ABSTRACT OF PAPER
Title: Invisible Hands and General Equilibrium
Author: Witztum Amos
Modern economist seems to be unable to resist the use of Smith’s invisible hand as a metaphor for competitive general equilibrium. Others seem to abhor the whole episode either because they find that Smith has no conception of general equilibrium or because they believe the invisible hand to be an insignificant element in Smith’s own writings. Naturally, everyone’s attention is focused on the invisible hand as it appears in the Wealth of Nations. However, given that general equilibrium is about co-ordination and not necessarily about unintended outcomes, the invisible hand of the Theory of Moral Sentiments seems a much better candidate for this metaphor than the one in the WN. In this paper, I will endeavour to show that while there is a legitimate claim for modern economist to argue that an invisible hand could be a metaphor for competitive general equilibrium, this does not mean that Smith’s system is necessarily the same as the modern one. By re-examining the foundation of both modern economics and the Smithian system, I will show that in spite of a lot of protestation, co-ordination is crucial to both systems. The narrative, which brings interdependence and co-ordination to the heart of both systems, is, of course, fundamentally different. But this difference is not enough to remove the similarities which are embedded in the interdependence across people, between whom, the social distance is great. I will thus argue that in the end, there are two co-ordinating mechanisms in Smith. Firstly, there is the invisible hand of the TMS, which facilitate the process of specialisation and trade (or division of labour). It is a co-ordinating mechanism and not a tautology as it is based on a presumption about human behaviour. Put differently, the fact that life’s necessities could always be distributed as if the Earth were equally divided, it does not mean that it would. Without the co-ordinating power of the invisible hand, labour would not have been divided and people would not have become dependent on others. Secondly, the growing dependency on strangers brings to the fore the co-ordinating powers of the market. Their function in this elaborate system is to uphold the promise of the invisible hand of the TMS and guarantee life’s necessities, as well as support the new social drive which, through the deception of nature, is manifested in the accumulation of wealth. I will argue that according to Smith, these functions are well performed by the markets when prices are all at their natural rate. It is only then that across all industries and employment, division of labour would occur, affluence would be generated and the worse off people in society would not be left behind.
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