There Is No Such Thing As A Theory of The Invisible Hand

Myth making at its finest. From a book review of “How Markets Fail” by John Cassidy:

Debunking theories

ALAN Greenspan has a dangerous weakness for Adam Smith – he believes firmly that untrammelled capitalism provides a uniquely productive method of organising markets.

Paying homage to Smith’s Theory of Invisible Hand, Greenspan wrote, shortly before the explosion of subprime crisis, “People must be free to act in their self-interest, unencumbered by external shocks or economic policy ... Yet, even in crises, economies seem inevitably to right themselves.”

Herds of Wall Street at the epic of the credit frenzy applauded this ode, taking it as a sign that reckless pursuits of self-interest equal Laissez-faire, a French phrase that means leave alone.

Yet, to anyone who suffered and is still suffering from the recent financial crisis, Greenspan was the wrong hand to be given the job as the head of an institution that is designed to help save financial capitalism.

To author John Cassidy, an economics writer for The New Yorker, Greenspan is simply naive, absurd and out of touch with the modern market mechanism.

I'm not complaining about the book - I'm complaining about the review. Here’s why:

1. There’s no such thing as the “Theory of the Invisible Hand” – Smith used the term “invisible hand” as a metaphor, not as the basis of a “theory”;
2. Adam Smith never advocated a laissez faire approach – that came from classical French economics – and had a pragmatic approach towards the role of government in the economy;
3. The reviewer is so obviously enamoured with the book, that you can’t get an objective view of whether it’s actually any good or not. I don’t know Cassidy or his credentials, and this review doesn’t help at all. If Cassidy actually wrote the two points above, then in my view his credibility’s shot through – he doesn’t know what he’s talking about. If it’s the reviewer making that connection, then Cassidy’s being misrepresented.

If you want more information on what Adam Smith actually said and wrote, I’d encourage a visit to Adam Smith’s Lost Legacy or the accompanying blog. No, I haven’t read Wealth of Nations or Theory of Moral Sentiments – but I do trust Prof Kennedy’s scholarship on this matter.

In the meantime, DON’T buy Cassidy’s book.