Tuesday, December 18, 2007

Invisible Hand no 357

Biz/ed here:

Term Adam Smith

Definition: Adam Smith is often seen as the founding father of economics. He developed much of the theory about markets that we regard as standard theory now Adam Smith was Scottish and after graduating from Glasgow (at the amazing age of 17!!) he was a fellow at Oxford and then he lectured back in Scotland again - first at Edinburgh and then Glasgow Universities. Surprisingly this was not in economics. Adam Smith's main work was 'The Wealth of Nations' He wrote it in five books and it was published in 1776. In the work he stressed the benefits of division of labour (specialisation) and its need, and outlined the workings of the market mechanism (price system). Perhaps the concept most associated with him is the 'invisible hand'. He argued that markets would guide economic activity and act like an invisible hand allocating resources. Prices would be the main means to do this. Prices would rise when there was a shortage of something and fall when it was plentiful.”

Comment
I have no idea who ‘biz/ed’ is, or what its purpose, but they fall at the first fence because they quote incorrect derivative sources to account in a single paragraph for Adam Smith’s contribution.

That Adam Smith is ‘associated’ with the invisible hand is undoubtedly true, if by ‘associated’ we mean in popular discourse.

The next sentence gives the game away:

He argued that markets would guide economic activity and act like an invisible hand allocating resources.”

No he did not! That statement is attributed to him, but you would be hard put to show it to be true.

He did not argue ‘that markets would guide economic activity and act like an invisible hand allocating resources.’ His reference to ‘an invisible hand’ had nothing to do with markets (WN Book IV: p456). It was about risk aversion and the whole is the sum of its parts.

Smith statements about how markets work in is Book I of Wealth Of Nations, where is did state that ‘Prices would be the main means to [allocate resources]. Prices would rise when there was a shortage of something and fall when it was plentiful.’ But he said nothing about ‘an invisible hand’, nor anything ‘like an invisible hand’, allocating resources.

Markets may be wonderful creations of human society, but there is nothing mysterious, miraculous, or ‘beyond human understanding’ in their operation.

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