Editing Invisible hand (section)

== The reinterpretation by modern economists ==
{{Also see|General equilibrium theory|Pareto optimum}}
In contrast to Smith's own usage, the "invisible hand" today is often seen as being specifically about the benefits of voluntary transactions in a free market, and is treated as a generalizable rule. [[Paul Samuelson]]'s comments in his ''Economics'' textbook in 1948 made the term popular and gave it a new meaning. The phrase was not originally commonly referred to among economists before the twentieth century.  [[Alfred Marshall]] never used it in his ''[[Principles of Economics (Marshall)|Principles of Economics]]''<ref>A. Marshall, Principles of Economics, 1890</ref> textbook and neither does [[William Stanley Jevons]] in his ''Theory of Political Economy''.<ref>S. Jevons, ''The Theory of Political Economy'', 1871</ref> Samuelson's remark was as follows:

{{quote|Even Adam Smith, the canny Scot whose monumental book, ''The Wealth of Nations'' (1776), represents the beginning of modern economics or political economy-even he was so thrilled by the recognition of an order in the economic system that he proclaimed the mystical principle of the "invisible hand": that each individual in pursuing his own selfish good was led, as if by an invisible hand, to achieve the best good of all, so that any interference with free competition by government was almost certain to be injurious. This unguarded conclusion has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their college course in economics.<ref>Paul Samuelson, ''Economics'', 1948</ref>}}

In this interpretation, the theory is that the Invisible Hand states that if each consumer is allowed to choose freely what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution and prices that are beneficial to all the individual members of a community, and hence to the community as a whole. The reason for this is that self-interest drives actors to beneficial behavior in a case of [[serendipity]]. Efficient methods of production are adopted to maximize profits. Low prices are charged to maximize revenue through gain in market share by undercutting competitors.{{citation needed|date=August 2016}} Investors invest in those industries most urgently needed to maximize returns, and withdraw capital from those less efficient in creating value. All these effects take place dynamically and automatically.{{Citation needed|date=August 2012}}

Since Smith's time, this concept has been further incorporated into economic theory. [[Léon Walras]] developed a four-equation [[general equilibrium]] model that concludes that individual self-interest operating in a competitive market place produces the unique conditions under which a society's total utility is maximized. [[Vilfredo Pareto]] used an [[Edgeworth box]] contact line to illustrate a similar social optimality. [[Ludwig von Mises]], in ''[[Human Action]]'' uses the expression "the invisible hand of Providence", referring to [[Karl Marx|Marx]]'s period, to mean evolutionary [[meliorism]].<ref>Ludwig von Mises (2009), Human Action: Scholar's Edition, Ludwig von Mises Institute</ref> He did not mean this as a criticism, since he held that secular reasoning leads to similar conclusions. [[Milton Friedman]], a [[Nobel Memorial Prize]] winner in economics, called Smith's Invisible Hand "the possibility of cooperation without [[coercion]]."<ref>Friedman's Introduction to ''[[I, Pencil]]''</ref> [[Kaushik Basu]] has called the [[First Welfare Theorem]] the Invisible Hand Theorem.{{sfn|Basu|2010|p= 16}}

Some economists question the integrity of how the term "invisible hand" is currently used.  Gavin Kennedy, Professor Emeritus at [[Heriot-Watt University]] in Edinburgh, Scotland, argues that its current use in modern economic thinking as a symbol of free market capitalism is not reconcilable with the rather modest and indeterminate manner in which it was employed by Smith.<ref>[http://econjwatch.org/articles/adam-smith-and-the-invisible-hand-from-metaphor-to-myth Kennedy, Gavin. 2009. Adam Smith and the Invisible Hand: From Metaphor to Myth. ''Econ Journal Watch'' 6(2): 239–263.]</ref> In response to Kennedy, [[Daniel B. Klein|Daniel Klein]] argues that reconciliation is legitimate.  Moreover, even if Smith did not intend the term "invisible hand" to be used in the current manner, its serviceability as such should not be rendered ineffective.<ref>[http://econjwatch.org/articles/in-adam-smith-s-invisible-hands-comment-on-gavin-kennedy Klein, Daniel B. 2009. In "Adam Smith's Invisible Hands: Comment on Gavin Kennedy". ''Econ Journal Watch'' 6(2): 264–279.]</ref> In conclusion of their exchange, Kennedy insists that Smith's intentions are of utmost importance to the current debate, which is one of Smith's association with the term "invisible hand".  If the term is to be used as a symbol of liberty and economic coordination as it has been in the modern era, Kennedy argues that it should exist as a construct completely separate from Adam Smith since there is little evidence that Smith imputed any significance onto the term, much less the meanings given it at present.<ref>[http://econjwatch.org/articles/a-reply-to-daniel-klein-on-adam-smith-and-the-invisible-hand Kennedy, Gavin. "A Reply to Daniel Klein on Adam Smith and the Invisible Hand". ''Econ Journal Watch'' 6(3): 374–388.]</ref>

