Tuesday, May 13, 2008

A Nearly Correct Account of Adam Smith's Views

Creating Community, 12 May, HERE:

Adam Smith
The invisible hand

There are two important features of Smith's concept of the "invisible hand". First, Smith was not advocating a social policy (that people should act in their own self interest), but rather was describing an observed economic reality (that people do act in their own interest). Second, Smith was not claiming that all self-interest has beneficial effects on the community. He did not argue that self-interest is always good; he merely argued against the view that self-interest is necessarily bad. It is worth noting that, upon his death, Smith left much of his personal wealth to charity.

On another level, though, the "invisible hand" refers to the ability of the market to correct for seemingly disastrous situations with no intervention on the part of government or other organizations (although Smith did not, himself, use the term with this meaning in mind). For example, Smith says, if a product shortage were to occur, that product's price in the market would rise, creating incentive for its production and a reduction in its consumption, eventually curing the shortage. The increased competition among manufacturers and increased supply would also lower the price of the product to its production cost plus a small profit, the "natural price." Smith believed that while human motives are often selfish and greedy, the competition in the free market would tend to benefit society as a whole anyway. This was later adopted as a universal principle by the laissez-faire economists of the 19th century.

Smith apparently used the phrase "invisible hand" only three times in his work. Later writers, both supporters and detractors, repeated this phrase far out of proportion to Smith's own usage.

I have taken the liberty to post the whole of the message because it is almost correct and I will not quibble on this occasion. It is almost 100 per cent more accurate than the usual assertions made about Adam Smith and his use of the metaphor of ‘an invisible hand’ and the term ‘laissez-faire’.

Congratulations to the unknown (to me) author.

OK. For regular readers: how would you comment on the reference of the author to markets as part of the meaning on 'an invisible hand'?


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