1. We have added the ability to collapse/expand forum categories and widgets on forum home.
    Dismiss Notice
  2. All Civ avatars are brought back and available for selection in the Avatar Gallery! There are 945 avatars total.
    Dismiss Notice
  3. To make the site more secure, we have installed SSL certificates and enabled HTTPS for both the main site and forums.
    Dismiss Notice
  4. Civ6 is released! Order now! (Amazon US | Amazon UK | Amazon CA | Amazon DE | Amazon FR)
    Dismiss Notice
  5. Dismiss Notice
  6. Forum account upgrades are available for ad-free browsing.
    Dismiss Notice

Adam Smith's pin factory vs. his invisible hand

Discussion in 'Off-Topic' started by WillJ, Dec 25, 2006.

  1. WillJ

    WillJ Coolness Connoisseur

    Joined:
    Aug 9, 2002
    Messages:
    9,471
    Location:
    USA
    I'm reading Knowledge and the Wealth of Nations by David Warsh, which is proving to be an interesting read, but I can't fully understand one of its central ideas: that there's a logical contradiction between the "pin factory" idea and the "invisible hand" idea, both of which are from Adam Smith's Wealth of Nations. (The book is specifically focused on the fact that in 1990, Paul Romer and some other brilliant young economists solved the contradiction---but before I begin reading the part where it talks about this, I'd like to understand how there was a contradiction in the first place!)

    Here is some background info on Adam Smith's "pin factory":

    [text in italics or quotes is quoted from Smith's Wealth of Nations; the other text is quoted or paraphrased from Warsh's analysis]

    The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour.

    ...

    To take an example ... one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them.


    In this way, Smith calculated, ten or fifteen men can between themselves make enormous quantities of pins (in contrast with a single worker being lucky to produce a single pin a day).

    Lest the world quickly be covered with pins, Smith introduces a new topic in chapter 2: a proposition about the mechanism by which the division of labor is governed. It is the willingness to buy and sell, out of self-interest. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

    How, then, to sell a million pins? Smith's answer was encapsulated neatly in the title of chapter 3---"The Division of Labour Is Limited by the Extent of the Market." That means that the degree to which you may specialize depends on how much of your product you can sell, on the scale of your business, because you must cover your fixed costs (whatever they are) and have at least a little left over.

    To Smith, this matter of scale---of the extent of the market---had to do mainly with transportation costs. In the Scottish Highlands, where villages were few and far between, every farmer must be butcher, baker and brewer for his own family. A man would have to go to a city before he could expect to make a living as, say, a porter. No little village can support a pin factory. So specialization is a matter of geography: where there is a river or a port, a city grows. There can be little or no commerce of any kind between the distant parts of the world without the sea.

    The division of labor is thereby limited by the extent of the market: wealth depends on specialization, and specialization depends on scale. Bigger nations with better-developed transportation networks will have more specialization and therefore be richer than smaller ones lacking rivers and roads, and nations with easy access to the sea will do best of all. That is the take-home message of the first three chapters of The Wealth of Nations.

    Background info on Smith's ideas on competition and the market's invisible hand:

    In chapter 7 of the Wealth of Nations, Smith states that in all markets for all things, there is a "natural rate" of wages, profits, and rent, regulated by the willingness of buyers and sellers to exchange at different rates for different things. From this "natural" price, market price sometimes departs: there may be a famine, or a blockade, or a sudden abundance of oranges. A public mourning raises the price of black cloth, as he writes. But either the cause of the perturbance is temporary, in which cases the price quickly falls again; or else a complicated concatenation of changes will set in. If oranges are too expensive, consumers will switch to apples or do without, sea captains will import more citrus, orange gorwers in Seville will plant more trees---and sooner or later the price will return to its natural level.

    What makes the system work is competition. All that is necessary for it to function smoothly is that everyone should be free to enter and leave the market, and change trades as often as he pleases---"perfect liberty," as Smith calls it. Intelligent self-interest will take care of the rest. People will seek to sell whatever they can at the highest price the market will bear, and buy at the lowest, and it will all balance out over time.

