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Adam Smith was right about that invisible hand, you know

But just not in the way you think

Abramovich's yacht

Roman Abramovich may have a £1.5bn (as an example) yacht, and that might be unfair and possibly even immoral when there's starving kiddies in Accrington. But if he's paid £1.5bn for that yacht then obviously there's some yacht builders somewhere who now have £1.5bn in spondoolies, and that's been used to pay the workers who built the yacht, pay the workers who made the steel, that made the yacht and so on and on.

Sure, Abramovich gets to consume the yacht but by doing so he must have, by definition, have spread the value of that consumption, thus allowing them to consume that amount, among the people who provided him with the yacht.

But this isn't where most people get their idea about the invisible hand from. Something that can be shown by a nice story about Roy Hattersley (for the young, a long time and vaguely leftish Labour politician).

He was chuntering on about how Wealth of Nations never did mention morals, it was all about markets: he was flabbergasted to be informed that Smith's other work was this Theory of Moral Sentiments.

The third mention is in Wealth of Nations and it's this:

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.

This is at the end of a long discussion (come on now, this is Smith, they're all long discussions) about how a merchant can employ his capital in either the foreign or the domestic trade. Mostly, but not exclusively, he's talking about trade, not manufacturing.

And he notes that the foreign trade will normally offer greater profits than the domestic. He also notes that there will be longer turnarounds in turning over the capital and so on. Today we'd adjust for risk, talking about risk adjusted returns.

But this is what he means: that the foreign trade will normally produce greater (risk adjusted) profits than the domestic. However, there's still some significant portion of people who would prefer to stick with the domestic trade just because.

That, in turn, means that there's more capital employed in the domestic trade than if this human peculiarity did not exist and that then benefits the others in that domestic economy. For it's capital added to labour which makes labour more productive and that's what then raises wages. And that's the invisible hand that benefits.

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