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Spotting the invisible hand out there in the wild

Summary:
Adam Smith’s actual use of “invisible hand” in Wealth of Nations was as follows:Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and 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.The background discussion is about the difference between the foreign and domestic trades. The argument being that the foreign trade produces more profit than the domestic, more more profit than the extra risk. Yet some do just prefer the domestic trade. Since domestic investment benefits the domestic economy this is the invisible

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Adam Smith’s actual use of “invisible hand” in Wealth of Nations was as follows:

Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and 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.

The background discussion is about the difference between the foreign and domestic trades. The argument being that the foreign trade produces more profit than the domestic, more more profit than the extra risk. Yet some do just prefer the domestic trade. Since domestic investment benefits the domestic economy this is the invisible hand. It’s an observation about a foible of humans, that their risk calculation is not necessarily entirely calculated.

One implication of this is about portfolio allocation:

British savers have been urged to expand their horizons and buy overseas stocks as their penchant for domestic companies has held back returns.

“Home bias” among Britons has been waning but the average investor still holds more than a quarter of their pension or Isa in UK companies. This is despite the global market’s total return of 78pc over the past five years, compared with just 22pc from London’s blue-chip FTSE 100 index.

The average investor’s exposure to the UK has almost halved over the past decade, from 42pc of their portfolio in 2010 to 26pc in 2020, according to the Investment Association, a trade body for the fund industry.

245 years and counting since first publication and we’re still catching up with the truths laid out for us. But then that’s true of so much of what’s in that book, isn’t it?

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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