Monday, September 14, 2009

I comment on an article covering the post by Robert Frank (commented on Lost Legacy yesterday) in Seeking Alpha Blog HERE:

“The Adam Smith concept of the invisible hand, the collective effect of all self-interests guiding economic activity to societal good is fundamentally flawed.”

You attribute to Adam Smith a modern invention about the metaphor of the “invisible hand”. Smith’s was not referring to “all self-interests” in society guiding it to the common good. His sole reference in Wealth Of Nations is in Book IV of Wealth Of Nations and refers to those merchants, but by no mean all, who were discouraged from engaging in foreign trade and shipping because of their perceived risks to the “security” of their capital and therefore preferred to invest locally, which added to domestic employment and output.

In the 1950s the “invisible hand” was re-defined by modern economists to become a general statement applying to all expressions of self-interest through markets and 50 years later it is widely believed, particularly by economists, most of whom have not read Adam Smith’s limited reference in Book IV, chapter 2, paragraphs 1 through 9, Wealth Of Nations.

Hence, any consequences from the modern, not Adam Smith’s, meaning of the “invisible hand” is caused solely by modern, not classical, economic theory. Robert H. Frank has blamed Adam Smith, who on the meaning on "an invisible hand", is in fact an entirely innocent man."


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