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Birks – Adam Smith and the Invisible Hand

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A commentary on Invisible hand

Adam Smith and the Invisible Hand

Many textbooks mention markets being guided by an “invisible hand”, including a reference to Adam Smith’s Wealth of Nations, where the expression is famously used. It is sometimes presented to suggest that Smith was saying that the market can use self-interest to promote general well-being.

Access an electronic copy of Smith’s book (free for Kindle here, or as a pdf here). If you search for the term, you will find that Smith used it only once. Now search for the term “monopoly”. You will find that Smith used this (or its plural, monopolies) 186 times. If you are using a Kindle, the search results will include some lines indicating the context. These show that Smith was well aware of, and concerned about, potentially harmful behaviours that might arise. It is misleading, therefore, to use the invisible hand to indicate the desirability of laissez faire, free market policies. This point is also made in Amir-ud-Din, R., & Zaman, A. (2013). Failures of the ‘Invisible Hand’. http://ssrn.com/abstract=2293940.

For a nice literary outline of markets from a very different perspective, get hold of a copy of The ragged trousered philanthropists, a novel written by Robert Tressell and originally published in 1914. You can access the text free here on Project Gutenberg. About two thirds of the way through Chapter 21 you will find:

‘Money IS the real cause of poverty,’ said Owen.

Read from there to the end of the chapter (about 2000 words). The character Owen is trying to explain to his workmates that the market system that they are operating under results in perpetual poverty for them and increasing wealth for those who own capital and land.

You could then consider that social systems and policies might be used to prevent the outcomes that he describes (consider a welfare state system, for example). In other words, he frames the issue in one way, mainstream textbooks frame it in another. Neither will fully describe the real world.

Commentary by Stuart Birks, 2 October 2014. Last updated 2 February 2015.

3 responses

  • David Harold Chester says:

    Money is not the cause of poverty!

    Before money existed there was a related degree of wealth difference between tribes, or families or individuals (although in the Bible (Leviticus) the sharing between families of agricultural sites was based on productuivuity of the site in question, with the aim of avoiding this imbalance).

    This lack of justice was due to the failure for an equality of opportunity to provide workers with their earnings in the form of produce (for barter). In otherwords, certain tribes or individuals held territory for their exclusive use and this stopped it being properly or fully being used.

    Clearly money is not the root of all evil, people were bad (unfair) and behaved in an unjust manner before they used money in exchange. The basis for this kind of inequality is still with us today, only it is far greater in magnitude. It is not money which has been the cause but population density causing land to be of hugely different productivity, depending on whether it is rural or urban in its situation.

  • Asad Zaman says:

    The issue is very complicated, and is explored in depth in the excellent but difficult and lengthy book: Debt: The First 5000 Years by David Graeber. There is definitely a link between poverty and money, though you are entirely correct in pointing out the money is not the SOLE cause here, many things combine to create injustice, oppression and poverty. Money is one of the tools. A very revealing book on the connection between money creation by the private banking system and concentration of wealth in the hands of a few is The Web of Debt: The Shocking Truth about our Money System and How we can break free by Ellen Brown. I have also tried to provide a summery of these ideas in my article on “The Nature of Modern Money” at http://ssrn.com/abstract=2535697

  • Stuart Birks says:

    Two further points for those who wish to look further into Adam Smith’s discussion of the invisible hand and of monopoly:
    1. Adam Smith’s use of the Invisible Hand was in a chapter where he was suggesting reasons why businesses would prefer to trade domestically rather than internationally.
    2. Adam Smith’s use of the term ‘monopoly’ differs from the current very specific interpretation. He included all situations where there were barriers to entry, either from natural or regulatory causes. This is briefly mentioned in a blog by Gavin Kennedy (author of Adam Smith’s Lost Legacy) and also discussed at length in a paper by Neri Salvadori and Rodolfo Signorino (2012) “Adam Smith on Monopoly Theory. Making good a lacuna”.

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