The Invisible hand theory of Adam Smith

The invisible hand theory describes the unintended social benefits of an individual’s self-interested actions, a concept that was first introduced by Adam Smith in The Theory of Moral Sentiments, written in 1759, invoking it in reference to income distribution. By the time he wrote The Wealth of Nations in 1776, Smith had studied the economic models of the French Physiocrats for

Concept of unintended consequences

This is a book about ‘unintended consequences of human action’ and the mecha- nisms that bring about these consequences. It investigates the explanatory role of the models that characterise institutions and macro-social structures as unintended consequences of human action. Many economists argue that certain institutions and/or social structures, such as money, language, rules of

Concept and Type of unintended consequences

1. Introduction The concepts of ‘invisible hand’ and ‘unintended consequences’ are closely related to each other. It is the task of this chapter to identify the type of unintended conse- quences implied by the ‘invisible hand’. The paradigmatic examples of invisible- hand explanations, as well as Adam Smith’s ‘invisible hands’, are concerned with a

Merton on unintended consequences

Robert K. Merton, in his classical piece, The Unanticipated Consequences of Pur- posive Social Action, clearly states what is included in the ‘consequences’ of an action: Rigorously speaking, the consequences of purposive action are limited to those elements in the resulting situation which are exclusively the outcome of the action, i.e., those elements which

The table of possibilities of unintended consequences

It is not easy to categorise different types of unintended consequences and any kind of categorisation will have problems in locating some of them, for unin- tended consequences might come about in a variety of contexts and some of these contexts may be very complex. This section aims to develop a framework that makes

Concept of Invisible-hand consequences

We have seen that the type of unintended consequences we are interested in form a small subset of the set of possible types of unintended consequences. We are interested in social unintended consequences that were brought about by indi- viduals who were intending to bring about consequences at the individual level. But why? Does

Some peculiarities of invisible-hand consequences

Although it is not our task to define the notion of ‘social phenomena’, it is obvi- ously necessary to have a rough understanding of what is meant by ‘social phe- nomena’ to understand unintended social consequences. Indeed, a common sense understanding of it would do. Institutions, conventions, norms, coded rules of the society, etc.

Menger’s explanation on the origin of money

Menger’s explanation of the origin of money is an example of what Menger’s calls an organic explanation. Menger thinks that natural organisms are analogous to certain social phenomena in a limited way. He argues that ‘there exists a certain similarity between natural organisms and a series of structures of social life, both in respect

Reconstruction of Menger’s story on the origin of money

To understand Menger’s explanation it is important to comprehend his story and its stages. Menger observes that there is a curious social phenomenon called ‘money’ and he wants to explain its emergence in order to understand its nature. He wants to find out how it could have emerged. Briefly, his task is to explicate

Exact understanding of money

Menger (1883: 35–36) makes a distinction between concrete phenomena and em- pirical forms. Concrete phenomena and their concrete relationships are specific to time and place. For example, the coins and banknotes in your pocket are examples of concrete phenomena. Empirical forms, on the other hand, represent the general aspects of phenomena. What we know

Explanatory value of money

We have seen that Menger’s story is an abstract one. It isolates market mecha- nisms and economising individuals to explain the emergence of money as a me- dium of exchange. We have also seen that he is abstracting from some institutions that seems to be important in the genesis of money, such as gift

Residential segregation

The chequerboard model suggests that residential segregation may be an un- intended consequence of the dispersed actions of the individuals. The focus of the analysis is on the ‘segregation that can result from discriminatory behavior’ (Schelling 1978: 138). That is, in the chequerboard model, segregation is caused by discriminatory behaviour. In the context of

Explanatory value of segregation

In order to examine the explanatory value of the chequerboard model we need to ask the following questions. First, is it necessary to conjecture about the indi- vidual mechanisms behind segregation and is this a good starting point for under- standing particular cases of residential segregation? Second, are the results of the chequerboard model

Smith’s invisible hand

Adam Smith’s ‘invisible hand’ is widely used and discussed in economics and other social sciences, as well as in language theories, philosophy of science, eth- ics, political theory and active politics.1 Although Smith’s ‘invisible hand’ is con- sidered to be an influential metaphor, he uses the phrase only three times and in different contexts.

The invisible hand: History of astronomy

Consider the paragraph where the invisible hand appears in HA: Fire burns, and water refreshes; heavy bodies descent, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters. But the thunder and lightening, storms and sunshine, those

The invisible hand and unintended consequences

Does the fact that Smith refers to individuals who are not aware of the future con- sequences of their action, and who fail to see the invisible hand, make the invis- ible hand an un-Smithian idea? Rothschild thinks so. She (2001: 123) argues that the word ‘invisible’ implies blindness15 and points out that Smith

Modern conceptions of the invisible hand

We have seen that the concept of the invisible hand is about how individuals who are pursuing their own interests bring about unintended social consequences and that there is a certain explanatory strategy attached to it. It is useful now to see how modern conceptions of the invisible hand relate to the original concept.

Invisible-hand explanations

The invisible hand is about unintended social consequences that have been brought about by the interaction of individuals who are pursuing their own inter- ests. Moreover, the original concept emphasises the need to explicate the process which brought about the social phenomenon in hand. Explanations that follow this process interpretation of the invisible hand

The origin of money reconsidered: Existence of a medium of exchange

Most of the models of ‘the origin of money’ are based on, or related to the Kiyo- taki–Wright (1989) model that focuses on the existence of an equilibrium where model agents use a certain commodity as a medium of exchange. For this reason it is important to have a fine grasp of the Kiyotaki–Wright

The origin of money reconsidered: Emergence of a medium of exchange

The attempts to examine the process of the emergence of money may be classified under three headings: computer simulations, experiments and theoretical models. First, ‘simulations’ and ‘experiments’ are examined, for they are directly related to the Kiyotaki–Wright (1989) model. Next, the theoretical models of the process of the emergence of money are examined, two