Invisible hand: Smith

Big ideas of economics

If Adam Smith had known which part of his published works would make him famous, he would have worded it more carefully. “Every individual necessarily labours to render the annual revenue of the society as great as he can,” wrote Smith in his 1776 Inquiry into the Nature and Causes of the Wealth of Nations, in a passage describing where investors should place their capital for greatest returns. “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.”

Smith had used the metaphor of the invisible hand before, in his other book, The Theory of Moral Sentiments. Here also the point was unintended consequences. He was describing rapacious landlords who thought merely of themselves but nonetheless promoted the public good. “Though they mean only their own convenience, though the sole end which they propose from the labors of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.” In this case, Smith seemed to equate the invisible hand with higher powers. “When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition.”

Almost two decades separated Smith’s Wealth of Nations from his Theory of Moral Sentiments. By then he had dropped God from the discussion. In another passage commonly quoted, Smith stressed selfishness as an engine of public good. “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. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Smith could be sharply critical of the kind of people who would come to revere him. “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Yet in this criticism lay the power of his argument. Most people who professed concern for the welfare of common folk appealed to virtue, making provision of the necessities of life a matter of philanthropy. Smith appealed to self-interest and the pursuit of profit, which he and many others considered more reliable.

Smith’s approach lent itself to caricature. Gordon Gekko in the 1987 movie Wall Street riffed rapturously on “greed is good.” Indeed a great deal of the enthusiasm for Smith over the centuries was self-serving: making capitalists feel good about capitalism.

But Smith’s argument wouldn’t have persisted if the underlying mechanism didn’t work. The most productive economies of the last quarter-millennium have been those that relied on the invisible hand of the marketplace. More people got their dinner from the self-regard of the butcher and the baker than from the altruism of any bureaucrat or commissar.

Capitalism has shortcomings. It can degenerate into cronyism when those conspiring tradesmen have their way—or worse, when they capture the government. By its nature capitalism produces inequality. Its emphasis on the bottom line devalues things that can’t be quantified or bought and sold.

But in terms of delivering the greatest economic good to the greatest number of people, no other system has approached the success of capitalism.

Adam Smith didn’t invent capitalism. That was the work of millions of people over decades and centuries.

But he furnished the metaphor that came to summarize the workings of capitalism. And for that he deserves applause— from hands that are audible, if not necessarily visible.