Tuesday, June 28, 2011

Mises and Hayek versus Adam Smith on the Invisible Hand

Sandy Ikeda, an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism, writes the Moral Liberal (HERE):

‘The Virtue of Market Inefficiency’

‘Taken together, Mises’s and Hayek’s analyses of the market economy added greatly to our understanding of what Adam Smith in the mid-eighteenth century referred to as the “invisible hand.” And so where this is repeated again and again for all goods and services produced in an economy, it’s easy to see why many economists are impressed by the problem-solving capabilities of the market.
’ (Copyright © 2011 Foundation for Economic Education.)

I am sure Mises’s and Hayek’s analyses of markets did add to our understand on how markets work, and I am also sure that Adam Smith’s analysis of how they work also added to our understanding too, but I am absolutely certain that neither Mises nor Hayek added anything to our understanding of what Adam Smith in the mid-eighteenth century referred to as the “invisible hand.”

Smith’s analysis of markets had nothing to do with his use of the IH metaphor (scroll down Lost Legacy for detailed rebuttals of such nonsense) because it had nothing to do with markets in WN (and likewise in TMS, which was about feudal landlords - even landlords and tyrants before feudalism, back to when ‘providence first divided the land’) and their having to feed their serfs, slaves, retainers, and, later, their tenants from the produce of their lands.

In WN it as not about how markets work (they work through very visible price signals!) but how the unintentional behaviour of some merchants, concerned with the security of their capital in foreign trade, preferred to invest in ‘domestick industry’. Read the two passages in TMS and WN – the only two occasions where Smith used the metaphor – and correct the modern economists misreading of Smith (and their apparent non-appreciation and understanding of what a metaphor is in the English language).



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