Written by Noah Rich
“Households and firms interacting in markets act as if they are guided by an ‘invisible hand’ that leads them to desirable market outcomes” (Mankiw 9), so claim many modern introductory economics textbooks. However, do they?
The invisible hand, as commonly defined by economists like Paul Krugman, is a metaphor describing the “unintended greater social benefits and public good brought about by individuals acting in their own self interests.” In Paul Samuelson’s Economics– a text that established the format of modern introductory economics textbooks- the phrase is referenced six times (Samuelson). Arguably, this phrase has retained popularity because of its simplicity. In two words, it establishes that self-interest, and markets by extension, are a good thing for society; a critical assumption that economists, business leaders, and public policymakers regularly use in their analysis of the world and its problems.
Because of the power of economics, it is important to understand where its key assumptions come from and how they have evolved over time. This is especially relevant when it comes to phrases- like the invisible hand- that serve to simplify counterintuitive yet alluring ideas.
One of the fathers of economics is Adam Smith, an 18th century Scottish Enlightenment philosopher. His use of the invisible hand in the Wealth of Nations is what those economics textbooks commonly attribute as the first key usage (Rosalsky).
In the Wealth of Nations, he uses the phrase ‘invisible hand’ exactly once. Unlike modern textbook writers, he does not use it as a catch-all phrase to describe the overarching power of self-interest and markets. He narrowly uses it to describe how “by preferring the support of domestic to that of foreign industry, he [an actor] 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” (Smith). In other words, when individuals act to optimize and enrich themselves they also unintentionally affect others.
There are a few important elements to note here: he only discusses international trade, he qualifies the power of the invisible hand to “many,” not all, cases, and he does not necessarily state that the outcome of the invisible hand is always beneficial. The invisible hand, in this text, was not a central theme. It was a narrow explanation for a specific situation.
In the 18th century, Scotland was a highly Calvinist (a form of Christian Protestantism) society. Religion permeated everyday life including academia, due to “the integration… of all the strands of intellectual life that are now kept separate in… a modern university” (Finn). In religious contexts, the invisible hand was generally used to indicate “divine providence” (Harrison 38), or the intervention of God. However, this was also a period of Enlightenment and industrialization. Religious laws were being questioned, natural laws were being postulated, and the scientific method was being developed. Most importantly, this was a period when young educated men like Adam Smith had the freedom to criticize “those who worked to the detriment of society” (BBC) and re-evaluate their world.
Smith was not personally religious, but there is little doubt that he was shaped by his religious society. Smith was Scottish, but that didn’t change his significant connection to Enlightenment science and innovation. His use of the phrase “invisible hand,” then, allowed him to communicate his revolutionary ideas within the context of his immediate surroundings.
These forces that shaped Smith’s use of the phrase invisible hand must now raise causes for concern in how we use the phrase: if we do not live in an uber-religious era where science is a new concept, why is vocabulary from a time with both of those qualities still being used? We have tools to analyze forces that in Smith’s age we could only use religion-infused language to explain.
I, by no means, am the only one asking this question. In modern academia, scholars are still investigating if Smith’s use of the invisible hand was an “ironic… joke” (Rothschild 319) or “one of the great ideas of history” (qtd in Harrison 29). On the one hand, Smith himself acknowledged that any philosophical system- including economics- “is a mere invention of the imagination to connect together the otherwise disjointed and discordant phenomena of nature” (qtd in Rothschild 321). However, his usage of the phrase seems to convey some sense of sincerity: he carefully defines the single time the phrase should be used as an explanation, and acidly comments why the idea of the invisible hand is self-evident.
Regardless of Smith’s intentions and usage, there are significant problems with how we use the phrase invisible hand today- and how economics as a whole uses the ideas it represents. Economics and its markets are part of a model created by humans to analyze how our world works, and by nature, has built-in “strong assumptions… not [always] accurate” (Rosalsky). Markets in real life are by no means perfect; in fact, we as a society spend many resources defining and regulating them. Further, some studies show that teaching the merits of economic analysis, assuming self-interest is beneficial, is associated with students gaining “more positive attitudes towards greed and toward one’s own greedy behavior” (Wang et al).
We can do better. Unlike Smith’s time, we have tools from a variety of disciplines- ranging from the biological to social- that we can use to analyze how our interpersonal interactions in and out of markets work. There are likely some overarching patterns and specific causal mechanisms we can use to explain our various interactions. However, we no longer need to rely so heavily on phrases that have their origin in faith and divinity. While the forces of our behavior might be invisible to the naked eye, they need not be guided by a mystical hand.
References
BBC – History – Scottish History. https://www.bbc.co.uk/history/scottishhistory/enlightenment/features_enlightenment_enlightenment.shtml. Accessed 24 Dec. 2021.
Daniel Finn. Theology’s Invisible Hand | Commonweal Magazine. https://www.commonwealmagazine.org/theologys-invisible-hand. Accessed 24 Dec. 2021.
Greg Rosalsky. “Freeing Econ 101: Beyond the Grasp of the Invisible Hand.” Behavioral Scientist, 14 May 2018, https://behavioralscientist.org/freeing-econ-101-beyond-the-grasp-of-the-invisible-hand/.
Harrison, Peter. “Adam Smith and the History of the Invisible Hand.” Journal of the History of Ideas, vol. 72, no. 1, University of Pennsylvania Press, 2011, pp. 29–49.
Invisible Hand | Definition, Economics, Example, & Facts | Britannica. https://www.britannica.com/topic/invisible-hand. Accessed 24 Dec. 2021.
N. Gregory Mankiw. Principles of Economics. 8th ed., Cengage Learning, 2018.
Paul Krugman. “The Invisible Hand in Economics – Definition, History, & Examples.” MasterClass, https://www.masterclass.com/articles/what-is-the-invisible-hand-in-economics. Accessed 24 Dec. 2021.
Paul Samuelson. Economics. McGraw-Hill, 1948.
Rothschild, Emma. “Adam Smith and the Invisible Hand.” The American Economic Review, vol. 84, no. 2, American Economic Association, 1994, pp. 319–22.
The Project Gutenberg EBook of An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith. https://www.gutenberg.org/files/3300/3300-h/3300-h.htm. Accessed 24 Dec. 2021.
Wang, Long, et al. “Economics Education and Greed.” Academy of Management Learning and Education, vol. 10, no. 4, Dec. 2011, pp. 643–60. Northwestern Scholars, https://doi.org/10.5465/amle.2009.0185.