Smith’s invisible hand

Adam Smith’s ‘invisible hand’ is widely used and discussed in economics and other social sciences, as well as in language theories, philosophy of science, eth- ics, political theory and active politics.1 Although Smith’s ‘invisible hand’ is con- sidered to be an influential metaphor, he uses the phrase only three times and in different contexts. In ‘The principles which lead and direct philosophical enquir- ies: illustrated by the history of astronomy’ (henceforth HA) he refers to those individuals who ascribe the ‘irregular events of nature to the agency and power of their gods’ (Smith 1795: 49).

Fire burns, and water refreshes; heavy bodies descent, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters. But the thunder and lightening, storms and sunshine, those more irregular events, were as- cribed to his favour, or his anger.

(Smith 1795: 49, emphasis added)

In The Theory of Moral Sentiments (henceforth TMS) he invokes the ‘invisible hand’ when he tries to show how the selfish behaviour of the rich (in combination with natural forces) ‘advance[s] the interest of the society, and afford[s] means to the multiplication of the species’ (Smith 1790: IV.I.10):

The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours 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 spe- cies.

(Smith 1790: IV.I.10, emphasis added)

In The Wealth of Nations (henceforth WN) he uses it when he tries to show how merchants support the public interest when they intend to increase their security ‘by preferring the support of domestic to that of foreign industry’ (Smith 1789: IV.2.9):

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)

The fact that Smith uses the invisible hand in three different contexts makes it hard to understand the implied meaning of the phrase. Some argue that there is no conflict in Smith’s uses of the invisible hand (e.g. Thornton).2 Some argue that although they have been used differently there is no inconsistency, but the role of the invisible hand was reversed from HA to TMS and WN (e.g. Macfie 1971: 596). Some argue that the invisible hand refers to the hand of God (e.g. Denis 1999) or that it is about the wisdom of nature (e.g. Khalil 2000b). Some others argue that the invisible hand is not necessarily providential (e.g. Flew 1987). Some say that we should only be concerned with the context within which the phrase is used and if we do this, the invisible hand in WN is simply about import duties (e.g. Persky 1989).3   Rothschild (1994, 2001), on the other hand, argues that Smith was sardonic in his use of ‘invisible hand’ and that the concept of the invisible hand is not consistent with Smith’s system of thought. Briefly, on the side of the historians of thought, there is no consensus about the interpretation of Smith’s invisible hands.

In what follows we will examine the relation between Smith’s invisible hands. We will see that the use of the invisible hand in HA provides the methodological background on which we may examine its other uses in WN and TMS. We will also see that Smith’s use of the invisible hand appears to be somewhat ironic, as Rothschild suggests. Yet it does not follow from this that the concept of invisible hand is not consistent with Smith’s system of thought. Rothschild’s interpretation embodies a misunderstanding concerning the relation between the concepts of invisible hand and unintended consequences. Since it is important to eliminate this misunderstanding we will use Rothschild’s (1994, 2001) interpretation as a case in point.

Rothschild (2001) solves the apparent inconsistency in Smith’s use of the invisible hand by arguing that the invisible hand was indeed an ironical joke, and she concludes that it is un-Smithian. To demonstrate this, Rothschild puts forward several pieces of evidence to show that the idea of invisible hand does not fit Smith’s general framework, and that Smith would not have favoured such an argument. Yet she (2001: 122) starts her discussion with an interpretation of the invisible hand that Smith would have favoured. It is argued that the invisible hand provides such an understanding about the economic or social order that it beauti- fully connects the parts of the system to the orderly state of the socio-economic world without the need of invoking a designer who is responsible for this order. Although Rothschild argues that such an interpretation would be supported by Smith, she goes on to argue that the implications of the invisible hand suggest that Smith would not have favoured the invisible hand.

Throughout her argument she takes it as given that the invisible hand is related to three main arguments (also see Vaughn 1987):

  1. ‘that the actions of individuals have unintended consequences;
  2. that there is order or coherence in events; and
  3. that the unintended consequences of individual action sometimes promote the interests of societies’ (Rothschild 2001: 121).

First, Rothschild suggests that the idea of individuals who are not able to see the overall picture and who are acting blindly conflicts with Smith’s overall thought. Rothschild (2001: 124) formulates this in the following way: ‘to be contemptuous of individual intentions, to see them as futile and blind, is to take a distinctively un-Smithian view of human life.’ Second, Rothschild (2001: 124) proposes that because the invisible hand ‘is founded on a notion of privileged universal knowl- edge’ and ‘it presupposes the existence of a theorist [. . .] who sees more that any ordinary individual can’, it is un-Smithian. Third, Rothschild (2001: 126–128) presents Smith’s proposal in WN that merchants should not seek their individual interests by political means (particularly by supporting restrictions on imports) as being conflicting with the idea that they would promote the public good by pursuing their self-interests. Fourth, Rothschild (2001: 129–130) suggests that religious connotations of the invisible hand do not go well with Smith’s some- what irreligious views. Finally, she (2001: 131–132) argues that the Stoic idea of a providential order, which is implied by the invisible hand, conflicts with Smith’s general views. It is argued here that Rothschild’s first three propositions are wrong because her account contains a misunderstanding about the invisible hand and its relation to unintended consequences.6 The truths of fourth and fifth propositions heavily depend on Smith’s ideas concerning religion on which there is no consensus, yet they are debatable. Our main focus will be on the first three propositions. Whether Smith was ironic in his use of the invisible hand is another matter and Rothschild seems to be right in suggesting that he was. But we will see that the irony in the invisible hand directs us to the philosophy of science behind the invisible hand, it does not suggest that the invisible hand is un-Smithian. Let us go back to the writings of Smith in order to discuss Rothschild’s propositions and to develop a better understanding of the invisible hand.

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

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