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 Philosophy, Copenhagen Business School Department: Department of Management, Politics and Philosophy, Copenhagen Business School Supervisor: Professor Niels Henrik Gregersen, Faculty of Theology, 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 problem for Smith as well as the modern economists. With this question in focus, Smith’s philosophy is synthesized and reinterpreted. 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 metaphysical 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 epistemologically 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 influenced modern economic theory, and further, how the idea of the invisible hand, in a secularized form, still haunts modern 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 økonomiskteoretiske positioner, nemlig generel ligevægtsteori (Kenneth J. Arrow, Frank Hahn og Gerard Debreu) og hvad der kunne kaldes for teorierne om den selvorganiserende økonomi (Friedrich 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 henblik 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 sekulariseret tænker, har der inden for de sidste femten år været forsøg på at fortolke ham som ikke-sekulariseret. Under indflydelsen af denne forskning forsøges i anden del en ikkesekulariseret fortolkning af Smith, hvor det vises, at teoriens verdslige momenter fremstår filosofisk mere konsistent i lyset af teoriens teologiske og metafysiske aspekter, herunder særligt spørgsmålet om forsynslæren. I afhandlingens tredje del sammenlignes Smiths grundlæggende antagelser med de antagelser, der er at finde i de to økonomisk-teoretiske positioner. Denne del viser, hvordan spørgsmålet om orden generelt har påvirket moderne økonomisk teori, og hvordan forestillingen om den usynlige hånd, i sekulariseret form, endnu spøger 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 orderliness 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 insurportables passages, émigrer vers un réellement satisfaisant et définit équilibre? (Michaux) LIST OF ABBREVIATIONS Essays on Philosophical Subjects, including: EPS Ancient Logics ‘The Principles which Lead and Direct Philosophical Enquiries; Illustrated by the History of the Ancient Logics and Metaphysics’ Ancient Physics ‘The Principles which Lead and Direct Philosophical 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 Nations 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 Correspondence 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 Metaphysics’, § 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 1 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 2 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 without 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 invisible 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 major 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 contributed 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 metaphysical 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 3 works of Smith, it is difficult to ignore the phrases that have a theological or metaphysical content. Instead of simply neglecting such phrases, this thesis examines the idea of the invisible hand in their light. I interpret the philosophy of Smith to expose and discuss the general assumptions in his philosophy emphasizing the question of order. The first concern of the thesis, then, is a historical philosophical inquiry focusing on the metaphysical parts of the theory of Smith including the idea of the invisible hand. The theory of Smith has had a major influence on later political economic theory and economics. Many parts of his theory have been rejected by later economists, and surely, the technical details in his theory do no longer play a role in present economics. However, other facets of his theory, and especially his general assumptions, remain in modern economic theory: in the self-organizing economy (Friedrich A. Hayek, Thomas Schelling, and Paul Krugman) and general equilibrium theory (Kenneth J. Arrow, Frank Hahn, and Gerard Debreu). These facets revolve around the metaphysical assumptions and the general economic problems Smith sets forth to solve. The second concern for the thesis, then, is to compare the metaphysical aspects found in the works of Smith with the general assumptions found in modern economics. A research question summarizes these two concerns: How are the metaphysical aspects revolved around the idea of the invisible hand found in the theory of Adam Smith reflected in modern economic thought? The thesis sounds: Smith is concerned with how order is established, and despite the scientific developments in economic theory, reminiscences of such concern is still found in modern economic theory, something reflected in the problems modern economists set forth to solve. 4 The question of order is related to notions such as order, organization, and self-organization. It also covers notions such as coordination, regulation, and equilibrium. Although I lose some of the slight differences between these notions, I group them together to be able to compare them across the various forms they may appear in. More concretely, the notion of order designates either that a part and the whole is in concordance with each other or that a domain has reached a certain stable state. 1 It may express both an activity, as when a realm organizes, and a state, as when a realm is in order. 2 Unless otherwise stated, the notion of self-organization is used when referring to “the idea that systems are organized out of preestablished elements” (Gregersen 1998, 335). The notion of self-organization (different from the notion of organization stating without further characterization that a realm organizes) is an activity specifying that a realm organizes by its own means and within its own boundaries. The purpose of the thesis is not to criticize Smith for having metaphysical references and allusions in his theory. Neither is the purpose to criticize the economic theories for inheriting these metaphysical aspects under a new form. Rather, more modestly and less controversial, I expound the metaphysical grounds found in Smith’s theory to expose how modern economic theory resembles his thought. In more general terms, then, the thesis explores a way of thinking in economic thought in which the question of order has been of central relevance and has shaped later economic theories. Following this definition: “Ordnung […] ist objektiv das strukturierte, geregelte, nicht zufällige Verhältnis der Elemente eines Ganzen, aktiv dessen Herstellung. Jede Ordnung bezieht ein Ordnung-Prinzip (Formalaspekt) auf die Mannigfaltigkeit eines Bereichs (Materialaspekt)” (Anzenbacher 1998, 1112). 2 The word organization never refers to a physical entity such as an institution or a company. 1 5 General assumptions in economic models and theories are important to study for at least two reasons. First, an economic theory is a frame of reference to understand parts of our world, the economic domain, which conducts our way of thinking about such domain. By examining the general assumptions of an economic theory, we can reflect on the foundation such theory is based on. Second, a theory is not an innocent contribution to economic science. It may be included in scholarly debates, but more important, it may also be adopted by institutions organizing the economy. An economic theory may for these reasons potentially transform social and economic structures at a basic level and to disclose such general assumptions is a necessary, continuous task. 1.1. Method When dealing with a problem, the problem gives the method. In this thesis the problem is as already mentioned two-sided. First, how to understand the metaphysical allusions and the idea of the invisible hand found in the works of Smith. Second, how to compare the general problems posed by Smith with modern economic theories. The first side of the problem could be studied by economic studies such as econometrics, case study based economics, micro-economic theory or the like, but they seldom reflect on their historical and underpinning presumptions. Instead, they set forth to develop problems of technical character trying to explain different economical phenomena (problems, of course, important to explore and solve). These studies may give an account of the existence of the invisible hand studying it as an expression for price mechanisms regulating market behavior. In this thesis, however, the problem is not if the invisible hand exists or not. The problem is what role the idea of the invisible hand and the metaphysical allusions play in Smith’s theory, and how they correlate with the question of order. 6 Other research fields have tried to unravel the idea of the invisible hand, most notably history of economic thought and history of philosophy. While history of economic thought tends to conceive the idea of the invisible hand as a not fullydeveloped theory of equilibrium theory, history of philosophy focuses on the metaphysical allusions found in the works of Smith. For these reasons, a historical philosophical reading of his works presents itself as a reasonable method. In my reading of the works I have two aims. First, I dwell on the phrases where Smith refers to a deity or the invisible hand. In these phrases the metaphysical aspects of his theory are explicit. But, when focusing on the general assumptions found in Smith’s works, other implicit metaphysical claims appears such as whether the universe is organized or not. The aim in this case is to infer a general theme of order. Until now I have used the word metaphysics rather vaguely, and surely, it is a disputed and ambiguous notion and discipline (see Ritter and Gründer 1980, 1186–8; van Inwagen 2007, § 1). Instead of sketching out the history of metaphysics and develop a notion considering all the possible meanings, I will settle giving a stipulative definition. The definition revolves around two slightly different but related meanings. First, when analyzing the passages in which Smith refers to a deity or the invisible hand, metaphysics is close to theology. A second meaning of the word metaphysics appears when Smith gives a general account of how the universe or the market is. Metaphysics, then, is not necessarily concerned with a suprahuman being but to general nonempirical statements on the universe of the character: is the universe distinguished by order or disorder? These two meanings of the word metaphysics are related to the first side of the problem. The second side of the problem is concerned with the comparison between the general assumptions found in the 7 works of Smith and those found in modern economic theories. While the general suppositions found in Smith’s theory are metaphysical, when turning to modern economic theories, we might label such general statements as the ontological assumptions of the theory. A general claim found in this thesis is, then, that the metaphysical assumptions found in Smith’s theory are reflected as ontological assumptions in modern economic theories. To guide my analysis of the ontological assumptions I use the following definition of ontology: “It is common to speak of […] the ontology of a theory, meaning the things that would have to exist for that theory to be true” (Craig 1998). For the modern economic theories, what has to exist is a belief in that the economy is either a realm already in order or a realm organizing itself. The research field known as philosophy of economics, and in particular ontology of economics, studies and criticizes such ontological assumptions in economic theories (see Guala 2004; Fullbrook 2009a, 2009b; Lawson 2003; Mäki 2001a, 2001b, 2002). My analysis is partly guided by this approach. However, they do not study economic theories historically and comparatively for which reasons I call upon the approaches of Michel Serres (2000) and Niels Henrik Gregersen (2008, 2006). Common for their approaches is that they work interdisciplinary discussing fundamental problems and ideas of relevance for two different fields of study. The former (in the mentioned work) compares early philosophy and modern physics, while the latter discusses the conjunction between theology and natural science. Similarly, but without claiming to reach such deep analysis, I examine an important idea in economic thought, unravel the metaphysical allusions in Smith’s works, and compare these with the ontological claims found in modern economic theories. 8 1.2. Literature Review Many attempts have been made to clarify the first side of the problem. Among these we find political interpretations posing arguments for economic liberalism (Baker 2010; Flew 1987; Friedman 1981). Invisible hand discussions have also been carried out in distant fields such as philosophy of science (Leonard 2002; Ylikosky 1995). Inside economic theory, discussions have been carried out in relation to several parts of the theory of Smith. Most noticeably, we find accounts of the idea of the invisible hand as something explaining unintended consequences on the market (Aydinonat 2008; Lehtinen 2009). On the other side of the scale we find attempts to overcome the invisible hand, either by proposing new ways of study for economics (Moore 2006), or by criticizing the influence the notion of the invisible hand has had on later economics (Finlayson et al. 2005). The variety of these studies shows the broad interest the idea of the invisible hand has gained. These studies, however, too often focus on the idea of the invisible hand as such without giving a comprehensive account of it based on Smith’s works. Another line of study is proposed by history of economic thought and history of ideas. These studies contextualize the theory of Smith displaying the influence from general ideas of his time such as general ideas of order and equilibrium (Toulmin 2001, 56–7). Other general historical approaches focus on the chronology in the history of economic thought showing how the idea of the invisible hand and the idea of equilibrium inspired future progress in economic thought (Bronk 1988; Foucault 2008; Ingrao and Giorgio 1990; Lal 2006; Milgate and Stimson 2009; Sandmo 2008; Smith 2006; Suntum 2004; Tieben 2009). Such studies are relevant and provide a background for my reading of Smith’s works, 9 but they do not scrutinize the works from which we may extract the general and metaphysical assumptions. For such a task, close readings of Smith are needed. Historical philosophical readings have so far been the ones most devoted to this task. Among these we find general readings of either Smith (Skinner 1989; Lawler 2006; Young 2009) or the invisible hand (Vaughn 1989). There are, however, also specific discussions on the notion of the invisible hand and the metaphysical allusions found in Smith’s works. To form a general idea of these discussions, they can be divided into secular and nonsecular readings, that is, readings for which the metaphysical allusions are irrelevant and relevant respectively. In a secularized age, not surprisingly, the notion of the invisible hand is by secular interpreters considered as either a metaphor (be that for price-mechanisms, market efficiency, competition or the like) or simply as a joke (Gramm 1980, 128; Hahn 1981; Kennedy 2008, 210; 2005, 165; Kurrild-Klitgaard 2004; Pack 1995; Rothschild 1994). Such interpretations seem to neglect the time Smith lived in where the division of faculties in the sciences were not strongly pronounced enabling metaphysical discussions to influence other disciplines. More important, these interpretations often fail to juxtapose the idea of the invisible hand with the metaphysical allusions found several places in the works of Smith. One may therefore argue that such interpretations are selective not including important passages in Smith’s works. On the other hand, one could still insist that the invisible hand is a metaphor, be that for a worldly or heavenly entity. To my mind, this question is wrongly posed. The invisible hand might be a metaphor, but regardless of its literary character, we are to look at the functional role it plays in the theory. It is that element in the theory, which organizes the market, and without it, the theory is amputated (in line with Hill 2001). In my interpretation, 10 the notion of the invisible hand epitomizes the organizing character of the market, and this organization is ultimately enabled by a deity. In other words, attention is needed towards phrases and allusions of metaphysical character when interpreting the works of Smith. The nonsecularized interpretations emerged in the 1990s following a track left in the second half of the 20th century by Jacob Viner (for an overview, see Kleer 2000). These interpretations discuss the teleological, theological, and metaphysical aspects in the works of Smith stressing other aspects of his theory than just his economic contributions (Brat 3 ; Clarke 2000; Evensky 1993; Harrison; Hill 2004, 2001; Jones 2010; Keppler 2010; Kim 1997; Kleer 2000, 1995; Klein 2009; Long 2009; Oslington 2011; Oswald 1995; Pack 1995; Schabas 2003; Waterman 2002). The first objective for this thesis is to contribute to these studies. In addition to discussing the nonsecularized facets of Smith’s theory, I also juxtapose the metaphysical parts with the economic parts: something often toned down by these studies, which focus mostly on the noneconomic parts of his work. About the second side of the problem, studies in history of economic thought has as already mentioned shown the importance of Smith for later economic theory, especially neoclassic economic theory and general equilibrium theory (Ingrao and Giorgio 1990; Tieben 2009). These studies focus on the scientific progress in economic theory but not on the shifts in the metaphysical or ontological assumptions. Such line of study would fall under the already mentioned research field philosophy of economics. However, their main interest has been to analyze theories such as neoclassic economics or classic microeconomics and macroeconomics (Hands 2004; Hausman 3 A reference without a year of publication refers to an unpublished work. In the reference list it is listed as ‘----’. 11 2009, 2001, 1980; Hoover 2009, 2001; Kincaid 2001; Rosenberg 2009, 2001, 1992, 1976). A historical collation of the metaphysical and ontological assumptions found in the works of Smith and modern economic theories has so far not been carried out. The second objective in this thesis, thus, is to sketch out a new line of study where such assumptions are studied. Needless to say, this new line of study is far from conclusive, but it may nevertheless inspire future studies on the matter. 1.3. Textual Basis A question to be answered when reading the works of Smith is how the works relate to one another. When reading the works of a philosopher, there is a risk of falling into the Bruckerian fallacy always looking for a coherent philosophical system throughout the works (see Catana 2005). I believe, though, there are reasons to claim a certain affinity between the works of Smith. It was common during the first half of the 20th century to question the relationship between WN and The Theory of the Moral Sentiments (TMS) (1759, revised for the sixth and last time in 1790): a scholarly discussion known as ‘The Adam Smith Problem’ (see Anspach 1972; Wilson and Dixon 2006). Most scholars, however, now see clear connections between the two works (cf. the introduction by D.D. Raphael and A.L. Macfie in TMS). Besides, the six revisions of TMS by Smith witness that he did not need to revise the content remarkably after the appearance of WN in 1776. Although there might be tensions between the two works, I believe it is reasonable to read the two works together. Alongside these two works, it is also relevant for this thesis to include the Essays on Philosophical Subjects (EPS) (1795). In it appears the essays ‘The Principles which Lead and Direct Philosophical Enquiries; Illustrated by the History of the Ancient Logics and Metaphysics’ (Ancient Logics), ‘The Principles which Lead and Direct Philosophical Enquiries; 12 Illustrated by the History of the Ancient Physics’ (Ancient Physics), ‘The History of Astronomy’ (Astronomy), and ‘Of the External Senses’ (External Senses). Although published after his death (with Smith’s consent), scholars give reason to believe that they were written before TMS (Ahmad 1990, 141). I include the essays because the invisible hand appears in one of them, and they support and confirm my thesis that Smith wanted to give an account of how order emerges. 