Monday, April 10, 2017


“The theory for the Invisible Hand states that if each consumer is allowed to choose freely what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution and prices that are beneficial to all the individual members of a community, and hence to the community as a whole. The reason for this is that self-interest drives actors to beneficial behavior in a case of serendipity.”
Allowing for the open nature of CORA, where anybody may ask any question and anybody may respond with any reply they care to make, the above statement is extraordinarily wishful thinking. It is more political than a statement from economics (similar statements in identical words have appeared on the internet recently, suggesting a common source).
Which “theory of the invisible hand” and from which author mades such an assertion as the one in CORA?
It most certaintly did not come from Adam Smith (1723-90).
Self interest” may “drive actors to beneficial behaviour”.
It also may drive them to private benefits at the expense of their customers!
Adam Smith discussed this latter group several times, for which he noted there was “no remedy”. Some individuals are beyond self-restraint unless the law intervenes. Moreover, some of these individuals are powerful enough to legally do what is anti-social by such behaviours as persuading governments to impose import tariffs on goods that raises their prices and gives a competitive advantage to domestic producers at the expense of domestic consumers. In more extreme cases, import tariffs are extended into outright import bans giving domestic producers an ouright incentive to raise their prices even higher.
How and where the so-called “invisible hand” operates as stated in the initial statement above is left unstated. 
Markets work best through VISIBLE prices. There is no INVISIBLE HAND! 
It was a metaphor used by Adam Smith for the motivated actions of a merchant who invested his capital employing local labour for wages that employees spent in the domestic economy, and the merchant bought inputs from other local merchants, needed for that his domestic production, both of which  added to DOMESTIC output that benefitted the domestic economy.
That inevitable consequence of the motivated merchant’s economic activity was a “public benefit”, claimed Adam Smith.
Those are  the economics behind the metaphor of “an invisible hand” as used by Adam Smith.
Almost all comments by modern economists and politically motivated commentators on the so-called “invisible hand” have nothing to do with Adam Smith.Neither are they true in themselves.


Post a Comment

<< Home