Friday, January 02, 2009

Who Has Not Read Wealth Of Nations?

Steve Ayers writes for (Camp Verde Bugle - Camp Verde, Arizona, HERE:

"Credit market back to basics: Smaller community lenders see little change in loans"

”To understand how the American economy got in its latest mess you need to do two things.

First, brush up on the principles espoused in Adam Smith's economic masterpiece "An Inquiry into the Nature and Causes of the Wealth of Nations," specifically the chapters on supply and demand and the "invisible hand" of the marketplace.

Then go back in time about 10 years

You need to start with reading ‘Wealth Of Nations’, and not rely on quotations from it, as Steve Ayers seems to have done.

If he had read it, including “specifically the chapters on supply and demand”, he would know that there is no mention whatsoever in those chapters (they’re in Books I and II) of ‘the "invisible hand" of the marketplace’.

This may come as a surprise to Steve Ayers (and I apologise for sending him bad news during the festive season), but Adam Smith only used the well-known, 18th-century literary metaphor of “an invisible hand” once in the whole of the 5 books that make up the near on a million words of Wealth Of Nations.

The sole reference to ‘an invisible hand’ is in Book IV, chapter ii, paragraph 9, on page 456 of the Oxford University Press/Liberty Fund edition; or on page 424, of the Edwin Canaan, 1937 Random House edition). There are not other references to it in Wealth Of Nations.

Moreover the reference to ‘an invisible hand’ was not about ‘supply and demand’ nor about ‘the marketplace’. It was about the consequence of some, but not all, merchants preferring to invest their capital close to where they lived in the home economy and not like some others, who took the greater risks of investing it abroad in the British colonies in North America, despite in being more profitable to do so (due to the British monopoly of the export and import trade, which, ironocally, was to come to end shortly thereafter). In short, the metaphor is about risk aversion and not supply and demand.

Download my longer paper on the use of the metaphor from the Home page (in red): ‘Adam Smith and the invisible Hand: from metaphor to myth’ (2008), and see how a literary metaphor was transformed into a mythical ‘concept’, a ‘principle’, even a ‘paradigm’ by mid-20th-century academic economists.



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