Adam Smith and the Invisible Hand - Politics Forum.org | PoFo

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#14801298
Smith only used the term 'invisible hand' once in The Wealth of Nations;

P 234 wrote:As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. 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 no 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.

Smith argues that we shouldn't fear money draining out of the economy by capital flight because business people will prefer domestic investments to foreign ones. He has been proven wrong repeatedly as businesses chased cheaper labour and land and lower regulation around the world by pursuing investments over the channel, the Atlantic and the Pacific.

CHAPTER II
Of Restraints upon the Importation from Foreign Countries of such Goods as can be produced at Home

Spoiler: show
BY restraining, either by high duties or by absolute prohibitions, the importation of such
goods from foreign countries as can be produced at home, the monopoly of the home market
is more or less secured to the domestic industry employed in producing them. Thus the
prohibition of importing either live cattle or salt provisions from foreign countries secures to
the graziers of Great Britain the monopoly of the home market for butcher's meat. The high
duties upon the importation of corn, which in times of moderate plenty amount to a
prohibition, give a like advantage to the growers of that commodity. The prohibition of the
importation of foreign woollens is equally favourable to the woollen manufacturers. The silk
manufacture, though altogether employed upon foreign materials, has lately obtained the same
advantage. The linen manufacture has not yet obtained it, but is making great strides towards it. Many other sorts of manufacturers have, in the same manner, obtained in Great Britain,
either altogether or very nearly, a monopoly against their countrymen. The variety of goods of
which the importation into Great Britain is prohibited, either absolutely, or under certain
circumstances, greatly exceeds what can easily be suspected by those who are not well
acquainted with the laws of the customs.
That this monopoly of the home market frequently gives great encouragement to that
particular species of industry which enjoys it, and frequently turns towards that employment a
greater share of both the labour and stock of the society than would otherwise have gone to it,
cannot be doubted. But whether it tends either to increase the general industry of the society,
or to give it the most advantageous direction, is not, perhaps, altogether so evident.
The general industry of the society never can exceed what the capital of the society can
employ. As the number of workmen that can be kept in employment by any particular person
must bear a certain proportion to his capital, so the number of those that can be continually
employed by all the members of a great society must bear a certain proportion to the whole
capital of that society, and never can exceed that proportion. No regulation of commerce can
increase the quantity of industry in any society beyond what its capital can maintain. It can
only divert a part of it into a direction into which it might not otherwise have gone; and it is
by no means certain that this artificial direction is likely to be more advantageous to the
society than that into which it would have gone of its own accord.
Every individual is continually exerting himself to find out the most advantageous
employment for whatever capital he can command. It is his own advantage, indeed, and not
that of the society, which he has in view. But the study of his own advantage naturally, or
rather necessarily, leads him to prefer that employment which is most advantageous to the
society.
First, every individual endeavours to employ his capital as near home as he can, and
consequently as much as he can in the support of domestic industry; provided always that he
can thereby obtain the ordinary, or not a great deal less than the ordinary profits of stock.
Thus, upon equal or nearly equal profits, every wholesale merchant naturally prefers the
home trade to the foreign trade of consumption, and the foreign trade of consumption to the
carrying trade. In the home trade his capital is never so long out of his sight as it frequently is
in the foreign trade of consumption. He can know better the character and situation of the
persons whom he trusts, and if he should happen to be deceived, he knows better the laws of
the country from which he must seek redress. In the carrying trade, the capital of the merchant
is, as it were, divided between two foreign countries, and no part of it is ever necessarily
brought home, or placed under his own immediate view and command. 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 natural residence of
such a merchant should either be at Konigsberg or Lisbon, and it can only be some very
particular circumstances which can make him prefer the residence of 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. The merchant, in order to save a second loading
and unloading, endeavours always to sell in the home market as much of the goods of all
those different countries as he can, and thus, so far as he can, to convert his carrying trade into a foreign trade of consumption. A merchant, in the same manner, who is engaged in the
foreign trade of consumption, when he collects goods for foreign markets, will always be
glad, upon equal or nearly equal profits, to sell as great a part of them at home as he can. He
saves himself the risk and trouble of exportation, when, so far as he can, he thus converts his
foreign trade of consumption into a home trade. Home is in this manner the centre, if I may
say so, round which the capitals of the inhabitants of every country are continually
circulating, and towards which they are always tending, though by particular causes they may
sometimes be driven off and repelled from it towards more distant employments. But a capital
employed in the home trade, it has already been shown, necessarily puts into motion a greater
quantity of domestic industry, and gives revenue and employment to a greater number of the
inhabitants of the country, than an equal capital employed in the foreign trade of
consumption: and one employed in the foreign trade of consumption has the same advantage
over an equal capital employed in the carrying trade. Upon equal, or only nearly equal profits,
therefore, every individual naturally inclines to employ his capital in the manner in which it is
likely to afford the greatest support to domestic industry, and to give revenue and employment
to the greatest number of people of his own country.
Secondly, every individual who employs his capital in the support of domestic industry,
necessarily endeavours so to direct that industry that its produce may be of the greatest
possible value.
The produce of industry is what it adds to the subject or materials upon which it is
employed. In proportion as the value of this produce is great or small, so will likewise be the
profits of the employer. But it is only for the sake of profit that any man employs a capital in
the support of industry; and he will always, therefore, endeavour to employ it in the support of
that industry of which the produce is likely to be of the greatest value, or to exchange for the
greatest quantity either of money or of other goods.
But the annual revenue of every society is always precisely equal to the exchangeable value
of the whole annual produce of its industry, or rather is precisely the same thing with that
exchangeable value. As every individual, therefore, endeavours as much as he can both to
employ his capital in the support of domestic industry, and so to direct that industry that its
produce may be of the greatest value; every individual necessarily labours to render the
annual reve nue of the society as great as he can. He generally, indeed, neither intends to
promote the public interest, nor knows how much he is promoting it. 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 no 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.
#14801308
He explains this preference a bit further up:

