Friday, April 13, 2012

Theology and Economics Do Not Mix Well

The “Invisible Hand”
Dr. Asad Zaman

1. The Doctrine of the Invisible Hand

 According to the famous doctrine of the “Invisible Hand” introduced by Adam 
Smith, people acting according to self-interest automatically promote the good of the
society. The object of this note is to evaluate in what sense, if any, this is true. Finding
that this doctrine fails on all counts, we consider why it was proposed in the first place, and also why it continues to be asserted most vigorously, despite strong evidence that it is false.

 Men have many motives for their actions. One of these is greed and
acquisitiveness. These characteristics have been universally condemned by all religions.Nonetheless, there are occasions when the ‘bad’ motives of selfishness may result in an  outcome that is socially beneficial. For example, noting that there are few fish stalls in a city far from the coast, a selfish individual decides to make a profit by transporting fish from a coastal city. He makes a tidy profit, but also serves society in that the (iodine) needs of the people are now met. Under ideal conditions of perfect competition, the profit he makes will be less than (and justified by) the added benefit to society from the provision of the fish.

This situation, in a nutshell, is the illustration of the ‘invisible hand’: A social benefit iis produced by a purely selfish motive. The idea that this situation is common and widespread leads to the philosophy of laissez-faire: let everybody do whatever they want to do. Everyone will naturally act selfishly, and this will automatically lead to the socially best outcomes.

Dr. Asad Zaman is not correct .  The “selfish individual decides to make a profit by transporting fish from a coastal city” because he has spotted an opportunity to supply fish to some people living up country and away from the sea.  He was not ”led by an invisible hand” to undertake this task; he was led by spotting the opportunity to do so.

An invisible hand had nothing to do with it.  What was happening to the “invisible hand”  to all the other people who passed by and were aware that fresh, or any, fish were unavailable when up country?  Of course, once the “selfish individual” spotted the opportunity, others would follow and competition if allowed to operate would add to supply and that supply would lower the visible price.  First movers can make extra profits; they can also make large losses.   First mover’s advantage can become first mover’s disaster.  That is the demonstrative power of markets to seek efficiency.

I suspect that Dr. Asad Zaman’s theology is trespassing on his economics.


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