Adam Smith’s Argument for the Existence of an ‘Invisible Hand’
6 Pages Posted: 31 Oct 2012 Last revised: 16 Mar 2015
Date Written: October 30, 2012
No other phrase has been as widely and as controversially used in the discussion of capitalism and markets as the ‘invisible hand’, a metaphor that Adam Smith used just once in each of his major works. There has been a debate as to whether Smith himself attached any importance to this metaphor. I do not deal with this issue directly. Instead, I ask another question that seems to me more relevant and interesting: Did Smith have a logical argument, call it a ‘proof’ if you will, as to why competitive economies would behave as suggested by the metaphor? I claim that the answer is a clear ‘yes’. Smith argued that the profit maximizing behavior of entrepreneurs leads them to produce the output that has the highest value that can be attained with given resources. The value of the total output is therefore a maximum also. This is precisely the condition that is also used in the most elegant mathematical proof of the efficiency of a competitive equilibrium. Comparing Smith’s argument with the Walras/Pareto approach raises important questions of methodology.
Keywords: Adam Smith,competitive equilibrium
JEL Classification: B12, B31, B41, D50
Suggested Citation: Suggested Citation