The Invisible Hand Hoax

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]


Sam Smouha

This is funny news to receive today; I have an intro macroecon final tonight.

Gary Arndt

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"

jonathan

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?

Mike Ruthorford

I believe Genesis had a similar theory. But it wasn't the hand that was invisible but the touch itself.

Caliphilosopher

#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.

michael webster

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.

frankenduf

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

Robert Earl

# 4 -

Outstanding.

ukdan

There's a story about this USSR poliburo guy who comes to visit the UK. After chatting with some officials he asks 'who is responsible for the supply of bread to London?'.

When told that no one was he couldn't get his head round it. Not sure if anyone explained the invisible hand metaphor to him.

Steve R.

Ukdan makes a very important observation about the free market, where there is DEMAND someone will come to fill it.

The problem today is we have voodoo SUPPLY side economics that assert that "incentives" are needed to create supply so that people can buy. Well this, in part, has lead to our financial crises.

Another aspect of economics that is being overlooked is the necessity to act ethically. Our current attitude towards capitalism is "buyer beware", which allows companies to "cheat". If they can cheat then the consumer is entitled to cheat too. Anarchy is not good.

Joel Richardson

Despite the accuracy of context for what was said "yester-year", the value and benefit that the "Invisible Hand" brings to the table of developed and developing countries greatly outweighs the costs and unfair business practices passed on to consumers at times.

To understand the complexities of this Invisible Hand in present day, we whould ask ourselves why is it that we Hate and Love Wal-Mart all at the same time?

So Booyah... in my opinion, the phrase is valid and alive in our day to day lives. Long live his principles and long live the Invisible Hand.

Jingrui Li

After reading the article of Professor Gavin Kennedy, I concluded the following points.

First, I agree with the notion of Professor Karen Vaughn that the theory of invisible hand is not that sound or scientific. Because the invisible hand is only one-way thinking. Individual investors and companies has to do business and operate under the market's rules and regulations, like listed companies has to under investigation of government institutions. Thus the individual entity is also affected by the invisible hand of the market.

Second, nothing in the world is certain and absolutely right. I am over 20 now and I think I heard over 100 times of the famous and holy phrase "the invisible hand theory" by Adam Smith, however Prof. Gavin Kennedy pointed out that the phrase was out of coincidence and can even be a joke Adam Smith had made with a great number of evidence and research on the issue. I agree with him to some degree. Thus the famous Adam Smith and his invisible hand theory does not necessarily be that true and scientific as I thought.

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