Lawrence Reed (7 March) “Adam Smith and the Birth of Economics” (video lecture) at the Foundation of Economic Education. View it HERE:
“Invisible Hand” is a “term coined by Adam Smith
that refers to the self-ordering process of the free market. As individuals
work to fulfill their own goals, there appears order out of the multitude of
individual plans. This is possible because, where property rights are secure
and the rule of law prevails, individuals have incentives to trade and cooperate
in a manner which benefits all parties involved.”
Smith insisted on the importance of property rights under the laws of justice
(which also potentially protected individuals from the miss-behaviour of those they live
amongst). Individuals who
trade with each other by exchanging some of what they have for some other
things that they prefer, with other individuals, positively benefit from such exchanges. Both are made better off from
exchanging; it is a non-zero sum game.
described this as bargaining by formulating proposed exchanges as: “give me
this that I want and I shall give that which you want”, the universal (If-then) conditional proposal. Agreed
settlement exchange may emerge by the successive specification of stated offers
and wants, which both parties may agree to after one or more mutual conditional
proposals are made and considered, until one proposal is accepted by both of
them, or they break off and find another trading partner.
parties benefit from the acceptance of the terms of the final proposed exchange
because they would normally only agree to any specific exchange if it made them
individually better off than before an exchange took place (though whether they
are equally better off is not of relevance – they cannot read each other’s
minds and individual perceptions cannot be measured).
the outcome is a “self-ordering process” is not decisive, especially if by this
is meant that there is only one, unique, exchange outcome that “benefits parties involved”. Individuals may reject terms that are accepted by other pairs. There may
be several possible outcomes among pairs of bargainers. There is no single bargained outcome
likely between all pairs of negotiators in the real world, though there may
be one in an imagined General Equilibrium. The real world does not conform to the imaginary conditions
of mathematical equilibrium. We know this because the assumptions of GE have never existed, yet.
“invisible hand” was not “coined by Adam Smith to “refer to the self-ordering
process of the free market”. He
didn’t ‘coin’ the IH metaphor. It was well known and regularly used in the 17th
and 18th centuries, manly among theological preachers to refer to
the “hand of God”, who was “invisible” and given to miraculous and mysterious powers. It was
also used by poets, playwrights, novelists and politicians long before it was
used only twice by Adam Smith and Smith never used the IH metaphor in any
relationship to “free markets”, which were also fictional, even fabled, because
they have not existed, anywhere, except as special theoretical cases in
This does not detract from the excellent educational work of FEE.
[Apologies: my original link to FEE was incorrect; the above new link worked today at 5.50pm BST, 31 March.]