"First, every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry; provided always that he can thereby obtain the ordinary, or not a great deal less than the ordinary profits of stock."

People will employ capital further away if there are significantly greater profits to be made, but not simply for the sake of it.

What has changed beyond all recognition since Smith wrote that is the ease of communication and transport meaning the threshold for what can be made further afield is far lower.
#14801338
What has changed beyond all recognition since Smith wrote that is the ease of communication and transport meaning the threshold for what can be made further afield is far lower.

Precisely. In other words, Smith failed to foresee the globalisation of the world economy. This process of globalisation has the effect that the "invisible hand" no longer guides the merchant or capitalist to promote the economic well-being of his or her own nation, but now guides him or her to promote the economic well-being of the world as a whole. In retrospect, this whole process of globalisation now looks inevitable, given the nature of capitalism to expand its store of capital and to constantly seek new markets and new resources and labour-power to exploit. And it is, in the broad sweep of history, a good thing - millions of people in the poorest parts of the world are now being lifted out of millennial poverty. But it means that capitalism is now in contradiction with the national interests of the developed nations, which were the historical heartland of global capitalism. This is why populist nationalists in those developed nations are now opposing the further development of global capitalism, either explicitly (in the case of the far right) or implicitly (in the case of Trump and Bannon, who are objectively now opposing capitalism while subjectively still supporting it). The next few decades will therefore be politically crucial - either the globalisation process will falter, due to a return to tariffs and protectionism, or the whole ideology of nationalism will falter and die in the developed nations, due to being completely outmoded by the natural development of the capitalist system. We may be witnessing the beginning of the end of the nation-state.
#14801346
@Potemkin

That's a very Kautsky way to look at it.

It's not an incorrect point of view, exactly. I need to dwell on it a bit before I can put into words what may (or may not) be missing.

It seems that, in Europe at least, there's a certain amount of following Lenin's critique of Kautsky; that the contradictions in globalism will undermine a united Europe which, essentially, could only exist as a way to pointlessly compete with the economy of the United States:

Lenin wrote:Of course, temporary agreements are possible between capitalists and between states. In this sense a United States of Europe is possible as an agreement between the European capitalists ... but to what end? Only for the purpose of jointly suppressing socialism in Europe, of jointly protecting colonial booty against Japan and America, who have been badly done out of their share by the present partition of colonies, and the increase of whose might during the last fifty years has been immeasurably more rapid than that of backward and monarchist Europe, now turning senile. Compared with the United States of America, Europe as a whole denotes economic stagnation. On the present economic basis, i.e., under capitalism, a United States of Europe would signify an organisation of reaction to retard America’s more rapid development. The times when the cause of democracy and socialism was associated only with Europe alone have gone for ever.


Anyway...I dwell....
#14801369
That's a very Kautsky way to look at it.

It's not an incorrect point of view, exactly. I need to dwell on it a bit before I can put into words what may (or may not) be missing.

Kautsky, it seems to me, was referring to the cartelisation of the European nation-states in the face of the damaging nature of imperialist competition - he was foreseeing the creation of the EU, in other words. This is not the same thing as what we now call 'globalisation', which is the creation of a world economy from which no individual nation-state can meaningfully detach itself, no matter how high the tariff barriers it erects or how determinedly it tries to protect its native industries and employment. Globalisation is not merely 'ultra-imperialism'; it is in fact a process which is highly corrosive of the nation-state as it has existed in the West for the past few centuries. This new global economy does not just encompass the European nation-states, but all nation-states, no matter how remote or undeveloped. The cartelisation of Europe into the EU will therefore be of no avail against the forces of globalisation - the EU can no more protect European industries or European jobs from foreign competition any more than the individual nation-states of Europe could protect their domestic industries or jobs from foreign competition. To compete in a globalised economy, the individual capitalists must outsource jobs and industries with utter ruthlessness, regardless of their own nation's best interests. No politician and no bureaucrat can stop them from doing this; it would be like ordering them to stop breathing.

