delicacy.
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…
Adam Smith: An Inquiry Into the Nature and Causes of the Wealth of Nations: OF MONEY CONSIDERED AS A PARTICULAR BRANCH OF THE GENERAL STOCK OF THE SOCIETY, OR OF THE EXPENCE OF MAINTAINING THE NATIONAL CAPITAL:
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 respect 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.
Adam Smith: An Inquiry Into the Nature and Causes of the Wealth of Nations: Inequalities occasioned by the Policy of Europe:
The very unequal price of labour which we frequently find in England, in places at no great distance from one another, is probably owing to the obstruction which the law of settlements gives to a poor man who would carry his industry from one parish to another without a certificate. A single man, indeed, who is healthy and industrious, may sometimes reside by sufferance without one; but a man with a wife and family who should attempt to do so, would in most parishes be sure of being removed, and if the single man should afterwards marry, he would generally be removed likewise…. To remove a man who has committed no misdemeanour from the parish where he chuses to reside, is an evident violation of natural liberty and justice. The common people of England, however, so jealous of their liberty, but like the common people of most other countries never rightly understanding wherein it consists, have now for more than a century together suffered themselves to be exposed to this oppression without a remedy…. There is scarce a poor man in England of forty years of age, I will venture to say, who has not in some part of his life felt himself most cruelly oppressed by this ill-contrived law of settlements….
Particular acts of parliament… still attempt sometimes to… regulate wages in particular trades and in particular places. Thus the 8th of George III prohibits under heavy penalties all master taylors in London, and five miles round it, from giving, and their workmen from accepting, more than two shillings and sevenpence halfpenny a day…. Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters. Thus the law which obliges the masters in several different trades to pay their workmen in money and not in goods, is quite just and equitable. It imposes no real hardship upon the masters. It only obliges them to pay that value in money, which they pretended to pay, but did not always really pay, in goods. This law is in favour of the workmen; but the 8th of George III is in favour of the masters…
[1] In The Theory of Moral Sentiments:
The proud and unfeeling landlord… the capacity of his stomach bears no proportion to the immensity of his desires… the rest he will be obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of… all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice…. The rich… are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society…
Upon equal… profits, every wholesale merchant naturally prefers the home-trade to the foreign trade…. In the home-trade his capital is never so long out of his sight as it frequently is in the foreign trade…. The capital which an Amsterdam merchant employs in carrying corn from Konigsberg to Lisbon, and fruit and wine from Lisbon to Konigsberg, must generally be the one half of it at Konigsberg and the other half at Lisbon. No part of it need ever come to Amsterdam…. The uneasiness, however, which he feels at being separated so far from his capital generally determines him to bring part both of the Konigsberg goods which he destines for the market of Lisbon, and of the Lisbon goods which he destines for that of Konigsberg, to Amsterdam: and though this necessarily subjects him to a double charge of loading and unloading, as well as to the payment of some duties and customs, yet for the sake of having some part of his capital always under his own view and command, he willingly submits to this extraordinary charge; and it is in this manner that every country which has any considerable share of the carrying trade becomes always the emporium, or general market, for the goods of all the different countries whose trade it carries on….
By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. 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. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.
Note that it is not profit-maximizing the produces the good outcome: it is a deviation from profit-maximizing in the direction of home bias for cognitive-psychology reasons plus that market that produces the good outcome.