THE ROOT OF MISUNDERSTANDING OF ADAM SMITH ON 'AN INVISIBLE HAND'

Capitalism’s Invisible Hand Doesn’t Generate Public Good in Liberal View News HERE

"Capitalism’s invisible hand does not promote general welfare. Leading economist Paul Samuelson describes his dawning recognition of this: “All of my teachers believed there was something to Adam Smith’s invisible hand—that each person pursuing their self-interest would, by some miraculous action of the invisible hand, be led to contrive in some vague sense the best interest of all. However, none of them could explain properly what the truth and falsity was in that position. I would say that if I had been a bright student in 1894 and read Pareto’s Italian journal article, I would have understood what I now understand to be the germ of truth in the invisible hand argument. All it refers to is the avoidance of deadweight loss.”

The point here is that Smith’s invisible hand does nothing to achieve ethical maximization. Pareto optimality (the thesis of the Pareto’s Italian journal article) is simply the condition in which there’s no more room for a better deal between any buyer and seller. Everyone is getting the best deal possible given their resources, and there’s therefore, no “deadweight loss,” no one paying too much or too little for anything given available supply and demand.

Capitalism’s invisible hand just produces market efficiency, everyone buying and selling at the most efficient price. According to idealized capitalist market theory, the rich can buy luxury goods at fair market price and the poor can buy what little they can at fair market value..

And that’s just market theory. In practice, the rich can campaign profitably to promote laws that advantage themselves, while the poor can have bake-sales to fund comparatively In practice, capitalism undermines general welfare as we see in all kleptocracies, including the one coming soon to a government near you.”

COMMENT

Please follow the link and see what you make of its author’s rambles through a melange of mixed up ideas, centred on a misunderstanding about the “invisible hand” as understood by Adam Smith and misunderstood by late Victorian era economists and then by Paul Samuelson in his 1948 first edition of 19 up to 2010, Economics with 5 million sales across the world in many languages.

Adam Smith said nothing about “ethical maximisation”, whatever than means. He simply said that a merchant seeking a profitable exchange in a domestic market was ‘led by an invisible hand’ metaphorically (not actually!) to benefit the domestic economy. 

How did this happen? By the fact that an intentional domestic investment adds both capital and consumption to the aggregate total of domestic capital and employment in an economy. 

Investment involves both capital - the purchase of machines, buildings, materials, and know-how - and human labour for wages. The capital expenditures on these add to domestic capital expenditure and the expenditure of wages adds to the total of all purchases by all employees  in the economy.

These inescapable consequences of the merchants’s intentional behaviours are an unintentional “public benefit”.

Simple!

Yet Paul Samuelson, a brilliant mathematical economist and Nobel Prize Winner, managed by his failure to understand Smith’s simple point, to read into Smith’s metaphor of “an invisible hand”, something completely different. That by “self-interest” Smith meant “selfishness” and that there was something mystical, even magical, in the metaphor of an “invisible hand”. Theologians also jumped on the metaphor giving it a theological meaning.

But Adam Smith stated a simple consequece of the merchant’s motivated actions, that by investing his capital with a view to making a profit, in the course of which, the merchant also contributed to the public good by adding his expenditures to the aggregate expenditures of an economy!