Self-Interest, Social Wealth, and Competition as a Discovery Procedure

A classroom experiment that makes the "invisible hand" visible. In Economics, as in any social science, empirical tests of theoretical results face a problem: researchers are unable to reproduce the whole economy (or at least its relevant parts) in their laboratories. Nowadays, Experimental Economics uses stylized experiments, drawing on the experience of Psychology, to test at least the basic assumptions of the economic theory of human behavior. Even classroom experiments may serve this purpose. This paper describes a simple classroom experiment that serves as an empirical test of Adam Smith's invisible-hand hypothesis. Furthermore, it demonstrates to the students that competition acts as a discovery procedure. The experiment is of high didactical value, since the students gain insights into empirical research and experience how markets work