Rafi Amir-ud-Din and Asad Zaman “Failures of the ‘Invisible Hand’”
Forum for Social Economics Vol. 45, Iss. 1, 2016 pp 41-60.
Textbooks, like Mankiw, state that the four claims listed below are at the center of modern economics. Our goal in this paper is to show that all four of these claims are wrong.
1. Participants in market economies are motivated by self-interest. (SI) – In fact, cooperation, service, recognition and status in community, and reciprocity are very strong motivators of human behavior.
2. Decentralized market economies work very well, and maximize the welfare of society as a whole. (FM: free markets). As illustrated by the Global Financial Crisis, unregulated markets lead with regularity to disasters and crises.
3. The reason for excellent functioning of decentralized market economies is that all participants are motivated by self-interest. This self-interest works better than love and kindness in terms of promoting social welfare. (GG: greed is good). This is absolutely false, and the opposite of the truth – love and kindness work much better at promoting social welfare.
4. The principles listed above were summarized in the concept of the “Invisible Hand” by Adam Smith. (AS). Adam Smith can be blamed for many wrong ideas, but this is not one of them. In fact, free market economists attribute this theory to Adam Smith to create legitimacy for their ideas.
Detailed presentation of the paper is available in the following 1 hr. video.