The invisible hand and unintended consequences

Does the fact that Smith refers to individuals who are not aware of the future con- sequences of their action, and who fail to see the invisible hand, make the invis- ible hand an un-Smithian idea? Rothschild thinks so. She (2001: 123) argues that the word ‘invisible’ implies blindness15 and points out that Smith ‘sees the people as the best judges of their interest [. . .] But the subjects of invisible-hand explana- tion are blind, in that they cannot see the hand by which they are led.’ Thus, she concludes: the invisible hand cannot be a truly Smithian idea.

A certain type of ‘blindness’ may be identified in the argument against import regulations in WN16 in two different forms. First, it is argued that those who try to implement the import regulations cannot judge the interests of the individuals. They cannot observe their interests and the peculiarities of their individual situa- tion. These are invisible to the regulators.

What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him.

(Smith 1789: IV.2.10)

In fact, a similar argument appears in TMS, where Smith talks about a legisla- tor who wishes to rule a society:

He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.

(Smith 1790: VI.II.42)

That is, no individual can know what is good for all the others, and since one is ‘blind’ to the principles of the motion of other individuals, it is better to let indi- viduals judge on their own what is good for them. We may add to this that since the exact response of the individuals to a regulation cannot be known in advance, the legislator would also be ‘blind’ to the future consequences of his regulation. The second form of ‘blindness’ is the ‘blindness’ of the individuals who do not intend to bring about social consequences. As the legislator, any individual is ‘blind’ to the decisions taken by the rest of the individuals that may influence the consequences of his action. They may also be ‘blind’ to some of the other factors that may influence the consequence of their action. These two forms of ‘blindness’ are essentially similar.17 ‘Blindness’ is attributed to all the individuals in the soci- ety; to merchants as well as to legislators, tailors, shoemakers, etc. The legislator cannot judge for the individuals, and any individual judges better for himself as long as he is not intending to bring about social consequences. Individuals are ‘blind’ to the social consequences of their action, but concerning their own inter- ests and their local environment18 they know better than others.19 In the terminol- ogy employed in Chapter 2, Smith argues that it is good for the society when each and every individual intends to bring about consequences at the individual level (at least for the cases in which he employs the invisible hand). He assumes that when every individual acts in such a way, beneficial social consequences will be brought about.

Remember that Rothschild thinks that the ‘blindness’ implied by the invisible hand is un-Smithian for this view conflicts with the view that individuals are the best judges of their interest. She argues:

[T]his independence and idiosyncrasy of individuals is what Smith seems to be denying in his account of the invisible hand; it is in this sense a thoroughly un-Smithian idea.

(Rothschild 1994: 320)

But when we distinguish between interests directed to the individual level and to the social level we may see that Smith’s argument is the following: Individuals are the best judges of their interest, but they cannot judge the interests of the rest of the society (i.e. they are ‘blind’ with respect to the interests of others); therefore they should not try to bring about social consequences. When seen like this, the ‘invisible hand’ seems to be a truly Smithian idea.20 It represents the connecting principles of the society, the network of interacting shoemakers, tailors, mer- chants and all others who, by definition, are pursuing their self-interests, acting somewhat myopically, and who are nonetheless the best judges of their interests. There is nothing in Smith’s account of the invisible hand that would deny the ‘independence and idiosyncrasy of individuals’.

Rothschild (2001: 126–128) also suggests that Smith’s proposal in WN that merchants should not seek their individual interests by political means (particu- larly by supporting restrictions on imports) is conflicting with the idea that they would promote the public good by pursuing their self-interests. Yet from the above argument it is obvious that pursuing self-interests by political means (intentions targeted at the social level) is an entirely different matter from pursuing self- interests at the individual level, and, thus, there is no such conflict.

It is also important here to note that Smith does not argue that self-interest promotes the interest of society under every condition (also see Schlefer 199822). According to Smith, if individual intentions are about the social level, that is, if self-interested individuals are intending to change social phenomena, then self- interest would conflict with society’s interest. The reason for this is clear. Indi- viduals could not know what is good for others. In WN Smith explicitly mentions that interests of merchants who are trying to impose trade restrictions conflict with that of society.

But if no individual knows better than the other what is good for the society, how can Smith know better? How can he be against import regulations?

To give the monopoly of the home-market to the produce of domestic in- dustry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful.

(Smith 1789: IV.2.11, emphasis added)

How can Smith suggest that import regulations are either useless or hurtful? Rothschild (2001: 24) suggests that because the invisible hand ‘is founded on a notion of privileged universal knowledge’ and because ‘it presupposes the exist- ence of a theorist [. . .] who sees more than any ordinary individual can’, it is un-Smithian.

