Talk:First fundamental theorem of welfare economics

'The idea behind the first welfare theorem goes back at least as far as Adam Smith's The Wealth of Nations. Smith argued that an unfettered market economy composed of self-interested consumers and firms could achieve an allocation of resources and goods that was socially efficient, as if an invisible hand were guiding the actions of individuals toward a state of affairs beneficial to all.'

This statement may be correct in itself in so far as it refers to a theorem in modern Welfare Economics but it is incorrect in so far as it refers to Adam Smith. It conflates several presentations of Adam Smith's ideas, mainly associated with neo-classical economics - if you like, the Chicago version of Adam Smith, but no the Kircaldy Adam Smith.

Nowhere in 'Wealth of Nations'does Smith assert the theorem linking an'unfetered market economy' to 'an invisible hand'. His reference to 'an invisible hand'(WN IV.ii.9: page 456) was not a statement about markets, efficient or otherwise, 'fettered' or unfettered; it was a metaphor about the consequences of unintentional actions of individuals - in the single case of merchants considering the security of their capital - having unintended (by them) consequences, in this case of leading to higher economic benefits for the home country than lowering net capital savings by the amounts that would otherwise be shipped abroad.

In short, there was no theory of markets associated with 'an invisible hand' (and neither did he use the expression 'as if' before 'an invisible hand'). The linkage of the metaphor to a 'theory of markets' is an interpolation of modern teaching and not what Adam Smith wrote. He did not invent the metaphor; it was used earlier by Shakespeare in Macbeth, 3.2, and by Defoe in 'Moll Flanders', and others too. He analysed how markets worked in Chapter VII of 'Wealth of Nations' in respect of 'natural' and 'market prices' and did not need to add to his analysis with a separate metaphor.