Monday, November 14, 2011

Three things you thought you knew about economics

Great post by Robert Vienneau who correctly claims that the three propositions below are well-established, namely :
"1. Adam Smith did not use the phrase "The invisible hand" to refer to the optimality properties of a static general equilibrium supposedly brought about by the workings of competitive markets. 
2. Thomas Carlyle did not coin the phrase "The dismal science" to refer to Thomas Malthus's anti-utopian theory of population. According to that theory, human population responds endogenously to increased prosperity, thereby making impossible any rapidly established, long-lasting general rise in per capita income beyond the custom and habits of mankind. 
3. John Maynard Keynes, in The General Theory of Employment, Interest, and Money, did not explain widespread and persistent unemployment by sticky, rigid, or slowly adjusting money wages and prices - a pre-Keynesian theory that, in fact, he opposed. Many economists, I claim, teach the opposite of these propositions. 
It seems to be a quixotic and never-ending task to oppose demonstrably false statements about economics, often made by economists."
It is absolutely true. I would even say the majority of economists teach the opposite. I have insisted more on 3 here, but 1 and 2 are equally true, and 1 at least as important as 3. I should probably use this in my history of thought lectures from now on.


  1. Matías, what was actually the meaning and intent of Smith's phrase of "invisible hand"? (En español, el significado y qué quiso decir realmente Smith con esa frase?) Gracias.

  2. The meaning is, in a strict sense, that those pursuing their self-interest, end up benefiting society as a whole. However, self-interest does not produce optimal allocation of resources (e.g. full employment of labor or capital), since that is actually alien to Smith's theory. Further, behavior for Smith is constrained by class, and in that sense the need to accumulate, that drives capitalists to produce, leads to the surplus that allows for the reproduction of the system.

  3. In his words: "by directing that industry in such a manner as its produce may be of the greatest value, 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. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it."


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