Invisible hand

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The invisible hand is a metaphor created by Adam Smith to illustrate the principle of “enlightened self interest”. Today, this principle is associated with psychological egoism. In The Wealth of Nations, Adam Smith makes the claim that, within the system of capitalism, an individual acting for his own good tends also to promote the good of his community. He attributed this principle to a social mechanism that he called “the invisible hand”.

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The Wealth of Nations

One of the main concepts discussed by Adam Smith in the Wealth of Nations is that of the Invisible Hand. To put it simply, the Invisible Hand is economic theory which states that if a market is left to decide how many products to sell and at what prices products are to be sold at, based on the demand of the consumers, providing that each consumer is allowed to choose from a variety of goods and services, based on the supply provided by industrialists, the market, will run smoothly. The reason for this is that people (in general) wish to achieve the best for them and their families. They therefore work extremely hard, becoming productive members of society. The greater the productivity is in an economy, the more effective and prosperous the economy will become.

The practise of this concept can be advantageous to an economy since it can lead to an increase in an economy’s productivity levels, an increase in the gross national production of the specific country, an increase in the amount and variety of goods and services available for consumption and to the promotion of fair competition in an economy. These factors all lead to a general increase in the standard of living of the participants of the specific economy if the participants are solely motivated in their actions by self interest, within the limits of the law.

With advantages come the disadvantages. These include the formation of monopolies by very aggressive competitors, the production of poor quality products to increase profit margins and the exploitation of the factors of production of an economy (e.g. labour and natural resources). These factors and more can encourage cycle of richer becoming richer, whilst the poor remain in poverty.



Smith includes the phrase in Book IV of The Wealth of Nations, as part of his argument against social controls:

Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally 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. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. (IV.ii.10, page 456 of the 1976 Glasgow Edition of Smith’s works)
(In the 1976 U. of Chicago Edition it's in vol. IV, ch. 2, p. 477.
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The Theory of Moral Sentiments

Smith used the same phrase in an earlier book:

The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. 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 species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for. (The Theory of Moral Sentiments, IV.I.9)
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The History of Astronomy

The 1976 Glasgow Edition of Smith’s works points out a third occurrence of the phrase, in an early work called The History of Astronomy. This was written before Moral Sentiments and Wealth of Nations, though it was only published after his death, in a collection called Essays on Philosophical Subjects:

For it may be observed, that in all Polytheistic religions, among savages, as well as in the early ages of heathen antiquity, it is the irregular events of nature only that are ascribed to the agency and power of the gods. Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter every apprehended to be employed in those matters. (III.2, page 49 of the Glasgow Edition)
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Understood as a metaphor

Smith uses the metaphor in the context of an argument against protectionism and government regulation of markets, but it is based on very broad principles developed by Bernard Mandeville, Bishop Butler, Lord Shaftesbury, and Francis Hutcheson. In general, the term “invisible hand” can apply to any individual action that has unplanned, unintended consequences, particularly those which arise from actions not orchestrated by a central command and which have an observable, patterned effect on the community.

Bernard Mandeville claimed that private vices are actually public benefits. In The Fable of the Bees (1714), he laments that the “bees of social virtue are buzzing in Man’s bonnet”: that civilized man has stigmatized his private appetites and the result is the retardation of the common good.

Bishop Butler claimed that pursuing the public good was the best way of advancing one’s own good since the two were necessarily identical.

Lord Shaftesbury turned the convergence of public and private good around, claiming that acting in accordance with one’s self-interest will produce socially beneficial results. An underlying unifying force that Shaftesbury called the “Will of Nature” maintains equilibrium, congruency, and harmony. This force, if it is to operate freely, requires the individual pursuit of rational self-interest, and the preservation and advancement of the self.

Francis Hutcheson also accepted this convergence between public and private interest, but he attributed the mechanism, not to rational self-interest, but to personal intuition, which he called a “moral sense”. Smith developed his own version of this general principle in which six psychological motives combine in each individual to produce the common good. In The Theory of Moral Sentiments, vol II, page 316, he says, “By acting according to the dictates of our moral faculties, we necessarily pursue the most effective means for promoting the happiness of mankind.” A contemporary example of such an effect could be the far-reaching social benefit realized via the proliferation of computers and software; goods which have been produced almost entirely by people trying to maximize their own economic gain. Presumably those producers didn’t manufacture the computers and develop the software out of a love for humanity or an altruistic desire to promote society’s collective fortune. Any social benefits that have accrued therefore, according to Smith’s doctrine, are simply a by-product of their striving for selfish reward.

Contrary to common misconceptions, Smith did not assert that all self-interested labor necessarily benefits society, or that all public goods are produced through self-interested labor. His proposal is merely that in a free market, people usually tend to produce goods desired by their neighbours. The tragedy of the commons is an example where self-interest tends to bring an unwanted result.

Moreover, capitalism arguably provides numerous opportunities for maximizing one’s own profit at the expense (rather than for the benefit) of others. The tobacco industry is often cited as an example of this: the sale of cigarettes and other tobacco products certainly brings a very good revenue, but the industry’s critics deny that the social benefits (the pleasures associated with smoking, the camaraderie, the feeling of doing something “cool”) can possibly outbalance the social costs.

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Examples and arguments

Since Smith’s time, the principle of the invisible hand has been further incorporated into economic theory. Leon Walras developed a four equation general equilibrium model which concludes that individual self-interest operating in a competitive market place produces the unique conditions under which a society’s total utility is maximized. Vilfredo Pareto used an edgeworth box contact line to illustrate a similar social optimality.

Ludwig von Mises, in Human Action (see note 3 at the bottom), claims that Smith believed that the invisible hand was that of God. He did not mean this as a criticism, since he held that secular reasoning leads to similar conclusions.

The invisible hand is traditionally understood as a concept in economics, but Robert Nozick argues in Anarchy, State and Utopia that substantively the same concept exists in a number of other areas of academic discourse under different names, notably Darwinian natural selection. In turn, Daniel Dennett has argued in Darwin’s Dangerous Idea that this represents a “universal acid” which may be applied to a number of seemingly disparate areas of philosophical enquiry (consciousness and free will in particular). See also Social Darwinism.

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Tawney’s Interpretation

Christian socialist R. H. Tawney saw Smith as putting a name on an older idea:

If preachers have not yet overtly identified themselves with the view of the natural man, expressed by an eighteenth-century writer in the words, trade is one thing and religion is another, they imply a not very different conclusion by their silence as to the possibility of collisions between them. The characteristic doctrine was one, in fact, which left little room for religious teaching as to economic morality, because it anticipated the theory, later epitomized by Adam Smith in his famous reference to the invisible hand, which saw in economic self-interest the operation of a providential plan... The existing order, except in so far as the short-sighted enactments of Governments interfered with it, was the natural order, and the order established by nature was the order established by God. Most educated men, in the middle of the [eighteenth] century, would have found their philosophy expressed in the lines of Pope:
Thus God and Nature formed the general frame,
And bade self-love and social be the same.
Naturally, again, such an attitude precluded a critical examination of institutions, and left as the sphere of Christian charity only those parts of life which could be reserved for philanthropy, precisely because they fell outside that larger area of normal human relations, in which the promptings of self-interest provided an all-sufficient motive and rule of conduct. (Religion and the Rise of Capitalism, page 195)
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See also

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External links

el:Αόρατο Χέρι es:La mano invisible eo:Nevidebla mano fr:Main invisible he:היד הנעלמה pl:Niewidzialna ręka rynku pt:Mão invisível fi:Näkymätön käsi sv:Den osynliga handen tr:Görünmez el

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