    Markets thus understood will, for the most part, be self-regulating, as a result of myriad little understandings of self-interested individuals in competition with one another. As every individual, therefore, endeavours ... to employ his capital ... so ... that its produce may be of the greatest value ... He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. ... [H]e intends only his own gain, and he is in this ... led by an invisible hand to promote an end which was no part of his intention. ... By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

    ---

    Apparently economists see a contradiction between the pin factory and the invisible hand, as David Warsh describes:

    Suppose the pinmaker gets into the market early, expands, specializes in pinmaking by investing in new equipment and pinmaking R&D. He develops better steel, more attractive packaging, more efficient distribution channels. The bigger his market, the greater the specialization of this sort he can afford. He replaces workers with machines. The greater the specialization, the more efficient his production, the lower the price at which he can afford to sell his pins. The lower the price, the more pins he sells, and the more he sells, the higher his profits: a greater return for the same effort, hence increasing returns to scale. The economics of the pin factory seem to be that, thanks to the advantages of falling costs, whoever starts out first in the market will run everybody else out of the pin business. Does that mean that big business is natural? That monopolies are inevitable? Desirable? If scale economies are so important, how do small firms manage to exist at all? How do we get the sort of competition essential to the Invisible Hand? These questions, which seem so pressing today, are unexplored in Wealth.

    The problem is that the two fundamental theorems of Adam Smith lead off in quite different and ultimately contradictory directions. The Pin Factory is about falling costs and increasing returns. The Invisible Hand is about rising costs and decreasing returns. Which is the more important principle? When Paul Romer read back over the literature, he found that one of his teachers had seen the dilemma perfectly clearly as a young man. In 1951 George Stigler had written, "Either the division of labor is limited by the extent of the market, and characteristically, industries are monopolized; or industries are characteristically competitive, and the [Invisible Hand]* theorem is false or of little significance." According to Stigler, they cannot both be true.

    These are the bifocals of Adam Smith. Through one lens, specialization (as in the Pin Factory) leads to the tendency we describe as monopolization. The rich get richer; the winner takes all; and the world gets pins, though perhaps not enough to satisfy its need for them. Through the other lens, the situation we describe as "perfect competition" prevails. The Invisible Hand presides over the situation among pinmakers (and all others). No manufacturer is able to achieve the upper hand. As soon as one raises his prices, someone else undercuts him and price returns to its "natural" level. There are exactly as many pins as people are willing to pay for.

    No one perceived the contradiction at the time. But then, it was only pins.

    ---

    Okay, so that's what the book I'm reading, David Warsh's Knowledge and the Wealth of Nations, says. The problem is, I don't follow his logic. I don't see any contradiction between the pin factory and the invisible hand. David Warsh is just a journalist, so I would have reason to be skeptical, except that George Stiger and Paul Romer (two major economists) also saw a contradiction.

    Adam Smith said that one's ability to specialize depended on the size of the market; Warsh then twists these words into specialization depending on the size of the specializer. Warsh is thereby twisting Smith's consideration of market size into a consideration of market concentration. Also, it is hard to see how "investing in new equipment" or "R&D" is "specialization." That's not specialization; that's simply becoming better at what you've already specialized in. If you make pins for a living, going on to make the pins with "better steel" is not further specialization; rather, an example of further specialization would be (to use one of Smith's examples) going on to only twist the steel of the pins, not straighten it (notice how Smith only talked about the specialization of the workers, not the specialization of the factory as a whole; the latter makes no sense).

    On the other side of the paradox, I cannot see how the invisible hand necessarily implies diminishing returns to scale. If you are able to rake in further profits by expanding your business, this does not violate the principle of the invisible hand: you are still competing with other people in the industry. Even if you were to gain a monopoly through your efficiency, Adam Smith's principles of the invisible hand, competition, and natural market rates would still apply: you would still face pressure to keep prices and quantity and quality at the natural rate; if you slip up, a competitor would be able to sweep in and undercut you, as long as we assume what Smith assumed: that the government allows for "perfect liberty."

