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.

 

Adam Smith's invisible hand

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.

Neo-classical incentive theory

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.

Adam Smith's philosphy of free choice

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?