4 The idea of the invisible hand is literally nearly invisible in the works of Smith. It appears only three times, once in each of his main works: Astronomy, TMS, and WN. In Astronomy it is discussed in relation to polytheistic religion, while in TMS and WN it is reserved to economic matters. In the three cases, the notion of the invisible hand is connected with the question of order and to questions of metaphysical character. In the following sections I will discuss how this manifests in the works. For now, it is enough to say that the idea of the invisible hand is a recurrent one in all his major works. 1.4. The Influence on Smith Since Smith never gives any formal definition of the idea of the invisible hand, I now turn to some of his sources to provide a frame of reference in which we may be able to get a sense of the idea. Historically, the idea of the invisible hand appears both in works of Homer, Augustine, Shakespeare, and others: works Smith could have read (see Harrison 2011; Kennedy 2008). Since the invisible hand is only mentioned in The Lectures of Jurisprudence (LJ(A), 1762–3; LJ(B), 1766) are mostly concerned with the topics in WN. It is only in so far the lectures illuminate relevant passages in WN that they are included. The Lectures on Justice, Police, Revenue, and Arms (1763), A Treatise on Public Opulence (1764), the Lectures on Rethoric and Belles Lettres (1762– 3), and the essays on poetry, music, and dancing appearing in EPS will not be included, since their content falls outside the subject matter. 4 13 passing, an accurate meaning of the invisible hand is difficult to retrieve from such references. Therefore, although some of these references might have inspired Smith to coin the phrase, we are rather to look at the role the invisible hand plays in his theory. Since I explore the metaphysical assumptions found in his works and interpret the invisible hand under the light of these, it is worth presenting an explicit source of influence in that matter: the Stoics (sec. 1.4.1). However, when stressing the question of order, the idea of spontaneous order is worth presenting too (sec. 1.4.2). 5 1.4.1. The Stoics’ Conception of Nature It is uncontroversial to refer to the Stoics as an important source of influence for Smith (cf. the introduction in TMS, 5– 10). 6 Smith’s moral philosophy is influenced by Greek virtue Other influences could have been mentioned. Among these we find Smith’s teacher, Francis Hutcheson (as proposed by Gregg 2008, 57; see also Jones 2010, 92). Not only did Hutcheson translate the Meditations of Marcus Aurelius, a work Smith is inspired by, but Smith also derives the concept of benevolence under the influences of Hutcheson’s writings (although Smith also criticizes Hutcheson for his inability to articulate the necessity of self-love in the economic realm (TMS.VII.ii.3.15–6)). David Hume could also have been mentioned. However, Hume was probably for the most an interlocutor (cf. the letter correspondences they had) and not a direct source of influence. Moreover, as Harold B. Jones argues, Hume’s Epicurean inspired metaphysics never substituted the Stoic metaphysics found in the works of Smith (Jones 2010, 93–4). It is also worth mentioning the Swedish/Finnish economist Anders Chydenius who in 1765 published a minor work entitled Den nationnale winsten (The National Gain): a work that anticipated Smith’s thoughts on the free market. In this work, Chydenius adopts a skeptical attitude towards governmental regulation being sympathetic towards free trade (Chydenius 1929). Although relevant in relation to some aspects of Smith’s theory, when stressing the metaphysical aspects of it, these influences seem to be less relevant. 6 The Stoic influence is, nonetheless, directly contested by Lauren Brubaker (Brubaker 2006, 173–6). The quotation she highlights from TMS, however, is to my mind not meant as a critique of the Stoic philosophy in general, as she concludes, but to specific points in the Stoic philosophy: 5 14 ethics, for example Plato, Aristotle, and the Stoics, but his theological stance is mostly influenced by the Stoics (see also Clarke 2000; Jones 2010; McCloskey; Montes). Throughout the TMS and especially at the end of the work (VII.ii.2.15–47), Smith spends thirty-two paragraphs interpreting the philosophy of the Stoics alluding most significantly to Epictetus and Marcus Aurelius. 7 Such accentuation on a philosophical tradition is worth examining. 8 Especially important for this thesis is the Stoic’s conception of nature, since it bears a resemblance to how Smith employs the notion of nature when accounting for the orderliness of the universe and the organizing character of the market (see also Schabas 2003). Charles L. Griswold, Jr. traces seven different meanings of the notion of nature in the works of Smith (1999, 316). Here, the relevant meaning in question is nature conceived as the whole and closely related to the universe. A similar conception of nature is found in Stoicism. In this philosophical school, nature is a “rationally organised structure” and affiliated to other entities such as the especially their attitude towards suicide and their conception of paradoxes. 7 Smith writes about the Stoics: “The few fragments which have come down to us of what the ancient philosophers had written upon these subjects, form, perhaps, one of the most instructive, as well as one of the most interesting remains of antiquity. The spirit and manhood of their doctrines make a wonderful contrast with the desponding, plaintive, and whining tone of some modern systems” (TMS.VII.ii.1.29); “That the Stoical philosophy had very great influence upon the character and conduct of its followers, cannot be doubted; and that though it might sometimes incite them to unnecessary violence, its general tendency was to animate them to actions of the most heroic magnanimity and most extensive benevolence” (VII.ii.1.47). The Stoic philosophy is also mentioned in the Astronomy and Logics. 8 A general remark is to be made. Whether the accounts given by Smith on earlier philosophers or philosophical schools are adequate or not is not the subject of this thesis. Of interest here is how Smith’s own thought is expressed through such interpretations. 15 universe and God (Long 1974, 108). Nature is characterized by having an inert active organizing principle that “holds the world together” and “causes things on the earth to grow” (Long 1974, 148): a similar organizing quality is also found in Smith’s conception of the market. Further, nature is omnipresent and man naturally takes part in this structure. Because of this, and since man 9 is endowed with reason (logos), he may grasp the nature of this whole and try to fulfill the part he plays in this whole. This human participation in the whole raises the question on the relationship between man and God. For the Stoics, man and God are not two complete different beings. On the contrary, the “human soul” is an “‘offshoot’ of God” (Long 1974, 150). A similar relation between man and God is found in Smiths moral philosophy. Here, as I show in the third part, man is attributed with a ‘demigod within’. The demigod is an instance in man that establishes a relation between man and God, which enables man to conduct his actions according to the whole. This demigod and the notion of nature can interpreted in line with Stoic metaphysics. Although there is reason to believe that Smith was influenced by the Stoics, it would be misleading to reduce his philosophy to this position. 10 Among the differences, one important point is man’s ability to achieve knowledge of God and nature. For both the Stoics and Smith, man stands in relation to God, but the confidence found in the Stoics regarding man’s (the sage’s) ability to fully account for the rational structure of nature is relaxed by Smith. When looking at his theory of knowledge, man only reaches an estimated account of nature, To avoid confusion I employ the same gender pronoun as Smith. As Griswold, Jr. points out, the significance of the Stoic influence is ambiguous due to the notion of nature (1999, 329–30). While the Stoics render themselves to be a part of nature or the whole, Smith upholds a difference between man and nature insisting on the free will of humans (see also sec. 3.2). 9 10 16 and this applies for the knowledge of God too. Since this fact does not prevent Smith in stating that nature is organized, I argue that his believe in a universal order is based on a general assumption. In other words, Smith asserts that the universe is in order, despite the fact that man will never be able to give a full rational account of such order. Therefore, although there are parts of Stoic theology and metaphysics in Smith’s reasoning, there is not a full resemblance. 1.4.2. The Tradition of Spontaneous Order Another important source of influence for Smith is the idea of spontaneous order. 11 A reference to this idea is not explicitly found in Smith’s works. Nonetheless, it flourished on the British Isles around the time of Smith among intellectuals such as Bernard Mandeville, Josiah Tucker, David Hume, and Adam Ferguson. Although a connection between this idea and Smith is difficult to prove with conviction in his works, there are reasons to believe that Smith knew the idea (see Barry 1982; Smith 2006, 5). Since the idea of spontaneous order to a certain extent resembles some of the qualities of the idea of the invisible hand, the former might provide a line of interpretation to unravel the latter. Recent studies in the history of economic thought have become more attentive to the influence from Chinese culture upon European economics. A last source of influence worth mentioning, then, is Chinese philosophy as demonstrated by Wei-Bei Zhang (2000) and especially the notion of wu-wei. The notion bears a certain affinity with the idea of spontaneous order and could be one of the sources of influence for its development. Wu-wei literately translates to ‘without action’ or ‘without governance’. In Daoism it is related to the governance of a state and related to nature expressing how nature unfolds or organizes itself without external interference. The French physiocrat François Quesnay was influenced by Chinese philosophy. Since Smith visited Quesnay’s economic school, and keeping in mind that Smith might have been heavily influenced by one of Quesnay’s students, Anne-Robert-Jacques Turgot, this Chinese concept also hints to an interpretation of Smith concerned with the question of order. 11 17 Shortly, the idea of spontaneous order refers to the organization of a particular realm, say the social or the market. This organization reaches order or equilibrium without outer influence such as a deity or imposed forces such as legislation or a contract (as in Hobbes 1651). Craig Smith defines the end of spontaneous order in relation to the social as “the product of the unintended consequences of the actions of subsistence and order-seeking individuals” (Smith 2006, 166). In this regard, a particular field organizes itself towards a certain state unintentionally. Such state is according to the Scottish Enlightenment worth reaching because of its stabilizing role: order is normatively good. Scholars note that one of the main qualities of the invisible hand is its ability to organize the economic realm, something similar to the idea of the spontaneous order. However, it is debatable if the organization of the market is provided without external influence, and if this organization leads to order at all. (At least, as I will show, the answers to these questions are not obvious.) More obvious is Smith’s concern with questions related to order. This is seen in his interest in how human organize their impressions of the world, how social order emerges, and how the behavior on the market results in the allocation of resources. Thus, how order emerges is crucial for Smith, but simply reducing the idea of the invisible hand to that of spontaneous order reduces the complexity (or perhaps the ambiguity) found in his works. Not surprisingly, the crux of the matter is how we interpret the works of Smith. As mentioned, many scholars read Smith as a genuine secular thinker. Such stance enables an interpretation where the invisible hand is an illustration of the idea of spontaneous order, that is, the economic realm organizes itself without the influence from a supreme being (see Smith 2006, 4; Barry 1982, B.54). However, when including 18 the metaphysical aspects of Smith’s theory the matter becomes more ambiguous, and an interpretation of the emergence of order with reference to a deity becomes possible too. On the other hand, deducing all facets of Smith’s economic thought from a single metaphysical principle, for example God, thus throwing aside the reference to the idea of spontaneous order, would also be misleading. In the following I will discuss such ambiguities. Other ambiguities to be found are whether the organization of the market promotes order or disorder, whether order is a state to be reached at all, or, whether order is already reached and to be maintained by continuous organization. Several passages in the works of Smith clearly suggest that the universe is in order and introducing an organizing device such as the invisible hand would be irrelevant if one adopted a secular stance. Adopting a nonsecular stance, on the other hand, could resolve such obvious textual divergences, since the need for organization could be explained under a specific understanding of theology. However, instead of resolving such ambiguities to a clear-cut reading, I believe that such ambiguities should be kept in mind when exposing the works of Smith. Despite the uncertainties that comes forth when introducing the idea of spontaneous order, it has a certain value to this thesis, since the idea has been adopted in modern economics (Smith 2006, 9–10). Among the economic theories we find conceptions of order similar to the idea of spontaneous order in which a specific realm, the market, has the ability to organize itself. Most noticeably, this idea is found in the economic theory of Friedrich A. Hayek, and as I show in the fourth part, the idea is implicitly present in other economic approaches. 1.5. Exposition What I set forth to do in the thesis is to give an interpretational frame in which these ambiguities can be included and dis- 19 cussed. To do so, I divide the interpretation of Smith’s works in two interrelated parts (part 2 and part 3). With this interpretation in mind, I compare the general assumptions found in his works with modern economic theories (part 4). The last part (5) makes up the conclusion. In the second part I am concerned with what I call the worldly life in Smith’s theory, that is, the non-theological elements in his theory. I show that Smith sets forth to argue how the events in the world are organized by the mind, how man organizes his feelings according to other people, and how the market organizes the actions of men. In other words, the starting point is the single human being and his actions in the mundane world. When seen from man’s perspective, opposite a deity’s, the world is not an already organized entity. On the contrary, the world appears dynamic. Man has to reorganize his image of the world because of the new events he experiences, and new social interactions are to be coordinated to reach social mutuality. In short, the worldly realm is for man something to be organized. The third part makes up the other side of the theory of Smith, the heavenly life. In this part I analyze the theological phrases found in the works of Smith and relate this side with the worldly side to give a full account of his philosophy. Of special interest is his notion of God, its connection to the invisible hand, and its linkage to the other parts of his theory. In this part, the view shifts from the limited human being to the all-encompassing view of God. From this perspective, the world is in order, and all parts of the world form a relevant piece in it. In short, from the perspective of God the world is organized. 12 The distinction between worldly and heavenly life is not only analytical. A similar distinction is found in Smith: “The great judge of the world, has, for the wisest reasons, thought proper to interpose, between the 12 20 The distinction between the worldly and heavenly life is kept in mind in the fourth part where I analyze and compare the modern economic theories within this frame. Economic theories have lost any reference to a deity, but their general and ontological presumptions are close to the metaphysical ones found in Smith’s works and can be discussed within this frame: some theories stressing the notion of organization, others the notion of order. In the fifth part I conclude and evaluate the thesis. weak eye of human reason, and the throne of his eternal justice, a degree of obscurity and darkness, which though it does not entirely cover that great tribunal from the view of mankind, yet renders the impression of it faint and feeble in comparison of what might be expected from the grandeur and importance of so mighty an object” (TMS.III.1.8.Eds.2–5). The same distinction is also found in Stoic philosophy as presented by Anthony Arthur Long (1974, 179–80). 21 2. WORLDLY LIFE: ORGANIZATION In my general interpretation of Smith, the keyword I use to describe his philosophy is order, but in this part specifically it is organization. The following part falls in three main sections, each of them showing how the question of organization is unfolded. Reading the main works of Smith chronologically, this part begins by exposing how the question of organization can be traced in Smith’s theory of knowledge. From a sentiment of wonder and a need to organize the world he sees, man produces invisible chains to organize the disorder he sees in the world (sec. 2.1). Similarly, in the social sphere, man constantly monitors his passions in relation to other people. He coordinates his actions with others to reach order, something expressed when reaching a state of mutual sympathy (sec. 2.2). When entering the market, men no longer have the means to coordinate their actions for which reasons the invisible hand steps in as an organizing device compensating for the distance between men that the market creates (sec. 2.3). 2.1. Organizing Events: Invisible Chains In EPS, Smith deals with philosophical subjects such as theory of knowledge, metaphysics, and astronomy. Although the essays where never completed and remained unpublished during Smith’s lifetime, they nevertheless present a preliminary outline for the theme of order. Focusing on the Astronomy, I now show how this theme plays a role in his theory of knowledge and his conception of human nature. Man, in Smith’s view, lives and acts in the world surrounded by a manifold of objects, people and nature. Not only is the world complex with causal relations not always intellig- 22 ible for man, it also qualifies by chance as when fortune plays a role in social life (TMS.II.iii; VII.ii.1.20). If not familiar with the array of certain events in the world, such set of events appears disorganized for the limited human mind. At times, then, whenever man has not yet been acquainted with a causal relation by custom, or when he sees something new (Astronomy.I.2, 3, 7, 9; II.4; TMS.V), his sense and understanding of the world is disturbed. Man begins to wonder about such experiences. This sentiment of wonder is central, since it pushes forward man’s wish to organize the flux of phenomena in the world. Before turning to how such organization comes about, a presentation of two central notions is needed: passions and sentiments. 13 Passions are psychological entities inert in man, which affect his emotions and imagination (Astronomy.I.2, 6). Passions are affected by the senses and inner experiences produced by the mind. Their character may be strong or weak, but they are transient and do not affect man for a long time. Sentiments, on the other hand, are also activated by the mind or external senses: especially from what man sees (External Senses.60). Although Smith at times juxtaposes them with the senses, it may be more adequate to interpret them as distinguished psychological ideas. These ideas are placed in the mind as inner sensations affecting man’s attitude towards the physical and social world. Although more stable than passions, they are modifiable in time. Further, sentiments are concre- Smith is not keen to give any formal definition of his notions. Their meaning must be inferred from the many passages in which they appear. Such indeterminateness may result in some insecurity when interpreting Smith. The indeterminateness could be met by recurring to a general meaning of the terms found in other philosophers from the Scottish Enlightenment. Such an approach, however, runs the risk of missing a specific meaning possibly found in Smith’s works. 