    There is no contradiction, as far as I can tell, between benefits from specialization and benefits from competition. Can anyone show me what I'm missing here?

    *Warsh said [Invisible Hand], although I think this is a typo; I'm pretty sure it should read [Pin Factory].
     
  2. Red Stranger

    Red Stranger Chieftain

    Joined:
    Aug 28, 2005
    Messages:
    1,678
    People don't need the best. They just need "good enough." You don't need to be the best to make "good enough," you just need to be "good enough," which is good enough in terms of business.
    That's how the contradiction can be solved.
     
  3. WillJ

    WillJ Coolness Connoisseur

    Joined:
    Aug 9, 2002
    Messages:
    9,471
    Location:
    USA
    Huh? What exactly does that have to do with anything? And keep in mind I'm not looking for solutions to the contradiction, as it's already been solved (in 1990 by an economist named Paul Romer---the solution dealt with looking at technological progress as an economic variable rather than as an outside factor, and modelling the situation accordingly). What I'm looking for is where the contradiction is in the first place; some economists say there is one, but I don't see it.
     
  4. shortguy

    shortguy It's a working title

    Joined:
    Mar 27, 2004
    Messages:
    2,913
    Location:
    the hook
    Now, I'm no economist, but this passage seems off for a few reasons:

    1) Selling more at a lower price doesn't automatically mean greater profits. This probably is not an important mistake wrt his point.
    2) Costs don't fall indefinitely. At some point, an operation gets "too large" and costs rise again. Growing doesn't ensure incresing returns to scale. The monopolistic force is limited by this factor. In most industries, the costs of one firm serving the whole market would be prohibitively high.
     
  5. Red Stranger

    Red Stranger Chieftain

    Joined:
    Aug 28, 2005
    Messages:
    1,678
    I don't think the argument is about technological progress, but rather about being first to the market. It's saying that if you're sufficiently early to the market, you can dominate enough of the market that another business can't get the same success that you have. This is true. Look at Microsoft.

    If we're using Microsoft as an example, their argument will say that since no one is as successful as Microsoft, they're free to charge whatever they want, hence no "invisible hand" to regulate prices. And it's probably true that there won't be a software company that will achieve the success of Microsoft. At least not for a long time.

    But the thing is that a company doesn't need to be as successful as Microsoft to compete with Microsoft. They just need to make a product that is good enough for their target audience, and they'll take business away from Microsoft.
     
  6. Mise

    Mise isle of lucy

    Joined:
    Apr 13, 2004
    Messages:
    28,359
    Location:
    London, UK
    Well, he said it himself; the number of pins you can sell is limited by the size of the market, and since the factory appears to be growing indefinately, there appears to be no limit to the size (geographically speaking) of the market. Therefore, identical companies who were once outside the geographical market for the initial "perfect" company soon become competitors as the company expands.

    Lets say 1 pin manufacterer grows up in Aberdeen, as described. Now, this growth appears unfettered by transportation issues (because, of course, if transportation issues were inhibitive, the company wouldn't be growing). We'll take this as a given -- transportation across Scotland is perfect. But because, at first, the Aberdeen Pin Co can only transport a certain radius, another, identical factory is built by the Edinburgh Pin Co, 200 miles away. The Edinburgh Pin Co (E for short) expands in an identical fashion to the Aberdeen Pin Co (A for short). Eventually, the geographical radius of the two companies' ability to supply goods begins to overlap, and in this area, there is now competition. As the companies expand further, this competitive area grows and grows. Lacking any reason to stop expanding, A and E begin to overlap with B, C, D, F, G,.... etc, until perfect competition is reached.

    This particular scenario is limited by geographical considerations. It's easy to imagine other more sophisticated and pertinent limits to the size of the market.

    That's my theory anyway. Thank you for watching Mise vs Pin Factory vs The Invisible Hand! *rolls credits*

    (PS I hope I'm using the terminology correctly...)
     
