The Mystery of the Invisible Hand: Why a Rare Mention in Smith's Work Has Become a Cultural Icon
Adam Smith's The Wealth of Nations is a foundational work in economic theory, yet a central concept within it - the 'invisible hand' - is not as prominent as one might expect. This article explores why this metaphor has become so widely believed and popular, despite Smith mentioning it only once in his most famous work and twice if we include his The Theory of Moral Sentiments.
The Origin and Usage of the Invisible Hand
The concept of the 'invisible hand' is a powerful assertion of the natural tendency of free markets to promote societal benefits. According to Smith, economic agents, driven solely by their self-interest, inadvertently make contributions to society. However, this idea is sometimes oversimplified and treated as a universal truth rather than one of many complex observations.
Smith mentioned the 'invisible hand' in his work, but his treatment of it was rather trivial. He stated that a merchant who avoids investing abroad due to distrust of foreign traders or foreign courts chooses to invest locally instead. This leads to a public benefit by increasing domestic revenue and employment through unintended consequences. Despite this, the metaphor has transcended the text and become a symbol of laissez-faire economics.
Popularization and Misinterpretation
The 'invisible hand' has become a popular and misinterpreted concept, often used in pro-capitalist propaganda to assert the inherent benefits of free markets. Many people interpret Smith's assertion as a magical and infallible process that always results in societal benefits, without understanding the conditions he placed on it.
Smith himself, a popular observer and descriptor of capitalism, is often misinterpreted as the inventor of modern capitalism. In reality, he was one of the early thinkers to describe the mechanisms of the free market, but he did not hold the concept in such high regard. The "invisible hand" can be seen as a mailed fist or even a weapon in the hands of manipulative individuals who use it to their own advantage.
The Academic Journey of the Invisible Hand
Contrary to popular belief, the 'invisible hand' was not immediately recognized as a crucial concept. Even when Smith was alive, it received little attention. It is notable that his close friend and colleague, Professor Dugald Stewart, taught at the University of Edinburgh without mentioning the 'invisible hand' even when quoting from the relevant paragraph. For nearly a century after its initial mention, leading economists such as Bastiat, Ricardo, and Mill did not refer to it.
The concept gained significant traction in the 1870s, with four writers mentioning it for the first time. It continued to grow in popularity, reaching its peak in 1948 when Paul Samuelson mentioned it in his textbook 'Economics'. Since then, the 'invisible hand' has become a staple in daily media and political discourse, often used to support arguments for free market policies.
The Widespread Misunderstanding
Modern economists often regard the 'invisible hand' as a uniquely important concept, but this overlooks the fact that Smith himself saw it as a trivial arithmetic assertion. His contemporaries and subsequent major economists ignored the metaphor, recognizing it for its simplicity and not taking it as a profound philosophical observation.
The widespread belief in the 'invisible hand' as infallible has led many to avoid careful questioning and thorough thought. Instead, they rely on vague, magical imagery to avoid recognizing the actual individuals and mechanisms at play in market exchanges. This oversimplification can lead to unethical and unjust outcomes that benefit a small group at the expense of the broader public.
In conclusion, the 'invisible hand' has gained cultural significance beyond its original intent and context. Understanding its true meaning requires acknowledging its limitations and recognizing the broader economic forces at play. As economic theory continues to evolve, it is crucial to maintain a clear perspective on the concepts that shape our understanding of markets and society.