Milton Friedman and his Version of the 'Invisible Hand" Contested

From: The Journal of Scottish Philosophy, 5 (2) 2007, 103–117 ISSN 1479–6651:

“INVISIBLE HAND ARGUMENTS: MILTON FRIEDMAN AND ADAM SMITH

ALISTAIR M. MACLEOD (Queen’s University Ontario)

When I first read this paper recently** I was struck by Alistair Macleod’s specific examination of Smith’s arguments regarding his use of the IH metaphor.  This is a welcome change, but so far few, if any, authors have followed Alistair Macleod’s more forensic approach.  Instead most, if not all authors simply assert the modern interpretations, for which Milton Friedman’s “Free to Choose” (1980) was a major authority:

Alistair Macleod:

 “I turn now to consider the account of Smith’s invisible hand argument offered by Milton Friedman in Free to Choose. He writes:

“The key insight of Adam Smith’s The Wealth of Nations is that if an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it.

Adam Smith’s flash of genius was his recognition that the prices that emerged

from voluntary transactions between buyers and sellers – for short, in a free

market – could coordinate the activity of millions of people, each seeking his

own interest, in such a way as to make everyone better off. …

…  “There are, however, some serious objections to the invisible hand argument in the form in which it is reconstructed by Friedman; and I have in mind here objections to the argument itself, not objections to the claim Friedman makes that the argument is the essential argument presented in The Wealth of Nations.”

Comment

Friedman interprets Smith’s analysis of bargaining in the usual terms of self-interest making every one better off, otherwise they could not agree to a bargain. To address this argument properly would take more space than I can allocate in this post, hence I refer readers to earlier posts "Adam Smith on Bargaining'.

Briefly, Smith was more interested in how self-interested parties to an exchange transaction could find an agreement.  He recommended that buyers seeking their dinner should address not their own self-interests, but instead address the seller’s “self-love” by seeking to persuade the sellers how much it was in their interests to sell their meat, beer and bread at the price the buyer offered them, and not by appealing to whatever buyer concerned themselves. 

In TMS he covered this in several places, broadly by highlighting how much successful persuasion comes from addressing the interests of the other party in the discourse between them and sellers (or vice versa).  That is why, in modern more experienced times, sellers waning to sell hair cream to buyers used the slogan: “a little dab’ll do ya”, persuading by appealing to the potential buyers' sense of not wasting their money, and sellers of Mars Bars said: “Mars helps you work, rest, and play”, persuading by appealing to buyers' wanting to benefit from the product's multiple services.  In Smithian terms, bargainers achieve their objectives of serving their own self-interests by mediating the differences in self interests between them and not by asserting their own self-interests only and disregarding what may appeal to the self-interests of the other party to the transaction.

 Alistair Macleod in “iii. adam smith on the invisible hand” cites paragraphs: (WN IV ii: 6); (WN IV ii: 7); (WN IV ii: 9);  and [110/11]

“According to this passage, the end that is unintentionally served when individuals are given the freedom to invest capital in ways of their own choosing is maximization of a society’s gross economic product.” [112]

“In The Theory of Moral Sentiments, the invisible hand is held to work its magic, not by contriving to maximize the gross domestic product of a commercial society, nor by distributing that product in a way which makes every member of society “better off,” but by securing the sort of economic distribution which ensures that the poor are provided with the necessities of life. (TMS IV i. 1.10).

Comment:

It is here that I find that Alistair Macleod is least convincing. 

In common with many modern economists (and philosophers) the IH metaphor used by Smith “describes in a striking and more interesting manner” the motivations of the parties that leads them to act in the particular manner represented by the metaphor of “an invisible hand”.

The resultant consequencies of their actions are quite separate from their motives, but their actions eventually have “unintended consequences”, so it is pointless to summarise the “invisible hand” in TMS (or indeed in WN), as “contriving’ to make everybody “better off” by “distributing” or “securing” anything.  The whole point of “unintended” is precisely that the individuals have no “intentions” besides their securing their immediate objectives of feeding the landless labourers employed to labour in the landlord’s fields, or his palaces and households, and to fight against his enemies.   Without food there can be no labour from their serfs, no “greatness”, and no life of luxury for themselves and their pampered families.  For this relationship to be true, as it is, no theory of individual “rationality” was required; hence I found Alistair Macleod’s long discussion of “rational maximizing quite misleading, interesting as it may be.

I have seen Smith’s “invisible hand” metaphor explained as a theory of  “unintended consequences”, joining the astonishing and invented idea of IH as a theory of “free markets”.  What is “unintended” has no relevance as a theory of ”intentions” and Smith never mentions “markets”, free or perfect, or only applying in such circumstances (Samuelson, 1948) in relation to the IH metaphor.  The employment of serfs, slaves, or peasants since “Providence divided the land” (TMS) unequally, i.e., it began a very long time ago, long before any markets existed, or since the operation of mercantile foreign v “domestic industry” decisions became relevant.   The more recent invocation of the IH with “unintended consequences” is wholly misleading too.  

Alistair Macleod cites IH paragraph (TMS IV i. 10):

“Whether these desires are efficacious in bringing about serious commitment to arduous toil only because action to satisfy such desires is believed to be required by the principle of self-interest, or whether they move to action independently of this belief, the important point is that their power and importance are in no way dependent on the truth of such a belief.”

Comment

The “commitment to arduous toil” is posed in too philosophical a manner.  Adults laboured under the absolute necessity of their having no independent source of subsistence. “Proud and unfeeling landlords” fed them because they had no other source of acquiring and binding labourers to their crucial and lowly roles.  So subsistence and suffering from their overseers, were the lot of labourers’  through the millennia.  

When fed regularly, the unintended consequence was the survival of new generations of labourers and the “procreation of the species”.  The landlords’ (inescapable) need to supply subsistence (quantities and qualities of that subsistence decided by the landlords’ overseers) eventually had “unintended consequences”, as did the landlords’ beginning to divert their surplus annual expenditure on “luxury” goods for themselves and their families.  This “enriched” the quality of their families’ lives and also the incomes (and families) of those merchants and the chain of manufacturers who supplied them with their “conveniences and amusements”.  Smith regarded the beneficiaries of the production and consumption of these goods, which together undermined the landlords’ ability to continue with the means to provide and sustain their incomes and civil power, especially in relation to the growth of towns and trade.  Among the long-run consequences of these trends was to give merchants and, eventually, manufacturers, initially in north-west Europe but eventually across Europe and North America, the base that undermined feudalism as unintentionally continued to build the international market economy.

Nobody intended that to happen; it was never designed by anybody and neither was it due to a magical entity called “an invisible hand”.  This metaphor remains Smith’s description “in a striking and more interesting manner” (see Adam Smith, 1762. “Lectures on Rhetoric and Belles Lettres”, p 29) the limited motivations that led the players to act in the manner they did, without the slightest intention of anything that happened as a consequence.

Nevertheless, I found Alistair Macleod’s paper well worth reading because he takes some small steps to understand what Adam Smith was about.

**

I found the PDF in an unused file with so many cobwebs on it that I couldn’t remember from whence I got it.  The original source is dated as 2007, so I could have collected anytime from six years ago, or somebody kindly sent it to me more recently and I do not appear to have acknowledged it, for which lapse in good manners I apologise.
Alistair Macleod's paper is at: http://www.euppublishing.com/doi/pdfplus/10.3366/jsp.2007.5.2.103