The Hand Behind the Invisible Hand

Front matter

THE HAND BEHIND THE INVISIBLE HAND

DOGMATIC AND PRAGMATIC VIEWS ON FREE MARKETS AND THE STATE OF ECONOMIC THEORY

KARL MITTERMAIER

Contents

Notes on Contributors vil

Foreword ix Isabella Mittermaier

Mittermaier’s Modern Message 1 Christopher ‘Torr

Foreword

Isabella Mittermaier

This book was written by my husband, Karl Mittermaier, in one year. Every Sunday afternoon I would type, on a typewriter, what Karl had written on a foolscap pad the previous week. Karl would not set up the computer that he had purchased until he had completed this work. Karl submitted it as an occasional paper to Joubert Botha, who had asked him to present his views on the market order. Karl was then forty-eight years old and, as a result of the idiosyncrasies of academic life in South Africa at that time, had not yet obtained a PhD. Joubert Botha recommended that this occasional paper should be submitted as a doctoral thesis. Two highly respected North American economists agreed to examine the dissertation. The original title was “The idea of market order in Adam Smith’s “Wealth of Nations” and some of its later developments.’ One of Karl’s colleagues, Tony Marais, having heard Karl express his ideas, said, ‘Oh, it is about the hand behind the invisible hand.” Karl was awarded a PhD for this work and I thank Joubert Botha for his instigation more than thirty years ago.

Karl signed a contract for its publication, but he never proceeded therewith, not wanting to add a chapter on developments in Eastern Europe, where the transition was occurring from state-controlled economies to market economies. He thought that such an addition would have ‘dated’ the book. Karl was always the prescient type, as the reader can ascertain from the pages that follow.

Karl passed away in 2016. The head of the School of Economic and Business Sciences at Wits, Jannie Rossouw, encouraged the idea of publishing Karl’s work, most of which Karl had never submitted for publication. I thank Jannie for getting the ball rolling. Michael Stettler and Christopher Torr took the manuscript from there, seeing it through to publication, and Giampaolo Garzarelli recommended Bristol University Press and made the necessary introductions. I thank them all for their contributions and their strong desire to see Karl’s book published. I thank Paul Stevens of Bristol University Press for his belief in Karl’s work, and Dan Klein, who volunteered to write a chapter on Karl as a classical liberal economist, which is included in the book. My thanks also go to Rod O’Donnell for writing an epilogue and to Christopher Torr for his chapter on the usefulness of the extended metaphor of ‘the hand behind the invisible hand’. These three contributions help bridge the passage of time from when the book was written in 1986 to the present, showing that none of its novelty, import and force have been lost after 34 years.

Karl has written a synopsis of the aims of the book: “Io examine certain expositions of market order for the purpose of characterizing, formulating, and assessing what may be called dogmatic and pragmatic views on free markets: further to investigate the dual task economics has had of analysing ideals of economic order and the actual state of economic affairs, to consider the bearing of the distinction between free-market dogmatism and pragmatism on the present state of economic theory and to make proposals for bringing ideals of economic order more explicitly within the ambit of economic theory’.

Johannesburg 25 February 2020

Christopher Torr

In an age of frequent upgrades and instant downloads, it is nice to come across a work of art containing an ancient line of thought and a modern message.

Karl Mittermaier submitted the final draft of his doctoral thesis to the University of the Witwatersrand in March 1987. A physical copy is housed in the Cullen Library of the university. He commenced the project over 30 years ago. Through the good offices of Bristol University Press, and in particular on account of the enthusiasm of the senior consulting editor, Paul Stevens, his thesis is at last being published, almost word for word, as it originally appeared. A special word of thanks is due to Giampaolo Garzarelli who provided the gateway to Bristol University Press.

The Hand Behind the Invisible Hand can be seen, in part, as an interpretation of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations (commonly referred to as The Wealth of Nations), which appeared in 1776.

Two hands appear in Mittermaier’ title and at least one is invisible. Is the other also invisible? By considering answers to the question, Mittermaier classifies a stance on the free market as either dogmatic or pragmatic.

Within the first couple of pages of reading his work, it will become apparent that it is a work of great erudition. Nevertheless, the argument may at times come across as dense. It with this in mind that this chapter will attempt to identify the main message of the book, as reflected in the two hands of the title, one of which we immediately know to be invisible. Some preparatory remarks on the concept of an invisible hand are in order.