13 23 tized in the form of a specific sentiment, for example wonder, or as the moral sentiment, sympathy (cf. TMS). When a new event is experienced by man, the passions revolt in his mind and he becomes upset or even disrupted. With his memory and imagination he tries to recollect similar experiences from the past with the purpose of finding an analogy for that particular experience. In other words, he tries to organize the events, which at first sight appears to be disorganized. If the mind does not succeed, the sentiment of wonder appears. Smith describes the process as follows: The imagination and memory exert themselves to no purpose, and in vain look around all their classes of ideas in order to find one under which it may be arranged. They fluctuate to no purpose from thought to thought, and we remain still uncertain and undetermined where to place it, or what to think of it. It is this fluctuation and vain recollection, together with the emotion or movement of the spirits that they excite, which constitute the sentiment properly called Wonder. (Astronomy.II.3, emphasis in original) Wonder is an important sentiment in Smith’s theory of knowledge, since it suspends the sensation of order man otherwise has when not confronted with a new and incomprehensible event. Man is displeased to be ‘wonder-full’, because the mind, naturally, as Smith alleges, is unfitted to be in a momentary lapse of order. The mind is pleased to create connections between events and resemble them into something already known and organized. It continuously arranges and classifies ideas and objects in several divisions and such state of order is quickly to be restored if interrupted (Astronomy.II.1, 3, 4). In 24 these paragraphs, thus, we find a general assumption in Smith’s thought: the human mind strives for order. 14 In order for the mind to reestablish order it must connect the successions of events and resemble them with ideas in the mind. In this case, the mind uses the imagination. The imagination is a conscious ability of the mind that settles or creates relations between seemingly unorganized events. After such creative operation, the unorganized events appear organized in the mind. This establishment of relations is ensured by what Smith calls invisible chains: Those two events seem to stand at a distance from each other; it [the mind] endeavours to bring them together, but they refuse to unite; and it feels, or imagines it feels something like a gap or interval betwixt them […;] it endeavours to find out something which may fill up the gap, which, like a bridge, may so far at least unite those seemingly distant objects. The supposition of a chain of intermediate, though invisible, events, which succeed each other in a train similar to that in which the imagination has been accustomed to move, and which link together those two disjointed appearances, is the only means by which the imagination can fill up this interval, Smith’s interest in order is expressed in various paragraphs: “It is evident that the mind takes pleasure in observing the resemblances that are discoverable betwixt different objects” (Astronomy.II.1); “Whatever […] occurs to us we are fond of referring to some species or class of things, with all of which it has a nearly exact resemblance” (II.3); “That the imagination feels a real difficulty in passing along two events which follow one another in an uncommon order, may be confirmed by many obvious observations” (II.10); “Nothing can more evidently show, how much the repose tranquility of the imagination is the ultimate end of philosophy” (IV.13). This is also mirrored in TMS: “If we consider the real satisfaction which all these things are capable of affording, by itself and separated from the beauty of that arrangement which is fitted to promote it, it will always appear in the highest degree contemptible and trifling. But we rarely view it in this abstract and philosophical light. We naturally confound it in our imagination with the order, the regular and harmonious movement of the system, the machine or oeconomy by means of which it is produced” (IV.I.9). 14 25 is the only bridge which, if one may say so, can smooth its passage from the one object to the other. (Astronomy.II.8) 15 Invisible chains construct a relation between unorganized events, thus stabilizing the ideas in the mind. The epistemological challenge for man, then, is to fill out the gaps between seemingly distant events. Further, Smith claims that this is even the task for philosophy: “Philosophy, by representing the invisible chains which bind together all these disjointed objects, endeavours to introduce order into this chaos of jarring and discordant appearances” (Astronomy.II.12). 16 Once again, it is fundamental for Smith to explain how order emerges. 17 Invisible chains are not constructed by the mind without reference to real events. Smith, instead, adopts a stance where invisible chains can be created more or less accurately. If the invisible chains give a fairly complete and simple account of the events, it is a reasonable characterization of the events. In that case, the mind accounts for how events are organized. But, the interesting point here is that it is only an approximated account. Smith argues that different explenations of the celesSmith’s conception of invisible chains is not all too different from Empiricus’ notion of connection. As Long writes when presenting the Stoic’s notion of man: “A man is a creature who possesses the capacity to see connexions (and to use language) as a natural endowment” (Long 1974, 125). 16 The connection between Astronomy and TMS is clear: “[…] and the system of human nature seems to be more simple and agreeable when all its different operations are in this manner deduced from a single principle” (TMS.II.ii.3.5). This single principle is the invisible chain in the theory of knowledge of Smith, and as I will show, it is sympathy in his social theory and the invisible hand in his economic theory. 17 Spencer J. Pack also draws attention to EPS but concluding the opposite, that is, that the “workings of the perceived invisible hand, is for Smith an empirical question” (1995, 293). Pack equates the invisible hand with the invisible chains making the invisible hand a product of human imagination (1995, 297–8). His emphasis on EPS, without alluding considerably to TMS, leads to such conclusion. 15 26 tial spheres throughout the history of astronomy have come gradually closer to the right account culminating with Isaac Newton (Astronomy.IV.68, 76). Newton created the single most important invisible chain with the idea of gravitation, which was apt to characterize a fundamental law of the universe and was at the same time complete and simple only using few general laws (see also Lindgren 1969; Montes 2006). 18 Despite his sympathy towards Newton, Smith’s essay also shows how knowledge is historically bound and a new description of the celestial sphere after Newton could be possible: a description coming even closer to the right explanation. This implies, then, that man can never give a complete description of how the world ontologically speaking is organized. But, by claiming that man can give an estimated account still moving closer towards an explanation of the order in the world, Smith seems to presume there is order although unimaginable for the human mind. As I will prove in the third part, this ambiguity can be resolved recurring to the metaphysical parts of Smith’s theory. I show that the universe is in order, something ensured by a metaphysical assumption. Before that, I now turn to his social theory. 2.2. Organizing the Social: Sympathy and the Spectator In the moral philosophy of Smith presented in TMS we are also confronted with the question of organization. As in his The influence on Smith from mechanistic Newtonianism on metaphysical grounds is pointed out by Donald J. Oswald (1995). I share Oswald’s motivation: “Smith’s empirical inquiries into social reality were ultimately and fundamentally dependent upon his nonempirical, metaphysical beliefs” (1995, 472). But, although his contribution is important in relation to Smith’s scientific point of view (and compatible with my interpretation), when coming to the metaphysical parts of his theory, Stoic philosophy has to be included, something Oswald unfortunately does not reflect upon. 18 27 theory of knowledge, passions and sentiments play an important role. When socializing, the passions and sentiments men have towards one another fluctuate. Again, such disorganization must be brought into concordance. This comes about by sympathy, which is realized by the socalled impartial spectator that organizes men’s passions and sentiments according to one another. This mutuality between men, however, is contrasted with the self-love also found in man and the social rank he strives to achieve. Such obvious opposition is to be solved with reference to Smith’s conception of the market presented in the next section 2.3. In his moral philosophy, Smith argues for a tendency in man’s nature to promote the well-being of other men. The widely cited first sentence in TMS reads: How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. (TMS.I.i.1.1) Smith claims that man finds it pleasurable to see others in a state of happiness (see also TMS.I.i.2.1). Given that it is the first sentence in the book and presented in a key part of TMS, this happiness between men is not merely a random incident. Instead, mutuality between men, where one another’s fortune is appreciated, is the end of social action. While happiness can be a concrete display of such mutuality, generally speaking, mutuality is expressed in the sentiment of sympathy. 19 This sentiment is at the center of Smith’s moral philosophy. When defining sympathy, Smith writes: “Sympathy […] may […] be As Smith writes: “But whatever may be the cause of sympathy, or however it may be excited, nothing pleases us more than to observe in other men a fellowfeeling with all the emotions of our own breast; nor are we ever so much shocked as by the appearance of the contrary” (TMS.I.i.2.1). 19 28 made use of to denote our fellow-feeling with any passion whatever” (I.i.1.6). Smith alludes to the interdependence between passions, and how they connect when they are like. For example, if another man is happy, I would take part in his joy and become affected by this passion finally reaching sympathy. Passions, again, are the foundational units in the inner world of man, but now, they are to be attuned to let sympathy come about (I.i.3.1). Passions are excited by different causes and events. They may arise from the body, the interaction between men, or the imagination (TMS.I.i.1.6; I.ii.1–2). Some of them are social, others unsocial (I.ii.3–5). In this welter of passions, men interact. Compared to the creation of invisible chains, the level of complexity now rises. Man does no longer stand in front of a set of passionless events but in front of another man also full of passions. What Smith has to show is how passions can be assembled into a social order. As in his theory of knowledge, imagination plays an important role in that matter. Sympathy is a sentiment created in the actual and concrete relation to the other person. Smith is, in other words, presenting a moral philosophy concerned with social relations unfolded in situ. There are no abstract principles, just the ethical event guided by virtues. 20 How to evaluate such event comes about using the imagination. Smith writes: As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation. Though our brother is upon the rack, as long as we ourselves are at our ease, our senses will never inform us of what he suffers. They never did, and never can, carry us beyond our own per20 I will not dwell on Smith’s notion of virtue but only state that the end of virtue is to “promote […] the order of society” and is “the fine polish to the wheels of society” (TMS.VII.iii.1.2). 29 son, and it is by the imagination only that we can form any conception of what are his sensations. (TMS.I.i.1.2). Man never conceives by rational means what another person experiences or feels. He cannot transgress himself to reach the other persons’ experiences. For that sake, he must use the imagination. When producing imaginations, man creates a sense of the inner world of the other person. Smith argues that man recreates the other’s situation in himself, “we enter as it were into his body” (TMS.I.i.1.2), and by such action of imagination he can grasp the other’s sentiments (see also I.i.1.11; I.i.3.9, 10). 21 The purpose of social life, thus, is to imagine what other people feel and experience to ensure the social order between men. 22,23 In the ethical sphere, man creates order by reaching sympathy (TMS.I.i.4.7). 24 Sympathy, in other words, is the gravitational point, which social actions tend towards. The problem is that this point is not stable. 25 Smith writes: Such act succeeds under the assumption that men are more or less similar. Although a man might not give a perfect representation of the other’s sentiment, he is nonetheless able to give an approximate account. This account is not intellectual in the sense that he theoretically can explain how the other person may feel. It is emotional and something that affects him directly as when Smith writes: “we then tremble and shudder at the thought of what he feels” (TMS.I.i.1.2). 22 As in his theory of knowledge, this is done using the memory with which man can grasp the events facing him (TMS.I.i.2.4). 23 A similar accentuation on the “inter-relationship between the agents” is found in Andy Denis (2004, 348–54). Jan Horst Keppler even describes this social interaction with the word auto-organization (2010, 6, 76–8). 24 As Smith writes: “The person principally concerned is sensible of this, and at the same time passionately desires a more complete sympathy. He longs for that relief which nothing can afford him but the entire concord of the affections of the spectators with his own” (TMS.I.i.4.8). 25 This is also the case with the market (cf. sec. 2.3). 21 30 Mankind, though naturally sympathetic, never conceive, for what has befallen another, that degree of passion which naturally animates the person principally concerned. That imaginary change of situation, upon which their sympathy is founded, is but momentary. (TMS.I.i.4.7) 26 From the passage we may infer that man must try to immerse into the sentiment of sympathy over and over again, or expressed differently, man must continually reestablish social kinship because of the momentary character social relations have. 27 As in the theory of knowledge, man never reaches order once and for all. Instead, man continuously has to organize his passions towards other men. The next question to answer is what ensures this social mutuality. During social interaction and before reaching sympathy, sentiments of pain and pleasure may oscillate in the mind of man. This instability is unpleasant for man, something he must balance by the right actions and imagination. To create stability, Smith introduces the impartial spectator: None of those systems [those systems which make virtue consist in propriety: the ethics of Plato, Aristotle and the Stoics] either give, or even pretend to give, any precise or distinct measure by which this fitness or A sense of balancing or gravitation is also identified when entering sympathy: “The propriety of every passion excited by objects peculiarly related to ourselves, the pitch which the spectator can go along with, must lie, it is evident, in a certain mediocrity. If the passion is too high, or if it is too low, he cannot enter into it” (TMS.ii.intro.I). 27 As when Smith writes: “In order to produce this concord, as nature teaches the spectators to assume the circumstances of the person principally concerned, so she teaches this last in some measure to assume those of the spectators. As they are continually placing themselves in his situation, and thence conceiving emotions similar to what he feels; so he is as constantly placing himself in theirs, and thence conceiving some degree of that coolness about his own fortune, with which he is sensible that they will view it” (TMS.I.i.4.8). 26 31 propriety of affection can be ascertained or judged of. That precise and distinct measure can be found nowhere but in the sympathetic feelings of the impartial and well-informed spectator. (TMS.VII.ii.1.49) When man enters social life, he has to watch and judge how social events unfold and see how he can reach the sentiment of sympathy. In short, guided by the wish of reaching sympathy, man regulates his behavior using the impartial spectator to bring the passions “under perfect subjection to the ruling principles of his nature” (TMS.VII.ii.1.23). 28 What, then, is the spectator? The question is debatable, since it depends on whether Smith should be read as a secular or nonsecular thinker. Surely, the impartial spectator is an inner instance found in all men (II.i.1.7), an ability to judge other person’s actions, and more important, an ability to imagine what the other person is experiencing (I.i.1.6; III.2.5). It is the ability to reflect on the actions of oneself through the spectator of the others as already stated. 29 So far presented, a secular reading would be possible, but as I will show in the next part, a nonsecular reading is needed to fully grasp the nature of the impartial spectator. Now, the sympathetic social game of passions contrasts with the self-love Smith also ascribes to man. Furthermore, As Smith writes: “When the original passions of the person principally concerned are in perfect concord with the sympathetic emotions of the spectator, they necessarily appear to this last just and proper, and suitable to their objects” (TMS.I.i.3.1); “In all such cases, that there may be some correspondence of sentiments between the spectator and the person principally concerned, the spectator must, first of all, endeavour, as much as he can, to put himself in the situation of the other, and to bring home to himself every little circumstance of distress which can possibly occur to the sufferer” (TMS.I.i.4.6). 29 Smith writes: “We must, here, as in all other cases, view ourselves not so much according to that light in which we may naturally appear to ourselves, as according to that in which we naturally appear to others” (TMS.II.ii.2.1). 28 32 the social ranks in society indicate that social life is more complicated than so far presented. Since self-love and social ranks are widely discussed in the studies of Smith, and often stressed in common readings of him, I find it necessary to include these notions in my interpretation. Throughout the last paragraphs in this section I show that sympathy and the impartial spectator are after all the driving forces behind all social action. Further, I show that sympathy at the same time is the cause behind the creation of a differentiated society, thus promoting economic wealth. The organizational problem now arising is that a differentiated society challenges stability in society. Without a distribution mechanism this may result in that society turns into an unorganized affair with social inequalities. As I will expose in the next section 2.3, a distribution or organizing mechanism is needed for which reasons Smith introduces the idea of the invisible hand. Smith’s statements on self-love are not only related to an economic discussion. The notion is broader than the terms economic self-interest or economic man. Self-love links to the social status of man both in relation to his virtuousness and economic wealth, and it is an important part of human nature, since it preserves the life of a human being. In the paragraphs devoted to the Stoics, Smith writes: [E]very animal was by nature recommended to its own care, and was endowed with the principle of self-love, that it might endeavour to preserve, not only its existence, but all the different parts of its nature, in the best and most perfect state of which they were capable. (TMS.VII.ii.1.15–6) 30 30 Since Smith also elaborates on the notion of self-love in earlier paragraphs in TMS (cf. III.ii.1.10), the quotation is not simply an introduction to a Stoic notion. 