The Invisible Hand

Chapter 6 presents a new formulation of Adam Smith’s ‘invisible hand’ argument. The underlying idea is that markets are valuable because they provide opportunities for voluntary transactions (rather than because they satisfy preferences). I propose a ‘Strong Interactive Opportunity Criterion’ which requires that all opportunities for feasible and non-dominated transactions within groups of individuals are made available to those individuals. I define competitive equilibrium without making assumptions about the rationality of individuals’ choices and show that the Strong Interactive Opportunity Criterion is satisfied in every competitive equilibrium of an exchange economy. This result is analogous with the classic theorems that every competitive equilibrium is Pareto-efficient and is in the ‘core’ of the economy. I extend these results to ‘storage economies’ in which trade and consumption take place over time and in which individuals’ choices may be dynamically inconsistent.