It's a good idea to get the invisible hand right

Vast numbers of people do seem to get the invisible hand idea wrong. Adam Smith was quite clear about that penumbra surrounding it- it’s not n*arrow self-interest, it’s enlightened. It’s not the benevolence which provides our dinner and so on. It’s even true that “invisible hand” appears only three times in Smith’s writings, never as anything like the foundation of a philosophy that so many now take it to be.

But I have to hand it to Conor Lynch here. His rejection of the thought depends upon Smith writing before the international mobility of capital. Which is really screwing the pooch there because the use of “invisible hand” in Wealth of Nations is about the international mobility of capital.

No, really. Here’s Lynch:

Donald Trump is the product of a society that values monetary success over all other forms of achievement (e.g., intellectual, creative, etc.), where the philosophy of greed has become the dominant ideology. This philosophy is established on Adam Smith’s concept of the invisible hand, which famously posits that when each individual pursues his or her own narrow self-interests — i.e., pursues profit — all those decisions unintentionally benefit society as a whole. This theory is true up to a certain point, and there is no doubt that capitalism has produced immeasurable wealth and technological innovations that have improved the lot of countless people over the past few centuries.

Yet Smith introduced the theory of the invisible hand long before globalization and the rise of multinational corporations, when most commodities were still being produced by local artisans, farmers and so on. As wealth has become increasingly concentrated with industrialization, the profit motive has created twisted incentives that often lead to psychopathic behavior.

Smith doesn’t say that narrow self-interest benefits all. He most certainly doesn’t say that narrow pursuit solely of profit does so either. He’s very clear that the restrictive practices of medieval guilds (also the East India Company), restrictions placed there in the pursuit of profit, are anti-beneficial to the society as a whole. That’s rather his point in fact, WoN can be usefully read as a diatribe against such practices.

He does indeed think that the competition which comes about from people being free to pursue profit benefits all but it’s the competition doing the work there, not the profits.

However, much more fun is this idea that the invisible hand doesn’t work because Smith was before internationalism. The problem with this being that the phrase is used in a discussion of that international movement of capital.

Smith walks through – at the usual 18th century length – the various uses to which a man can put his capital. One distinction is made between using it in the Foreign trade or the Domestic. There are advantages to both. Foreign probably has higher returns, Domestic a swifter turnover of capital even if a lower total return. Modern English might talk about swings and roundabouts at this point. Smith then goes on to point out that even with those greater foreign returns some will still prefer to invest domestically. Just because, no reason other than they’d prefer to. Such domestic investment is indeed of benefit to the domestic economy. And so they are led as if by an invisible hand…..and so on.

They’re not acting in their own pursuit of profit. He’s quite clear on that – they’re forgoing profit in fact. Just because they’d prefer to invest at home. Maybe just so they can see it, Smith doesn’t distinguish. He just says some will so prefer. Today we’d say their utility is higher doing so. OK.

But note what you can’t do. Reject Smith’s invisible hand on the basis that he was writing before the international movement of capital. Because his very discussion in which he uses the invisible hand analogy is one about the international movement of capital.

But then, you know, Conor Lynch appears in Salon which isn’t where we expect nuanced discussion of economics, is it? Not even a basic understanding of the core concepts either.

And if we were to point out that the modern lesson to draw from the invisible hand discussion in WoN is that at least some of the incidence of corporate taxation will be upon the owners of domestic capital he’d be entirely mystified, wouldn’t he?

*See comments for the amusing typo

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  1. And again, it’s not through the psychopathic behaviour of multi-nationals that we get our dinner, but we get it anyway. And motorbikes and cellphones and health and all the good things our grandparents did not have and could not dream of. Only some sort of Guardian writer idiot could prioritize his own disapproval of the behaviour over the unquestionable good done however incidentally.

  2. It is not that we don’t expect “nuanced discussion of economics” in It’s that we don’t expect any of its authors to have even read Wealth of Nations. (A couple may have the laminated exam notes.)