Lecture 3 - Counting the Fingers of Adam Smith's Invisible Hand

coauthor: Jim Alexander, Enron
author: Douglas W. Rae, Yale School of Management, Yale University
recorded by: Yale University
published: July 31, 2012,   recorded: September 2009,   views: 5077
released under terms of: Creative Commons Attribution No Derivatives (CC-BY-ND)

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Professor Rae introduces Adam Smith's notion of the "invisible hand" of the market. Several preconditions must be met for the invisible hand to work. Markets must be open, and there cannot be just one buyer or one seller who can control product prices. No producer can hold a pivotal private technology, and there must be more or less truthful information across the whole market. Governments must enforce property and contracts. However, many of these preconditions are at odds with the Porter Forces, which represent general rules of thumb, or principles, for a firm trying to make above average profits. These principles include avoiding direct competition, establishing high barriers to entry, and avoiding powerful buyers and powerful suppliers. Professor Rae suggests that submission to Adam Smith's invisible hand may be contrary to basics of corporate strategy. Corporations can leverage powerful political influence to affect the movements of the "invisible hand." Guest speaker Jim Alexander, formerly of Enron, discusses problems of very imperfect information, as well as the principal-agent problem. Professor Rae also discusses Adam Smith's complicated ideas about self-interest and morality.

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