  7. Ayatollah So

    Ayatollah So the spoof'll set you free

    Joined:
    Feb 20, 2002
    Messages:
    4,387
    Location:
    SE Michigan
    OK, but then isn't specializer what Smith should have said? After all, if I'm to have a job just sharpening pins, surely that requires that my company be large enough to allow this, not just that the industry be large enough. Unless multiple companies are sharing this one worker, somehow. :crazyeye:
     
  8. JerichoHill

    JerichoHill Bedrock of Knowledge

    Joined:
    Nov 23, 2005
    Messages:
    10,384
    Location:
    Washington DC
    There is no contradiction. Smith described two different scenarios. A company cannot face both rising costs and decreasing costs at the same time.

    Therefore, each represents the rational solution to a different phenomenon.
     
  9. Unser Giftzwerg

    Unser Giftzwerg UgLe Game Promoter

    Joined:
    Feb 22, 2006
    Messages:
    767
    Location:
    GMT-6 (a.k.a. Wisconsin, USofA)
    The contradiction comes about because the Pin Factory touts the competetive advantages to economies of scale. The most efficient Pin Factory earns more, which allows this firm to invest more to further widen its competative edge. Which, according to the theroy, allows proportionally more investment, greater competative edge, more etc and so on until the cmpeting Pin Factories sell so little product the go into another business.

    The contradiction comes about because The Invisible Hand is supposedly out there whipping up new competative forces which constantly work against the Pin Factory's attempts to boost its profits. But the Pin Factory theory, taken to its logical conclusiong, seems to demonstrate shrinking competative forces.

    That's how it strikes me, at least.

    Quibble: "Better steel" for pins is indeed an example of increasing specialization. Steel optimized for making pins is not the same steel optimized for making electrical transformers.
     
  10. Gavin Kennedy

    Gavin Kennedy Chieftain

    Joined:
    Dec 26, 2006
    Messages:
    4
    WillJ has bought the assertions of Stigler that Smith stated a ‘theory’, or ‘theorem’ even, about ‘an invisible hand’ and WillJ thinks that this ‘theorem’ (which appears to be neoclassical ‘perfect competition’) ‘contradicts’ the division of labour. From this association he finds himself trapped in a contradiction of his own ( or rather George Stigler’s) making.

    Fact: there is no ‘theorem’ of an invisible hand in Wealth of Nations. That is a post-Smithian construct built on a simple literary metaphor that he used (also used by William Shakespeare in 1605 in Macbeth and by Daniel Defoe in Mill Flanders, and assorted others fro Roman literature onwards).

    Fact: Smith did not advance a neoclassical theory of perfect competition (that came about 100 years later, out of Walras and Edgeworth’s mathematical work in search of ‘general equilibrium’ economics from their mechanical transfer of some early, and now outdated, mathematical models from physics). He stated a simple model of an economy to illustrate the distribution of revenues from sales in product markets among Natural and Market prices.

    Fact: the allusion to ‘an invisible hand’ (never ‘the’ invisible hand) in Wealth of Nations was about the unintended consequences of risk aversion of merchants between investing their scarce capitals locally, where they knew the people they dealt with and thay had confidence in the rule of law and justice versus investing it distantly abroad to import for sale locally, including in the carrying (shipping) trade. In in Book 4, he was not referring to markets, nor to how they worked, which subjects he had dealt with in Book I of Wealth of Nations.

    His point was blindingly simple (so simple he did not express it other than in a literary manner):

    The aggregate consequence of the actions of the individuals of which it is composed is the sum of the parts which each individual contributes to the total: if each individual maximizes his local contribution by directing all of his capital locally and not dispersing it abroad, the sum of the contributions to annual product or revenue of all those involved will be greater than otherwise. Smith’s metaphor reduces to the ‘arithmetic whole is the sum of its arithmetic parts’. Nothing more; nothing less.

    WillJ gives himself a redundant contradiction in respect of Adam Smith, thanks to the fantasies created by George Stigler and his ‘Chicago Adam Smith’ colleagues. Stigler’s US counterpart bears little resemblance to the Kirkcaldy Adam Smith, who lived just across the Firth of Forth from where I live, in a place called Edinburgh.
     