The former [[Drummond Professor of Political Economy]] at [[University of Oxford|Oxford]], [[D. H. MacGregor]], argued that:

{{quote|The one case in which he referred to the 'invisible hand' was that in which private persons preferred the home trade to the foreign trade, and he held that such preference was in the national interest, since it replaced two domestic capitals while the foreign trade replaced only one. The argument of the two capitals was a bad one, since it is the amount of capital that matters, not its subdivision; but the invisible sanction was given to a Protectionist idea, not for defence but for employment. It is not surprising that Smith was often quoted in Parliament in support of Protection. His background, like ours today, was private enterprise; but any dogma of non-intervention by government has to make heavy weather in ''The Wealth of Nations''.<ref>D.H. MacGregor, ''Economic Thought and Policy'' (London: Oxford University Press, 1949), pp. 81–82.</ref>}}

[[Harvard]] economist [[Stephen Marglin]] argues that while the "invisible hand" is the "most enduring phrase in Smith's entire work", it is "also the most misunderstood."

{{quote|
Economists have taken this passage to be the first step in the cumulative effort of mainstream economics to prove that a competitive economy provides the largest possible economic pie (the so-called first welfare theorem, which demonstrates the Pareto optimality of a competitive regime). But Smith, it is evident from the context, was making a much narrower argument, namely, that the interests of businessmen in the security of their capital would lead them to invest in the domestic economy even at the sacrifice of somewhat higher returns that might be obtainable from foreign investment. .&nbsp;.&nbsp;.

[[David Ricardo]] .&nbsp;.&nbsp;. echoed Smith .&nbsp;.&nbsp;. [but] Smith's argument is at best incomplete, for it leaves out the role of foreigners' investment in the domestic economy. It would have to be shown that the gain to the British capital stock from the preference of British investors for Britain is greater than the loss to Britain from the preference of Dutch investors for the Netherlands and French investors for France."<ref>{{cite book |last= Marglin |first= Stephen |author-link= Stephen A. Marglin |year= 2008 |title= The Dismal Science: How Thinking Like an Economist Undermines Community |location= Cambridge,&nbsp;MA |publisher= [[Harvard University Press]] |isbn= 978-0-674-02654-4 |page= [https://books.google.com/books?id=d_lYHlp72EQC&pg=PA317 99 n.1] }}</ref>
}}

According to [[Emma Rothschild]], Smith was actually being ironic in his use of the term.<ref>{{cite book |last= Rothschild |first= Emma |author-link= Emma Georgina Rothschild |year= 2001 |title= Economic Sentiments: Adam Smith, Condorcet, and the Enlightenment |location= Cambridge,&nbsp;MA |publisher= [[Harvard University Press]] |pages= [https://archive.org/details/economicsentimen00rots_0/page/138 138–42] |isbn= 978-0-674-00489-4 |url-access= registration |url= https://archive.org/details/economicsentimen00rots_0/page/138 }}</ref> [[Warren Samuels]] described it as "a means of relating modern high theory to Adam Smith and, as such, an interesting example in the development of language."{{sfn|Samuels|2011|p=xviii}}

Proponents of liberal economics, for example [[Deepak Lal]], regularly claim that the invisible hand allows for market efficiency through its mechanism of acting as an indicator of what the market considers important, or valuable.<ref>{{cite book |last1=Lal |first1=Deepak |title=Reviving the Invisible Hand |date=2006 |publisher=Princeton University Press |doi=10.1515/9781400837441 |isbn=9781400837441 |url=https://www.degruyter.com/document/doi/10.1515/9781400837441/html}}</ref>