The Invisible Hand and Modern Welfare Economics1
J. E. Stiglitz
Somewhat more than two centuries ago, Adam Smith delivered at this
University a set of lectures, later written down
his monumental work, The
Wealth of Nations, which perhaps had more influence on the development of
our discipline than any other work in the history of the subject. And among
the ideas presented there, perhaps none has held such sway, not only over
professional economics, but also over all those who concerned about how best
to organize society to promote the General Welfare than his concept of the
invisible hand: this, in spite of the fact that he explicitly used the term
only once in The Wealth of Nations.
Smith argued not only that individuals were led in the pursuit of their
self interest by an invisible hand to pursue the Nation's interest, but
also that this pursuit of self interest was a far more reliable way to
ensure that the Public Interest would be served than any alternative- -surely
better than relying on some government leader, as well-intentioned as that
leader might be.
Much of the subsequent history of our discipline has been a search tounderstand the sense and conditions under which Smith's essential insights
are valid. His perspective has provided the intellectual basis for a theory
of economic organization- -competitive markets provide an efficient way of
organizing economic activity- -and economic policy- -
ensure that efficiency
is a substantially revised version of a lecture originally
presented at Glasgow University in December, 1988.
This paper is based on
research supported in part by the Olin Foundation, the National Science
Foundation, and the Hoover Institution. Many of the ideas presented in this
paper are based on joint work with Richard Arnott, Bruce Greenwald, Raaj
Sah, and Andrew Weiss.