The idea of the invisible hand had just been put forward in 1922, when Edwin Cannan edited the third edition of Wealth of Nations (Smith 1776, 1922, London: Methuen).
In this, Adam Smith explicitly referred to the invisible hand in Chap. 2: Of Restraints upon the Importation from Foreign Countries of such Goods as can be Produced at Home, in Book IV: Of Systems of Political Economy.[11] Since then, the term has been over-used.
This brief look at the meanings of the phrase ‘invisible hand’ has therefore largely been in terms of the traditional economic theories. As an optimizer independent of participants in the market, the ‘invisible hand’ does not work well in either classical or financial markets.In Hayek’s view, the market does not operate automatically. Instead, it must reveal and exploit a set of potential resources, either things or people. As mathematical economists like Arrow and Debreu (1954), Debreu (1959) and Arrow and Hahn (1971) discussed, we need a bundle of mathematical assumptions to fulfill the general equilibrium. Such assumptions are too precise to be practical in the real world. As Bliss (1972) stated, by moving further from reality, general equilibrium analysis contributed to its own difficulties. The continuity of real numbers is indispensable for equilibrium. But the real world does not contain √2 cars. Instead of giving up continuity, we can use a discrete algorithm, although this may reach the limit of computation. We therefore see that there are theoretical obstacles to the implementation of general equilibrium, and we discuss this more in Chap. 2.
There is a further problem with implementation. The financial market cannot dispense with supervision from a regulatory body such as the Financial Supervisory Agency. The contemporary financial system is essentially based on the world external to its system. The most typical example is that the best risk-free asset is sovereign bonds. This shows clearly why the financial market could not be an automatic optimizer. This is the basic proposition of risk calculation. This then is similar to the historical logic of the ‘gold standard’. The financial market cannot find its own solution but needs a set of regulations to relax the high tension or load of trading activities as the amount of trading increases. The market system must pay more for its sustainability, otherwise governments will have to do so. It is therefore easily verified and clear that the individualistic aspects do not hold automatically except for minor markets. I therefore conclude that the most important factor has been the interaction between the international financial market and national economies. Marshall envisaged that a harmonious market could be sustained by the spirit of economic chivalry, but in the modern financial world, we look instead to regulatory institutions.
1.7.1