Origins of the Myths of the Invisible Hand

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Gavin Kennedy

I was looking for a reference in a book in my library and came across, at the back, as you do, my rather battered copy of Paul Samuelson’s popular textbook, ‘Economics’ (which I had looked for unsuccessfully for many years).

In the 1960s, my later edition of this book was the class textbook at my university; I also bought a first edition of it at a bookfair in the 70s.

I knew that Samuelson had mentioned the ‘invisible hand’ in his textbook and he is, in my view, more than anyone else, responsible for popularising the incorrect notion that Smith believed there was an invisible hand at work in the general economy, which in the minds of modern economists somehow, mysteriously, was behind the undoubted success of capitalism in making possible unprecedented living standards. (The Cold War was on and many academics and their students were more impressed with Marxism than capitalsm.)

The reputation of Paul Samuelson, from the start of his illustrious academic career, and the publication of his Phd, Foundations of Economic Analysis (1947), deservedly is enormous.

His popular textbook, Economics, was used to teach, literally, tens of thousands of post-war students, and even his latest writings on his profession (e.g., ‘Inside the economist's mind: conversations with eminent economists‎, 2007 show why his reputation was and remains so high.

However, Samuelson was certainly wrong on one subject.

Metaphors, like ‘waggon way through the air’ (Wealth Of Nations, II.ii.86: p 321)or the ‘invisible hand’ (IV.ii.9: 456), are representative, not real; they exist only as the imaginary image of what they allude to; they do not define to what they allude (Smith: Lectures on Rhetoric and Belles Lettres, 30-1).

Modern economists have projected onto a venerable literary metaphor a significance well beyond anything implied by Adam Smith, whom they allege was the originator of their modern and different, version of the metaphor.

Among the first to do so was Paul Samuelson, in the first edition
(1948) of his famous and influential textbook, Economics: an introductory analysis, he wrote (page 36) that Adam Smith, ‘the canny Scot’:

‘was so thrilled by the recognition of an order in the economic system that he proclaimed the mystical principle of “the invisible hand”: that each individual in pursuing only his own selfish good was led, as if by an invisible hand, to achieve the best good of all, so that any interference with free competition by government was almost certain to be injurious. This unguarded conclusion has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their college course in economics.’

But the ‘canny Scot’, of course, said no such thing.

Smith did not proclaim ‘the mystical principle of “the invisible hand” ’. He was so reticent about his use of the metaphor that he mentioned it only once in Wealth Of Nations, more than half-way through his book, buried in a chapter about how some cautious (risk-averse) merchants preferred the ‘home trade’ to ‘foreign trade’ in pursuit of their ‘own security’.

Smith never proclaimed in favour of ‘selfishness’, nor did he describe the actions of such merchants as ‘selfish; he always recognised self-interest’, which he never confused with ‘selfishness’, an attribute of Bernard Mandeville's philosopy (1734), which Smith regarded as licentious'.

Smith never regarded nor stated that ‘any interference with free competition by government was almost certain to be injurious’; he identified the circumstances where government policies, such as the dominant policy of mercantile political economy since the 16th century, had slowed ‘progress towards opulence’ and he identified which of these policies should be changed.

Smith didn't think much good came from sovereigns and legislators telling merchants what to do - he didn't think governments were up to the task

In fact, Smith identified that the main ‘interference’ with ‘free competition’ came from the ‘merchants and manufactures’ themselves, with their agitation for legislators, and those who influenced them, to legalise or award monopolies and trade protection, which were against the public interest in general and the interests of consumers in particular.

I conclude, given the misunderstanding of Adam Smith’s political economy that began in the mid-twentieth century, which led to ideological protection of much corporate behaviour (not much different from their behaviours in his day) that if Samuelson had read Moral Sentiments and Wealth Of Nations for himself, instead of recalling what he was taught incorrectly by his Chicago tutors in the 1930s, he could have prevented many tens of thousands of students, who in the 16 editions of his textbook taught from it well into the 1970s, from ‘remembering’ the same error that he passed on to them, many of whom became teachers of yet more students. And so the myth was spread across generations of studenets and tutors.

His readers spread the nonsense of the myth of the invisible hand widely for more than forty years. They have also made Adam Smith culpable for the current crisis, when, he is, in fact, wholly innocent. The epigones are the guilty party.