Monday, October 19, 2009

Another Myth Circulates

Subir Gokarn (19 October) in Business Standard HERE
writes on Oliver Williamson's work and its “great relevance for many contemporary Indian issues”

Adam Smith is best known for his characterisation of the market economy as an “invisible hand”. Buyers and sellers, each acting in their own interest, lead to a collectively superior outcome in terms of the efficiency of resource utilisation. The efficiency gains that the invisible hand generated were a primary contributor to the “wealth of nations”.

Adam Smith never “characterised” the market economy as “an invisible hand”. Yes, many modern economists have so-characterised Smith in such an attribution, but there is no documentary evidence that he did so.

The documentary evidence of the only three times that he used the invisible hand (in his posthumous Essay On Astronomy, 1795; Theory Of Moral Sentiments, 1759; Wealth of Nations, 1776) shows clearly that he was not referring to the market economy at all.

The first time (History Of Astronomy, 1744-58) refers to the invisible hand of Jupiter, a Roman god, no mention of a market economy; the second time, Moral Sentiments (1759), refers to a rich landlord feeding the “many thousands” he employed from the produce they supplied each harvest (no mention of a markets economy), and the third time, Wealth Of Nations (1776), refers to some, but not all merchants investing their capital locally rather than abroad (no mention of a market economy).

Smith discusses the working of markets in Books I and II of Wealth Of Nations and does not mention “an invisible hand” at all. I would regard this as conclusive: when he does mention the metaphor as an “invisible hand” he does not mention “market economies” and when he mentions market economies, he does not mention an “invisible hand”.

On this basis why is “Adam Smith … best known for his characterisation of the market economy as an “invisible hand”?

The explanation can only be that the belief is a myth, created by modern economists who believed what they were told by their tutors or read in their modern textbooks. None of them, apparently, checked with Adam Smith’s published works. Most still insist, however, in believing the characterisation to be true despite the facts being drawn to their attention.

See my articles on “Adam Smith and the Invisible Hand: from metaphor to myth” HERE; the response by Daniel Klein (HERE) and my reply to Daniel Kelin HERE.



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