Adam Smith’s invisible hand

The invisible hand conceived by Adam Smith is the greatest argument against socialism, Kings, Queens, technocrats, bureaucrats and social engineers. The theory was expressed in the An Inquiry into the Nature and Causes of the Wealth of Nations in 1776 and elements of his philosophy in The theory of Moral Sentiments in 1759.

The invisible hand is real and works. The opponents of the Adam Smith’s economics idea of the free market market do not understand economics. Anyone who proposes an alternative system proposes an economic system that will leave people at a lower level of happiness.

Smith developed David Hume’s A treatise on Human Nature that asserted that humans motivated by accumulating ‘utility’. Smith expressed this in economic incentives and developed. Mandeville’s idea that ‘Private vices … may be turned into public benefits’.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

 

The people at the market serving you are driven by enlightened self-interest and society is brought to equilibrium.

The central thesis of the invisible hand metaphor

The core meaning of Adam Smith’s Invisible hand is: there are unintended consequences of individual action. What this means is, when we are all acting on our enlighten self-interest, society as a whole benefits, in ways no one could ever imagine.  It is like magic, your enlighten greed, improves society develops in a positive way. In other words, The self-interest of the individual unwittingly serves societies self-interest by satiating a demand.

in competition, individual ambition serves the common good

The Enlightenment philosophers believed people are innately good and with education or training we will seek out activities that we enjoy the most, which also happen to help others. Think about it, what do you do for work? Chances  are it in someway helps someone else.  There is no way your job you go to everyday does not help others.

led by an invisible hand to promote an end which was no part of his intention

It is a combination of creative thinking and enlighten greed. It means, you, yes you personally have a gift to satisfy the needs of society in ways no super computer or world leader could ever envision.

Human interaction and incentives can not be engineered by government or the shelves would be empty.

What is the force behind the invisible hand?

It is people respond to economic incentives. I can not explain it in any other way. The supernatural force behind the invisible hand is simple. People are rational and are motivated by economic incentives. Therefore, they seek out ways to get paid the most, for their time because they want to satisfy their needs and chip away at the fundamental problem of economics scarcity. The way you get paid the most is to figure out what people demand. This is a lesson in philosophy as much as an lesson for entrepreneurs.

What should government do?

Not an economics Professor,  nor even a President who went to an Ivy league school could ever have a greater knowledge of economics than you. You personally are that economic agent who thinks of ways to earn money which translates into satisfying some demand.  When a new demand arises the market will satisfy it, if money is involved, trust me, people will jump through hoops to get the job done, no matter what it is. How would you explain so many plumbers (I would be a plumber).

An efficient market arises superior to anything a government could produce. Micro managing the economy creates distortions and unhappiness. Therefore government should be hands off.

The hand is a perfect metaphor because it is what we use to be creative and productive, the instrument which ideas are brought to reality.
Metaphorically you are a finger in that invisible hand that is creating something great. Lets say you are a painter, government would be a third person trying to move your figures.

Metaphorically, imagine a hand, that plays the violin, yet each finger is controlled by another person. This is what it would be like if government tries to direct the market. Better is the free market, capitalism, to have a hand playing the violin on its own accord orchestrated by a consciousness. In terms of economics it is the collective unconsciousness or the aggregate.

If governments just left people alone to trade and create markets, people motivated by self-interest would create positive outcomes. Just let individuals make their own economic choices and the result between people is a mutually beneficial outcome, rather then at the hand of a third party come between two market agents.

In the wonderful world of Adam Smith, people are free to choose.

The invisible hand in action

For example, if someone charges less than what you sell your goods, people will buy the other persons good. If you charge too little, it is not worth your time or your net profit marketing will be too low or negative. This is market equilibrium.

Another example, if the world demands a clean source of energy, then an entrepreneur will start to work on bringing solar to market. He is motivated by profit, however, society’s demand is satiated.

Metaphorically, the complexities of the market and an amazing self-correcting balancing act is best done by the person on who is walking on tight rope, rather than someone guiding them from the audience. The invisible hand is the cerebellum of the market.

Ayn Rand is different than Adam Smith

Remember, Smith was a moral philosopher, he was not  a cold hearted capitalist as many of this followers are portrayed. He was seeking answers to how society as a whole could reach its optimal level of equilibrium and commenting on how people act in society to maximize their happiness. I would say Adam Smith would not agree with with Ayn Rand’s ethical egotism. Ayn Rand’s Objectivism movement did have a laissez-faire message, however, it was counter to the enlightenment ideals of altruism. Ayn Rand was more of a radical force countering the ideas of her time at an extreme. Adam Smith was not extreme and advocated limited government to uplift and better society and individuals, such as education. Rand’s philosophy almost had a caustic angry message, and I think gives capitalism a bad reputation. In contrast Adam Smith’s message was uplifting.

However, economists like Milton Friedman and Hayek subsequently championed this idea in their libertarian  economics schools of thinking in a more positive way. The Austrian school of economics and neoclassical thinking are worthy successors to Adam Smith’s theory because they focused on the operation of the market with more academic rigor kept it about economic theory rather than a replacement of religion or a way of life.

  • Capitalism motivated by consciousness is a great thing. Read Conscious Capitalism by John Mackey or books of this sort, people transform the work though economic incentives. You can be counter culture, alternative and a capitalist.

