A New Series on the Genesis of the Invisible Hand Myth from the 1950s No. 2

David Begg, Stanley Fisher and Roger Dornbush Economics (1984) New York: McGraw-Hill (British Edition of a popular US text)

‘The Invisible Hand’

‘Smith argued that individuals pursuing their self-interest would be led “as if by an invisible hand” to do things that are in the interests of society as a whole …
Smith argued that the pursuit of self-interest, without any central direction could produce a coherent society making sensible decisions’ (p 11-12).

‘Market Failure
We begin by showing that in the absence of any distortions a freely competitive equilibrium ensures allocative efficiency. We use the term market failure to cover all circumstances in which equilibrium in free unregulated markets (i.e., markets not subject to direct price or quality regulation by the government) will fail to achieve an efficient allocation. Market failure describes the circumstances in which distortions prevent the invisible hand from allocating resources efficiently” (333).

‘If every market in the economy is a perfectly competitive free market, the resulting equilibrium through out the economy will be Pareto-efficient. Formulating Adam Smith’s remarkable insight of the Invisible Hand, this result is the foundation of modern welfare economics’ (769).David Begg, Stanley Fisher and Roger Dornbush Economics (1984) New York: McGraw-Hill (British Edition of a popular US text)

‘The Invisible Hand’

‘Smith argued that individuals pursuing their self-interest would be led “as if by an invisible hand” to do things that are in the interests of society as a whole …
Smith argued that the pursuit of self-interest, without any central direction could produce a coherent society making sensible decisions’ (p 11-12).

‘Market Failure
We begin by showing that in the absence of any distortions a freely competitive equilibrium ensures allocative efficiency. We use the term market failure to cover all circumstances in which equilibrium in free unregulated markets (i.e., markets not subject to direct price or quality regulation by the government) will fail to achieve an efficient allocation. Market failure describes the circumstances in which distortions prevent the invisible hand from allocating resources efficiently” (333).

‘If every market in the economy is a perfectly competitive free market, the resulting equilibrium through out the economy will be Pareto-efficient. Formulating Adam Smith’s remarkable insight of the Invisible Hand, this result is the foundation of modern welfare economics’ (769).

Comment
I have no objection to anyone writing in an avuncular fashion if it helps their readers understanding. I do object, however, when the author completely misleads them about an eminently checkable set of facts with a distorted version of what the authority they purport to report upon wrote to the contrary.

Professor Bowden had not read Adam Smith when he wrote the above.

Smith never used the phrase ‘as if by an invisible hand’. He never linked the metaphor of ‘an invisible hand’ to a market process. He did not consider that ‘market processes’ always, or necessarily, did ‘the best things for society. They could do the ‘best things’, but as often do not.

Mercantile political economy – since the 19th century known by it German language root as ‘mercantilism’ – was not just a policy instituted by ‘government’. It was a commercial policy brought about by the clamour of mercantile interests (‘businessmen’) linking their persuasive influence to that of ‘sovereign kings’ not ‘sovereign consumers’. Kings were gullible from their need for money to fight continental wars (often merely dynastic squabbles) and to ‘maintain the dignity of their office’ (i.e., live in the splendour to which they were accustomed). Customs tariffs provided those resources and narrowed the market for the profitable benefit of ‘businessmen’. Its modern version is still with us and is a multi-billion dollar with, known as lobbying.

Smith reference to ‘an invisible hand’ was not about markets. It referred to the consequence of some, but not all, merchants, choosing to invest locally rather than abroad, because of their concerns at the risks of sending their capital to foreign countries or the British colonies in North America.

It followed that each merchant keeping his capital within his sight and with people he knew, and under a legal system he was sure of, added to local investment. This made national investment and the associated employment larger than it would have been if they were less ‘insecure’ and sent it abroad.

The consequence was not ‘magical’, nor mysterious. It was simply the necessary outcome of the arithmetic rule that ‘the whole is the sum of its parts’. The more parts, the larger were national output and employment, which Smith considered to be an important public benefits (output equalled ‘national wealth’ and employment equalled the ‘spread of opulence’, particularly to the otherwise poor).

This simple and singular observation of Smith’s was turned into a general statement that whatever businessmen and people did in pursuit of their self-interest ‘automatically’ benefitted society, which is a nonsensical statement and very unSmithian.

Professor Bowden misled his readers and his students.