FROM A MISREADING OF SMITH CAME MODERN NONSENSE

Politiseek Staff post 27 April on PoltiSeek (Political News Research) HERE

Invisible Hand Of The Free Market Man

“Concepts Smith pioneered, such as the invisible hand and the division of labor serve are now quintessential economic theories. Okun’s 1975 book Equality and Efficiency: The Big Tradeoff, had only one basis for his remarkable theory: “The Invisible Hand” automatically creates market efficiency, and it would be a mistake to tamper with the automatic efficiency of the marketplace by redistributing wealth and income.Capitalism’s invisible hand just produces market efficiency, everyone buying and selling at the most efficient price. 

COMMENT

Politiseek staff exemplify the modern misreading of Adam Smith since Paul Samuelson led gnerations of ECON 101 students astray with his misreading of Smith’s use of a three-word metaphor in 1948. Samueson earned several fortunes from sales of his textbook, Economics through its 19 editions, and multiple translations. (It was the standard 101 textbook when I was an undergraduate in the 1960s)

All Smith intended in his Wealth of Nations was the very simple - and blindingly obvious - point that a merchant who invested his capital in the domestic economy, thus adding to domestic investment and employment, and in doing so added to aggregate domestic investment unintentionally! The merchant was only interested in making a profit from his investment but in acting to do so he was led, metaphorically, by an invisible hand to add his expenditures to gross domestic investment!

Yes, that’s all! Smith’s point was so obvious that hardly anybody commented on his use of the now (in)famous metaphor through much of the 19th century. And this near silence lasted well into the 19th century and for much of the 20th century too, up  to 1948 when Samuelson, a brilliant mathematical economist, misread Smith’s wording.

Think about it. 

The merchant was motivated to invest domestically because, said Smith, he did not trust foreign merchants, nor their legal systems. (Wealth of Nations, 1776 and etc; Book IV, chapter 2, page 456). 

But by investing locally he automatically added to aggregate domestic investment. The point was and is so obvious from Smith’s ever so clear exposition, yet despite that the world now believes that there is an actual (not a metaphorical) invisible hand, miraculously at work that “automatically creates market efficiency, and it would be a mistake to tamper with the automatic efficiency of the marketplace by redistributing wealth and income. Capitalism’s invisible hand just produces market efficiency, everyone buying and selling at the most efficient price.”

Except, of course, that is not what Smith wrote…