Thursday, April 30, 2009

Free Markets (22) - Economic Providence

Many people expect free markets to act as economic providence. They assume that when Adam Smith referred to an “invisible hand” working through markets, he was saying that it can “work all things together for good”. The common assumption is:

Invisible Hand = Providential Force
Anyone who understands how markets function knows that this is not true.

Markets are not rational entities, so they cannot act to produce a perfect world. Adam Smith understood this well. He only referred to the invisible hand three times in his writings. He used the term to describe situations where a business owner acting in self interest does things that benefits society in a way that he had not intended. Smith never described the “invisible hand” as a hidden divinity that would work all things for good. He had a more realistic view of the way that free markets function.

A belief that free markets work everything for good is totally unrealistic. Those who equate markets with providence have trusted in a false religion.

Different thought have arisen, so I will get back to this series after the weekend.

See this full series at Markets add Value.

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