It seems that, in Europe at least, there's a certain amount of following Lenin's critique of Kautsky; that the contradictions in globalism will undermine a united Europe which, essentially, could only exist as a way to pointlessly compete with the economy of the United States

I agree that the EU, insofar as it is a cartelisation of the European nation-states to avoid the damaging consequences of imperialist competition between its member states, is doomed. What Kautsky called 'ultra-imperialism' will avail nothing against the forces of globalisation. At best, it will merely be a pointless re-division of the world, like re-arranging the deckchairs on the Titanic; and at worst it will lead to gigantic wars between ultra-imperialist blocs of nations.
#14801372
Or he just lied about it to appease.

Adam Smith was an 18th century English rationalist and optimist, Beren. He believed that all is for the best in the best of all possible worlds, and that the world was slowly but inevitably progressing through gentle, incremental steps into a utopia. He therefore wan't lying, but merely delusional. Lol. ;)
#14801373
Potemkin wrote:Adam Smith was an 18th century English rationalist and optimist, Beren. He believed that all is for the best in the best of all possible worlds, and that the world was slowly but inevitably progressing through gentle, incremental steps into a utopia. He therefore wan't lying, but merely delusional. Lol. ;)

I think he had a utopistic liberal-globalist agenda, so he was biased and "lied" about globalisation. As to the EU, whether it's doomed or not, it's Europe's only possible answer/reaction to globalisation.
#14801374
I think he had a utopistic liberal-globalist agenda, so he was biased and "lied" about globalisation. As to the EU, whether it's doomed or not, it's Europe's only possible answer/reaction to globalisation.

Smith certainly had an agenda, but it wasn't a hidden one. He was an early advocate of free trade and economic liberalism, but (due to his sunny optimism and his faith in human reason and gradualist progress) he totally failed to foresee the rising contradiction between the nation-state and capitalism, which manifested itself in imperialism, massive wars, and now globalisation. In other words, he failed to foresee the upheavals which free trade would bring in its wake. He was like one of those 18th century geologists who had no conception of the existence of periodic mass extinctions or ice ages which would periodically scour the land bare. Like most 18th century English thinkers, he had far too much faith in human reason and in gradual historical progress.
#14801377
Potemkin wrote:Smith certainly had an agenda, but it wasn't a hidden one. He was an early advocate of free trade and economic liberalism, but (due to his sunny optimism and his faith in human reason and gradualist progress) he totally failed to foresee the rising contradiction between the nation-state and capitalism, which manifested itself in imperialism, massive wars, and now globalisation. In other words, he failed to foresee the upheavals which free trade would bring in its wake. He was like one of those 18th century geologists who had no conception of the existence of periodic mass extinctions or ice ages which would periodically scour the land bare. Like most 18th century English thinkers, he had far too much faith in human reason and in gradual historical progress.

Adam Smith had to convince himself and others that being rational and selfish, which equals being or acting like a capitalist, works for the common good without much intervention from the state, or rather the state would make it just even worse. He was an advocate of the social order of his time, about which he couldn't do anything actually, so he advocated liberal capitalism and globalisation. As a matter of fact it worked for Britain pretty well.
#14801378
Adam Smith had to convince himself and others that being rational and selfish, which equals being or acting like a capitalist, works for the common good without much intervention from the state, or rather the state would make it just even worse.

That was indeed his agenda, but it wasn't a hidden one, and it seemed to make sense at the time. After all, what was the alternative back then? Mercantilism? Royal monopolies being handed out to favoured courtiers? Trade wars? Smith's ideas of the "invisible hand" seemed like a breath of fresh air back then, the voice of sweet reason. We now know better, of course, but it was a nice idea at the time.

He was an advocate of the social order of his time, about which he couldn't do anything actually, so he advocated liberal capitalism and globalisation. As a matter of fact it worked for Britain pretty well.

Indeed, until the rise of competitors such as Germany or Russia in the late 19th century, of course. Free trade then had to give way to imperialism, in a desperate attempt on the part of the British to retain their stranglehold on the world economy. It is this which Smith did not and could not foresee.
#14801380
Beren wrote:Adam Smith had to convince himself and others that being rational and selfish, which equals being or acting like a capitalist, works for the common good without much intervention from the state, or rather the state would make it just even worse. He was an advocate of the social order of his time, about which he couldn't do anything actually, so he advocated liberal capitalism and globalisation. As a matter of fact it worked for Britain pretty well.


