Concept of Invisible-hand consequences

We have seen that the type of unintended consequences we are interested in form a small subset of the set of possible types of unintended consequences. We are interested in social unintended consequences that were brought about by indi- viduals who were intending to bring about consequences at the individual level. But why? Does the invisible hand really imply this specific set of unintended consequences? This section answers this question with a sneak preview of the following chapters.

As a first step to locate invisible-hand type of unintended consequences (invis- ible-hand consequences) in our table of possibilities let us consider Adam Smith’s most quoted sentences concerning the invisible hand:

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.

(Smith 1789: IV.2.9, emphasis added)

Here, individuals pursue their own interests and hence they do not intend to bring about consequences at the social level. That is, individual intentions are directed to the individual level. However, the (unintended) consequences are at the so- cial level: by pursuing their own interests individuals promote the interest of the society. Thus, the consequences generated by the invisible hand correspond to cell 1.6 in Table 2.2 (see Chapter 5). Similarly, Carl Menger’s (1892a) explana- tion of the origin of money, which is a paradigmatic example of invisible-hand explanations, portrays individuals as having intentions targeted to the individual level which bring about consequences at the social level: cell 1.6 in Table 2.2 (see Chapter 3).

Generally speaking, the invisible hand implies beneficial unintended social consequences of the actions of individuals who are pursuing interests concerning the individual level. Some of the paradigmatic examples (e.g. Menger 1892a) confirm this idea. Yet the invisible hand is also associated with what we may call disadvantageous social consequences of human action. This type of invisible hand may be called invisible backhand (Brennan and Pettit 1993). While the invisible hand produces beneficial consequences, invisible backhand produces undesirable or disadvantageous consequences. Well-known examples of invisible backhands are Prisoner’s dilemma type of situations: individuals pursuing self-interests bring about a consequence which is not desired by any of these individuals. Another paradigmatic example of invisible hand explanations, Thomas Schelling’s (1978) explanation of racial residential segregation, may also be considered as an ex- ample of the invisible backhand. In Schelling’s model, mildly discriminatory individuals who are willing to live in mixed neighbourhoods end up living in segregated neighbourhoods because of their intolerance to living as an extreme minority in their neighbourhood. Again, in this example, intentions are directed to the individual level. Individuals’ actions are not based on intentions concerning the formation of neighbourhoods or the state of the city in terms of distribution of different races in distinct neighbourhoods. Yet, an unintended consequence emerges out of their actions: ethnically segregated neighbourhoods (see Chapter 4). The pure invisible backhand consequences correspond to cell 1.7 in Table 2.2.

In fact, it is not exactly true that segregation is undesirable in Schelling’s model. In his explanation few individuals who are unhappy (i.e. because they live as an extreme minority) move to other neighbourhoods where they can be content. By moving they trigger a process that slowly changes the states of other individuals. Hence, while individuals who were initially living as an extreme mi- nority may consider an ethnically segregated neighbourhood as a desirable result, other individuals may consider it as being disadvantageous.9 This alerts us to the fact that different individuals may evaluate the desirability of invisible-hand type of consequences differently. For this reason, from a purely methodological point of view, we may consider both desirable and undesirable social consequences of invisible-hand type of mechanisms altogether under the heading of invisible-hand consequences. That is, in principle the invisible hand and the invisible backhand are similar in all respects apart from the desirability of the consequences they produce. Methodologically speaking, they imply similar explanatory mechanisms and for this reason they may be discussed together. Consequently, cells 1.6, 1.7 and 1.8 in Table 2.2 imply invisible-hand consequences.

It is important to note here that even under this broader conception, invisible- hand consequences form a small subset of the set of possible types of unintended consequences. Failure to see this relation may drastically change our opinion concerning the invisible hand and invisible-hand explanations.

Source: Aydinonat N. Emrah (2008), The Invisible Hand in Economics: How Economists Explain Unintended Social Consequences, Routledge; 1st edition.

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