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Interdependence, the Invisible Hand, and Equilibrium in Adam Smith

  • Amos Witztum
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    The question of whether there is general equilibrium in Adam Smith lies at the heart of the battlefield between those who wish to see Smith as a precursor of modern economics and those who see in his writing an alternative system. In this article I will argue that it is possible for general equilibrium to be present in Smith and yet, for his system to be an alternative to, rather than a precursor of, modern economics. I will show that coordination is crucial in both systems although the narratives that produce it are fundamentally different. I will argue that in the end, there are two coordinating mechanisms in Smith. First, there is the invisible hand of the Theory of Moral Sentiments, which facilitates the process of specialization and trade (or division of labor). It is a coordinating mechanism and not a tautology, as it is based on a presumption about human behavior yet it is not dependent on the market. Without the belief in the coordinating power of the invisible hand, labor would not have been divided and people would not have become dependent on others. Second, the growing dependency on strangers brings to the fore the coordinating powers of the market. Their function in this elaborate system is to uphold the promise of the invisible hand of the Theory of Moral Sentiments and guarantee life's necessities, as well as support the new social drive that, through the deception of nature, is manifested in the accumulation of wealth. I will argue that according to Smith, these functions are well performed by the markets when prices are all at their natural rate. It is only then that across all industries and employment, division of labor would occur, affluence would be generated, and the worse-off people in society would not be left behind. The mere existence of general equilibrium ensures none of the above and is hence unrelated to the question of successful coordination.

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    Article provided by Duke University Press in its journal History of Political Economy.

    Volume (Year): 42 (2010)
    Issue (Month): 1 (Spring)
    Pages: 155-192

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    Handle: RePEc:hop:hopeec:v:42:y:2010:i:1:p:155-192
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