Adam Smith was right about that invisible hand, you know

But just not in the way you think


Worstall @ the Weekend We have a nice little empirical proof that Adam Smith really was right about us all being guided by that invisible hand. Yeah, I know, you're sooo tired of the free market maniac telling you that governments are all wet and laissez faire is where it should be.

Except that's not something Smith ever said nor is it what he meant by 'invisible hand'. What he did mean was this from Barry Ritholtz:

Most investors are (or at least should be) familiar with the concept of "home country bias" – the natural tendency to be more familiar and comfortable with public companies in your home country.

Investors everywhere consistently display this trait, which is in direct conflict with the basic principles of international diversification ... Now consider the typical domestic portfolio in Canada, which accounts for four per cent of global equity capitalisation.

According to a recent survey from the International Monetary Fund, Canadian investors allocate a mere 40 per cent of their total equity investments outside Canada. Their local allocation to Canada is about 10 times what it should be.

The numbers are similar for the UK. The considerably smaller size of these markets means that these home country biases create a significant overexposure to home country companies. Radically reduced diversification is the net result.

This is not, to put it mildly, what we generally think of when we meet that phrase of the invisible hand.

To most of us it means that government can bugger off, markets work best when they're left alone, the only thing wrong with society today is a dreadful shortage of chimneys up to stick waifs, and Maggie was right!

This is also, to put it mildly, not what Smith was about at all in his economics. The best description of Wealth of Nations being an examination of when this could be true and also of all of the times when it is not true, and something must be done about that.

He's perfectly happy with the government subsidisation of elementary schooling for example, with the subsidy to merchant shipping provided by the Navigation Acts (really, a subsidy to the Royal Navy), and he's often warning against the idea that businessmen should just be allowed to get on with it for fear that they'll gang up on the consumer.

That later authorities have used 'invisible hand' to mean that laissez faire economy (a phrase that Smith, along with such words as 'capitalism', didn't use at all) doesn't mean that Smith would have agreed with them, far from it.

And in Smith's economics, as opposed to his other writings, that quote above from Ritholtz is indeed what he meant. That people prefer to invest at home. Just, you know, because.

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