33 To preserve himself, man has to choose between objects that ensure his own health while rejecting those that do not. Such thinking could lead to an egotistical stance where man only strives for his own well-being. But this facet of human nature must be exceeded in favor of an ethical stance where self-love is brought under control. Smith, then, is not arguing that man should simply follow his self-love. Instead, man is to evaluate his actions according to the impartial spectator in order to be accepted by other people. Smith writes: If he would act so as that the impartial spectator may enter into the principles of his conduct, which is what of all things he has the greatest desire to do, he must, upon this, as upon all other occasions, humble the arrogance of his self–love […]. (TMS.II.ii.2.2) Further, man should not only control his self-love, he should also act towards social life: first towards his family but ultimately towards mankind. As he writes: “Among those primary objects which nature had recommended to us as eligible, was the prosperity of our family, of our relations, of our friends, of our country, of mankind, and of the universe in general” (TMS.VII.ii.1.18; see also III.3.4.ed.1). In short, Smith does speak for self-love but framed in a concern for all other people. Related to Smith’s conception of self-love is the question of rank and status in society. While the social game of passions could suggest that Smith refers to a nonhierarchical equal society, he is aware of that social life is not carried out without the riches of the world. Social life exists parallel to the riches and ranks in society. 31 Ranks and riches distinguish men: some being wealthier and more virtuous than other. This difference does not result from a societal failure (for ex- 31 This too is derived from the Stoics (see TMS.VII.ii.1.16). 34 ample an unequal distribution policy). The nature of man demands those ranks in society. As Smith writes: The man of rank and distinction, on the contrary, is observed by all the world. Every body is eager to look at him, and to conceive, at least by sympathy, that joy and exultation with which his circumstances naturally inspire him. (TMS.I.iii.2.1) It is the pleasure in seeing another person in joy that animates the rank in the first place. The wealth of other people is, then, tied with Smith’s conception of sympathy, because men are “disposed to sympathy more entirely” with those carrying out a joyful and wealthy life than to sympathize with the poor (TMS.I.iii.2.1). Since man is directed towards other men’s joy and wealth, he is affected to such a degree by wealth that he wishes to avoid poverty and vicious acts, because, when he is wealthy, sympathy from other men is awarded. 32 Smith has to introduce ranks because they give stability in society in the long run. Social interaction based on the game of social passions can only lead to a temporary order, since the organizing role of sympathy only plays a role during the social interaction. By introducing ranks, Smith sediments the organizing quality of sympathy into stable structures in society. Sympathy creates order in the local and intimate relations between men, but its character transforms by the same token this temporary interaction into a structural organizing feature in society. As Smith writes: “Upon this disposition of mankind, to go along with all the passions of the rich and the powerful, is founded the distinction of ranks, and the order of society” 32 Smith writes: “Nothing is so mortifying as to be obliged to expose our distress to the view of the public, and to feel, that though our situation is open to the eyes of all mankind, no mortal conceives for us the half of what we suffer. Nay, it is chiefly from this regard to the sentiments of mankind, that we pursue riches and avoid poverty” (TMS.I.iii.2.1). 35 (TMS.III.iii.2.3). However, the introduction of ranks leads to another organizational problem: how can wealth be distributed among men to avoid the mortifying poverty that may challenge the ranked and stable society? Man steps into the market and is, then, both a social actor and an economic agent. Stepping into the market creates a distance in the social relations, since bargaining is mediated by prices and not concrete social interrelations. Opposite the intimate face-to-face relation motivated by sympathy, now stands an abstract and distant relation set by the prices on the market. While social relations settle with sympathy, when stepping into the market, the results of men’s actions can no longer be regulated by themselves. By separating the intimate social relations, Smith must introduce the idea of the invisible hand to account for the organization of events on the market. Before reaching a clarification of the notion of the invisible hand, I now move on to show how the economic domain relates to the question of organization. 2.3. Organizing the Market: Prices To give a fair interpretation of Smith’s economic theory, I find it necessary to expose some of the main facets of it, thus not only focusing on the invisible hand. Therefore, I begin by presenting the constituting parts of his economic theory exposed in WN. For Smith, the objective of political economy is to provide revenue for people and public services (cf. WN.IV.I.1). He sets forth to explain how wealth is created and organized in the economy. 33 Among the many parts in his political econo33 Wealth is understood as economic wealth. For example, if a merchant gets a higher price for a commodity he sells, he increases his wealth. The subject in WN, however, is how wealth in general develops. Wealth was also a matter of interest for the Stoics: “Wealth accords with Nature in the sense that a rational being is naturally predisposed to prefer wealth to poverty if it is open to him to select either of these” (Long 1974, 192; cf. sec. 2.2). 36 my that describe this matter, the four most important units are nature, labor, capital, and the market. They connect in the following way: While nature is the preliminary condition to produce wealth (sec. 2.3.1), labor is the activity that elaborates nature and further increases wealth (sec. 2.3.2). Without capital, wealth cannot increase beyond its natural level and not be distributed in society (sec. 2.3.3). The final component that ensures this distribution of wealth by organizing nature, labor, and capital, is the market: something led by the invisible hand (sec. 2.3.4). 2.3.1. Nature: The Prime Mover in the Economic System Reflections on nature are rare in WN, even though being the chief wealth source nourishing all other economic components (II.v.11). 34 In WN, nature appears in two different but associated forms both expressing the question of order, that is, either as an entity organizing itself or one being organized. 35 The first form is the physical nature (II.i.27): in economic terms, the unmanufactured resource to be cultivated to enable wealth. Smith calls this nature a “spontaneous production” (I.xi.e.27; II.iii.3, 9). Once again, Smith does not give a formal definition of his notion. Given the regular sense of the word ‘spontaneity’ (cf. OED), a possible interpretation could be a compound consisting of physical things not formed by another being (for example a farmer) but produced and reproduced by its own means. In this regard, nature continuously produces itself. Although the notions production and organization are far from similar, I believe it is sensible to compare them to Nature is not the only source of wealth and surely not the most effective to increase wealth. Because of the division of labor, nonagricultural production increases wealth more than agriculture (WN.I.i.4), but the resources for nonagricultural production are in one form or another ultimately found in nature (II.iii.4; III.i.2). 35 In this case, the notion of nature is not to be understood as the conception presented in sec. 1.4.1. 34 37 each other when seen under the light of the idea of spontaneous order (cf. sec. 1.4.2). Smith is to my mind alluding to this idea when using the notion of spontaneous production. On the other hand, simply equating the two terms is misleading, since there is a slight difference between the two notions. Spontaneous order reaches at a certain point a stationary or organized state. Smith’s notion of nature, on the contrary, expresses how nature produces itself within the given boundaries set by nature but without necessarily reaching order. The second form of nature is a cultivated form of the spontaneous productive nature. It is nature brought under control or nature accommodated to human needs. This subordinated nature is regulated by an external cause such as labor. Out of this labor process the potential wealth found in nature actualizes into new forms such as a commodity or a piece of land. Under this process of cultivation, nature does not vanish. Instead, as a commodity, it remains in the product as a quality (WN.I.vi.1–2; see also II.iii.1). For example, wood may be the quality of a chair. As land, nature remains the force behind the process of cultivation that helps to improve wealth by its spontaneous productivity now brought under control (II.v.11). In both cases, nature is man’s property and a mean to gain revenue: either as a product to sell or as a piece of land to be rented (I.xi.a). This second form of nature, then, is the raw material for all other labor processes and makes up the ‘prime mover’ of wealth. 2.3.2. Labor and Division of Labor: Production of Difference In the economic theory of Smith, it is not only nature and land that increases wealth. Manufacturing and industry in towns, and labor in general, also increase wealth. 36 While nature is 36 Although the division of labor may be of use for the labor in the country, Smith states that advantages are greater in towns where manufac- 38 the first cause of wealth, labor is the action that further increases wealth and transforms nature into a concrete commodity to be used or consumed. In abstract terms, labor alters materials (whether natural or cultural) incorporating the value of its own process into the commodity. 37 Labor, then, as nature, is embedded in the commodity. Further, labor is the source that ultimately preserves human life. As the first sentence in WN reads: “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniencies of life which it annually consumes” (I.I.1). Since labor is important for society, it has to be evaluated fairly, that is, by evaluating the alteration man gives the material. In other words, the price paid for a commodity includes the rent of land and the wages paid for the labor activity (I.v.1; I.vi.3). 38 What characterizes labor is its ability to be divided. 39 By dividing labor into single, simple and repetitive movements, this action is specialized resulting in a higher quantity of work done (WN.I.i.7; I.I.4). Consequently, wealth increases. The division of labor has another implication. While many scholars states that dividing labor impoverishes the worker (also noted by Smith and Karl Marx), I want to highlight another ture is more pronounced (WN.I.i.4). Because of the nature of manufacturing labor and the concentration of people in towns, towns support by the means of their effectiveness the natural riches found on the country. There exists, then, a mutual relation between towns and the country (III.i.1). 37 More straight, the amount of time spent on laboring the material is reflected in what kind of commodity that results from this process: a house requires more labor than a cottage. 38 More technical, “[l]abour measures the value not only of that part of price which resolves itself into labour, but of that which resolves itself into rent, and of that which resolves itself into profit” (WN.I.vi.9). 39 On the improvement of labour, Smith writes: “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” (WN.I.i.1; see also I.I.4 and I.i.6–8). 39 side of this division. Division not only divides labor, it also divides several realms in society thus creating differences in society (differences reflected in the aforementioned social ranks in sec. 2.2). Although men by nature are more or less similar (I.ii.4), dividing labor gives them the means to concentrate their effort into one activity (that being either philosophy or trading) finally creating differences between men and hence a differentiated society. By introducing the division of labor, Smith can account for how wealth increases in society. In return, though, the question of order rises once again, for, what are the results of such type of society? And more important, how is such differentiated society organized? A differentiated society could lead to disorganization. Yet, a mechanism ensures the common good by distributing the riches in society (WN.I.ii.4–5). 40 Smith writes: It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. (WN.I.i.10) Apart from a paragraph in the introduction in WN (I.I.5), this quotation is the first passage speaking of an underlying organizing principle, which possesses the same quality as the one found in the invisible hand. Although the mechanism is related to the division of labor, organizing the riches cannot be understood merely with reference to this division. Instead, I argue, it must be seen under the light of the invisible hand. 40 Smith writes: “Among men […], the most dissimilar geniuses are of use to one another; the different produces of their respective talents, by the general disposition to truck, barter, and exchange, being brought, as it were, into a common stock, where every man may purchase whatever part of the produce of other men’s talents he has occasion for” (WN.I.ii.5). 40 This means: since the division of labor continuously creates difference in society, Smith has to introduce the invisible hand to organize and distribute this difference to omit societal disorganization. Before turning to the invisible hand, the third unit of Smith’s economic theory has to be introduced. For the division of labor to be realized, accumulation or capital is needed (WN.II.I.3). Capital is needed in the form of technology to provide the means for such division. Otherwise, labor may not be rearranged for specialization (II.ii.7). More important, the circulating character of capital is the medium in the economic complex that enables the organization of the market. 2.3.3. Capital: Organizing Medium As seen, labor is already a form of accumulation, since the alteration of the material remains in the product. Another type of accumulation is the one of goods, corn, money etc. derived from labor, land rent, or selling products. Accumulation is important because it reflects how high general wealth is in society: higher accumulation equals higher wealth. As the word suggests, accumulation comes about when riches piles up into a stock. Once a stock is accumulated it may be used for consumption or as revenue. Leaving the former out, the latter may be invested or lent in return for interests. It is as revenue that a stock makes up capital: “That part [of the stock] which, he expects, is to afford him this revenue, is called his capital” (WN.II.i.2). Such capital, Smith claims, is used to further promote accumulation, since its owner as far “as possible” wishes to improve the quantity of labor (II.I.4; II.iii.27, 38). 41 Smith points out, then, that the nature of capital is to be acElsewhere Smith simply writes: “Whatever part of his stock a man employs as a capital, he always expects is to be replaced to him with a profit” (WN.II.iii.6). 41 41 cumulated, and similarly, the nature of man is also to accumulate. As a general assumption in the economic theory of Smith we find, then, that capital and wealth in society continuously increases (II.iii.14). Smith divides capital into two forms. It may be fixed as when used to improve buildings, land, machines or the workforce. In this case, capital does not change hands and is not transformed into something else (WN.II.i.5). It may also circulate. Smith pays most attention to the latter, since it makes up the former. 42 When characterizing the latter, Smith writes: His capital is continually going from him in one shape, and returning to him in another, and it is only by means of such circulation, or successive exchanges, that it can yield him any profit. Such capitals, therefore, may very properly be called circulating capitals. (WN.II.i.4) This form of capital has the ability to circulate and to transform. It may adapt the form of goods or money according to what the exchange situation needs (a landlord may for example want corn, a merchant gold) afterwards circulating to another exchange situation needing new forms. Further, capital may circulate at different rates of speed depending on the size of the capital. Small amounts of capital are fast, while large amounts are sluggish causing that the economic system organizes at different rates of speed. Capital, in sum, is the medium enabling exchanges on the market and hence the organizing medium in the market. Capital so to say runs through all economic activities. It sets the economy into moHe writes: “Every fixed capital is both originally derived from, and requires to be continually supported by a circulating capital” (WN.II.i.24). On the fundamental importance of circulating capital, he writes: “It is the circulating capital which furnishes the materials and wages of labour, and puts industry into motion” (II.ii.25). 42 42 tion letting accumulation to take place little by little in society. 43 According to Smith, now, circulating capital should be let free from possible hindering forces (WN.II.ii.94). But, since Smith is concerned with how the market organizes, he is not ready to let this free capital transform the market into a wilderness. On the contrary, Smith can only argue for this freedom, because free capital is incorporated into an organized whole ensured by the invisible hand. As seen in the previous section, the price of a commodity is based on land and labor reflected in rent and wages respectively. Capital, similarly, is a part of the commodity reflected for example in the interest paid for a loan. Now, with this interpretation of capital, the full price of a commodity is set. Rent, wages, and interest make up what Smith calls the natural price. As the following section will show, when introducing the natural price, Smith can show how the market organizes and how another type of price, the market price, revolves around it. 2.3.4. The Market: The Invisible Hand As showed so far, the three units, nature, labor, and capital have themselves a certain affinity to the question of order and organization. The last of the four central units in WN, the market, binds the three other units together, sets the limits for them, 44 and organizes them. Smith’s notion of the market is presented in the next sec. 2.3.4.1, reserving the characteristics of its organizing nature to sec. 2.3.4.2. 43 Smith also argues for a steady accumulation of capital throughout the history of nations (WN.I.ix.6). 44 Smith writes: “As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market” (WN.I.iii.1). 43 2.3.4.1. Natural and Market Prices The market is a concrete place in which bargaining takes places. We may speak of a multiple of markets: some small, others large, some exchanging commodities, others again setting finances. Despite these differences and the autonomous character markets may have at first glance, they are united, or certainly, becoming united. By developing carriages, land- and water-carriages, as Smith describes, the markets connect to each other. Connecting the markets reduces travel time between spaces (Calcutta comes closer to London), thus opening up for a global market (WN.I.iii). 45 Smith, then, argues that all people and markets in the economic world are uniting to a connected whole (cf. sec. 3.2). With such a description, his conception of the market turns into a general description. 46 At a closer look, what takes places in the market is bargaining. For bargaining to take place at all, a social realm is needed. As seen in TMS, men are social beings dependent of one another. 47 When they exchange, besides, this mutuality and dependency is constantly confirmed. The difference among men created by the division of labor, however, implies that they also have different preferences. While all men have some necessary basic needs, for example the need for water, they have also “many insignificant demands” (LJ(B).209, Most clearly when Smith writes: “Since such, therefore, are the advantages of water-carriage, it is natural that the first improvements of art and industry should be made where this conveniency opens the whole world for a market to the produce of every sort of labour, and that they should always be much later in extending themselves into the inland parts of the country” (WN.I.iii.4). 46 I accentuate this generalization since it opens for an interpretation of Smith where his notion of the market resembles the Stoic’s notion of nature (cf. sec. 1.4.1). 