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The invisible hand is a metaphor invented by Adam Smith to illustrate how those who seek wealth by following their individual self-interest, inadvertently stimulate the economy and assist the poor. In the general opinion, in The Wealth of Nations and other writings, Smith claims that, in capitalism, an individual pursuing his own good tends also to promote the good of his community, through a social mechanism that he called “the invisible hand”. However, Smith himself used the metaphor of the "invisible hand" fairly regularly in contexts outside of economics, and arguably the modern sense of "invisible hand" is entirely on account of Smith's preference for this particular metaphor. The History of Astronomy The first one of the three occurrences of the invisible hand phrase in Smith's works is found in his early unpublished History of Astronomy (1750~): For it may be observed, that in all Polytheistic religions, among savages, as well as in the early ages of heathen antiquity, it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 ever apprehended to be employed in those matters. (III.2, page 49 of the Glasgow Edition) Here, the invisible hand is the hand of our invisible God, the nature's architect, the designer of the regular events of nature. The Theory of Moral Sentiments Smith used the invisible hand phrase in his Theory of Moral Sentiments (1759) too: It is to no purpose, that the proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his brethren, in imagination consumes himself the whole harvest that grows upon them. ... The capacity of his stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. ... 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,... 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. (The Theory of Moral Sentiments, IV.I.9) Here, Smith uses the invisible hand to explain the distribution of wealth. The invisible hand is active in economics because it leads the rich landlords to nearly replicate the distribution of necessities that would have happened if earth was divided equally among its inhabitants. Providence will be carried out by the ‘’invisible hand’’, taking care of those who were seemingly left out of the partition. The Wealth of Nations Smith mentions the phrase once in Book IV of The Wealth of Nations, arguing against import restrictions, on the basis that merchants naturally prefer to direct their resources in support of domestic (rather than foreign) industry. Every individual naturally inclines to employ his capital in the manner in which it is likely to afford the greatest support to domestic industry, and to give revenue and employment to the greatest number of people of his own country. ... As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, 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 the society that it was no part of it. 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. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. (IV.ii.6-9, page 456 of the 1976 Glasgow Edition of Smith’s works; vol. IV, ch. 2, p. 477 of 1976 U. of Chicago Edition.) Economists Interpretation of The Wealth of Nations quote The concept of the Invisible Hand is nearly always generalized beyond Smith's original discussion of domestic versus foreign trade. Smith himself participated in such generalization, as is already evident in his allusion to "many other cases", quoted above. Notice that the invisible hand is a natural inclination, not yet a social mechanism as it will be after Leon Walras and Vilfredo Pareto. Many economists claim that the theory of the Invisible Hand states that if each consumer is allowed to choose freely what to buy and each producer is allowed to choose freely what to sell, the market will settle on a product distribution and prices that are beneficial to the entire community. The reason for this is that the benefit of competition will overcome the detriment of greed. In The Wealth of Nations Smith provides another, homelier metaphor that illustrates the simplicity of the principle: It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self-interest. However, according to Smith not all private interests are equal. He thinks that agriculture is more productive than manufacture: Planting and tillage frequently regulate more than they animate the active fertility of nature; and after all their labour, a great part of the work always remains to be done by her. The labourers and labouring cattle, therefore, employed in agriculture, not only occasion, like the workmen in manufactures, the reproduction of a value equal to their own consumption, or to the capital which employs them, together with its owners' profits; but of a much greater value. ... No equal quantity of productive labour employed in manufactures can ever occasion so great a reproduction. In them nature does nothing; man does all. (*, II.5.12) He also argues that "every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land" (*, I.11.255); so: but the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin. ... The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. (I.11.264) In The Theory of Moral Sentiments Smith had said: In the middling and inferior stations of life, the road to virtue and that to fortune, to such fortune, at least, as men in such stations can reasonably expect to acquire, are, happily in most cases, very nearly the same. ... In the superior stations of life the case is unhappily not always the same. ... To attain to this envied situation, the candidates for fortune too frequently abandon the paths of virtue; for unhappily, the road which leads to the one, and that which leads to the other, lie sometimes in very opposite directions. (Part I, Sec. 2, Cp. 3, *) In the Wealth of Nations he says: To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain is as absurd as to expect that an Oceana or Utopia 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. Examples and arguments A very simple real world example of how the invisible hand is supposed to work is the queue for a shop checkout. Each customer getting in line selfishly chooses to maximize his own interest, that is to checkout in the shortest time, regardless of the other customers. Their utility maximizing choice is to get in queue in the shortest line, this means that eventually customers queue up in lines all of the same length. Therefore even without the slightest direction and by following only their selfishness, the lines are all of the same length, which is clearly the most efficient disposition. 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. 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: Criticism However, high-profile US dissident Noam Chomsky points out that Smith's metaphor from this book is wildly taken out of context by many of today's mainstream economists: Let's... keep to Adam Smith, a very important figure. He was pre-capitalist in his conceptions, and often quite interesting. For example, his basic argument for his rather nuanced views about markets: Further, Adam Smith himself frequently warned in Wealth of Nations about how the invisible hand can lead to disastrous outcomes (as Chomsky pointed out *). For instance: In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it. * See also | |||||||
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