Invisible Hands

We’re lucky when the teaching moments come to us.

My wife was explaining how she got a discount on milk yesterday. Apparently, the local Walmart and Publix are in a price war over milk which has dropped the price per gallon more than 90 cents. My six-year-old daughter wanted to know why the Walmart checker dropped the price without even being prompted.

“Let’s say you and Ryan are selling cupcakes,” I said. “You are selling them for five dollars, and Ryan is selling them for three. Who makes more money?”

I do,” she said.

“Okay, now say I have ten dollars (holding up 10 fingers). I can buy two of your cupcakes (spending the fingers), or I can buy three of his and still have a dollar left over (re-spending the fingers). NOW who makes more money?”

Ryan does.

“So what do you need to do?”

Charge three dollars,” she said.

Why is it that Adam Smith’s invisible hand is so difficult to understand?  Functional adults deny its existence because it clashes with their ideology, yet a six-year-old gets it in 30 seconds.

[tags]Ike Pigott, Occam’s RazR, economics, Adam Smith, Invisible Hand, education[/tags]

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  1. Hi Ike

    I have responded to your charming piece on your 6-year-old daughter understanding competitive price signalling on my blog:

    It is rather long and I would not wish to trespass on your patience. Briefly, I think you have misunderstood Adam Smith and his use of a fairly common 18th century metapohor of ‘an invisible hand’ on three counts: he only used the metaphor three times in all of his writings and on no occasion was it linked to how markets work.

    I outline in my response the detailed circumstances of Adam Smith’s uses of the metaphor.

    Smith analysed commercial markets in Boosk I and II of ‘Wealth Of Nations’ and did not mention anything about invisible hands’.

    Even your bright dauighter did not mention the invisible hand in her correct answer to your question. Why because the emtaphor adds nothing to her answer – indeed it would only add confusion to her answer.

    You can read my response and judge for yourself.

    Gavin Kennedy (Emeritus Professor)

  2. Thanks for the clarification, Professor Kennedy.

    To wit:

    1 – I never used the words “invisible hand” with my daughter, either.

    2 – I am not promoting a divine intervention of any sort.

    3 – The commentary is aimed at those who would advocate the use of experts and government to set prices. In that regard, my daughter immediately understood the forces of competition in the market, and I’m sure that with additional iterations and multiple competitive pressures, she will learn even more.

    It does make me wonder if the lack of lemonade stands hasn’t retarded the development of micro-economic understanding. Instead of learning such lessons hands-on at the age of eight, modern children must wait until they are dealing drugs at 16.

  3. Hi Ike,

    What a wonderful example of budding entrepreneurship in action! I really enjoyed the post, kudos.

    This reminds me very much of the sorts of things my dad used to do with me as a boy. Used to lay dollar bills out across the breakfast table, and fire random “buy and sell” examples my way with all sorts of breakfast foods and cereals. I can still remember those instructive lessons more than 30 years later…so I highly encourage you to continue with the tutelage.

    Today…lemonade…tomorrow…she’s trading heavy-industry commodities in emerging economies around the globe.



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