Adam Smith’s Very Brief Mention and Discussion of the Invisible Hand, In His The Theory of Moral Sentiments and The Wealth of Nations, Was Not Intended to Provide Any Theoretical Foundation for Any of His Analysis: Smith Regarded the Invisible Hand as an Unimportant Obiter Dicta Used for Metaphorical Purposes Only
36 Pages Posted: 3 Aug 2019
Date Written: July 27, 2019
Adam Smith’s The Theory of Moral Sentiments (1759) provided a general analysis of virtue ethics (prudence, temperance, courage, justice, benevolence, where Smith combined the virtues of temperance and courage into the virtue of self command) that was applied to all areas of a human society -the political, ethical, economic, social, civic, and institutional. His The Wealth of Nations (1776) provided a specific analysis that concentrated on the one virtue that primarily applied in the economic realm, the virtue of prudence. It is in the market place where this all important virtue manifests itself.The connection between Smith’s two books is very similar to the connection between Keynes’s A Treatise on Probability (1921), a book that provided a general theory of decision making that applied to all aspects of society, and his General Theory (1936), which applied his general theory of decision making to one specific area, the area of macroeconomics, which was the study of the economy as a whole.
Smith’s version of virtue ethics is heavily connected to the specific virtue ethics of Aristotle, which, in turn, was a version of Plato’s virtue ethics that Plato had learned from Socrates. All of the different types of virtue ethics (Buddha, Confucius, Plato, Jesus, Augustine, Aquinas, Mohammed, etc.) regard the virtue of prudence as the first virtue that must be successfully implemented and practiced before any other virtue can be successfully mastered and applied.
At least four different types of general errors are made among economists writing on Adam Smith, the one exception being Gavin Kennedy.
The first general error is to confuse and conflate Jeremy Bentham’s Maximize Utility concept ,where an individual’s self interest stands for the love of money, wealth and material goods, based on selfish, insatiable and greedy psychological egoism, with Smith’s virtue of prudence, where self interest stands for behavior which is aimed at maintaining the security and safety of the individual’s long term health and welfare through personal dedication, determination, hard work, cautiousness, thriftiness, frugality, saving, parsimony, judiciousness, circumspection, shrewdness and sagacity. The prudent person will, like the bears, beavers, and squirrels, build up a surplus, rainy day fund of sufficient size to protect him, his family and relatives from the uncertainties and vicissitudes of life. Only after this has been accomplished is an individual in a position to implement other virtues and be benevolent and magnanimous.
The second general error made by economists writing on Smith is to ignore or downplay the impact of a very significant segment of the upper income class, which Smith categorized as being prodigals, imprudent risk takers and projectors. These individuals were associated with the British East India Company and the private banking industry. The British East India Company dominated English economic and political life and policy from the 1680’s till the 1850’s. The existence of such individuals renders the very idea of an Invisible Hand of the Market, which, supposedly, is able to transform individual, micro selfishness into aggregate, macro social benefits for all through the price mechanism, a phantasm of the mind.
The third general error is to confuse a concern with consequences on Smith’s part as being evidence that he was a utilitarian. For utilitarians, consequences alone matte. For virtue ethicists, consequences, as well as honesty, sincerity, fairness, motivations, intentions, etc., also matter. An example of this error is R. Skidelsky’s claim that Keynes had utilitarian sympathies because he considered consequences (Skidelsky,1992,p.66). Thus, supposedly, Keynes’s book, titled The Economic Consequences of the Peace (1919), makes him a utilitarian because he considered consequences.
The fourth general error is the failure to recognize that Smith’s original contributions to decision making under uncertainty and risk lead to the complete and total denial of even the possibility of maximizing utility by optimization because uncertainty, in general, meant that the necessary point probabilities and point outcomes could not be specified by decision makers. Frank Knight completely overlooked this aspect of Smith’s thought, as did Jacob Viner. Smith rejected the concept of precise, additive probability and was the first academic to explicitly use imprecise, interval valued probability and recognize that risk was not proportional to profit, as opposed to Cantillon‘s belief that there was a linear (proportional) relationship between profit and risk. Cantillon dealt with risk, not uncertainty.
Correcting these four errors (See SSRN paper by Brady in References) leads to the conclusion that Smith’s general system required a clear cut role for government to use laws and sanctions to actively prevent the detrimental activities of the prodigals, imprudent risk takers and projectors from severely damaging the rest of society,the sober people, through their use of bank loans to engage in (a) the financial manipulation of debt by leverage and (b) speculative practices in financial and money markets through their access to bank loans, which led to bubbles like the Mississippi Bubble and South Seas bubble. Opposing Smith on these issues was Jeremy Bentham, a lifelong advocate and agent of the British East India Company, who actively opposed the American Revolution, the Declaration of Independence, the American Constitution and the Bill of Rights.
Keywords: Smith, Virtue ethics, Benthamite Utilitarianism, Kennedy, money, banking, prodigals, Imprudent risk taker, projectors
JEL Classification: B10, B12, B14, B16, B20, B22
Suggested Citation: Suggested Citation