  11. Unser Giftzwerg

    Unser Giftzwerg UgLe Game Promoter

    Joined:
    Feb 22, 2006
    Messages:
    767
    Location:
    GMT-6 (a.k.a. Wisconsin, USofA)
    WillJ has bought nothing; he is asking honest questions. Did someone poke you in a pet peeve, or something? Read what WillJ is asking before you chastize him.
     
  12. Gavin Kennedy

    Gavin Kennedy Chieftain

    Joined:
    Dec 26, 2006
    Messages:
    4
    "Can anyone show me what I'm missing here?"

    Apologies if you think my contribution is a 'pet peeve', unworthy of my answer to the question set by WillJ above.

    If the quandry faced is a possible contradiction between the division of labour in the pin factory example (though I believe the full significance of Smith's reporting what was widely noticed by many since Plato and Petty wrote about it has to be taken with his example in BookI of the manufacture of the day labourer's woolen coat) and what WillJ reports as the 'theorem of the invisible hand' from George Stigler of Chicago University, I answered with the obvious: if there was no such theorem, even theory, of 'an invisible hand' remotely worthy of the significance given to it by Stigler or his Chicago colleagues (or indeed David Warsh) then his quandry disappears in an instant.

    I noted in his contribution the following: "David Warsh is just a journalist, so I would have reason to be skeptical, except that George Stiger and Paul Romer (two major economists) also saw a contradiction."

    I took it that WilllJ was an economist and felt it appropriate to disparage 'journalists' and take seriously economists. Well, I too am an economist, not a journalist, and state with conviction that George Stigler and Paul Romer, both faculty members in their careers at Chicago, on this subject at least (the alleged theory of 'the' invisible hand and Smith's affinity with neoclassical economics) were woefully wrong.

    My authority for my assertion is Wealth of Nations, Moral Sentiments and Lectures in Jurisprudence, and most certainly not anythig as trivial as a 'pet peeve' on my part.
     
  13. JerichoHill

    JerichoHill Bedrock of Knowledge

    Joined:
    Nov 23, 2005
    Messages:
    10,384
    Location:
    Washington DC
    Gavin, glad to have a fellow economist here. Thanks for taking that time to write out such a good response. Sometimes its tough too.
     
  14. Cheetah

    Cheetah Chieftain

    Joined:
    Dec 20, 2002
    Messages:
    6,881
    Location:
    Norway
    Thanks for the response Gavin (though I think I'll need to read it again after some sleep, it was a bit hard to understand at the moment).

    And welcome to CFC. :)
     
  15. WillJ

    WillJ Coolness Connoisseur

    Joined:
    Aug 9, 2002
    Messages:
    9,471
    Location:
    USA
    Wait, are you saying that there isn't a contradiction? I'm confused.
    Well, in Smith's example, the specializers were the workers. As the market, which includes the factory, expands, the people can specialize more. Right?

    You're right, though, that as the factory expands, its own workers can specialize more, but that hardly means the factory itself is specializing, plus this stops being true after 15 or so workers (which is how many different pin-making tasks Smith said could be done).
    I believe the supposed contradiction comes from the fact that, at least according to some people's interpretation, Smith was claiming that both were far-reaching concepts. Now, you never explained how the two things translate into rising costs and decreasing costs, which is partly what I'm asking.
    That's how the people I mentioned intrepret it, but I don't see why it should be interpreted that way. All Smith talked about were laborers specializing, thanks to a large market---not the factory becoming more and more powerful.
    I guess you're right in a certain sense, but I don't think that parallels with what the kind of specialization Smith was talking about.
    First of all, I should indeed take back my labeling of Mr. Warsh as "just a journalist." I said it not because I am an economist (I am still in high school) but because I figured a journalist, even one as knowledgeable of economics as Mr. Warsh, should be expected to know a little less about economics than an actual economist. And, of course, I realize that I should be skeptical of economists too. I phrased my question as, "Can anyone show me what I'm missing here?" not out of guillibity (If I had "bought" the men's ideas, why would I have bothered to create this thread?) but out of humility, as I alone can hardly be expected to analyze the work of Adam Smith very well, which is where the good people of CFC, including you, should come in.