47 Something confirmed in WN as when Smith writes that man “stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons” (WN.I.ii.2; see also I.i.11). 45 44 adopted from the editor’s note in WN.I.iv.13.n31). Such different demands result in the so called paradox of value between two types of value. One kind of value concerns the ‘value in use’ of goods, that is, “the utility of some particular object” (I.iv.13). The other one concerns the ‘value in exchange’: “the power of purchasing other goods which the possession of that object conveys” (I.iv.13). The paradox consists in that certain goods have no value in use, while they have great value in exchange (for example diamonds). This paradox splits Smith’s conception of the market into two realms. One realm revolves around the exchangeable value where commodities have a nominal price, 48 and another revolved around a natural value where commodities have a natural or real price. What makes up the real price is labor: “The real price of every thing […] is the toil and trouble of acquiring it” (WN.I.v.2; see also I.v.7). In other words, the bodily trouble or effort put in a labor activity sets the natural price of a commodity. Smith recognizes the problems such measure gives for how do we compare the work of a philosopher at Edinburgh University with a worker in the wool factories? Although this problem could be “adjusted” by the market (I.v.4), Smith admits it is practical to exchange using the relative value of commodities rather than labor itself (I.v.5–6). This other value constitutes the nominal price. Now, in turn, a problem of relativity arises, for, how can the price be set without a firm measure? (I.v.8). Instead of resolving these problems of measure, Smith preserves both types of prices in his theory (I.v.9–10). Although wicked tongues would claim that Smith’s theory of prices is wrong, the two types of prices do not form a theoretical problem for him, since he is able to 48 Smith also uses the terms money price, exchange price or relative price. All these are equivalent to the term nominal price. 45 connect them to each other due to the organizing nature of the market (see next sec.). 49 The relation between the two prices varies with time and place: “At the same time and place the real and the nominal price of all commodities are exactly in proportion to one another” (WN.I.v.19). This moment is but an ideal state immediately to be disorganized by the flux of time. Separating the real and nominal prices results in value and price displacements in the market where an ounce of silver may buy more labor in Canton than London (I.v.20). In sum, Smith introduces market dynamics (expressed in price fluctuations) causing instability on the market. In the long run, however, the market organizes such insecurities because of the nature of the market. 50 2.3.4.2. The Nature of the Market There are two important qualities regarding the nature of the market worth exposing. First, the market price tends towards the natural price, and second, the market organizes all events in the economy. While the natural price is stable representing 49 Smith indicates that labor alone (and thus natural price) is the “the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared” (WN.I.v.7; cf. I.v.17). On the other hand, he also gives priority to the nominal price, when it comes to its practical use: “As it is the nominal or money price of goods, therefore, which finally determines the prudence or imprudence of all purchases and sales, and thereby regulates almost the whole business of common life in which price is concerned, we cannot wonder that it should have been so much more attended to than the real price” (WN.I.v.21). Nonetheless, Smith lets the two types of prices coexist with each other. 50 Smith writes: “When by an increase in the effectual demand, the market price of some particular commodity happens to rise a good deal above the natural price, those who employ their stocks in supplying that market are generally careful to conceal this change. […] Secrets of this kind, however, it must be acknowledged, can seldom be long kept; and the extraordinary profit can last very little longer than they are kept” (WN.I.vii.21). 46 the real value of the commodity, the market price fluctuates (WN.I.vii.18–9) around the natural price (I.vii.8). As Smith writes: The natural price […] is, as it were, the central price, to which the prices of all commodities are continually gravitating. Different accidents may sometimes keep them suspended a good deal above it, and sometimes force them down even somewhat below it. But whatever may be the obstacles which hinder them from settling in this center of repose and continuance, they are constantly tending towards it. (WN.I.vii.15) 51 Although the flux of time separates the natural and market price, there is still an organizational relation between the two. The natural price is a firm and stable price, since it reflects something natural and real (made up by rent, wage, and interest). The market price, on the other hand, is artificial or nominal constantly changing according to different individual demands causing it to lie under or above the natural price. For example, demand for blond wigs may rise instantaneously due to a performance of Così fan tutte, but the cost of producing wigs changes only naturally over time. The natural price, acting as a gravitational point, continuously attracts the market price. Now, the question is why and how this attraction occurs? An explanation has to be sought between the effects resulting from men’s actions and the market price. Every eco- 51 The wording in this passage is not unlike Newton’s law of gravitation (see also Montes 2006, 252–8). Keeping Smith’s enthusiasm for Newton in mind, he writes on gravitation: “He [Newton] demonstrated, that […] the Planets were supposed to gravitate towards the Sun, and to one another, and at the same time to have lad a projecting force originally impressed upon them” (Astronomy.IV.67). 47 nomic action, as Smith states, affects the prices. 52 Prices, then, reflect economic actions. Attracting the market prices towards the natural state of the natural prices, therefore, implies regulating the effects stemming from economic actions. A full explanation of this cannot be given recurring to economics only. Surely, an interpretation referring to price developments on the market could be given, but such interpretation cannot account for why human actions unfold in the way they do on the market. A full clarification can be given turning to Smith’s claims on the nature of the market and the ‘natural’ regulation and organization found on the market. 53,54 At this point we may refer to the idea of spontaneous order (cf. sec. 1.4.2) where the nature of a given entity organizes into an organized whole. Similarly, but as already stated not identical, the nature of the market in Smith’s theory also has such organizing character. It organizes economic actions into a cohesive whole regulating all the transactions in the economy. By alluding to As when he writes: “The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labour, and profit, which must be paid in order to bring it thither” (WN.I.vii.8). 53 Smith has many references to natural regulation. To mention a few: “There is in every society or neighbourhood an ordinary or average rate both of wages and profit in every different employment of labour and stock. This rate is naturally regulated, as I shall show hereafter, partly by the general circumstances of the society, their riches or poverty, their advancing, stationary, or declining condition; and partly by the particular nature of each employment” (WN.I.vii.1); “The quantity of every commodity brought to market naturally suits itself to the effectual demand” (WN.I.vii.12); “A trade which is forced by means of bounties and monopolies may be and commonly is disadvantageous to the country in whose favour it is meant to be established […] But that trade which, without force or constraint, is naturally and regularly carried on between any two places is always advantageous, though not always equally so, to both” (WN. IV.iii.31). 54 Now, nature and natural refers to the notion of nature as presented in sec. 1.4.1. 52 48 the nature of the market, Smith can describe the advance of wealth so important in WN. The nature of the market finds an epitomizing expression in the idea of the invisible hand. Roughly halfway in WN, the notion of the invisible hand appears as that instance organizing the effects of economic actions. The controversial passage reads: 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 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. (WN.IV.ii.9) 55 55 And similarly in the passage in TMS containing the notion of the invisible hand: “The capacity of [the landlord’s] stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. The rest he is obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, 49 The invisible chains had the important role to organize the events. Now, the invisible hand organizes the actions of persons on the market to promote the public interest, thus spreading wealth to all corners of the economic system. The invisible hand does not lead the intentions of an economic agent. It does neither affect an agent’s will nor the prior conditions for his actions. What it does, is to lead the effects resulting from his actions. In social life man could organize the social behavior by the means of the impartial spectator. Now, on the market, the results of economic activities are too complex, or unimaginable. The complexity found in the connecting markets where all economic actions such as bargaining, laboring, lending land, and lending capital interact, hinders man in knowing how to reach sympathy or to act according to the “prosperity of mankind” (cf. sec 2.2). Therefore, an organizing unit needs to step in: the invisible hand. The few quotations containing the notion of the invisible hand suggest that the invisible hand only appears in relation to economic events and among those who provide and keep in order all the different baubles and trinkets, which are employed in the economy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice. The produce of the soil maintains at all times nearly that number of inhabitants, which it is capable of maintaining. The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, tho’ they mean only their own conveniency, tho’ the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species” (TMS.IV.1.11). Although the contexts where the notion of the invisible hand appears are different, the same organizational character is found in both. 50 not social life. The appearance of the invisible hand on the market, however, does not only occur once. Instead, since people exchanges constantly, the invisible hand must intervene and reorganize the market continuously. Organizing the market, then, is a continuous affair. With this lifeline in place, complexity is reduced, and man may focus on his own economic actions and interest, since the invisible hand will lead the results from his actions towards the general interest. So far, the general assumptions in Smith’s theory of knowledge, his moral philosophy, and political economy have been exposed. These assumptions point towards an interpretation of his theory based on the notion of organization: to organize events using the imagination, to organize passions to reach sympathy, and to organize wealth to distribute the riches in society. This rather long exposition was necessary for two reasons. First, to identify the general assumptions found in the theory of Smith. Second, extrapolating these assumptions should reflect central parts of his theory. Otherwise, interpreting the metaphysical aspects would be insensible to and incompatible with major parts in Smith’s works. Along this interpretation two theological problems have been presented but not been fully explored. These are the impartial spectator and the invisible hand. My interpretation of the impartial spectator called for a theological interpretation, since the use of the word ‘demigod’ and passages in Smith’s works suggests so. The invisible hand, similarly, also calls for a theological interpretation, for, what entity has the ability to regulate the actions of humans? From this interpretation of the worldly life, where the limited human nature grasps the world as an organizing enti- 51 ty, 56 I now turn to the heavenly life of Smith’s theory showing how the world at a global level is organized. Some have argued that Smith’s conception of the market should be characterized as a self-organizing system (for an overview see Fuchs and Collier 2007, 27; Kurakin 2007, 12; Ruzavin 1994, 68–9; Witt 1997, 490). Recurring to modern scientific conceptions of self-organization, however, may run the risk of being insensible to the existing text material. 56 52 3. HEAVENLY LIFE: ORDER When trying to expose Smith’s theological stance or infer the influences from the tradition of metaphysics in his works, one is met with only few hints. Smith often refers to a deity, but what theology we might deduce from this is not obvious. Among the many words Smith uses when referring to a deity are Jupiter, God, the Creator, the Director of Nature, and many more. Whether these words refer to the same object, denote different divine qualities, or even refer to different deities, is uncertain. What role the deity plays for the invisible hand is also unclear, and maybe one should simply add the invisible hand to the list of deities. Despite these difficulties, there are some assumptions of metaphysical character found in his works useful when exposing his theology. The assumptions are general, often vague, and do not offer a specific account of his theological stance, but they may guide a sensible interpretation of his metaphysics and theology. My method to grasp Smith’s theological stance is to include the passages on theology and metaphysics in EPS and juxtapose these with his references in TMS and the general assumptions presented in the previous part. What Smith may have meant by God or the invisible hand is probably out of reach for historical studies. What can be done is to interpret the few passages in which a metaphysical claim or discussion is present. Keeping Smith’s epistemological, ethical and political economic stance in mind, we may be able to combine the worldly and heavenly aspects into a coherent theological stance. In order to account for this heavenly realm, I will discuss three theological issues. First, I show how Smith’s theological stance is partly inspired by Christian theology, partly by Stoic 53 theology (sec. 3.1). Second, I consider how the heavenly life in Smith’s theory is not characterized by organization, as the worldly life, but by order. From God’s view, the whole is organized although the single parts in this whole may not grasp this order, something related to the discussion of the relation between man and God. With this theological discussion, I am now able to give a full account of the impartial spectator (sec. 3.2). Third, the question of order and organization will be discussed in relation to Smith’s conception of providence, thus finally exposing the invisible hand in its totality (sec. 3.3). 3.1. One God and One Hand With poor textual evidence many possible interpretations of the idea of the invisible hand comes at hand. Common readings of Smith grasp the invisible hand as a metaphor for either market price dynamics or a divine being. Conceived as a metaphor for market prices, the organization of the prices is not explained properly. Explaining the prices in this way, one risk resting on a dogma saying that prices are organized by the effects of supply and demand without explaining why supply and demand forces act in that manner. To strengthen Smith’s statements and to give his ideas coherence at a metaphysical level, such reading of the invisible hand should be abandoned. If thought as a metaphor for a divine being, the interpretation would be more convincing. In such case the invisible hand is merely just another word for God. Although sound, such interpretation would nevertheless neglect that the idea of the invisible hand actually appears in his works. Further, this reading would be stressing what Smith might have meant instead of interpreting the words actually appearing in the works. Despite the interpretational difficulties it may raise, I distinguish between God and the invisible hand, thus accepting the semantics found in Smith’s works at its face value. 54 A way of approaching the theological stance of Smith is to consider what may be excluded from this stance. Among the omissions we find a polytheistic stance. Smith criticizes this theological stance in several passages: not because it assigns existence to a metaphysical realm but because it assigns it to a realm consisting of more than one deity. He writes: The idea of an universal mind, of a God of all, who originally formed the whole, and who governs the whole by general laws, directed to the conservation and prosperity of the whole, without regard to that of any private individual, was a notion to which they [philosophers whose natural philosophy is based on the four elements] were utterly strangers. (Ancient Physics.9) Smith speaks of one God who created the universe and directs his conduct towards the prosperity of that whole. 57 His theological stance, then, is not polytheistic but monotheistic. With the expression ‘general laws’, Smith asserts that God organizes this whole by some unchangeable principles. Smith might be speaking for a natural theological stance where the acts of God may be revealed when studying nature by the means of reason, experience or science instead of recurring to the Bible or other sacred texts (Krolzik 1988, 17). 58 Such interpretation could be sound when keeping in mind his epistemological concern in unifying the events with the invisible chains to grasp the general laws of nature (cf. sec. 2.1). However, as I A similar prosperity was expressed with the invisible hand where the invisible hand ensures the prosperity of all on the market (cf. sec. 2.3.4.2). 58 Natural in natural theology meaning: “‘Natürlich’ als […] von der Natur als erfahrbarer Wirklichkeit ausgehend […] ‘Natürlich’ als Erkenntnis, die sich argumentativ nicht auf die im Glauben angenommene Offenbarung stütz” (Kraus 1998, 677). TMS is partly composed of some of the lectures Smith held. Although there are no records that may confirm this, the lecture course included natural theology (Brewer 2009, 534, quoting Alec L. Macfie; see also Pack 1995, 290). 57 55 argued, man only gives an estimated account of the world. If Smith’ stance should be described as a natural theological one, it has to be flavored with a skeptic attitude only giving an estimated account of God’s general laws. 59 In Stoic philosophy, the universe is distinguished by logos. Since humans take part in the universe, they have the ability to account for logos. Smith’s stance is more humble. The universe is gifted with logos but human beings have only limited means to describe it. 60 Proving the existence of God, then, cannot be given by reason only. Explanations must be supported by recurring to general (Christian) beliefs or dogmas, something Smith does although not explicitly referring to passages in the sacred texts. Another problem with the polytheistic stance is that divine beings are ascribed to be the cause of unusual events occurring in the universe. Instead, Smith argues for a monotheistic stance where all events are the cause of one deity. For it may be observed, that in all polytheistic religions, among savages, as well as in the early ages of Heathen antiquity, it is the irregular events of nature only that are ascribed to the agency and power of their gods. Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their Although my interpretation is in many points in line with Lisa Hill’s interpretation at this point we differ, since I emphasize the epistemological skepticism from Astronomy (Hill 2001, 5). 60 Smith writes: “The administration of the great system of the universe, however, the care of the universal happiness of all rational and sensible beings, is the business of God and not of man. To man is allotted a much humbler department, but one much more suitable to the weakness of his powers, and to the narrowness of his comprehension; the care of his own happiness, of that of his family, his friends, his country: that he is occupied in contemplating the more sublime, can never be an excuse for his neglecting the more humble department; and he must not expose himself to the charge which Avidius Cassius is said to have brought, perhaps unjustly, against Marcus Antoninus [Aurelius]; that while he employed himself in philosophical speculations, and contemplated the prosperity of the universe, he neglected that of the Roman empire” (TMS.VI.ii.3.6). 