Monday, November 27, 2017

THE OBVIOUS MEANING OF ADAM SMITH'S USE OF THE 'INVISIBLE HAND METAPHOR

Fiscal Poicy in an Islamic Economy
“Every individual necessarily labors to render the annual revenue of the society as great as he can … He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention … By pursuing his own interests, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”
Adam Smith’s believes that there is no need for external party to intervene in the market.
He believes that the market are capable of correcting itself because of the ‘invisible hand mechanism’, which is the the unobservant market force that helps the demand and supply of goods in a free market to reach equilibrium automatically.
He explained that an economy will comparatively work and function well if the government will leave people alone to buy and sell freely among themselves.
He suggested that if people were allowed to trade freely, self interested traders present in the market would compete with each other, leading markets towards the positive output with the help of an invisible hand.
COMMENT
Adam Smith’s use of the “invisible hand” was not a theory. It was a metaphor. Moreover his use was ignored until the 1880s, even by several prominent 19th century commentators who wrote extensive comments of his Wealth of Nations. It became widely referred to only after Paul Samuelson (Nobel prize inner) published his Economics textbook in 1948.
Adam Smith died in 1790, before even the word ‘capitalism’ appeared in English in the 1830s.
The modern ‘theory’ of “an invisible hand” is based on a myth. Smith's use was so obvious it was not commented on by any leading economists in the 19th century.
If a merchant invests capital in an economy he/she adds to aggregate domestic capital investment,which metaphorically is a social benefit from the expense of the investment, which automatically becomes income for those employed by the investment, which in turn adds to subsequent rounds of their expenditures. That is all Smith meant by his use of the metaphor.

1 Comments:

Blogger Amar Pal said...

It is quite interesting to see how often Smith's metaphor of the invisible hand gets misused even by those who are considered to be experts in the field of economics such as Paul Samuelson. I think it is quite clear that Smith acknowledged that government did have a role to play albeit a limited role, but he recognized that some of the duties they should perform are protecting society from foreign invasion, protecting members within society from oppression and creating public works and institutions along with universal education. Smith's attack was moreover against the mercantile system. I am still not quite sure how the perception that government should never intervene within the market got created. I concur with your belief that Smtih's metaphor of the invisible hand is not what people seem to make it today.

It is also fascinating to see what commentators ahead of Smith had to say about self-interest. Bernard Mandeville talked about how private vices led to public benefits. Granted that Mandeville was arguing on the side of selfishness rather than self-interest. And intriguing enough Smith would later attack Mandeville's beliefs. Nonetheless, Bishop Butler even went as far to say that by pursuing the interest of the public good. As a result, one would see themselves progressing. However, from what I interpret Smith did provide his own insight into self-interest in Theory of Moral Sentiments: "By acting according to the dictates of our moral faculties, we necessarily pursue the most effective means for promoting the happiness of mankind." But it certainly seems that his invisible hand metaphor does not have much to do with this and is often quoted in the wrong context.

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