    When I used the words "theory" and "theorem," I was quoting Warsh. Warsh, by the way, was using these words rather metaphorically, as he was comparing Smith's illustrations (literary ones, as you call them, and as Warsh called them as well, as it so happens) to William Harvey's idea of blood circulation, the argument in defense of which was put forth in a rather elegant way, almost like a geometric theorem (but by no means as rigorous, of course).

    Now, anyway, this is the relevant quote from Smith's Wealth:

    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 bolded what I imagine people like Stigler consider to be important words. In this passage, Smith, directly addresses only the idea of domestic vs. foreign investment, as you said, but perhaps (if you think I'm wrong, do tell) he suggests in the bolded words that this is true in general (with, of course, many exceptions, as Smith pointed out in other parts of the book, and as Warsh pointed out, and as I believe even the Chicago school will admit).
     
  16. Mise

    Mise isle of lucy

    Joined:
    Apr 13, 2004
    Messages:
    28,359
    Location:
    London, UK
    What I've said is that the Pin Factory model necessarily implies competition, which implies the Invisble Hand. So yes I'm saying there isn't a contradiction.
     
  17. Gavin Kennedy

    Gavin Kennedy Chieftain

    Joined:
    Dec 26, 2006
    Messages:
    4
    WillJ: All views should be considered on their merits not on their occupation. David Warsh is a distinguished journalist who has taken a close interest in economics, which makes him no more right or wrong about the history of economic thought than many distinguished economists (of which I include George Stigler – except on the question of Adam Smith’s Wealth of Nations). Both Warsh and Stigler display excellent literary credentials too.

    You say you are ‘still in High School’, which I did not guess from the high quality of your piece. I only took up your question and answered it from the point of view it not being a contradiction at all because one part of it did not apply (Adam Smith did not have a theory of the invisible hand). George Stigler (and the Chicago School) believed that Adam Smith did have a theory of the invisible hand – Stigler said for instance that the “Wealth of Nations is a stupendous palace erected upon the granite of self-interest” (‘Smith’s travels in the ship of state’, 1975, in A. Skinner and T. Wilson, Essays on Adam Smith, Oxford). Spread throughout the US, graduates of Chicago teach ‘the theory of the invisible hand’, attributed to Smith, yet Smith’s writings do not support such an extension of his metaphor.

    Nor does your selection from the quotation: “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” Smith’s social-evolutionary model from his first ‘juvenile’ essay on the philosophical method (c.1744-50; unpublished until 1795), through his essay on the origins of language (1761), his lectures on Rhetoric (first given at the University of Edinburgh 1748-51), Moral Sentiments (1759), Lectures on Jurisprudence (1762-3), the ‘Early Draft’ (1763) and Wealth of Nations (1776). His was an historical approach to social phenomena, not an equilibrium mathematical model. His reference to ‘as in many other cases’ refers to many other instances of the untended (but sometimes highly important) consequences of human motivations generally.

    For example, two ‘savages’ needing to communicate together turned sounds into regular word sounds, which originated languages; superstitious pagans and their invisible gods trying to cope with frightful events laid the basis for philosophical understanding; rich landlords unable to consume the produce of their land ended up distributing that surplus to their armed retainers and serfs almost on the same level they would have received if they had never ‘acquired’ the land; the vanities of feudal lords leading them to purchase ‘trinkets and baubles’ from traders spent the basis of their local war-making power (the armed retainers and serfs), which led to the rise of towns and elements of democracy; and, when merchants were highly risk averse (and with piracy, fraud and foreign theft they had good reasons to be averse), the aggregate of their individual local wealth creation increased local wealth above what it would have been if foreign trade was ‘safe’.

