Regarding Smith’s example of the pin factory and metaphor of the invisible hand, the author presents a problem. The pin factory is based on the idea of increasing returns to scale, or that specialization will lead to lower costs, more sales, higher profits, and the potential for market dominance. The larger the market, the greater the potential for a firm to accomplish this. The invisible hand theory reflects the opposite, the idea of perfect competition and the inability of a firm to gain an advantage through price manipulation. So the question is, which theory is most important?
A for Jim.
ReplyDeleteI don't know that I'd use the word "important" at the end. Perhaps "relevant" would be better. Both theories are important to how we do economics, but one of them turns out to have more meaning for the world we live in today.
But, Warsh thinks people missed that for a long time, because it was just a story about pins. Or was it?