Carefully read the quote of Adam Smith on page 28 of Chapter 1 of the textbook. What exactly did Smith imply with his metaphor of'the invisible
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Carefully read the quote of Adam Smith on page 28 of Chapter 1 of

the textbook. What exactly did Smith imply with his metaphor of "the invisible hand." Is this a good metaphor for an economic system? Why or why not?


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The metaphor of the invisible hand dates back at least to the 18th century, but it gained prominence after neoclassical analysis came to dominate mainstream economic thinking towards the end of the 19th century. In search of theoretical rigor, neoclassical economists have estab- lished the full set of assumptions that must be met for an economy to operate in accordance with the metaphor, among which are that all economic activity passes through competitive and fully informed markets. The actual markets we observe seldom satisfy the required assumptions, nor does provisioning activity involve only human interactions in organized markets. Human eco- nomic interactions take place in households, social settings, business organizations, and govern- ment organizations. Transactions in uncompetitive markets and non-market interactions are un- likely to translate individual decisions and actions into socially optimal outcomes as the metaphor of the invisible hand suggests. Yet, mainstream economics continues to predict general equilibrium outcomes that reflect the invisible hand. This paper seeks to underscore the lack of realism of the metaphor by means of a simple and obvious quantitative exercise that uses evi- dence from mainstream and heterodox research to estimate the percentage of all human econom- ic interactions that are actually carried out in competitive markets. This exercise, easily under- stood by beginning students of economics, shows that the proportion of human economic interac- tions carried out in the types of competitive markets required by the invisible hand is much too small for the invisible hand metaphor to accurately describe an economic system.

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