Adam Smith‘s “invisible hand” theory of efficient markets is one of the first lessons taught to young economics students. James Tobin, a Nobel prize-winning economist, once described the theory as “… one of the great ideas of history and one of the most influential.” But in this new paper, Gavin Kennedy argues that Smith actually had no invisible-hand theory, pointing out that the phrase appears only three times in Smith’s writings. One scholar believes that Smith’s use of the phrase was a “mildly ironic joke.” (HT: Brad DeLong) [%comments]
The Invisible Hand Hoax
TAGS: adam smith
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This is funny news to receive today; I have an intro macroecon final tonight.
I had to read the Wealth of Nations in college. He used the phrase once. I never came away thinking he had an invisible hand theory. It was a metaphor, nothing more.
I don’t see how debunking something which no one ever really thought existed is scholarship.
The real money quote from Smith I think is: “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest”
Of course, Smith didn’t use the phrase as it’s commonly used today. So what? That is of historical interest but has no meaning to the world of economics or discourse today. Does anyone care that when Shakespeare writes, “The lady doth protest too much, methinks,” he was not indicating Gertrude’s guilt but was offering a comment on the overacting by the players in a play. The word protest had a different meaning then.
It’s perfectly reasonable to take the usage in The Wealth of Nations and see that it applies generally. That Smith did not comprehend things exactly as we see them today is self-evident given the multitude of varying interpretations. Writing in his day, how would he have known how economics would develop?
I believe Genesis had a similar theory. But it wasn’t the hand that was invisible but the touch itself.
#3 -
Shouldn’t the historical accuracy of the text be the foundation for what is going on today? To discount it because it wasn’t “commonly used” as it is today is pretty odd.
Gavin Kennedy is a respected Adam Smith scholar, and uses his blog http://adamsmithslostlegacy.com/BlogBlog.htm to constantly remind people of what Adam Smith wrote and meant.
The metaphor of “invisible hand” introduced into common talk by Paul Samuelson is short hand for a series of bad ideas about markets and auctions that ironically Adam Smith debunked.
The oft quoted “benevolence butcher” is one of those ideas that are completely misunderstood.
Read Gavin’s blog, it is great fun.
this along with the irony that Smith is presented as the quintessential proponent of capitalism- Smith knew full well and was explicit about the dangers of free markets, task specialization, and the advantage of free capital vs. disenfranchised labor
# 4 -
Outstanding.