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Failures of the 'Invisible Hand'

Forum for Social Economics, Vol. 45, Iss. 1, 2016

27 Pages Posted: 19 Jul 2013 Last revised: 23 Jul 2016

Rafi Amir-ud-Din

International Islamic University, Islamabad

Asad Zaman

Quaid-i-Azam University - Pakistan Institute of Development Economics (PIDE)

Date Written: July 15, 2013

Abstract

The introduction of an economics textbook by Manikiw quotes Adam Smith regarding the invisible hand and deduces the following claims:
1. Participants in market economies are motivated by self-interest. (SI)
2. Decentralized market economies work very well, and maximize the welfare of society as a whole. (FM: free markets)
3. The reason for excellent functioning of decentralized market economies is that all participants are motivated by self-interest. This self-interest works better than love and kindness in terms of promoting social welfare. (GG: greed is good)
4. The principles listed above were summarized in the concept of the “Invisible Hand” by Adam Smith. (AS)
Manikiw writes that these ideas remain central to modern economics. This paper proves that all four of these central claims are wrong.

Keywords: invisible hand, market economy, traditional society, East Asian financial crisis, trade barriers

JEL Classification: A13, B41

Suggested Citation

Amir-ud-Din, Rafi and Zaman, Asad, Failures of the 'Invisible Hand' (July 15, 2013). Forum for Social Economics, Vol. 45, Iss. 1, 2016. Available at SSRN: https://ssrn.com/abstract=2293940 or http://dx.doi.org/10.2139/ssrn.2293940

Rafi Amir-ud-Din

International Islamic University, Islamabad ( email )

PO Box 1243
Islamabad, PA 44000
Pakistan

Asad Zaman (Contact Author)

Quaid-i-Azam University - Pakistan Institute of Development Economics (PIDE) ( email )

Quaid-i-Azam University Campus
P.O.Box 1091
Islamabad, Federal Capital 44000
Pakistan

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