Monday, June 07, 2010

Two Japanese Economists Correctly Interpret Adam Smith's Use of the Invisible Hand Metaphor

At last!

Two modern economists discover the truth about Adam Smith's use of the metaphor of 'an invisible hand'. I refer to two Japanese economists, Ayumu Yasutomi, Institute for Advanced Studies on Asia, University of Tokyo and Charles Yuji Horioka, Institute of Social and Economic Research, Osaka University, and National Bureau of Economic Research, in their short paper:



"In this paper, we show that Adam Smith pointed out the existence of the Feldstein-Horioka Paradox or Puzzle and even gave an explanation for it more than 200 years before the publication of Feldstein and Horioka (1980). Smith argues that it is the pursuit of their own security that leads owners of capital to invest their capital in their own country to as great an extent as possible and that it is the pursuit of security rather than the pursuit of profit that leads individuals to promote the good of society as a whole via the “invisible hand.”

Thus, Smith argues that it is the owner of capital’s concern about her own security, not her concern about the rate of profit, that leads her to invest her capital domestically to as great an extent as possible.

Note, moreover, that, contrary to common belief, this is the only usage the term “invisible hand” in the entire book. Thus, Smith argues that what leads individuals to promote the good of society as a whole is not the pursuit of profit but the pursuit of security! And it is this tendency toward risk-aversion and the dominance of this tendency vis-à-vis the tendency to pursue profits that causes capital to be immobile between countries

Ayumu Yasutomi and Charles Yuji Horioka have got it right.

They have read the relevant passage in Wealth Of Nations, with greater care than many contemporaries (congratulations!) and correctly diagnosed the avoidable problems attributed to Smith's use of the invisible hand metaphor: it was not a 'magical' diagnosis of a new, but still undefined fore in the workings of a commercial economy;in Smith's case it was about the risk-aversion, or security concerns of some, BUT NOT ALL, merchants leading them to invest locally instead of abroad, that on the arithmetic sum of the parts contributing to the whole of domestic national production and employment.

You can read Ayumu Yasutomi and Charles Yuji Horioka's short article HERE

Read it and pass it on to colleagues - post it on your Blog, if you can.



Blogger 安眠亭 said...

Thank you for your nice comments!!

I am YASUTOMI Ayumu. Our paper was published in Economic Letters as follows;

Prof. Horioka is an American economist, whose parents are Japanese.

11:32 am  

Post a Comment

<< Home