The concept of an invisible hand plays a vital role in Karl’s analysis, even though Smith refers to it explicitly only twice in his two major books, once in The Wealth of Nations, and once in The Theory of Moral Sentiments (2005 [1759]). At a rough estimate, that means that Smith brings up the subject twice in the space of over 1,000 pages. The fact that a stone which the builder apparently neglects has become — at least in the hands of many of his interpreters — the head of the corner, is in itself an intriguing issue. This is not the place to address the issue — let us simply note that many scholars would agree with Otteson (2018, 48) when he remarks that the notion of the invisible hand ‘is absolutely central to Smith’s thought’. Others, however, are not convinced. The title of a book by as eminent a scholar as Warren Samuels (2011) — Erasing the Invisible Hand: Essays on an Elusive and Misused Concept in Economics — speaks for itself and indicates that, at the very least, opinion is divided on the matter. (See also Grampp (2000) and Kennedy (2009).)

While there is no generally agreed-upon definition of what is meant by an invisible hand, we shall employ the approach of Ullmann- Margalit (1978), which even Samuels (2011, 291) appears to regard as above reproach.

Suppose we identify an order in human affairs. On further investigation we ascertain that although the regularity came about as a result of human action, it did not arise from human deliberation. In other words, the order did not arise from human design. Under such conditions, says Ullmann- Margalit (1978, 263), we have an invisible hand explanation. She refers to this realm of things that results from human action but not from human design as a middle realm (1978, footnote 2) and cites Hayek (1966 and 1960) as her source. An example that comes most readily to the fore as an invisible hand explanation is the one associated with the creation of money (Ullmann-Margalit 1978, 264) or the emergence of language.

Ullmann-Margalit’s approach accordingly relies on Hayek’s identification of this middle realm to develop Smith’s invisible hand argument. Hayek notes that if we confine our arguments to the natural and artificial realms confusion is bound to ensure: ‘... one would describe a social institution as “natural” because it had never been deliberately designed, while another would describe the same institution as “artificial” because it resulted from human action’ (Hayek 1967, 130). Hayek is thus informing us that the framework of our analysis should include institutions that are ‘The results of Human Action but not of Human Design’. Here Hayek (1967) is drawing attention to the work of another Adam, namely Adam Ferguson (1767, 90). (See Hayek 1967, 96; Langlois 1986, 241-7; Ullmann- Margalit 1997, 182.)

Immediately after introducing the concept of spontaneous order, Hayek (1967, 98-9) refers to Smith’s notion of an invisible hand and the reader may not unreasonably be led to believe that Hayek prefers to use the more positive-sounding term spontaneous order than the more mysticalsounding invisible hand. Others, however, prefer to use another term. ‘I prefer the term “unintended order” to the more familiar “spontaneous order” because the former conveys that the system of order was not anyone’s intentional design without suggesting, as “spontaneous” might, that there is no way to account for the creation of the system’ (Otteson 2002, 6; see also Otteson 2007, 21).

We have a means of identifying what an invisible hand is all about without necessarily using the terms invisible or visible. And should we find it more convenient to do so, we can associate an invisible hand argument with either a spontaneous (Hayek) or an unintended (Otteson) order.

Although Hayek generally gets the credit for introducing, or at least popularizing the notion of spontaneous order, Jacobs (1997—1998, 2000) argues that Michael Polanyi was employing the term prior to Hayek. (See Bladel 2005 for an opposing view.)

We have, therefore, Hayek’s (1966, 1967) notion of spontaneous order being employed by Ullmann-Margalit (1978, 1997) in order to provide an invisible hand explanation along the lines of Smith (2007 [1776]). Let us call this the Hayek-Ullman-Margalit-Smith or HUMS approach. Although we shall not pursue the matter further, Ullmann-Margalit also points out that we can distinguish further between the emergence (or regularity) of such an order and the endurance of such an order.

Now let us make use of a modern-day example, namely the Burning Man event. It is an annual event lasting about a week and takes place in the Nevada Desert towards the end of August.

The following descriptions are taken from two articles in the New York Times, written by Laura Holson (30 August 2018) and Emily Badger (5 September 2019). We want to provide just enough detail of the proceedings in order to illustrate the point behind Mittermaier’s question as to whether the hand behind the invisible hand is also invisible.

Burning Man had its origins in 1986 when the founder Larry Harvey set a wooden statue of a man alight on a beach in the San Francisco area. The procedure continued on an annual basis and the numbers attending grew. After four years, however, the concerns of fire authorities brought an end to the San Francisco part of the adventure. Burning Man subsequently moved to Black Rock Desert in Nevada.

The event lasts for a week — from the end of August to early September. A few days before it commences, the flat Black Rock Desert site is deserted. Recent attendance has been in the vicinity of 70,000. Coffee and ice can be bought on site, but purchases are otherwise not allowed. Those attending are expected to bring their own provisions and to provide gifts to others.

Picture it this way. Around the middle of August, in any particular year, the allotted site is empty. Within a couple of weeks thousands of people converge on what emerges as an instant city. A week or so later they are all gone.

One might expect conditions to be somewhat chaotic when some 70,000 people descend suddenly on an isolated part of a desert. In the early years of the exercise there were indeed signs that chaos could ensue, there being virtually no rules and no central authority. Guns and fireworks were in evidence. A fatal motorcycle accident occurred in 1996 and in another vehicle incident three people were seriously injured. The year 1996 appears thus as some sort of watershed when a decision was made to bring explicit rules into the proceedings. Streets were laid out. Fire prevention procedures materialized in the form of fire extinguishers. Explicit rules were applied. That coffee and ice can be purchased amounts to a rule.

Tens of thousands of human beings are ‘doing their own thing’ in the desert. In other words, human action is very much to the fore. If we leave out the organizers of the event, those who have descended on the scene are not intentionally at work designing any sort of order. Some sort of order has nevertheless emerged in this flat piece of earth, even if those flocking there had no thought of design in mind. In terms of the HUMS approach, we have the tinges of an invisible hand explanation.

Let us now apply Mittermaier’s reasoning to the event. He would have us ask: Is the hand behind the invisible hand also invisible? Or is it visible?

In terms of the narrative sketched above, the answer would seem to be that from 1996 onwards, the hand behind the invisible hand was a visible one. The organizers had come to the conclusion that if the event were not to descend into chaos, some sort of planning or design was called for. Rules of behaviour were laid down, plans were made, streets were laid out.

The economist Paul Romer, who attended the 2019 event, was quoted in the New York Times as saying:

I picture an economist showing up at Burning Man and saying: ‘Oh, look! This is the miracle of the invisible hand. All of this stuff happens by self-interest, and it just magically appears’ And there’s this huge amount of planning that actually is what’s required beneath it to make the order emerge.

We can see, therefore, in Romer’s remarks the idea behind Mittermaier’s argument that we must investigate whether or not there is a hand behind the invisible hand and whether or not that hand is invisible. The order in the proceedings arises from the institutional setup — the set of rules enforced. Thousands of individuals are pursuing their own satisfactions, and institutional structures (street layout, fire prevention measures, moral codes etc) ensure that some sort of order prevails. The hand behind the invisible hand is visible.

An invisible hand process is at work if individual human action results in some sort of order that was not specifically designed by those individuals pursuing their own ends. But in order for the invisible hand to operate well, institutions need to be in place for otherwise the human action at play could result in chaos (no order at all). Mittermaier asks the question, does the institutional setup also emerge spontaneously via an invisible hand? As the 1996 watershed year specification makes clear, a decision was made to insist on arrangements deliberated upon with an idea to prevent chaos. In other words, in terms of Mittermaier’s argument we could say that in the case of the Burning Man event, the hand behind the invisible hand is visible, which amounts to a pragmatic rather than a dogmatic stance on the emergence of the institutions involved.

We have thus an example in which the hand behind the invisible hand is visible, in line, therefore, with Mittermaier’s presentation of the pragmatic view in which humans deliberately decide upon an institutional framework within which an invisible hand is supposed to operate. If, however, we were to argue that the appropriate institutional arrangements would have emerged of their own accord, in other words without such planning, Mittermaier would classify us among the ranks of the dogmatic free marketeers. For a dogmatic free marketeer, the hand behind the invisible hand is also invisible.

In his opening remarks Mittermaier (this volume, 25—6) has this to say on the type of issues involved:

But since institutions vary so much from place to place and from period to period and since not all of them are conducive to an advantageous market order, the question arises how an arrangement of society which constitutes an invisible hand may come into being. Does it simply arise in the absence of meddling hands or does someone have to turn his hand to the task? Do the rules of conduct which give rise to a spontaneous order also arise spontaneously if governments do not interfere — or do governments or others have to bring them about deliberately? There is a hand behind the invisible hand. The question is: Is that hand invisible too?

It is intriguing to note that Mittermaier would have been putting the finishing touches to his thesis in the same year in which Burning Man originated (1986). He would have had no knowledge that a few friends had assembled in the San Francisco area around that time to set alight to a wooden man.

By way of an exercise let us imagine that the Burning Man event evolved differently. In particular, let us suppose that there was virtually no deliberate attempt to stamp any sort of design or planning on the proceedings. We saw that 1996 was the watershed year when procedures were adopted such as laying out the streets and introducing various forms of legislation such as forbidding firearms. Suppose that in spite of the lack of planning, some sort of order emerged, with the type of institutions necessary for the invisible hand to operate (at a different level) also emerging spontaneously, in other words, without being planned. If such were the case, Mittermaier’s analysis would point to the fact that the hand behind the invisible hand can also be invisible. We would then have a situation in which the institutions necessary to ensure the persistence of Burning Man also emerged without design.

The HUMS invisible hand explanation does not explicitly indicate that the events under consideration involve markets and hence price signals. What the HUMS explanation does is to establish that the order emerging is one that has not been designed by the individuals involved in the action. In economics, the HUMS type of argument is typically applied to markets but as Hayek has indicated, it can also be applied to the emergence of language. Polanyi (1962) has employed it to indicate that individuals engaged in research can stumble upon an order that constitutes no part of their research agenda.

If the hand behind the invisible hand is also invisible, we have invisible hands operating, as it were, at different levels. The signalling device at the individual dimension (let’s call this Level 1) will be the price system. If the hand behind the invisible hand is also invisible, then the HUMS explanation amounts to the claim that the system is spontaneously generating the kind of institutions (Level 2) necessary for the invisible hand to operate at Level 1. We would then have spontaneous or unintended order at Level 1 and Level 2.

Another way of examining the concept of an invisible hand is via Heilbroner’s book entitled The Making of Economic Society, which is in its 13th edition and now appears under the authorship of Heilbroner and Milberg (2012).

Heilbroner and Milberg (2012, 6) make use of a three-part framework when they examine the making of an economic society, but they make no direct reference to Hayek’s notion of a spontaneous order. Hayek is mentioned only once (in a footnote on page 63). When the authors refer on various occasions to notions of spontaneity, it is never with reference to the work of Hayek. They point out that there are three ways in which humankind has seen fit to solve production and distribution problems, and they call them tradition, command and the market.

Tradition is perhaps best understood by an example — see also Torr (1980). Writing of his experiences, Stefánsson (1913, 62-3 and 362) observes:

I know now that the Eskimo [sic] temperament is that they never expect to find anything in any place where no one has found it before, so far as they know, and never having heard of any one catching fish in Smith Bay they had felt sure there would not be any. ... This was a valuable lesson to me, and has on many occasions encouraged me to go into districts that the Eskimo considered devoid of game and in which I have usually found plenty.

... Although Natkusiak reported that all winter the people of the Baillie Islands had caught no foxes, still he agreed with Ilavinirk in thinking that surely there must be plenty of them out at Cape Parry. Temperamentally it seems difficult for Eskimo to imagine that things can change. Natkusiak had found plenty of foxes on Cape Parry in January, 1910, and he could not see why there should not be plenty also in January, 1912.

The economic problem can also be dealt with by means of a command system in which plans are made by a central agency.

That there is such a term as market socialism should be enough to convince us that the command, tradition and market classifications should not be regarded as watertight compartments. A predominantly marketorientated economy can also contain elements of tradition. For example, the eldest son of a farmer might traditionally be the obvious person to take over the farm when the father retires.

To many, the concept of an invisible hand simply represents free market forces and the implication often drawn is that if only the government would stay out of the picture, an invisible hand (representing unfettered market forces) would ensure an optimal use of resources. Mittermaier’s achievement is to show that invisible hand arguments do not exist in vacuo. He identifies invisible hand procedures at the level of individuals (Level 1), where the regularities being generated involve price signals. For the operation of an invisible hand at Level 1, institutions are required at Level 2. The analysis thus shifts to whether or not the institutions of Level 2 will emerge spontaneously or not. The argument that the requisite institutions will emerge spontaneously amounts to the dogmatic free market argument. The belief that the emergence of such institutions requires deliberate planning amounts to the pragmatic free market argument. The requisite institutions have to be created by the visible hand of government.

In Chapter 5, Mittermaier presents Murray Rothbard as a dogmatic free marketeer, whereas Henry Simons and Walter Eucken appear as pragmatic free marketeers. Mittermaier also spends some time considering Hayek’s position. The younger Hayek comes across as someone with pragmatic views, whereas Hayek the elder appears to exhibit dogmatic free market views. In a somewhat different context, Hutchison (1981, Chapter 7) also distinguishes between what he terms Hayek I (views presented up to 1936) and Hayek II (views presented after 1937). Hutchison suggests that Hayek I is following the (a priori) philosophical views of Mises, whereas Hayek II comes across as a somebody enamoured of the views of Popper.

When any system is replaced by another, as in the Soviet system of command being replaced by a market system, the new system will require appropriate institutions. The dogmatic view on free markets is the view that such institutions would emerge of their own accord without the visible hand of government.

By the nature of their profession, economists are often asked to expound on the appropriate role of government. In my opinion The Hand Behind the Invisible Hand provides us with a platform to discuss one of the most pressing issues of our time, namely the appropriate role of government. At various times during the academic year, economics lecturers will be asked to expand on the role of government. It is not unusual then to find subsequent discussion being divided into two main groups, those of a free market persuasion arguing that the government is doing too much, while those of an interventionist persuasion argue that it is doing too little. I have found that raising the issue of whether or not the hand behind the invisible hand is also invisible gets an appreciative hearing from those who emerge as pragmatists and from those who emerge as dogmatists.

Mittermaier’s approach provides a framework for discussion, whether one is in academia or not, or whether one leans to the left or to the right. Both the academic and non-academic community can at last benefit from having access to The Hand Behind the Invisible Hand.

Bristol University Press has done the economics fraternity a great favour by upgrading an essay written 33 years ago by a master craftsman. Through their foresight we are now able not only to hold a copy of a modern classic in our visible hands; we can also, should we wish to do so, download this modern classic instantaneously via some sort of invisible network.

I recall that I once approached Karl with a view to discussing a book by Paul Davidson on modern monetary theory, called Money and the Real

World. He asked to see the book, which I had brought with me. I recall him examining the title page. He shook his head — more with sadness than with surprise. ‘Strange title? he remarked with a sigh. Karl was wondering what kind of a thing Davidson’s unreal world might be.

Don’t think for one minute that if you were to discuss a modern economic issue with Karl that you could avoid a discussion of the economic lineage of your question. Don’t imagine either that he would merely refer you to Marshall, whose Principles of Economics was published in 1890, or that he would stop at Ricardo’s writings in the 1820s or even Adam Smith’s Wealth of Nations of 1776. No — eventually you would find yourself being taken back to the Greeks, and in particular to Aristotle.

To get some idea of the pace of the proceedings, let us in closing trace the history behind Mittermaier (2018).

In the early 1990s Karl was encouraged by an ex-colleague, Jochen Runde, to submit a manuscript to the Cambridge Journal of Economics. I am not suggesting, of course, that Jochen stamped and sealed the envelope in which it was submitted, but I very much doubt that the manuscript would ever have reached Cambridge had it not been for Jochen’s prompting.

From what I recall it was accepted for publication. The editor simply wanted Karl to correct or add a couple of technical things. Once again, I don’t know if Karl couldn’t be bothered by such technicalities or whether he didn’t think it important enough. In any event, he never sent the final version back for publication. In these days of publish or perish, it is hard to imagine such a decision.

Karl is the only economist I ever met who put a manuscript into his bottom drawer after it had been accepted for publication. After Karl passed away, one of his colleagues, Michael Stettler, who had also been a student of his, played a key role in preparing the manuscript anew. With the kind permission of Isabella Mittermaier, and with the encouragement of Jochen, it was resubmitted.

The title of the paper originally presented to the Cambridge Journal of Economics in 1992 and subsequently published more than a quarter of a century later says it all. It is entitled “Menger’s Aristotelianism’.

I left the University of the Witwatersrand (Wits) in the late 1980s. In 2015, after having spent a decade away from academia, I returned to Wits in a part-time capacity and started wondering what had become of Karl’s thesis and whether or not it had been published. So I started searching for The Hand Behind the Invisible Hand on the Internet and to my surprise I immediately came across publication details. It had been published, according to one of the references I found, on 1 November 1996. I even came across an ISBN number, and was informed that it consisted of 288 pages. I recall even seeing a revised edition specified, even though it had not been published. As we all know, fake news has been around for quite a while.

Karl is the only economist I have met who wrote an invisible book about the invisible hand. It is the only book that I have heard of that went into a revised edition without ever being published in the first instance.

Acknowledgements I should like to thank Rod O’Donnell and Dan Klein for their most useful comments and suggestions on an earlier draft.

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