    In his account of the evolution of markets (Book I) and its elaboration in Book II, Smith did not refer to anything ‘miraculous’ or ‘magical’ about how they worked – no ‘invisible hand’ or force drove markets. What Chicago ('Adam Smith is alive and well and living in Chicago') did was give its neoclassical models ‘authority’ by linking them to Smith’s metaphor of ‘an invisible hand’ in contradiction to what he wrote and the whole tenor of his approach to political economy. I have argued against this view for some years, more so now that my retirement has given me more time (see my blog: www.adamsmithslostlegacy.com).

    Smith’s reference to the many exceptions to self-interest driving markets to socially optimum outcomes is not a ‘get out of jail’ card for invisible hand theorists or the Chicago School. He cannot be said to have accepted that self-interest necessarily leads to socially beneficial outcomes; it could do so, of course, but he was too suspicious of self-interested individuals with the power to subvert social ends to their own vanities, be they monopolists, protectionists, ambitious ‘princes’, ‘cruel rulers of mankind, and ‘men of system’, to hand such a blank endorsement to them.

    The ‘many other cases’ refers to the consequence of human motivations across the whole social spectrum of behaviours and not just to market situations (patiently analysed in Books I and II of Wealth of Nations); his entire corpus of writings concerned much more than economics.

    Apologies if my contribution earlier was a bit ‘robust’. If you are interested in these aspects of economics at such a level, I think you will make a formidable academic.
     
  18. WillJ

    WillJ Coolness Connoisseur

    Joined:
    Aug 9, 2002
    Messages:
    9,471
    Location:
    USA
    Re-reading your post with that in mind, what you're saying makes sense. It seems to poke a hole in the idea that we should be concerned with who came first into the market.
    Thank you for your informative post. I must say, you've built a convincing case that Smith's "invisible hand" metaphor shouldn't be taken as a grand theory, which is enough, as you say, to call into question the idea that there must be some contradiction between it and the pin factory. Similar to what JerichoHill said: there's no contradiction, simply because they are about two different situations, which need not overlap.

    That said, though, I'd still like to fully understand the economics of this, and so let's have a "what if" scenario: just pretend that Smith did have an invisible hand grand theorem, implying that competition generally leads to the social good. If that were true, would there be a contradiction with the pin factory illustration of specialization? For reasons that I pointed out in the original post, and for different reasons that Mise mentioned, it seems to me like the answer is "no," there would still not be a contradiction. Even if the pin factory model and the invisible hand metaphor are taken as universals, it doesn't seem to me that this is a contradiction. Stigler, Romer, Warsh, and now JerichoHill all say that it's a matter of decreasing costs vs. increasing costs, but I don't see how decreasing/increasing costs have anything to do with the matter.

    The reason I ask about this what-if scenario is that Warsh's book and Romer's ideas deal with bringing the issue of knowledge/ideas into economics (hence the title of Warsh's book), and so it is quite likely that Warsh's book and Romer's ideas are worth thinking about (which is basically what this thread is for)---if they can be paralleled with Adam Smith, as Warsh and Stigler tried to do, then great, but if not (which is what you are convincing me is the case), the book and ideas are not necessarily without value. (Of course, if the book and ideas are actually without value, then I'd like to hear your thoughts on that as well. ;))

    And thank you for your compliment. :)
     
  19. JerichoHill

    JerichoHill Bedrock of Knowledge

    Joined:
    Nov 23, 2005
    Messages:
    10,384
    Location:
    Washington DC
    Will, I think you misinterpret what I said. Perhaps I said it wrong, but I meant that these are separate items and therefore must be considered separately and therefore are not contradictory
     
  20. Whomp

    Whomp Keep Calm and Carry On Retired Moderator

    Joined:
    Dec 17, 2004
    Messages:
    18,198
    Location:
    Chicago
    I'm reading your blog Gavin and kudos to WillJ and his OP for being prominently mentioned.

    Not to get off topic but I think it would be interesting if you started a thread whether on negotiation behavior or discussing hedge funds .
     

Share This Page