Please complete the famous quote of Adam Smith and his renowned metaphor related to the functioning...

Please complete the famous quote of Adam Smith and his renowned metaphor related to the functioning of markets. Then, answer the below question related to the KSA economy.

[A producer,]...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 ____________________ to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing ________________ he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

Expert Solution

Answers in bold and underlined

[A producer] 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.

Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

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This quotation basically talks about how a socially optimal allocation of resources is achieved through the decentralized and uncoordinated action of individual economic agents pursuing their own interest, without needing intervention by a centralized and coordinated agent like an NGO.

It has its merits; Adam Smith had showed intuition in deducing that (free) markets tended to work efficiently. What Adam Smith's intuition leaves out, but the formal argument by later thinkers like Arrow and Debreu make perfectly clear, are the conditions under which the invisible hand fails. Specifically stuff like market power (e.g. monopolistic price setting influence as measured by Lerner's index), asymmetric information (e.g. adverse selection), irrational consumers (e.g. bounded rationality), etc.
^ The names in brackets are suggestions for you to search and read up btw.

Rahul Sunny answered 1 year ago

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