THE MYSTERY OF THE UBIQUITOUS INVISIBLE HAND

Art Carden, Associate Professor of Economics at Samford University’s Brock School of Business posts (January, 2017) posts on The Imaginative Conservative HERE

What is the “Invisible Hand”?

Observers who dissapprove of other’s exchanges too often want to substitute the visible first of the state for the invisible hand of the market

“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. 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.” —Adam Smith, Wealth of Nations

Which better guides the use of a society’s decentralized knowledge: the invisible hand of the market or the visible fist of the state? Adam Smith began An Inquiry into the Nature and Causes of the Wealth of Nations by explaining that people have become more productive because they have been able to specialize and divide labor. He identified and explained something really marvelous. The invisible hand of the marketplace helps us make use of others’ knowledge and encourages us to help ourselves by helping others. The invisible hand of market exchange—and voluntary action more generally—generates the ordered use of social knowledge according to the visions, plans, and expectations of the many members of that society, rather than according to the visions, plans, and expectations of state functionaries.

[Republished from The Intercollegiate Review, Fall 2016].

COMMENT

Adam Smith never referred to the “invisible hand of market exchange”. That last is an assertion of modern economists, largely since Paul Samuelson’s careless remarks in his textbook, Economics, in 1948, 19 editions to 2010, and 5 millionn sales, plus, of course the active second-hand market. Smith used the ‘invisible hand” metaphor in his “Wealth of Nations” once in a direct reference to a merchant who preferred the home market over the risks of foreign trade, hence he invested locally. A consequence of that intended action by the merchant was that he added unintentionally his capital to domestic capital, which was a public benefit in employment.

The sequence is the merchant’s motive leading him to an intentional action, which action had unintended consequences. The invisible hand metaphor describes that sequence metaphorically. Nothing more! Metaphors do not describe some unseen force that consciously leads to unintended consequences, as is sometimes claimed by apologists for some conscious or purposeful force (even a ‘spiritual force’ has been claimed for it - ‘hand of God, etc) at work in markets. 

Moreover, Smith did not ‘coin’ the metaphor, which had been in general use  since Greek and Roman times as the ‘invisible hand of Jupiter’ - hence it was originally a popular, mainly theological idea, often heard in Church ministers’ sermons in the 18th century.

There were, of course, many other actions by many other “merchants and manufacturers”, not all of which were “public benefits” (also discussed several times in Smith’s Wealth of Nations). On these occasions the intended actions of ‘merchants and manufacturers’ were public disbenefits, such as their clamoutrng to impose tariffs, even direct prohibitions on imports, a consequence of which were restrictions on supply and thereby rises in domestic prices.

Ard Carden, a distinguished economist, knows these facts but does not qualify his assertions about the supposed generality of the “invisible hand” as a public benefit. Smith’s Wealth of Nations is awash with criticism of many of the behaviours of “merchants and manufacturers” in and through markets and in their lobbying of politicians and being lobbied by them.

Art Carden's article presents a somewhat idealised picture of how markets work. Adam Smith was not so starry eyed. He understood the positive and the negative sides to human actions. That is why Smith wrote extensively about Jurisprudence - the history and need for laws, which he taught for longer than he taught political economy. He also incorporated ideas from his early Jurisprudence lectures throughout Wealth of Nations. 

Surprisingly, given the modern extensive claims of what Smith meant by using the now infamous metaphor, it is possibly remarkable that those economists who came after Smith, including his friends and contemporaries who were familiar with Smith’s work, did not mention his use of the “invisible hand” metaphor, nor its supposed significance.  Only after 1874 were there references to the metaphor by a handfull of authors, and even then a virtual public silence until after Paul Samuelson.  Today references to Smith’s so called “invisible hand theory” are ubiquitous (try Googling “Adam Smith and the invisible hand” and see its plentitude of daily references compared to none while he was alive to 1790 and up to the 1870s).

Markets are wonderfull human activities, indeed, but science, including its history, sets higher standards for explanation and understanding, than is evident in the 21st century myths about Smith’s use of the “invisible hand” metaphor in the 18th century.