The Misappropriated "Invisible Hand"

Correspondence with Robin Chew: www.lucidcafe.com

Hi Robin

You have an interesting web site on Adam Smith. Mostly accurate. You write:

"Smith laid the intellectual framework that explained the free market and still holds true today. He is most often recognized for the expression "the invisible hand," which he used to demonstrate how self-interest guides the most efficient use of resources in a nation's economy, with public welfare coming as a by-product. To underscore his laissez-faire convictions, Smith argued that state and personal efforts, to promote social good are ineffectual compared to unbridled market forces."


However, these remarks about the 'invisible hand' should not be generalised to suggest Smith favoured 'unbridled competition'. He never used the words laissez faire, which most people would be surprised to hear, including many economists. The association of Adam Smith with this view is a 19th century literary invention, started by John S. Mill in 1848. The association of Smith with the 'invisible hand' is a 20th century invention, originating largely in the US academic community.

Smith's used the word 'invisible hand' only three times. The first is in his essay on the Philosophical Method in reference to the History of Astronomy, written between 1743-8 (first published posthumously in 1795) in which he refers to pagan superstition and the 'invisible hand of Jupiter', the god, not the planet. This had nothing to with economics.

The second was in The Theory of Moral Sentiments (1759) in reference to rich landowners who are led by an 'invisible hand' to distribute the produce of the land they own (but do not work on) with the poor in the 'nearly the same' proportion as it would have been made if each family had owned the same equal amount of land and worked on it. The third, and last reference, is in Wealth of Nations (1776) and refers to a preference for home production rather than foreign trade by merchants and manufacturers; they are led by ‘an invisible hand' to maximise national production, which was not part of their private intentions.

Nowhere does Smith generalise this metaphor into society wide injunction. Not all unintended consequences of human action are benign (monopoly in the 18th century; pollution, etc., in the 21st). Indeed, Smith had strong reservations about leaving 'merchants and manufacturers' alone to do their will because of their inherent tendency to form monopolies, to restrict supply and to raise prices when ever they can.

For example, he held strong views about the disadvantages faced by common labourers who were prevented by laws and local magistrates from forming 'combinations' to raise wages, while 'Masters' were not prevented from forming combinations to lower or hold down wages (which they did regularly).

To transfer, out of context, isolated words from fairly minor asides in his books as 'rules' for the conduct of modern economies with vastly more complex interactions than were known to Smith in the mid-18th century - he never knew the word nor the phenomenon of 'capitalism', for instance - is an all too common error. I regard these as misuses Smith's Legacy.”


Correspondence with Professor Brad Delong (delong@econ.berkeley.edu)

Dear Brad

Your write:'The invisible hand assumed a "rational economic man," a greedy human.' Brad Delong

I have just read your paper on "Speculative Microeconomics for Tomorrow's Economy" and was drawn to it because of your mention of Adam Smith's insight into how an economy was 'regulated' (unintentionally) for maximising output.

Perhaps, I should put my hand up and say that your elaboration of how Smith is regarded today is perfectly correct. He is seen as a theorist of capitalism, even extravagantly as the 'high priest of capitalism'. Unfortunately, whatever his reputation he was no such theorist. He wrote in the mid-18th century and the markets he wrote about were primitive. He did not foresee 'capitalism' (a word he never used, or even knew). His markets were local village and town affairs that were common over western Europe, which he saw as a revival of the Commercial Age of classical Greece and the Roman Empire which were swept aside by war lords and barbarians following the Fall of Rome. These early markets were dormant for near 1,000 years.

That his work - and words taken out of context - became metaphors for 19th-21st century capitalist national and international mass markets is undeniable. That they represent his views certainly is deniable. This does not preclude referring to Smith's Works to see if anything he said has relevance today; it means that we first must dump much of the baggage falsely credited to Adam Smith by modern economists, and then apply the authentic prescriptions of Smith for economic growth and markets, which have more relevance than normally ascribed to him.

On your interesting assessments of the changing micro markets I would concur with your analysis. The analysis of the existing, or traditional market forms, I also concur, except when you link them to Adam Smith's ideas, particularly on the 'invisible hand', an isolated metaphor in Wealth of Nations, and from which I believe that you cannot really draw your generalised conclusions. But this is for debate!