59 56 own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters. (Astronomy.III.2) Alongside Smith’s critique of polytheism, the passage also presents the invisible hand in a setting different from the one presented in the previous part (sec. 2.3.4.2). Again, the invisible hand is only mentioned in passing without any clarification or elaboration. What we may infer from the quotation, though, grammatically speaking, is a possessive case between God and the invisible hand: the invisible hand of Jupiter. At least there is a conceptual difference between God (or Jupiter) and the invisible hand. Smith employs the notion of the invisible hand in two ways: either to describe how the actions of men are led to another end (WN and TMS) or as the reason behind events in the universe (Astronomy). Both cases are not necessarily antipodes, since the invisible hand in the first case could be interpreted as a divine being organizing events in the world. In the second use, Smith might assert that the invisible hand is similar to the underlying logos in the universe responsible for all events occurring in the universe. In both cases, the invisible hand is an active force in the universe. A way of grasping this active force is to recur to the Stoic idea of pneuma. The idea expresses “the active principle” or a “force” working in nature manifested both in the physical and supra-physical realm (Long 1974, 155–6). Pneuma assembles the universe by connecting the center of the universe with the circumference. Further, it is a force both inert in man and universe uniting the two. Although there is no textual instance to confirm a collation between pneuma and the invisible hand, the invisible hand shares some of its qualities. The invisible hand organizes wealth in society centered in the hands of one part of the population to another surrounding part, and it is the active force leading man’s economic actions. By recurring 57 to pneuma it is possible to further explain the link between God and the invisible hand. Pneuma is a force active in nature and closely affiliated to God although not identical. Similarly, the invisible hand is a force intervening in the universe and God-like but should not be reduced to God. The invisible hand, then, should be interpreted as a quality of God or God’s intervention in the world. Now, what is more ambiguous is Smith’s use of the word Jupiter, since it refers to Roman mythology: a polytheistic theological stance. When looking into the passages in which Jupiter appears, its use is most extensive in the paragraphs on the Stoics found in TMS (I.iii, ed. 2–5; III.5.4; VII.ii.1), in Ancient Physics (11), and in a letter to Lord Hailes (March 5, 1759) referring to Homer. Roman mythology was adopted from Greek polytheistic mythology, but in Stoic philosophy, Jupiter (or Zeus) represents the king of Gods and the principal divine being of the divine realm (see also Long 1974, 150). To my mind, the quotation should be read in this context. Smith proposes a monotheistic stance but keeps a semantic relation with Stoic metaphysics by referring to Jupiter. Given the affinity between Smith’s philosophy and the Stoics, this could be a reasonable first hint on how to interpret Smith’s theological stance, which could be named a Stoic influenced Christian position or an eclectic Stoicism (cf. Montes). 3.2. A Part of the Whole To further characterize the theology of Smith, we are to explore an idea he often recurs to. The idea that a part in the universe is not isolated from but connected to the whole. As Smith writes: As all, even the smallest of the co-existent parts of the universe, are exactly fitted to one another, and all contribute to compose one immense and connected sys- 58 tem; so all, even apparently the most insignificant of the successive events which follow one another, make parts, and necessary parts, of that great chain of causes and effects which had no beginning, and which will have no end; and which, as they all necessarily result from the original arrangement and contrivance of the whole; so they are all essentially necessary, not only to its prosperity, but to its continuance and preservation. (TMS.VII.ii.1.38) 61 With the Stoic conception of nature in mind (cf. sec. 1.4.1), the quotation can be read along two lines. First, worldly objects are related to one another as when people sympathize through passions or when products circulate on the market by means of the circulating capital. Second, there is a connection between the worldly and heavenly life in which God takes part in the world as expressed with the idea of the invisible hand. The two realms, the worldly and heavenly side, are thus connected through the invisible hand as an acting force moving all the single parts in accordance with the whole or God (see also sec. 3.3). Because of this interconnection, man, nature and God form a whole. In several passages Smith argues that man is a part of Nature: he is not “detached” from things (TMS.VII.ii.1. 19). Although man may not recognize what part he plays in the whole (cf. man’s cognitional limitations), he is nevertheThe idea also appears outside the paragraphs on the Stoics: “In every part of the universe we observe means adjusted with the nicest artifice to the ends which they are intended to produce” (TMS.II.ii.3.5). The common clock metaphor is also used: “The wheels of the watch are all admirably adjusted to the end for which it was made, the pointing of the hour. All their various motions conspire in the nicest manner to produce this effect. If they were endowed with a desire and intention to produce it, they could not do it better. Yet we never ascribe any such desire or intention to them, but to the watch–maker, and we know that they are put into motion by a spring, which intends the effect it produces as little as they do” (TMS.II.ii.3.5). 61 59 less a part of that whole and should see himself as a part. The universe’s perfection is ensured by God; man should live following that life assigned to him (TMS.VII.ii.1.21), because everything occurs according to the will of God; and man is to follow God’s will (TMS.VII.ii.1.22). As Smith writes: He [a wise man] does not look upon himself as a whole, separated and detached from every other part of nature, to be taken care of by itself and for itself. He regards himself in the light in which he imagines the great genius of human nature, and of the world, regards him. He enters, if I may say so, into the sentiments of that divine Being, and considers himself as an atom, a particle, of an immense and infinite system, which must and ought to be disposed of, according to the conveniency of the whole. (TMS.VII.ii.1.20) 62 The quotation shows the affinity between man and God. Man is a part of the whole, and he can imagine how God sees him. Again, the imagination presented in his theory of knowledge (cf. sec. 2.1), and often neglected by scholars, plays an impor- Similarly: “This [the essence of virtue] was what they [the Stoics] called to live consistently, to live according to nature, and to obey those laws and directions which nature, or the Author of nature, had prescribed for our conduct” (TMS.VII.ii.1.16); or as when quoting Aurelius: “From thee are all things; in thee are all things; for thee are all things” (VII.ii.1.38); and: “Whoever does not cordially embrace whatever befals him, […] wishes, so far as in him lies, to stop the motion of the universe, to break that great chain of succession, by the progress of which that system can alone be continued and preserved, and, for some little conveniency of his own, to disorder and discompose the whole machine of the world” (TMS.VII.ii.1.38). It is also mirrored at a societal level: “It is thus that man, who can subsist only in society, was fitted by nature to that situation for which he was made. All the members of human society stand in need of each others assistance, and are likewise exposed to mutual injuries. […] All the different members of it are bound together by the agreeable bands of love and affection, and are, as it were, drawn to one common centre of mutual good offices” (TMS.II.ii.3.1). 62 60 tant role in the theology of Smith. 63 The sentiments too play a role in his theology. They are possessed by man but also by God and therefore may man, when using his imagination, enter God’s sentiments and fulfill the role he has to play in the whole. 64 As I argued in the previous part (sec. 2.2), a full account of the impartial spectator was not possible. Now, the task can be fulfilled. The link between man and God is confirmed with the impartial spectator and especially with the word demigod. The impartial spectator is not only a judicial agency estimating which acts result in sympathy. It is also a facility mediating affairs between man and God letting man reflect on his actions by entering “into the sentiments of that divine Being”. Smith writes: In such cases, this demigod within the breast appears, like the demigods of the poets, though partly of immortal, yet partly too of mortal extraction. When his judgments are steadily and firmly directed by the sense of praise–worthiness and blame–worthiness, he seems to act suitably to his divine extraction: But when he suffers himself to be astonished and confounded by the judgments of ignorant and weak man, he discovers his connexion with mortality, and appears to act suitably, rather to the human, than to the divine, part of his origin. (TMS.III.2.32) 65 The connection between Smith’s theology and the rest of his philosophy is also stated by Pack (1995, 289). 64 My interpretation could at this point be criticized for overemphasizing the Stoic influence. The passages above are extracted from the section where Smith presents Stoic philosophy, but Smith frames his presentation with important notions from his own philosophy such as imagination and sentiments. 65 And in another passage Smith writes: “The weak, the vain, and the frivolous, indeed, may be mortified by the most groundless censure, or elated by the most absurd applause. Such persons are not accustomed to consult the judge within concerning the opinion which they ought to form of their own conduct. This inmate of the breast, this abstract man, 63 61 The quotation suggests that man is endowed with a judging faculty that is partly mortal, partly immortal or divine. Smith states there is a tribunal in man that “acts suitably” when he acts in concordance with the divine, something that requires entering God’s sentiments. This tribunal, however, may be corrupted and man acts in that case according to his human side thus not entering the sentiments of God. The relation between man and God does not work both ways. Smith is stating that man has the means to enter the sentiments of the divine being, but he is not stating that God is influencing his decisions directly. 66 In other words, man may act according to God’s will, but Smith also states that man may not always fulfill this task. Here, Smith is not adopting a Stoic stance. Because of pneuma, the Stoics could describe all events recurring to the logos inert in nature ultimately reducing all human actions to be a part of the divine plan as expressed in destiny (fatum) (Long 1974, 168–70, 182). The problem with the Stoic theological stance is that it cannot describe evil in the universe: if God is all-benevolent, why does evil exist? 67 Smith, instead, reserves a place for evil and the representative of mankind, and substitute of the Deity, whom nature has constituted the supreme judge of all their actions, is seldom appealed to by them. They are contented with the decision of the inferiour tribunal” (TMS.III.1.8.Eds.2–5). 66 Although his analysis is framed differently, Keppler also notes that the communication between man and God is not direct (Keppler 2010, 84). 67 Clearly expressed by Smith: “The ancient stoics were of opinion, that as the world was governed by the all–ruling providence of a wise, powerful, and good God, every single event ought to be regarded, as making a necessary part of the plan of the universe, and as tending to promote the general order and happiness of the whole: that the vices and follies of mankind, therefore, made as necessary a part of this plan as their wisdom or their virtue; and by that eternal art which reduces good from ill, were made to tend equally to the prosperity and perfection of the great system of nature. No speculation of this kind, however, how deeply soever it might be rooted in the mind, could diminish our natural abhorrence 62 flaw in his theology by giving humans more autonomy. 68 Humans, then, are not a perfect reflection of God and his will. They are independent beings, imperfect; they may act immorally, and respectively, they do not have knowledge of how events in the universe will unfold. 69 If there is a clear division between the heavenly and worldly life, why does God need to intervene in the worldly for vice, whose immediate effects are so destructive, and whose remote ones are too distant to be traced by the imagination” (TMS.I.ii.3.5). 68 As Smith writes: “That men, however, might never be without a rule to direct their conduct by, nor without a judge whose authority should enforce its observation, the author of nature has made man the immediate judge of mankind, and has, in this respect, as in many others, created him after his own image, and appointed him his vicegerent upon earth to superintend the behaviour of his brethren. They are taught by nature to acknowledge that power and jurisdiction which has thus been conferred upon him, and to tremble and exult according as they imagine that they have either merited his censure, or deserved his applause” (TMS.III.1.8.Eds.2–5; see also III.2.31). 69 This interpretation is in line with Griswold, Jr. and consistent with my division between worldly and heavenly life. From the point of view of God, human actions are of no interest, because they form a part of the whole, which human beings do not have access to: “moral distinctions disappears” (Griswold, Jr. 1999, 319). From the point of view of man, moral distinctions reappear and human actions become important for social life. The division is also expressed in the following: “Thus man is by Nature directed to correct, in some measure, that distribution of things which she [Nature] herself would otherwise have made. The rules which for this purpose she prompts him to follow, are different from those which she herself observes. She bestows upon every virtue, and upon every vice, that precise reward or punishment which is best fitted to encourage the one, or to restrain the other. She is directed by this sole consideration, and pays little regard to the different degrees of merit and demerit, which they may seem to possess in the sentiments and passions of man. Man, on the contrary, pays regard to this only, and would endeavour to render the state of every virtue precisely proportioned to that degree of love and esteem, and of every vice to that degree of contempt and abhorrence, which he himself conceives for it. The rules which she follows are fit for her, those which he follows for him: but both are calculated to promote the same great end, the order of the world, and the perfection and happiness of human nature” (TMS.III.5.9). 63 life? In other words, what role does the invisible hand plays? Such questions are related to providence. 3.3. The Invisible Hand: Providence As stated in the introduction, the heavenly side of Smith’s theory is in order, something confirmed when Smith argues for a connection between parts and whole. What I still need to clarify is the relation between the worldly and heavenly side. The first clarification to be made is if Smith argues for a deistic position, 70 that is, a theological stance where God created a perfect universe for which reasons God does not have to influence the universe after the creation. Since the invisible hand is an active principle such interpretation would not be sound. Instead, the invisible hand is an expression of God’s interference in the universe, or in other words, providence (cf. also Hill 2001). 71 Next, what kind of providence is Smith proposing? As argued in the previous paragraph, Stoic fate cannot account for evil in the universe. Another problem with the Stoic conception is to account for man’s free will. Given that nature in Stoic philosophy is a rational active force arranging all the parts of the universe according to its law, the Stoic position does not leave space for the free will. 72 If Smith adopted the Stoic stance entirely, freedom, the basic pillar in liberalism, would only be a matter of appearances. Smith, then, is not proposing a type of providence where God decides how individuals should act. Instead, he proposes a type of providence where he gives space to individual freedom. But, since he also 70 Something Anthony Brewer, following Macfie, seems to imply (2009, 534). 71 A formal definition of God’s providence could sound: “Die providentia Dei ist also die auf die allgemeine Schöpfung und Geschichte gerichtete gegenwärtige Gottesherrschaft” (Krolzik 1988, 17). 72 I am simplifying the Stoic position to draw a clear distinction between Smith and the Stoics. 64 insists on market order, God needs to engage in the world to preserve and confirm the order that free individuals on the market might disturb. God as the creator of the universe, then, acts upon the agents on the market. In this concourse (concursus divinus) between God and an economic agent only God plays a role. Man may grasp God’s sentiments with the imagination, but he can neither appeal to nor affect God. Man has been given a domain in which he can act freely as long as he acts according to God’s will (as man imagines it to be), and to a certain extent, he can fulfill this will. 73 For example, in social relations, man may organize his passions according to the other. But, when entering the market, he is no longer able to preserve this order. Man no longer knows the results of his actions and can no longer organize his passions according to other people. In other words, the effects stemming from bargaining cannot be organized by man: a social distance is created when entering the market. Smith, therefore, has to introduce the invisible hand. God must intervene in the market to organize the outcomes of human action that happens when bargaining. God’s providence, in sum, is not to foresee human actions but to intervene and organize the results of human action unfolded when men bargain on the market. Since human beings constantly bargain on the market, God’s intervention with the invisible hand on the market is also continuously. Smith writes: “But by acting according to the dictates of our moral faculties, we necessarily pursue the most effectual means for promoting the happiness of mankind, and may therefore be said, in some sense, to co-operate with the Deity, and to advance as far as in our power the plan of Providence. By acting other ways, on the contrary, we seem to obstruct, in some measure, the scheme which the Author of nature has established for the happiness and perfection of the world, and to declare ourselves, if I may say so, in some measure the enemies of God” (TMS.III.5.7). 73 65 The government of God in the world (gubernatio), then, is given a restricted role in the theology of Smith. Since the active invisible hand only appears in paragraphs discussing the market, a possible interpretation could be that the otherwise organizing world cannot organize itself when speaking of the market. An external influence is needed, and the invisible hand intervenes to conserve (conservatio) 74 and confirm the order created when the universe was created. The invisible hand, then, reestablishes order and is the helper ensuring the increase of wealth on the market organizing the disruptions on the market by gravitating the prices. The question is how extensive the market is. Is the market a single and isolated domain among other domains such as the social or the physical nature? Or is it a domain making up all other domains? Smith sees the market as a global entity (cf. sec. 2.3.4.1) giving it almost the same universal status as nature. In this case one could speak of a naturalized providence. On the other hand, he also speaks of a noneconomic realm such as when men interact socially without promoting economic results (cf. sec. 2.2). Since human beings have the means to organize this realm with the impartial spectator, the market (and the business of society) seems to be the only realm that needs to be organized. In this case one could speak of ‘marketalized’ providence. To my mind, it is in this and only this domain that God needs to intervene in. God takes part in the world, and this participation may be revealed by man. For example, the world’s orderliness could be a proof of God’s existence. In this case God is revealed by Conservatio is: “begrifflich die extensive Fassung des Schöpfungsgedankens, welche in der Verbindung ‘Schöper und Erhalter’ […] vertraut ist”; and may in this case be conceived as “die Vorstellung von geordneten Kosmos eingebettet, in welcher der Fortbestand der Welt als notwendiges Moment ihrer Erzeugung mitgedacht werden muss” (Scheffczyk 1995, 762). 