Wednesday, October 03, 2007

Wikipedia Is Not a Good Source For Understanding the Invisible Hand

In what for me was a slightly nostalgic piece about IMB tracing developments after the short era of the IBM360 machines by Irving Wladawsky Berger: “Welcome to Adam Smith’s World” at Always On: the insider’s network (AOBlog) (here). I read it with interest because I remember those years well and also because it contained this:

"Adam Smith, an 18th century Scottish philosopher and economist, is generally considered the father of free-market, free-trade capitalism. The seminal expression of those policies was An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776 and generally regarded as the first work of modern economics

“Smith introduced the famous metaphor of the invisible hand - "the free market, while appearing chaotic and unrestrained, is actually guided to produce the right results by this so-called invisible hand." It clearly applies to IBM’s situation. While we survived our near-death experience, most companies do not. Given enough time, it seems almost inevitable that in highly competitive industries like IT, companies, no matter how powerful their position, will get in trouble in the marketplace when the environment in which they once flourished changes significantly. They are victims of the invisible hand. Some will be able to reinvent themselves and overcome their troubles, but more often than not, their problems will prove lethal.To a greater or lesser extent, every industry in the private sect goes through its own invisible hand struggles when its underlying technologies or markets change. This is never pretty. In the struggles to survive, some companies will even slip into the kind of malfeasance that we saw from Enron, WorldCom and other companies when the dot-com bubble burst

Adam Smith did not introduce the ‘famous metaphor of the invisible hand’, despite what Wikipedia says. It was fairly common in 17th-and 18th-century literature, and long before then too in Greek and Roman times.

Free markets are not ‘actually guided by an invisible hand’. That is mysticism and while widely accepted by modern trained economists it is quite nonsensical if you think about it. Given, by definition, that nobody has seen the so-called invisible hand, how does anybody know that there is one? Is it of divine origin? Where’s the science in that?

It is a metaphor, not a reality; Adam Smith’s explanations of how markets work (Books I and II of Wealth Of Nations) make no reference to invisible disembodied body parts, nor, frankly, does he need to rely on a metaphor for what he explains perfectly clearly.

However, I agree with the last sentence of the piece: “The unpredictability of free markets is one of the most intriguing aspects of Adam Smith's world”. Correct!

So what happens to the invisible hand while free markets are behaving unpredictably?


Blogger PhD Student said...

Dear Gavin,
since the aim of wikipedia is to share his knowledge, it's up to you to improve the article you mention.
It willundoubtfully helps you in the better understanding od Adam Smith that you promote since wikipedia is now the first reference students adopt for browsing a subject.
I participate in the Wikipedia program in french and try to lead my professors to improve the articles which deserve such improvements.
It's not wikipedia which is at fault but the persons who don't try to improve this encyclopedia.
Best wishes

6:29 pm  
Blogger Gavin Kennedy said...

Thank you for your suggestion.

Presently I am in France but return tomorrow. I shall examine what I could do to improve what is written and, perhaps, do so.

I take your point.

6:50 am  

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