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« There is only Good Economics ... and it belongs in Economic Departments (and perhaps all the social sciences and policy sciences, including law) | Main | The Fall Liberty Tour Continues »


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What is the big deal about being at (or within 5% of) the center, especially of a very long book? Numerous psych studies show biggest impacts and memorability come from placing something at either the beginning or end of something. Putting something at or near the center is usually a good way to bury it.

Also, the usage of this phrase by Smith is not what most people think it is, rather peculiar actually. It is later interpreters who have given it its textbook interpretation.

Finally, he did not come up with it. It, or something like it, was almost a cliche at the time he wrote. However, most of those other works have been pretty much forgotten.

Barkley - Could you remind those of us who may have forgotten those works?

According to Stefan Boehm in his "Is There Progress in Economics?" 2002, p. 101, the term "invisible hand" dates to 1712 when Robert Cotes used it in correspondence with Isaac Newton in regard to his theory of gravity. The term was deep trope of the British Enlightenment, but Adam Smith was probably the first to apply it to economics.

It's from MacBeth, it was well known at the time:

"Be innocent of the knowledge, dearest chuck,
Till thou applaud the deed. Come, seeling night,
Scarf up the tender eye of pitiful day;
And with thy bloody and invisible hand
Cancel and tear to pieces that great bond
Which keeps me pale! Light thickens; and the crow
Makes wing to the rooky wood:
Good things of day begin to droop and drowse;
While night's black agents to their preys do rouse.
Thou marvell'st at my words, but hold thee still;
Things bad begun make strong themselves by ill.
So, prithee, go with me."


OK, but a bit removed from the sort of usage that was common during the British Enlightenment. That there is a link between the theory of gravity and the theory of economic equilibrium is as old as, well, Adam Smith, if not Newton himself, who did think a lot about economics. Your version is more a night of the living dead model, although clearly the phrase is an oldie but goodie in the English language.

Oh, btw, everybody should keep in mind that Smith's use of the phrase in WN was in connection with one of his few outbursts of protectionism. Investors thinking about whether to invest abroad or at home were the ones that he declared would be led by that famous hand to see the wisdom of...investing at home.


I confess I was surprised by your last comment and checked it out here:

I don't think I accept your read. Is there something in there about preventing investors from investing abroad? I scanned only, but I didn't see that.

If you read from the start of the chapter, or follow down a bit further, I think it's clear he is opposing "restraints" on "importation." So he is opposing protectionism. He makes the point that, as Mill later put it, "Industry is limited by capital," and expresses opposition to directing domestic industry into "artificial" channels through restraints. A bit below the famous quote he says, "It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy."

I think you were thrown off by neglecting context. His seemingly pro-restraint remarks are comments saying that if you see someone investing at home, then which every domestic direction he's going in is likely to be best.

I think Roger is right, the context of the paragraph makes it clear that Smith is talking about self-interest in general. The example of investing at home is just an example.

I agree that he is not directly supporting protectionism per se, but he does do exactly as I said, although arguing it on ground of information and control. Of course it is self-interest, one likes to see one's capital nearby where one knows what is happening to it and can get one's hands on it and one knows the laws that affect it and so on. He goes on at great length about this.

However, and here is the part that is quasi-protectionist, he also argues that investing at home involves a greater postive impact on the domestic economy, which we certainly hear all the time from protectionists. And in the end that is exactly the key to this argument about the invisible hand leading the investor to work for the greater goood: because he is investing at home rather than abroad, just as any good protectionist would argue, even though he is most definitely not arguing specifically for limits on importation.

Right: Agency problems and monitoring costs tend to favor domestic investments circa 1776. I think the bit about maximizing domestic employment was meant to parry protectionist concerns. "You protectionists seem to think we need restraints to ensure a brisk demand for domestic labor. Well," says Smith in effect, "that's wrong because industry is limited by capital. Besides, this fear of trading with foreigners is completely exaggerated. You generally want to invest at home anyway because of monitoring costs and, therefore, the amount of capital going overseas to employ foreigners isn't so great in the first place." Moreover, Smith is in effect saying, "The capitalist who chooses to put his capital to work domestically because of the transaction costs of investing abroad adds just as much to domestic labor demand as he would have if his choice were motivated by the opportunity to exploit a domestic monopoly created by restraints on trade." I don't really see how that's a protectionist outburst. I think Smith is quite unambiguous in opposing restraints on trade.

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