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January 25, 2005

Adam Smith on the Invisible Hand and Wealth Maximization

Here is the famous passage from Adam Smith's Wealth of Nations on "the invisible hand" ( B.IV, Ch.2, Of Restraints upon the Importation from Foreign Countries):

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can . He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and 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. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

Notice that he explicitly uses a criterion close to the "wealth maximization" standard in economics. (See the "Notes on Value Maximization" that I just wrote for class.)

Posted by erasmuse at January 25, 2005 02:10 PM

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