Birks – Adam Smith and the 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.