THE INVISIBLE HAND: THE METAPHYSICS IN THE THEORY OF ADAM SMITH COMPARED ...

106 Pages·2011·0.52 MB·English

by  Immanuel Noexiste

THE INVISIBLE HAND:
THE METAPHYSICS IN THE THEORY OF ADAM SMITH
COMPARED WITH MODERN ECONOMICS

Master’s Thesis

Danish Title: Den usynlige hånd: Metafysikken i Adam Smiths
teori sammenlignet med moderne økonomisk teori
Study Program: MSc in Business Administration and Philoso-
phy, Copenhagen Business School
Department: Department of Management, Politics and Philos-
ophy, Copenhagen Business School
Supervisor: Professor Niels Henrik Gregersen, Faculty of The-
ology, University of Copenhagen
Name: Joakim Kromann Rasmussen
E-Mail: [email protected]

Submitted December 5, 2011

Copenhagen Business School, 2011
ABSTRACT

This thesis shows how the metaphysical foundation in Adam
Smith’s theory is reflected in modern economic theories. It is
shown that the question of order is the main economic prob-
lem for Smith as well as the modern economists. With this
question in focus, Smith’s philosophy is synthesized and rein-
terpreted. Upon this reading of Smith, a comparison is made
to two modern economic positions: general equilibrium
theory (Kenneth J. Arrow, Frank Hahn, and Gerard Debreu)
and theories on the self-organizing economy (Friedrich A.
Hayek, Thomas Schelling, and Paul Krugman). In this regard,
the thesis is a philosophical interpretation of Smith’s works
emphasizing the idea of the invisible hand and the metaphysi-
cal foundation in his theory: an interpretation juxtaposed with
two stances in modern economic theory in order to unravel
how the metaphysics in Smith’s works still finds an expression
in modern economic thinking.
The analysis falls into three parts. While the two first
parts make up the interpretation of Smith, the third part
makes up the comparative analysis. In the first part it is
shown how Smith deals with the question of order in his
works, as when he argues that humans qualifies epistemologi-
cally by organizing the events they meet, that humans at a
social level strive for the sympathy of others to stabilize the
social life, and how the market organizes resources for the
common good. While many Smith scholars have interpreted
his theory secularly, within the last fifteen years there have
been attempts to interpret his theory nonsecularly. Under the
influence from this research, a nonsecularized interpretation
of Smith finds its way in the second part of the thesis. This
part shows that the secular elements in Smith’s theory stand
forth more consistent in light of the theological subject of
providence. In the third part, Smith’s basic assumptions are
compared with assumptions set forth in the two economic
positions. This part shows how the question of order has in-
fluenced modern economic theory, and further, how the idea
of the invisible hand, in a secularized form, still haunts mod-
ern conceptions of economic theory.

Keywords: History of philosophy; invisible hand; ontology
of economics; order; organization; Adam Smith.
DANSK RESUMÉ

Nærværende kandidatafhandling viser, hvordan det teoretiske
og metafysiske grundlag, som er at finde i Adam Smiths teori,
stadig er at genfinde i moderne økonomiske teorier. Der vises,
at spørgsmålet om orden er det centrale økonomisk-teoretiske
problem for såvel Smith som de moderne økonomer. Med
spørgsmålet om orden i fokus sammenfattes og genfortolkes
Smiths økonomiske og filosofiske tænkning. Ud fra denne
læsning foretages da en sammenligning af to økonomisk-
teoretiske positioner, nemlig generel ligevægtsteori (Kenneth
J. Arrow, Frank Hahn og Gerard Debreu) og hvad der kunne
kaldes for teorierne om den selvorganiserende økonomi (Frie-
drich A. Hayek, Thomas Schelling og Paul Krugman). I den
forstand er afhandlingen en filosofihistorisk fortolkning af
Smiths filosofi med særlig vægt på idéen om den usynlige
hånd og teoriens metafysiske grundlag som sammenlignes
med to positioner inden for nyere økonomisk teori med hen-
blik på nærmere at udrede, hvordan Smiths metafysik stadig
er at spore i moderne økonomisk tænkning.
Afhandlingen falder i tre dele. De første to dele udgør
fortolkningen af Smith, hvor der i første del vises, hvordan
Smith i sin filosofi tematiserer spørgsmålet om orden. Således
når han fokuserer på, hvordan mennesket epistemologisk set
er et væsen kendetegnet ved at ordne de begivenheder, det
møder; hvordan mennesket socialt set stræber efter andres
sympati for at kunne stabilisere det sociale liv; og hvordan
markedet organiserer de menneskelige ressourcer til et fælles
bedste. Mens mange forskere har fortolket Smith som en se-
kulariseret tænker, har der inden for de sidste femten år været
forsøg på at fortolke ham som ikke-sekulariseret. Under ind-
flydelsen af denne forskning forsøges i anden del en ikke-
sekulariseret fortolkning af Smith, hvor det vises, at teoriens
verdslige momenter fremstår filosofisk mere konsistent i lyset
af teoriens teologiske og metafysiske aspekter, herunder sær-
ligt spørgsmålet om forsynslæren. I afhandlingens tredje del
sammenlignes Smiths grundlæggende antagelser med de an-
tagelser, der er at finde i de to økonomisk-teoretiske positio-
ner. Denne del viser, hvordan spørgsmålet om orden generelt
har påvirket moderne økonomisk teori, og hvordan forestil-
lingen om den usynlige hånd, i sekulariseret form, endnu spø-
ger i moderne udlægninger af, hvordan økonomi skal forstås.