74 66 experience and man could grasp God’s existence by studying nature and the laws inert in it. But, as argued (cf. 2.1 and 3.1), man can only give an estimated account of the events in the world. Now, in his theology, Smith pushes this skepticism even further. Man has no remedy to reveal God’s providence, since he would interfere in the providence of God. Smith writes: If those infinite rewards and punishments which the Almighty has prepared for those who obey or transgress his will, were perceived as distinctly as we foresee the frivolous and temporary retaliations which we may expect from one another, the weakness of human nature, astonished at the immensity of objects so little fitted to its comprehension, could no longer attend to the little affairs of this world; and it is absolutely impossible that the business of society could have been carried on, if, in this respect, there had been a fuller revelation of the intentions of providence than that which has already been made. (TMS.III.1.8.Eds.2–5) The quotation is consistent with Smith’s Stoic-Christian position, but he also disassociates from the Stoic position. In the quotation we find agnostic tendencies, not about the existence of God but about his providential aims. This fact is reconcilable with Smith’s epistemological skepticism. With this quotation we now understand why Smith argues that humans should not intervene in the course of events. They should follow their own interest, since they cannot grasp the providence of God anyway. God and the invisible hand will ensure that the course of events will fall out to the best. Summary: The Metaphysics of the Invisible Hand In the works of Smith we find a fundamental and recurrent theme: order and how to ensure order. As I have displayed, nature and God, the heavenly side of Smith’s theory, are a 67 harmonious whole in which all parts are an integrated and fulfilling part of the whole. The worldly side does not have this same character. When stepping down from the pedestal of God, the world no longer appears to be a harmonious whole. From man’s point of view, the flux of the world must be organized, both the experienced events and social passions. While man succeeds organizing these two domains, when entering the market, he no longer has the means to organize his surroundings. In steps the invisible hand and organizes economic events. It continuously takes part in the market and organizes it towards an organized state, and, since men always bargain, the market never reaches a stable state. Similar to man, who continuously organizes the events he sees and the passions he experiences, the invisible hand organizes market activities confirming nature’s perfection although never reaching the permanence and harmony of the heavenly side. The link between the organizing principle and the fluctuating prices of the market ensures that wealth increases by organizing the market into a well-distributed domain. In the next part of the thesis I expose how two important modern economic theories, general equilibrium theory and self-organizing economy, are related to the theory of Smith. While the former subscribes to the heavenly side always assuming an order which all economic activities are a part of, the latter stays at the worldly side trying to state how selforganization unfolds. In other words, the metaphysical assumptions and general problems stated by Smith are retained in modern economics. 68 4. MODERN ECONOMICS: SELF-ORGANIZING ECONOMY AND GENERAL EQUILIBRIUM THEORY Smith is without doubt one of the major contributors in political economy and economics even though many parts of his theory has been discarded. What did influence later economics and not least economic policy, even in our time, is the idea of a self-sustaining market free from governmental intervention. Indeed, many later economists still try to explain these forces in the market. While Smith used price mechanisms to explain market behavior (mechanisms supported by the invisible hand), later economists have explored the same issue with different tools, models and notions. In this part I argue that reminiscences from the metaphysical assumptions in Smith’s theory are still to be found in recent economic schools of thoughts. Not in a sense that new theories are simply reproducing Smith’s theoretical frame. Instead, I argue that the question of order raised by Smith founded on metaphysical premises can still be found in modern economic theory at an ontological level. 75 In this part, two major economic theoretical advances are analyzed in relation to my interpretation of Smith. First, the economic theory proposed under what could be named selforganizing economy. 76 Here the later works of the Nobel LauAttempts to show how the idea of the invisible hand has influenced modern economic theory have of course already been made (see for example Barry 1985; Tobin 1991; Witztum 2010). However, interest has been on the scientific facets of his Smith’s theory and not the metaphysical aspects. 76 A formal definition of self-organization is never given by these economists. To extend the definition from the introduction, the definition given by Paul Cilliers is useful because it is wide enough to contain the informal descriptions found in the works of the economists. It sounds: “The capacity for self-organisation is a property of complex systems 75 69 reate in 1974, Friedrich A. Hayek (1899–1992), draws the attention, as well as developments urged by Nobel Laureate in 2005, Thomas C. Schelling (1921–), and Laureate in 2008, Paul Krugman (1953–). 77 In the next section (4.1), I show how the heavenly side found in the theory of Smith collapses giving up the assumption of order for a self-organizing realm. If these recent economists still represent a heterodox position in economics, the second position I consider, general equilibrium theory, is a settled position in mainstream economics. Here the classic figures are the two Nobel Prize winners Kenneth J. Arrow (1921–) and Gerard Debreu (1925–), and Frank H. Hahn (1925–). They may be interpreted in line of the heavenly side where order is the ground premise (sec. 4.2). 4.1. Economic Self-Organization Although the following economists present different economic theories and deal with different economic problems, the notion that grasps their difference and relates them to one another is the one of organization and self-organization. This is seen in Hayek’s idea of spontaneous order. Here the question of order concerns how the economy organizes itself. Simiwhich enables them to develop or change internal structure spontaneously and adaptively in order to cope with, or manipulate, their environment” (1998, 90). Contrary to the definition given in the introduction, these systems do not necessarily evolve out of preestablished elements. 77 The economic studies from Santa Fe Institute could have also been included. However, because of their diversified computational approach, their theoretical foundation is difficult, if not impossible, to extract (see for example Anderson, Arrow, and Pines 1988). The work of Paul Ormerod (1998) implicitly referring to Schelling could likely have been be included. However, such inclusion would not add essential insights in relation to this study since Ormerod shares many of Schelling’s fundamental assumptions as when he writes: “Individuals do not act in isolation, but affect each other in complex ways” and “[t]he often unpredictable interactions between individuals lead to a certain kind of selfregulation in the behaviour of the system as a whole” (1998, x and xi respectively). 70 larly, the contributions of Schelling and Krugman also link to the question of organization. 4.1.1. Hayek: Catallaxy The most elaborated conception of self-organization in political economy is found in the three volume work of Hayek from the 1970s, Law, Legislation and Liberty (here only the two first volumes, Hayek 1973, 1976). 78 In this work, Hayek treats a central economic problem: the question of knowledge and what we can know about the economy (1973, 11–5; 1945, 519– 30; 1948). Instead of assuming that economic agents have the means to gain full information, Hayek supposes the opposite: agents do not have the cognitive capacity to get full information. They have a limited capacity and can only organize a limited series of events outplayed in the economy (an economy complex in nature). Furthermore, not even institutions have the means to monitor the information in the economy, since these are also ultimately conducted by human beings. At a basic level, therefore, there is none or nothing (institutions, a governmental system) that can give a full, detailed account of the economy (1984b, 56–7, 59). What Hayek sets to explain is how the economy after all is organized (1973, 35). Hayek’s answer to this question relates to his idea of catallaxy. 79 The word is a definition of the economy meaning the evolution of a spontaneous order based on the coordination of single economic agents (1973, 107–9; 1984c, 368). In other words, Hayek’s notion of order denotes an order created enHayek was earlier concerned with economic equilibrium, something he to a certain extent has criticized and developed (see 1984a, 1948). This aspect of his authorship will not be discussed. 79 Catallaxy is a neologism by Hayek derived from the Greek verb katallattein (to exchange, to admit into the community, and to turn from enemy into a friend) and substantivated. It is used as a substitute for the Aristotelian oikonomia (household management, law of the house) (Hayek 1976, 108; 1984c, 367). 78 71 dogenously. 80 Although Hayek states there are other forms of order creation, for example exogenously created order, the fundamental creation of order in the economy is spontaneous order (1973, 47). What provides order in the economy is the coordination of knowledge, which is ensured by market prices. 81 Apart from being an exchange medium, prices carry out information. A price is a condensed expression communicating the value of a specific product to agents on the market. The prices, thus, coordinate the knowledge at hand for the single agents on the market telling a value, which agents may or may not accept (1976, 115–8). Agents act upon price information, and conversely, the actions of the agents are reflected in the prices because prices are affected by what economic agents buy and sell. Since prices work as a neutral communication medium, the agents themselves can organize their activities on the market without any external legislator or price fixer giving the market a self-organizational character (1984d, 217–9). When comparing Smith and Hayek, we find a similar epistemological skepticism in Hayek as in Smith. In Smith’s epistemology, man can only give an estimated account of the events in nature, and he cannot forecast developments of the market at all. Although Smith discusses the epistemological Hayek’s definition of order sounds: “[A] state of affairs in which a multiplicity of elements of various kinds are so related to each other that we may learn from our acquaintance with some spatial or temporal part of the whole to form correct expectations concerning the rest, or at least expectations which have a good chance of proving correct” (1973, 36). Hayek’s notion of order is derived from the Greek kosmos, which he translates as “a right order in a state or a community” (1973, 37). 81 In abstract terms, Hayek writes: “The spontaneous order arises from each element balancing all the various factors operating on it and by adjusting all its various actions to each other, a balance which will be destroyed if some of the actions are determined by another agency on the basis of different knowledge and in the service of different ends” (1973, 51). 80 72 problems in a natural scientific setting and Hayek in a social and economic setting, 82 it is nonetheless this skepticism that leads both economists to similar conclusions. Since human beings cannot organize the results of their actions on the market (Smith), or do not have the capacity to gain full information (Hayek), human beings have to let market forces unfold without trying to control them. In Smith’s theory, the price developments on the market, ultimately supported by the invisible hand, will in the end ensure the organization of the market. Hayek, similarly, argues for the self-organizing character of the market where economic agents follow price developments on the market without any reference to an outer governing principle. The difference between the two economists is that Hayek argues for a self-organization without a single purpose (1973, 39). 83 In Smith’s theory, the market has a telos as when market prices revolve around natural prices reflecting the order of nature and God. The market may never reach order, but the inclination towards order and that order is good in itself is obvious in Smith’s theory. What Hayek does inherit from Smith is the assumption that the free market is the most efficient way to govern the economy. Without intervention, the market follows its own nature, 84 something based on their skeptical epistemology. 85 C. Smith, when writing on the epistemological skepticism of Hayek, echoes A. Smith: “Science can assist us better to understand the general nature of social inter-relation-ships, but it cannot ever hope to provide formulae that allow the accurate prediction of all future human circumstances” (Smith 2006, 152). Although by different means, C. Smith also seems to reach a similar conclusion as I do in relation to the question of knowledge found in A. Smith and Hayek (2006, 166). 83 “The cosmos of the market”, instead, “serves the multiplicity of separate and incommensurable ends of all its separate members” (Hayek 1976, 108). 84 Hayek does not speak of a natural price being a result of nature. There is no transcendent entity, such as nature, working as the premise for the prices on the market. It is only the social interaction on the market that 82 73 4.1.2. Schelling and Krugman: Self-Organizing Economy A similar concern for the question of organization is found in the works of Schelling (1978) and Krugman (1996). From a game theoretical perspective, what interests Schelling is the social behavior that unfolds among people. While Hayek’s problem was information and how the market distributes it, Schelling deals with the social behavior of people. 86 For Schelling, people are not guided by prices but by other people’s actions – even personal preferences are formed by others. Or, as Schelling states, he is interested in a “kind of analysis [that] explores the relation between the behaviour characteristics of the individuals who comprise some social aggregate, and the characteristics of the aggregate” (1978, 13, emphasis in original). Using the word aggregate can be misleading, since Schelling insists on the complexity of social interaction not reducing collective actions to a mere sum of single people’s actions. In that sense, Schelling shares Smith’s assumption in which the single takes part in the whole (cf. section 3.2). This leads Schelling to a fascination for organization and how social life organizes: “Somehow all of the activities seem to get coordinated” (1978, 20). Schelling gives a thorough account for this fascination, but the main point here is that his point of departure is organization and how social activities organize. Instead of arguing for a disorganized universe, Schelling claims that society is organizing much similar to the worldly side of Smith. How perfect this organization may for sure vary but the para- decides the prices on the market, but Hayek nevertheless sees social interaction as the most efficient way of organizing the market. 85 Andy Denis finds a similar connection between Smith and Hayek, but he focus on the interrelationship of economic agents and the epistemological grounds (2004, 348–54). 86 Schelling, though, also shares the same assumption that human beings have cognitive limitations and may not grasp the complex world. In his theory, there is also a skepticism towards central planning (1978, 22). 74 digmatic approach is the one of organization (see also 1978, 20–4). As I have showed in sec. 2.2, Smith is concerned with the ethical relation between men. When they act, they do so to gain sympathy by organizing their passions according to one another. Such purpose is not found in Schelling’s theory, but people do coordinate their actions towards one another. 87 With preferences (Schelling) or the impartial spectator (Smith), the agent acts in a social sphere towards order. Smith reserves social coordination to intimate interactions, and Schelling traces out the behavior of the aggregate from social micro-relations without alluding to a single mechanism (price mechanisms, God). The organization of the social and the market, thus, is innate, that is, organized solely by the means of people. Now, the question is what end such organization has. As seen in Smith, the telos of the organizing market is to reach order. Schelling recognizes that the market may fail, either economically or socially, but he nevertheless grants the market the ability of “harmonizing” the acts of many single “individuals and organizations” (1978, 23). The organization of the social does not manifest as a single equilibrium but in a socalled dual equilibrium. 88 For Schelling equilibrium is “a situSchelling even mirrors the impartial spectator, although omitting all ethical connotations: “And if we know what a problem a person is trying to solve, and if we think he actually can solve it, and if we can solve it too, we can anticipate what our subject will do by putting ourself in his place and solving his problem as we think he sees it” (1978, 18, my emphasis). 88 Schelling gives an account of this dual equilibrium by recurring to the notion of critical mass. Critical mass is a phenomenon appearing when the behavior of one agent acting among other people adapts to the behavior of the many or the mass. When the amount of people acting according to a relative large group of people becomes so high that all other people will follow their action, we may speak of a critical mass (1978, 91–102, 104–19). The mass is critical in the sense that the moment and the number of persons making up a mass are not fixed. For example, if a 87 75 ation in which some motion or activity or adjustment or response had died away, leaving something stationary, at rest, ‘in balance’” (1978, 25). Although equilibrium may adopt several forms, be “exact or approximate”, the main point is that there is tendency that the economic system will evolve towards a state of order (dual equilibrium). The metaphysical claim found in Smith’s theory that the universe is organizing is resembled, and although the telos inert in the system is relaxed, Schelling’s economic system still moves towards an orderly state. The third economist, Krugman, is inspired by Schelling, but he is concerned with the spatial analysis of the economy focusing on the emergence of order for a specific region, for example a city (Krugman 1996; see also Fujita, Krugman, and Venables 1999). While he adopts the insights from Schelling, for example the dual equilibrium (1996, 7, 15–22), he pays more attention to the initial state conditions prior to the evolution of a particular region into order. He arrives to the conclusion that the economy reaches order in two ways: it may either be organized from instability, or it may be organized along random economic growth (1996, 7, 99–100). For the former, order emerges spontaneously. Although spontaneous order is given a scientific flavor in Krugman, opposed to Hayek and Smith, the idea is the same. Further, Krugman resembles Smith when accounting for the premises for this group of ten persons are waiting to cross a pedestrian crossing, one single person may not animate the remaining nine persons to cross the street. But if two or three persons follow the first, the rest will tend to follow the same action. In this case the critical point could be set to be three persons crossing, that is, a point where the behavior of the seven remaining may go either way. The three people, then, represent a critical point where the system of ten people trying to cross the road is in an unstable equilibrium, which may have two equilibriums: the three trying to pass get cold feet and return to the pavement or the seven follow and cross the road to the pavement on the other side of the road. 76 order from instability. In drawing an analogy to natural science, Krugman writes: An individual fruit fly cell presumably does not think to itself, ‘I am part of a wing,’ yet cells collectively seem in effect to decide to become different parts of the organism. Experiments suggest that cells indeed behave as if they knew their own polar coordinates! (Krugman 1996, 48) Krugman states that cells are not isolated entities having no references to other parts in the biological system. Since they have the ability to become another part, this implies that cells are a part of a whole. Although Krugman’s description is more technical than the ones found in Smith and free from theological allusions, the underlying premise is that the part is connected to the whole. Order from random growth, on the other hand, has two sides. First, the actual rate of growth characterizes how the economy develops randomly. Second, the expected rate of growth characterizes how the economy develops within the scope of a so-called power law (Krugman 1996, 100). 