Saturday, December 26, 2009

The Invisible Hand and Markets

Seth Sandronsky posts (26 December) in Alternet (HERE):

"Our 'Green Jobs' Dollars Help a Ritzy Car Company Open a Toxic Manufacturing Plant?”

“Here it may be useful to recall economist Adam Smith. In his 1776 work The Wealth of Nations, he wrote of an "Invisible Hand" that guides the marketplace when individuals pursue their self-interest to buy and sell. This individualism, in turn, improves the common good if government stays away. His theory of the invisible hand of the market (replacing the visible hand of the monarch) holds no small sway in many circles today, even with the Great Recession currently. Readers can judge how Smith’s view holds up in the case of Tesla.”

Sorry, Seth, but where in Wealth Of Nations did Adam Smith write “of an "Invisible Hand" that guides the marketplace when individuals pursue their self-interest to buy and sell”?

He did not write such a “theory”. It was a metaphor, not a prescription.

I suggest you look up Wealth Of Nations, turn to Book IV, chapter 2 and read paragraphs 1 thru 9. His single reference to the metaphor of an invisible hand is on page 456 (Oxford University Press edition).

The invisible hand was not about “individuals” “buying and selling. That is an modern invention, going back to the 1930s, not 1776.

It was about some, but clearly not all, British merchants preferring to trade locally and not to engage in foreign trade with Europe or the British colonies in North America, even though the latter activity was more profitable; it was also more risky. Some merchants were more risk-averse than others.

Smith’s alleged view in your case would not be relevant in terms of his use of the metaphor of an “invisible hand” because the Tesla investment is in Texas, or California, USA, (the condition of the loan). It is also a subject of government policy and is not a free choice of location.

The world and economics has moved on a great deal since Smith wrote Wealth Of Nations, but there were few free markets in his time and precious few today, including in the USA.

Also, In Smith's works there was never an “invisible hand” in Wealth Of Nations guiding buyers and sellers in markets either.



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