Is "the state" irrational and altruistic then? Surely the difference between princes and merchants is not in their rationality or instincts for self-enhancement but only in their ability for martial pursuits or lack thereof? Adam Smith vs Keynes is a tension between civilians who want to go about their business unmolested by meddlesome authority and princes who want to control everything, to rule. Adam Smith is trying to persuade the rulers that less is more, that by controlling less they will get more. Keynes invented a counter excuse for princes to control more. Smith is for the merchants, Keynes is for the princes.
#14801381
Potemkin wrote:It is this which Smith did not and could not foresee.

He wasn't a prophet of course, but I wonder if he was such a naive person. I'm sure he was aware that lots of capital will leave the country and Britain will be a net exporter of capital.

SolarCross wrote:Is "the state" irrational and altruistic then?

It's just not a real capitalist I guess.
#14801383
He wasn't a prophet of course, but I wonder if he was such a naive person.

I think he really was that naive, Beren. He wasn't alone in his naivete, of course. If you read Edward Gibbon's Decline and Fall of the Roman Empire, towards the end Gibbon discusses whether modern European civilisation could ever again fall in the same way as the Western Roman Empire. His conclusion is that it would be impossible for such a thing to happen, that civilisation had successfully conquered and subjugated barbarism around the world, and that therefore no barbarian tribes could possibly manage to invade and conquer Europe in the same way the Germanic tribes invaded and conquered Rome. In our post-Holocaust world, of course, Gibbon's pronouncements look hilariously naive. He failed to understand - indeed, given his faith in human reason, he could not understand - that the barbarians are already within the gates, that we ourselves are the barbarians, and that if a crisis occurs our own inner barbarism will rise up and overthrow our own civilisation. Adam Smith had that same 18th century English naivete, Beren.

I'm sure he was aware that lots of capital will leave the country and Britain will be a net exporter of capital.

Like most sunny optimists, Smith tended not to pursue thoughts which led in directions which made him feel uncomfortable. That's the thing about the human mind - it is guided by feelings even when it thinks it is being completely rational. :)
#14801387
Potemkin wrote:Like most sunny optimists, Smith tended not to pursue thoughts which led in directions which made him feel uncomfortable. That's the thing about the human mind - it is guided by feelings even when it thinks it is being completely rational. :)

With the exception of Marxists, right? ;)
#14801389
With the exception of Marxists, right? ;)

Of course, Beren! :) ;)

But as I pointed out on PoFo several years ago, rationality and irrationality are dialectical opposites - at the heart of every rational theory about the world, there is a kernel of irrationality, from which it has grown; and at the heart of every irrational idea there is a kernel of rationality. After all, the very fact that we can diagnose and treat mental illnesses implies that there is a rationality at the root of the madness, and likewise every rational theory about the world is ultimately motivated by irrational feelings about the world. That doesn't make madness any less irrational or Marxism any less rational, of course. :)
#14801400
Potemkin wrote:Kautsky, it seems to me, was referring to the cartelisation of the European nation-states in the face of the damaging nature of imperialist competition - he was foreseeing the creation of the EU, in other words


He was, but I think we need to underline that almost every inch of the planet was, at that point, officially or unofficially run by a European power, the US, or Japan. My impression of Kautsky is that he saw these imperial powers being forced to create a common market at a global level.

Lenin pointed out that such a union would really be a way to join together to compete with the US and fall apart eventually.

But Marx and Engels, in the manifesto's first chapter, pretty much describe a global market being built. Despite nationality, the global market will be built. The creation of the bourgeois state is at odds with the capitalist drive to expand globally. I suspect Kautsky thought that the bourgeois state would concede to the bourgeois economy. Lenin saw this as a far more violent confrontation. Smith seemed to think, as you imply, that individual rationality would win over everything else. This latter view is typical for the Enlightenment, but was obviously optimistic.
#14801401
The Chinese invented your diamat metaphysics first. One day I am going to invent the superior metaphysics of polylectical materialism.

They also invented the 'complemtarity principle' of modern quantum mechanics first too. Fun fact: when Niels Bohr, the guy who came up with the standard 'Copenhagen Interpretation' of quantum mechanics, was knighted by the Danish government for his contributions to science, he chose to place the Chinese yin-yang symbol in a prominent position on his coat of arms, to signify his intellectual debt to Chinese Taoism. :)
#14801420
Potemkin wrote:Adam Smith was an 18th century English rationalist and optimist, Beren. He believed that all is for the best in the best of all possible worlds, and that the world was slowly but inevitably progressing through gentle, incremental steps into a utopia. He therefore wan't lying, but merely delusional. Lol. ;)

But Adam Smith's Utopia has come true in spades. Look at anything, life expectancy, health care, education, Britain in 2017 is a magical utopia compared to the eighteenth century. If Adam Smith was at fault he wasn't optimistic enough. What is underestimated is the human capacity for complaining.

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