Seeing the Invisible Hand

[alex_tabarrok]

Originally posted on March 8, 2010

Under certain conditions the pursuit of self-interest leads to the social good even when no one has the social good as their goal.  Under these conditions it is, using Adam Smith’s metaphor, almost as if an “invisible hand” were guiding self-interested individuals to work towards what is in society’s interest.  One of the goals of Modern Principles is to teach students to “See the Invisible Hand,” that is to recognize when self-interest leads to the social good and to understand that this beneficial result is not automatic but depends crucially on the operation of institutions.  Students who can recognize and understand the invisible hand gain an appreciation for what markets can do but precisely by understanding the difficulty of the task that markets sometimes accomplish they also gain a deeper appreciation of  market failure.

In See the Invisible Hand (powerpoint slides),  I illustrate the invisible hand and some of the institutions that channel self-interest towards the social good.  (These slides are an extended version of a talk that I also gave at the North Carolina teaching symposium).  See the notes pages for some notes on the slides.  If the embedded video doesn’t work you can find it online here.