Wednesday, October 29, 2008

Wight on Smith's Invisible Hand

The current economic crisis has provoked a lot of people into saying that this shows the failure of Adam Smith's metaphor of an invisible hand. For example, David Sloan Wilson has argued that the invisible hand is dead, because we have seen that the greedy behavior of individuals in unregulated markets does not promote the public good, and because research in evolutionary psychology has shown that human behavior is guided by moral sentiments that cannot be explained as the rational maximization of self-interest. In an earlier post, I responded to Wilson.

Wilson's rejection of Smith's idea of the invisible hand is based on a misunderstanding of Smith's idea and of its relationship to Darwinian evolution. Two good articles help to clear up this misunderstanding. On the relationship between Smith and Darwin, the article I have in mind is Toni Vogel Carey's "The Invisible Hand of Natural Selection, and Vice Versa," in Biology and Philosophy, vol. 13, 1998, pp. 427-442. I might comment on this article in a future post. But here I want to draw attention to another article--Jonathan Wight's "The Treatment of Smith's Invisible Hand," in the Journal of Economic Education, Summer 2007, pp. 341-58.

Here's the abstract for Wight's article:

"Adam Smith used the metaphor of an invisible hand to represent the instincts of human nature that direct behavior. Moderated by self-control and guided by proper institutional incentives, actions grounded in instincts can be shown to generate a beneficial social order even if not intended. Smith's concept, however, has been diluted and distorted over time through extension and misuse. Common misperceptions are that Smith unconditionally endorsed laissez-faire markets, selfish individualism, and Pareto efficiency. The author draws upon recent literature to clarify Smith's meaning and to discuss ways of improving its classroom presentation. The author argues that the invisible hand operates within a variety of institutional settings and that a number of arrangements are compatible with economic progress."

Wight concludes:

"The interpretation of Smith's invisible hand offered here is that it represents man's natural instincts channeled by institutions and self-command. A person's highest instincts are to persuade, to be believed, to sympathize, to fashion order, to truck and barter, and to better one's conditions in the surroundings. These are invisible passions that lead people, both in Moral Sentiments and Wealth of Nations. Although self-interest is a dominant and necessary passion in the economic realm, it does not operate in isolation. Experiments show that even graduate students in economics have not lost an instinctual passion for reciprocity and justice."

I agree with Wight's interpretation of Smith's invisible hand as "man's natural instincts channeled by institutions and self-command." I also agree with Wight's rejection of five alternative interpretations that appeal to providence, selfishness, enlightened self-interest, efficiency, and laissez faire.

(1) Providence. Smith speaks of the human instincts as coming from nature. But he also speaks of nature as guided by the "Author of Nature." This has led some of his readers to conclude that the metaphor of the invisible hand points to a providential deity as the final cause of nature, including human nature. This might suggest some kind of intelligent-design argument. But it seems doubtful that Smith was in any way an orthodox religious believer. He appears to use the idea of God as a way of expressing the regularities of nature that are manifested in living things. Moreover, he might well have felt the need to use religious language to protect himself against religious critics.

(2) Selfishness. Although Smith certainly emphasized the need to recognize the power of selfish passions in human nature, he also emphasized that a good society requires both social and unsocial passions that sustain the human virtues. Greed is not enough. Indeed, Smith was quite clear in rejecting the Hobbesian egoism that dominated so much of early modern moral and social philosophy. So the research in behavioral economics and evolutionary psychology showing the moral motivations of human nature that go beyond narrow self-interest confirms Smith's work.

(3) Enlightened Self-Interest. Even if narrow self-interest is insufficient, one might think that the invisible hand works through enlightened self-interest, in that human beings might see that their self-interest is best served by a rational calculation that acting for the good of others advances one's own good. But Smith saw sympathy or fellow-feeling as an instinct that arose spontaneously without rational calculation, and as arising from sympathy, the moral sentiments could not be explained as grounded purely in enlightened self-interest.

(4) Efficiency. Many economists today assume that the invisible hand is the idea that free markets promote efficient outcomes through a pricing mechanism. Although this does correspond with much of what Smith says, Smith was also concerned with the national welfare of Great Britain and with the institutional structures that might promote British interests rather than the abstract efficiency of global markets.

(5) Laissez-Faire. The most common misperception of Smith's invisible hand is that it rejects all governmental regulation of economies. It is true that Smith criticized governmental interventions that were harmful. But it is also true that Smith argued for many governmental activities in sustaining military defense, the rule of law, public works of various sorts, and an educational system that fostered the moral and intellectual development of the people.

Far from being a dead idea, as Wilson has argued, Smith's metaphor of the invisible hand is the single most fruitful idea for unifying the social sciences and the life sciences.

No comments: