I’m currently reading through some of Karl Polanyi’s less famous works. I had always thought Polanyi was not a fan of Adam Smith based on his amazing, “Oh, Snap!” worthy comment in The Great Transformation. Polanyi argues that Smith was wrong about the nautralness of the motivation to “truck, barter, and exchange” and that for most of human history, trucking, bartering and exchanging are nowhere to be found. Polanyi then memorably says of Smith, “In retrospect it can be said that no misreading of the past ever proved more prophetic of the future.” (GT 45) So, Smith was utterly wrong about the 18th century and before, but prescient about the 19th century. Overall, not so positive, especially from someone like Polanyi who is so concerned with creating useful theories of economic life that make sense in different times and places.

In “The Place of Economies in Societies”, Polanyi shows a bit more love to Smith. More specifically, in the previously unpublished lecture notes collected by Dalton, who edited the collection Primitive, Archaic and Modern Economies, Polanyi argues that economic thought has gone through five periods in the early 18th century. The first, which included Quesnay and Smith, still saw the economic system as part of society. Only with Townsend, Ricardo and Malthus do economists begin to think of the economic sphere as autonomous. As a side note, Polanyi’s reading of Quesnay is impressive, and very useful for me. Polanyi notes that Quesnay had been a vet before studying economic affairs, and that “In his physiology Quesnay had used the word economy in the sense of husbandry or householding of the animal body.” (PAME: 125) The idea of circulation inside the body was relatively new, and Quesnay adapted the idea to the social body. I need to dig into that claim for my dissertation, as it’s a fascinating hypothesis about how we came to talk about economies the way we do now.

Polanyi’s reading of Smith is equally helpful. Writing here in 1947 according to the footnotes, Polanyi is in some sense anticipating the dramatic rise of Paul Samuelson and his famous economics textbooks which claimed that Adam Smith emphasized the power of the invisible hand of the market to produce socially optimal outcomes. Polanyi disagreed, noting:

Reference to the ‘hidden hand,’ which made the self-interest of the butcher and the baker ‘serve me with a meal,’ have been exaggerated out of all proportion. Adam Smith wished to discourage the idea that the self-interest of the merchant naturally benefited the community. He demanded, e.g., that the British government should rule India, not the merchants of the East India Company, whose interests, he asserted, were contrary to those of the population, while the government’s interests ran parallel to that interest (for instance, in terms of taxation). Self-interest is not yet differentiated into economic motives of employers and employed. All through, the approach is still institutional, historical, and societal. (PAME: 128-129)

Given Gavin Kennedy’s recent work on the history of the invisible hand metaphor, and my own reading of the passage, I couldn’t agree more with Polanyi. In some ways, I’m coming to appreciate more Emma Rothschild’s reading of the invisible hand as a “mildly ironic joke”. In particular, Smith devoted several extensive passages to showing how merchants (and others) often colluded to act in their own interests and against that of the public (think of: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” from Book I, Ch. X). And Smith’s hatred of corporations was evident, as noted by Polanyi. In the famous invisible hand passage, Smith notes that some merchants prefer to safeguard their capital and thus invest locally rather than abroad, in spite of the higher possible returns in foreign trade:

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. (Book IV, Ch. II)

So, his point is that most merchants are most of the time out for themselves and do all sorts of terrible things that are not at all in the public interest to get their way. But, some merchants, those that out of fear (and not civic-mindedness) support domestic over foreign industry, end up promoting the interests of society by accident. Hence the irony of the joke.

But to reiterate the overall point of this post: Polanyi was right about Smith, and far less negative than I had originally thought.

Update: For continuing discussion of this post, see also Gavin Kennedy’s comments and my response over at Adam Smith’s Lost Legacy.