Saturday, October 24, 2009

A Claim Too Far

Terry Arthur posts on the Adam Smith Institute Blog HERE:

The “invisible hand”, in its modern guise, has been given many invented roles by modern economists since the 1950s, all wrongly attributed to Adam Smith’s single use of the popular, 18th-century metaphor in Book IV of Wealth Of Nations.

For example, it’s been credited wrongly with meaning market forces, supply and demand, the price mechanism, market co-ordination, balancing economies, and ensuring that self-interested actions always result in public benefits.

Terry Arthur takes these exaggerations to new heights:

It is the result of Adam Smith’s "invisible hand" – the most powerful information system the world has ever seen – bar none...”.

In Smith’s use he explains why some, but clearly not all (British foreign trade was a high proportion of its 18th century annual economy), merchants, from a “concern for their own security’, preferred to avoid the higher risks of foreign trade by investing locally, which, by the arithmetical rule that the whole is the sum of its parts, increased domestic output and employment.

It had nothing to do with Smith’s writing on the above subjects, all covered in Books I and II of Wealth Of Nations without any mention of “an invisible hand”.

Should Terry Arthur wish to source his notion of Adam Smith’s original use of the “invisible hand” he would search “vainly for support of [his] notions” in Wealth Of Nations.

In books I and II, Smith discusses market forces and the coordination role of prices, without mention of an “invisible hand”, and in Book IV, where he mentions (once) “an invisible hand”, he does not discuss market forces or the coordination role of prices.

[Disclosure: I am a Fellow of the Adam Smith Institute]



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