Adam Smith looked at life from a behavioral science perspective with a particular focus on altruism and moral behavior. If you want to succeed in life, jettison wrong ideas about capitalism and read Wealth of Nations.

Do blonds motivate you?

Funny way to look at the Philosophy of Adam Smith

Invisible Hand academic reference

 

In summary

Although everyone speaks about Adam Smith, few people read him.  I love reading Adam Smith as you find something that is not in common wisdom. Anyway, here is Adam Smith’s invisible hand quote.  So many people talk about the invisible hand but in the Wealth of nations it only appears once.

He intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Book IV, Chapter II

What does Adam Smith’s Invisible hand mean?  You need to understand who Adam Smith was, he was a moral philosopher and a religious man.  He believed that when people act on their enlightened self interest, than society as a whole benefits in positive ways in which the individual could not imagine.

This means man is basically good. People who are against Adam Smith’s invisible hand believe people are basically bad and need to be engineered by wiser more moral government bureaucrat. Anti-Smith thinkers like Karl Marx believe individuals can not be trusted to live their lives and government needs to put into place laws that direct social economic behavior. Alfred Marshall’s criticism of Smith when in the realm of monopoly or oligopoly is not based on quantifiable data.

Smith as a thinker was pure genius. How could a government engineer an economy if the greatest benefit comes from unseen consequences of actions? Think about it please. Adam Smith’s Invisible hand is genius and minds like this come around only once every few hundred years. I live in Poland and travel to Russian and Ukraine and see the lasting affects of a government engineering an economy.

Adam Smith’s invisible hand was nothing more than Adam Smith believing in the good in people. That you personally can make free choices about your life and your career and the way you participate in the economy. Is there anything wrong with that?

6 Replies to “Adam Smith’s invisible hand”

  1. Just looking at that quote (which is incomplete btw), it does not stand out to me that Smith made any mention or suggestion of moral quality concerning the “end” that was “unintended”. Could it not be suggested that you are assuming that he is qualifying this “end” as something ‘good’ and ‘good for all society’?

    A more complete reading of Smith leads many economist and economic historians, such as myself, to conclude that for decades now must of the establishment characterizations are complete nonsense. Smith was closer to Marx on most issues than he is to all the libertarian-like minded folks today (so were the US founding fathers). He valued labor over multinational corporate tyranny (that usurps political power). Just my thoughts….

  2. The context: “As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” (Book 4, Chapter 2)

  3. That quote is the full context. When read completely, one can see how OPPOSITE the ‘myth’ of Smith’s ideas, let alone the ‘invisible hand’ concept, are from reality. Also he was writing in the mid 18th century, before not only the industrial revolution, but the 20th century take over of financial capitalism over industrial capitalism. Smith was not a ‘free market’ laissez-faire capitalist.

    It also seems odd that the whole idea of representative democratic ideals is to put in check the power of the economic elite. They were more conscious of the British E. India Co., then whether King George had eggs for breakfast.

    (Sorry for the multiple posts, but it is not a shallow topic. Thanks.)

    1. Great comment and Mike this is greatly appreciated. You are right he did value labor and real value and work over corporate smoke and mirrors. However, it is a stretch to say he was closer to Marxism. He was someone who believed in natural value, money earned and wealth created over nominal wealth effects. It was the Austrian school of economics that focused on the subjective value of things.
      However, I still think Adam Smith was the father of capitalism. This is my reading of him.
      Further, people have choice not to work in corporate America. I do not. I am not affected by what the fat cats on Wall Street do. I basically focus my productive energies and work on creating something of value and if it is good, I will have earned some money.

  4. malcolm-daniel says:

    You need to eliminate this following paragraph from your post above as it is incorrect and untrue.

    “This means man is basically good.”

    Just because humans work for their self interest benefiting society does not make humans good.

    Marx does not in any way that I know of say government is needed for control of people. Marx wanted no or minimal government and said government only exists primarily because of the class war and eliminating the capitalist eliminates class war and makes government unnecessary. Marx said society shapes man as man shapes society. Socialism, communism and anarchism believe in the greater good of man , given the right circumstances, the idea is to create a society of co-operation not competition to do that. Defenders of capitalism (not necessarily defenders of Smith as most are not that well read) say its human nature that cant make socialism work and we need capitalism because humans are lazy and greedy . Actually capitalism is a system designed on man’s worst human behaviours in my opinion and I think history would show this.

    I am not even sure Marx was anti-Smith as he built on his knowledge.

    While I have not read wealth of nations yet- I have heard that Smith did not believe completely in the invisible hand and believed their is a role for government – more so than Marx.

    1. Mark Biernat says:

      Marx’s philosophy does not work without a dictatorship type government. Read The Grand Failure: The Birth and Death of Communism in the Twentieth Century
      Zbigniew Brzezinski.

      I have a question. If you are working hard to support your family and help them develop and educate them. Working day and night until your back hurts and your life is hard. Are you going to happily just give all your productive efforts to some government official who then gives it to your neighbour’s wife? That is Marxism. Without a dictatorship there is no way a person will willingly do that.

      Man is essentially good and if you look around you, you will see that. Yes some people go to the dark side but essentially people are working hard and supporting their families and trying the best they can. Adam Smith’s philosophy was let people do this and society as a whole will improve.

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