89 The former is an inexplicable process, since the economy is a spontaneous production not following general laws. The latter is measurable and describable by the universal power law. Krugman may be right or not. What is important here is his attempt to explain economic activity alluding to one single, Krugman’s definition of the power law sounds: “[T]he number of objects […] whose size exceeds S is proportional to S-a, where a is not only a mystery parameter but […] a round number, like 1 or 2” (1996, v). Krugman finds this law expressed in the population of cities. The most populous city in a country is twice as populous as the second largest, is three times as populous as the third largest, and so forth. Expressed in a curve the relation would yield the slope a = -1 (1996, 39–43, 96–7). 89 77 scientific principle. 90 The gravitational law of Newton inspired Smith, and Krugman similarly incorporates the power law into economic domains to explain economic phenomena. Smith used the idea of gravitation to explain how the fluctuating market prices tended towards the more stable natural prices. Krugman argues, in a similar way, that the actual rate of growth is random as the market prices in Smith’s theory. But, the evolution of this growth is on the long run nevertheless describable and tends towards a certain law (or something natural). Both economists, then, share the same ambition to describe fluctuating markets with a scientific principle. Like Smith, Krugman has a tendency to ascribe the market a certain nature to describe how market developments take place. In Smith’s theory, the market follows its own nature and without any external intervention, the market will organize its activities properly. Similarly in Krugman’s theory, the economy is ascribed to have a certain self-organizational nature (1996, vi, 4). Both economists give different accounts of this nature, but they share the belief that an economy is an entity with a certain nature. For Smith, the market distributes personal gain for the common good, and it gravitates the market prices towards the natural prices. For Krugman, the selforganizational character of the market organizes the entire economic region resulting in local equilibriums, which might become unstable and be replaced by new local equilibriums, and so forth (1996, 58–9). Krugman’s notion of organization, then, does not bear reminiscences from Smith in the sense Krugman also mirrors Smith to a certain extent when describing the actual rate of growth as a spontaneous production. In Smith’s theory, nature too is a spontaneous production necessary for wealth growth (cf. sec. 2.3.1). 90 78 that order is good (cf. 1996, 5–6), but the economy is nevertheless describes as something naturally organizing. 91 Hayek, Schelling, and Krugman, in different ways, reflect in a secularly manner Smith’s theory, since the economy is organized by itself. Their way of describing the organization of the economy is not normative as in Smith’s theory. Smith claims that organization towards order is good in itself, since it confirms the order of the universe. In their conception, the heavenly side of Smith’s theory has so to speak collapsed, or, the invisible hand is an entity strictly inherent the economy. What does remain in their theory is the focus on organization, and they share with Smith the fundamental assumption that the nature of the economy is to organize itself. 4.2. Economic Order The other economic position I now analyze is general equilibrium theory, 92 especially the major contributors to this theory, Arrow, Hahn, and Debreu. 93 There is a long tradition in economics for studying equilibrium. Among the founding fathers to this school of thought we find the developments of Léon Walras (1834–1910) and Vilfredo Pareto (1848–1923). These two economists would lay the groundwork for later refAs when Krugman writes: “Nor do I think that this insight is merely about modeling. It seems reasonable to speculate that the immensely more complex landscape that determines the real geography of the world economy has its own underlying approximate simplicities. That is, there may be many possible outcomes, […] [b]ut some broader features may be more or less independent of historical contingency” (1996, 37). 92 This interpretation draws on Bruna Ingrao and Giorgio Israel (1990, chps.9–10). 93 Although trivial, it is important to point out that developments in the economic science are as diverse as in any other science. Even in subdisciplines within a single science, as general equilibrium theory, the progression is nonlinear. To talk about a general equilibrium theory is therefore misleading. The contributions from Arrow, Hahn, and Debreu are crucial but not the only ones (see Arrow and Debreu 2001). 91 79 lections on this subject (Arrow 1974, 19; Arrow and Hahn 1971, 3–6). 94 Walras’ contribution to economic theory was his idea of tâtonnement. This idea, as the French word suggests, characterizes economic progression as something moving towards equilibrium in a fumbling or groping fashion. Pareto, on the other hand, was concerned with the optimum distribution of resources in the economy. In short, the Pareto optimum is when two economic agents or more are in a state where no one can come out better-off without others coming out worse-off. With these two concerns on equilibrium and optimum modern general equilibrium theory would evolve. 4.2.1. Arrow, Hahn, and Debreu: General Equilibrium Theory Several economists developed during the 1950–1970s a theory that described the economy as a realm in equilibrium. They drew on game theory (developed first by Oskar Morgenstern and John von Neumann and generalized by John Forbes Nash), and developed their theories in a rigorous mathematic language. Although the economic problems set by the general equilibrium theory varies, the overall task is to mathematically infer the price conditions that may describe economic equilibrium. 95 Their notion of equilibrium states that all economic Arrow and Hahn also mention Smith: “[…] Adam Smith’s ‘invisible hand’ is a poetic expression of the most fundamental of economic balance relations” (1971, 1); “Thus it can be maintained that Smith was a creator of general equilibrium theory, though the coherence and consistency of his work may be questioned” (1971, 2). 95 Arrow and Hahn writes: “Our main concern will be the description of situations in which the desired actions of economic agents are all mutually compatible and can all be carried out simultaneously, and for which we can prove that for the various economies discussed, there exists a set of prices that cause agents to make mutually compatible decisions” (1971, 16; Debreu 1959, § 5.7). And: “A general equilibrium theory is a theory about both the quantities and the prices of all commodities” (Arrow and Hahn 1971, 2). 94 80 relations are balancing forces sustaining the price conditions enabling equilibrium. If the relations are unbalanced (cf. temporary equilibrium, Arrow and Hahn 1971, 35–40), other forces in the economy will reestablish the balance (1971, 1, 22–3). The generality in general equilibrium theory rests on the belief that “every economic activity is connected with every other one” (Arrow quoted in Ingrao and Giorgio 1990, 273). This means that the single economies affect each. To find the general equilibrium, therefore, includes finding equilibriums between economies. Their concern is not local or partial equilibrium of which there can be many, but the general equilibrium of which there can only be one (cf. the uniqueness of equilibrium, Arrow and Hahn 1971, chap. 9). 96 At this general level, their approach to economy resembles Smith’s. Improved carriages and circulating capital make Smith’s conception of the economy global, something also reflected in his primary aim: to explain the wealth of nations. Similarly, the belief that all economic events are united resembles Smith’s metaphysical assumption that every part takes part in the whole. Further, when economic relations unbalance, other parts in the economic system will restore balance. For Smith, the invisible hand restores this balance. The invisible hand leads the actions of economic agents thus affecting the market price. General equilibrium theory is in this case remarkably close to Smith, since the prices are also regulating forces eventually resulting in market equilibrium. 97 The gravitating market 96 Another important contributor to the study of general equilibrium theory, Lionel W. McKenzie, writes: “Unlike partial equilibrium theory, general equilibrium theory treats as constant only non-economic influences and embraces all sales and purchases of all agents involved in exchanges. It implies that all subsets of agents are in equilibrium and that all individual agents are in equilibrium” (2008, sec. Abstract). 97 As Arrow and Hahn’s conclusion reads: “We have thus been able to establish that for the market here described there exists a set of ‘signals’ 81 prices moving towards the natural price is, thus, not far from the accounts found in general equilibrium theory. An important assumption in general equilibrium theory is that the economy must be a competitive economy: a decentralized economy where a state or a monopoly is not the only force influencing economic actions. If an almighty force had the power to rule out destabilizing forces in the economy, one could assume that such model would be more suitable to balance the economy. However, general equilibrium theorist argues that single forces regulate the economy more effectively without the intervention from a powerful instance. This assumption is not far from the normative framework of Smith where governmental influence should be restricted to a minimum, since the nature of the market will ensure stability. Although the competitiveness assumption in general equilibrium theory is founded mathematically, it is nevertheless an assumption reflecting the normative scheme found in Smith’s theory. Another concern for general equilibrium theory is the question of optimum. Their problem is to generalize Pareto’s insight to a global economy with a single equilibrium. Despite the different economic mathematical solutions there might be to this question, assumptions are needed to solve such economical-theoretical problem. The assumption made in the general equilibrium theory links to the question of order. For general equilibrium theory the point of departure for their way of solving the problem is that equilibrium exists. They never question if disorder could be the natural starting point when describing economic actions. On the contrary, they assume there is order. The task, then, is mathematically to find – market prices – that will lead agents to make decisions that are mutually compatible” (Arrow and Hahn quoted in Ingrao and Giorgio 1990, 279, my emphasis). 82 the conditions for order. General equilibrium theory has been criticized for their formal theory without reference to real economic phenomena. 98 The interesting point here, however, is not the critique of their formalization but the premises for this formalization. To my mind, general equilibrium theory has inherited an economic problem (the question of order) stemming from Smith and later developed by Walras and Pareto without questioning if this problem is reasonable. Opposite the self-organizing economy, they do indeed depart from an assumption, that there is order. Thus, the model departs from the heavenly side of Smith’s theory in which order is founded and ensured by the Great Director of Nature. General equilibrium theory’s concern for the existence of equilibrium is only theoretical, and surely neither theological nor metaphysical. But, it is still ontological in the sense that equilibrium concerns all markets and economic actions, and equilibrium is further the fundamental assumption in the theory. Both for the Hayek-Schelling-Krugman liaison and the Arrow-Hahn-Debreu one, they are immersed in the metaphysics exposed in Smith’s works. Surely, their contributions to economic theory are secularized, but they stand on the same metaphysical basis. The first liaison is a continuation of the invisible hand as an inherent force in the economy organizing itself by its own means. The second comes forth by assuming order (equilibrium), and then afterwards trying to find the laws behind that order. Two important modern contributions Although not meant as a critique, William Zame writes: “The definition of competitive equilibrium identifies a particular state of the economy but provides no clue as to the process by which the economy is to reach this state. Without such a process, competitive equilibrium may retain its usefulness as a benchmark (normative solution), but is in doubt as a description of reality (positive solution)” (2008, sec. Equilibration). 98 83 in economics are, then, still in the hand of the invisible hand: one immersed in the worldly life, the other in the heavenly life. 84 5. CONCLUSION In my interpretation of Smith’s philosophy I have argued that his major concern is how order can be established. The underlying metaphysical assumption is that the universe is organized or organizing, and the task for him is to show how. I have identified this problem in the context of his epistemology, social life, and political economy. The crux of the matter in this reading has been the idea of the invisible hand and what character it has. Ascribing the invisible hand a metaphysical character may still cause an outcry, not least in economic theory. For the rest of us, keeping in mind the time in which Smith wrote, the metaphysical allusions are merely a frame of reference informing the endeavors of the mind rather than trusting positive facts. When ascribing the invisible hand a metaphysical character it opens for a reading dividing Smith’s theory between worldly and heavenly aspects in his theory. This distinction also marks two different points of view, that is, between a human, local perspective and a godly, global perspective. For the former, the realms of the world appear as continuously organizing towards order although never reaching a stable state. From the perspective of God, the world is in order. In this interpretational frame, the invisible hand is the active principle confirming this order and the mechanism ensuring market order, since the social distance between humans created when entering the market disables them to uphold this order themselves. I have also identified the question of order in two modern economic positions. The task for modern economists surely differs from one another and Smith. But, both positions sets forth either to explain how order emerges as an act of self-organization or to find the mathematical premises that proves market equilibrium. In short, the 85 thesis shows how the metaphysical problem set by Smith still bothers modern economists at an ontological level in their theories. The interpretation of Smith and the comparison to modern economics could have been further supported. For the former, the interpretation could include reflections on what role the invisible hand has had in theological positions before Smith. Worth mentioning are the works of Martin Luther and his idea of the hand of God and the Christian and Jewish conception of manus dei. Also the studies on the relation between Christian theology and economics would be profitable (see Harper and Gregg 2008, part I). For the latter, the comparison could have been supported by history of economic thought, drawing the historical lines between Smith and the modern economic stances. Although these general historical lines have already been given, an historical analysis tracing the ontological assumptions underlying the theories still misses. In addition to these two lines of studies, an analysis of the notion of self-organization could stress other qualities of the invisible hand giving new possible interpretations of Smith and clarifying the self-organizing economy of Schelling, Krugman, and Hayek. This could be done applying scientific works on self-organization (to mention a few Bak 1997; Kauffman 1993; Luhmann 1984). Although reasonable in modern economics, it would be misplaced in the case of Smith, since a detailed scientific notion hardly fits with his works. Instead, a conceptual and less scientific account focusing on the relation between nature and self-organization, or parts and whole, would be compelling. Comparisons to Immanuel Kant (1974/1791, §§ 62–8) and Friedrich W.J. Schelling (1985/1799, 333, n. 1 [I/3, 17, n. 1]; 1985/1797, 279–80 [I/2, 86 41–2]; see also Heuser-Kessler 1986) could sketch out such new lines of interpretation. To argue that Smith’s theory contains metaphysical facets could be regarded as an accusation. Although not my purpose, it is possible to criticize Smith’s theory for being swaddled in metaphysics. Critics of capitalism and socialist positions could nourish their suspicion of liberalism by pointing to this fact. However, people who live in glasshouses, as the old saying goes, should not throw stones. A critique of Smith, or for that sake liberalism, must include reflections on the metaphysics and ontology their own alternative rests on. It has to be sensible to similarities and differences between the alternatives at this level. Otherwise, critics could end proposing the same as their opponents. 99 To give a complete empirical account of the economy is an impossible task. To formulate a theory that describes the economy is on the other hand possible. Such a theory is always built, as the studies in philosophy of economics have taught, on some assumptions. These must be exposed and evaluated reflecting on the consequences they have in other parts of the theory. A philosophical conceptual analysis may not be fertile at the practical and technical level for these theories. However, at the foundational level, the analysis may expose aspects of their underlying principle that could yield new results in other levels in the theory. General assumptions, either of metaphysical or ontological character, are unavoidable. Reflections on them are not. Philosophy and economics may at this level have more in common than usually admitted, and with philosophy we may The celebrated 21st century Communist manifesto Empire by Michael Hardt and Toni Negri comes remarkably close to the Hayek-SchellingKrugman liaison as when stating that “[t]he multitude is a biopolitical self-organization” (2000, 411). 99 87 as economists further move our endeavors. The mist from the British Islands hindering our endeavors to grasp the economy has so far required that we hold hands with the invisible hand, but if economic theory is to move on we might shake hands with it end up saying, “goodbye for now”. 88 REFERENCES Ahmad, Syed. 1990. Adam Smith’s Four Invisible Hands. History of Political Economy 22(1): 137–144. Anderson, Philip W., Kenneth J. Arrow, and David Pines, eds. 1988. 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