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Adam Smith's Answer to the Feldstein-Horioka Paradox: The Invisible Hand Revisited


  • Ayumu Yasutomi
  • Charles Yuji Horioka


In this paper, we show that Adam Smith pointed out the existence of the Feldstein-Horioka Paradox or Puzzle and even gave an explanation for it more than 200 years before the publication of Feldstein and Horioka (1980). Smith argues that it is the pursuit of their own security that leads owners of capital to invest their capital in their own country to as great an extent as possible and that it is the pursuit of security rather than the pursuit of profit that leads individuals to promote the good of society as a whole via the "invisible hand."

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  • Ayumu Yasutomi & Charles Yuji Horioka, 2010. "Adam Smith's Answer to the Feldstein-Horioka Paradox: The Invisible Hand Revisited," ISER Discussion Paper 0778, Institute of Social and Economic Research, Osaka University.
  • Handle: RePEc:dpr:wpaper:0778

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    1. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
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