Keywords: Filosofihistorie; orden; organisering; Adam
Smith; den usynlige hånd; økonomiens ontologi.
Scientists were rated as great heretics by
the church, but they were truly religious
men because of their faith in the orderli-
ness of the universe.
(Einstein)

Il est mauvais d’être en équilibre sur des
haches, sur des haches qui vont tomber,
qui vont s’enfoncer dans la chair tendre, si
douloureuse, si lente à se refermer. [...]
Mais comment, de ces précaires et insur-
portables passages, émigrer vers un réel-
lement satisfaisant et définit équilibre?

(Michaux)
LIST OF ABBREVIATIONS

EPS Essays on Philosophical Subjects, including:

Ancient Logics ‘The Principles which Lead and Direct Phi-
losophical Enquiries; Illustrated by the
History of the Ancient Logics and Meta-
physics’
Ancient Physics ‘The Principles which Lead and Direct Phi-
losophical Enquiries; Illustrated by the
History of the Ancient Physics’
Astronomy ‘The History of Astronomy’
External Senses ‘Of the External Senses’

TMS Theory of Moral Sentiments
WN An Inquiry into the Causes and Nature of the Wealth of Na-
tions
LJ(A) Lectures on Jurisprudence, Report of 1762–3
LJ(B) Lectures on Jurisprudence, Report dated 1766

All works are from The Glasgow Edition of the Works and Correspon-
dence of Adam Smith by Liberty Fund originally published by Oxford
University Press. References to the works are as follows:

Ancient Logics.1 = ‘The History of the Ancient Logics and Meta-
physics’, § 1
Ancient Physics.2 = ‘The History of the Ancient Physics’, § 2
Astronomy.I.3 = ‘History of Astronomy’, Section I, § 3
External Senses.60 = ‘Of the External Senses’, § 60
TMS.I.iii.2.2 = The Theory of Moral Sentiments, Part I,
section iii, chapter 2, § 2
WN.I.x.b.1 = Wealth of Nations, Book I, chapter x, section
b, §. 1
CONTENTS

1. INTRODUCTION ........................................................ 3
1.1. Method .................................................................................................. 6
1.2. Literature Review ................................................................................. 9
1.3. Textual Basis ....................................................................................... 12
1.4. The Influence on Smith ...................................................................... 13
1.4.1. The Stoics’ Conception of Nature ............................................... 14
1.4.2. The Tradition of Spontaneous Order ......................................... 17
1.5. Exposition ........................................................................................... 19

2. WORLDLY LIFE: ORGANIZATION .......................... 22
2.1. Organizing Events: Invisible Chains.................................................. 22
2.2. Organizing the Social: Sympathy and the Spectator ........................ 27
2.3. Organizing the Market: Prices ........................................................... 36
2.3.1. Nature: The Prime Mover in the Economic System .................. 37
2.3.2. Labor and Division of Labor: Production of Difference ........... 38
2.3.3. Capital: Organizing Medium ...................................................... 41
2.3.4. The Market: The Invisible Hand ................................................ 43

3. HEAVENLY LIFE: ORDER ....................................... 53
3.1. One God and One Hand ..................................................................... 54
3.2. A Part of the Whole ............................................................................ 58
3.3. The Invisible Hand: Providence ........................................................ 64
Summary: The Metaphysics of the Invisible Hand ................................. 67

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4. MODERN ECONOMICS: SELF-ORGANIZING
ECONOMY AND GENERAL EQUILIBRIUM THEORY . 69
4.1. Economic Self-Organization .............................................................. 70
4.1.1. Hayek: Catallaxy .......................................................................... 71
4.1.2. Schelling and Krugman: Self-Organizing Economy .................. 74
4.2. Economic Order ................................................................................. 79
4.2.1. Arrow, Hahn, and Debreu: General Equilibrium Theory ........ 80

5. CONCLUSION .......................................................... 85

REFERENCES ............................................................................... 89

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1. INTRODUCTION

In the year 1776 a sublime phenomenon appeared in the
northern part of the foggy British Islands. Several previous
appearances had been observed, especially in 1759, but with-
out any larger public interest. This time, seventeen years later,
appearing in a different setting, the phenomenon gathered
strength to a degree that would be noticed in Scotland and
Europe then, but as far as U.S., Chile, and China in the time
coming. The reappearing and illusive phenomenon is the in-
visible hand by Adam Smith (1723–1790) appearing in his
work An Inquiry into the Nature and Causes of the Wealth of
Nations.
Wealth of Nations (WN) is without doubt one of the ma-
jor contributions to economic and political economic thought,
surely in economics but indeed also in political discussions.
The idea of the invisible hand has to a large extend contri-
buted to form our everyday conception of the economy as
when we use expressions such as the self-regulating market,
market efficiency and free market. Still today, the idea of the
invisible hand is subject to controversies, for, what did Smith
meant? Does the idea of the invisible hand refer to a meta-
physical being? Does the invisible hand exist? Is it a deity? Is
it an expression to grasp market phenomena? Despite such
unanswered questions, or maybe because of them, the idea of
the invisible hand still attracts the attention of the public and
academic debate.
The invisible hand is an idea used by Smith to express the
properties of the market and its behavior. The crucial question
is, if Smith hints to a metaphysical being to account for these
properties, or if the idea of the invisible hand is just a figure of
speech explaining market mechanisms. When reading the

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