Two important points should be noted. First of all, Smith sees philosophers as products of division of labour (also see Peart and Levy 2005). They are not natu- rally better acquainted than others for inquiring into the connecting principles of nature and society: ‘by nature a philosopher is not in genius and disposition half so different from a street porter’ (Smith 1789: I.2.5). But, by way of specialisa- tion, they can do better:

Many improvements have been made by the ingenuity of the makers of the machines, when to make them became the business of a peculiar trade; and some by that of those who are called philosophers or men of speculation, whose trade it is not to do any thing, but to observe every thing; and who, upon that account, are often capable of combining together the powers of the most distant and dissimilar objects. [. . .] [S]ubdivision of employment in philosophy, as well as in every other business, improves dexterity, and saves time. Each individual becomes more expert in his own peculiar branch, more work is done upon the whole, and the quantity of science is considerably increased by it.

(Smith 1789: I.1.9)

Thus, it is quite natural that he thinks that he observes better than the porter, and that he is less ‘blind’ to the connecting principles of nature and society than others who are specialised in other industries. Yet this does not necessarily imply ‘privi- leged universal knowledge’. Smith, a man of speculation, is conjecturing about those connecting principles. It is also true that Smith thinks that the shoemaker, the tailor, as well as the merchants, are able to understand his argument that it is not to the advantage of a society to produce the goods that are produced less costly in other countries, and that every nation will be better off if they produce the good in which they have advantage. But more importantly, Smith does not presume that he has knowledge of the local situations and interests of particular individuals. Rather, from the argument that this is not possible, he suggests it is better to leave every individual to their own principles of motion.

Moreover, Rothschild implicitly assumes that ‘unintended’ means ‘unantici- pated’.23 It has been argued in Chapter 2 that it is possible to have anticipated but unintended consequences. The absence of foresight and awareness of the social consequence is not a necessary condition for invisible-hand type of explanations. It is entirely possible that one or some of the individuals foresee the unintended consequence that is ahead but fail to act accordingly to change this consequence. There may be many reasons for this, but the most important seems to be that since there are many individuals who are involved in the process that brings about the unintended consequence, it may be costly to deviate from the original intention/ action unless others do the same. In some cases, collective action may be costly and/or risky, thus individuals may bring about an unintended but anticipated so- cial consequence. Smith, as well as any other individual, may foresee or recognise unintended social consequences. For this reason, Smith’s recognition of the ben- eficial unintended consequences does not imply that he has ‘privileged universal knowledge’.

Rothschild has two other points that may be discussed together. First, she (2001: 129–130) suggests that religious connotations of the invisible hand do not go well with Smith’s somewhat irreligious views. As Rothschild nicely argues, the religious connotations come from its previous uses. Moreover, Smith use of invisible hand in HA carries religious connotations. In fact, we have seen that he criticises the practice of associating the apparent irregularities of nature with the ‘invisible hand of Jupiter’. This supports Rothschild’s argument that Smith used the phrase ironically, in TMS and in WN. However, if Smith uses it ironically, this means that the latter uses do not necessarily have any religious connotation.24 We can read the invisible hand as a metaphor conveying a message about the responses of our imagination to the surprising aspects of nature. In TMS and WN, it may be understood as saying that ‘what savage man may have associated with “the invisible hand of Jupiter” is hereby explicated’. Smith used the phrase to indicate that behind the order of things (which we may associate with design) there is some ‘invisible’ chain of events that brought them about. Yet he suggests that this invisible chain of events needs to be explicated in order to explain the phenomenon. Second, Rothschild (2001: 131–132) argues that the Stoic idea of a providential order, which is ostensibly implied by the invisible hand, conflicts with Smith’s views. While it is true that Smith would not agree with the idea of an order that is not caused by the individuals who take part in it (the idea of providen- tial order), we have seen that Smith’s invisible hand does not necessarily imply such an idea. In fact, in WN and TMS social facts are explicated with reference to the interaction of individuals who are pursuing their own interests.

The invisible hand is an important concept in economics and our understand- ing of it should rest on a good understanding of the subset of unintended conse- quences implied by it. As we have seen, the invisible hand is neither a mysterious concept, nor does it imply complete blindness on the part of individuals or univer- sal privileged knowledge on the part of the scientist. In fact, on the contrary, the concept of the invisible hand emphasises the will to remove mysteries concerning nature and society; it acknowledges the ability of men to act intentionally and cal- culate the consequences of their action; and alerts us to the incompleteness of our knowledge concerning other individuals and nature. Unintended consequences are brought about by men who are pursuing their own ends and it is the task of the social scientist to explicate how different individuals are connected to each other in producing those consequences. In the language of the previous chapters, the concept of the invisible hand suggests that we should study how certain individual mechanisms (e.g. the principles of motion of different individuals) are connected to each other.

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

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