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Encyclopedia > Invisible Hand

The invisible hand is a metaphor coined by the economist Adam Smith. In The Wealth of Nations and other writings, Smith claims that, in a free market, an individual pursuing his own self-interest tends to also promote the good of his community as a whole through a principle that he called “the invisible hand”. He argued that each individual maximising revenue for himself maximises the total revenue of society as a whole, as this is identical with the sum total of individual revenues. The Invisible Hand has numerous meanings The term Invisible Hand was started by Adam Smith in Economics Also, it is a name of the Trade Federation Cruiser flagship of the capitalist Confederacy of Independent Systems This is a disambiguation page — a navigational aid which lists other pages that might... Image File history File links Broom_icon. ... This article is about metaphor in literature and rhetoric. ... Alan Greenspan, former chairman, United States Federal Reserve. ... For other persons named Adam Smith, see Adam Smith (disambiguation). ... Adam Smith An Inquiry into the Nature and Causes of the Wealth of Nations is the magnum opus of the Scottish economist Adam Smith, published on March 9, 1776 during the Scottish Enlightenment. ... A community is a social group of organisms sharing an environment, normally with shared interests. ...


Adam Smith originally mentioned the 'invisible hand' specifically only once in each of his three works. The metaphor later gained widespread use.

Contents

The Wealth of Nations

Adam Smith mentions the metaphor in Book IV of The Wealth of Nations, arguing that actors in any economy will employ their capital in foreign trading only if the profits available by that method far exceed those available locally, and that in that case it is better for society as a whole that he does so.

But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual wasteman produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavors 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 labors 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 not 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 1776 Glasgow Edition of Smith’s works; vol. IV, ch. 2, p. 477 of 1776 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 here considered a natural inclination, not yet a social mechanism as it was later classified by Leon Walras and Vilfredo Pareto. Marie-Ésprit-Léon Walras (December 16, 1834 in Évreux, France - January 5, 1910 in Clarens, near Montreux, Switzerland) was a French economist, considered by Joseph Schumpeter as the greatest of all economists. He was a mathematical economist associated with the creation of the general equilibrium theory. ... Vilfredo Pareto Vilfredo Federico Damaso Pareto [vilfre:do pare:to] (July 15, 1848, Paris – August 19, 1923, Geneva) was a French-Italian sociologist, economist and philosopher. ...


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 and how to produce it, the market will settle on a product distribution and prices that are beneficial to the all individual members of a community, and hence to the community as a whole. The reason for this is that greed will drive actors to beneficial behavior. Efficient methods of production will be adopted in order to maximize profits. Low prices will be charged in order to undercut competitors. Investors will invest in those industries that are most urgently needed to maximize returns, and withdraw capital from those that are less efficient in creating value. Students will be guided to prepare for the most needed (and therefore most remunerative) careers. And all these effects will take place dynamically and automatically.


It also works as a balancing mechanism. For example, the inhabitants of a poor country will be willing to work very cheaply. Entrepreneurs can make great profits by building factories in poor countries. But since they increase the demand for labor, they will increase its price. And since the new producers will also become consumers, local businesses will have to hire more people in order to provide for them the things that they want to consume. As this process continues, the labor prices will eventually rise to the point at which there is no advantage for the foreign countries doing business in the formerly poor country. Overall, this mechanism will cause the local economy to function on its own.


In The Wealth of Nations Smith provides a 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 interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of their fellow-citizens.

Criticism

As the invisible hand as such is a metaphor of free markets, common criticism of free markets also applies to the theory of the invisible hand. A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of coercion are inclusive of theft). Colloquially and loosely, a free market economy is an economy...


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. This article is about metaphor in literature and rhetoric. ... Protectionism is the economic policy of restraining trade between nations, through methods such as high tariffs on imported goods, restrictive quotas, a variety of restrictive government regulations designed to discourage imports, and anti-dumping laws in an attempt to protect domestic industries in a particular nation from foreign take-over... Bernard de Mandeville (1670- January 19 or 21, 1733?), was a philosopher and satirist. ... There have been three notable bishops named Butler: Joseph Butler (b. ... The title of Earl of Shaftesbury was created in 1672 for Anthony Ashley Cooper, 1st Baron Ashley, a prominent politician in the Cabal then dominating the policies of King Charles II. Earls of Shaftesbury (1672) Anthony Ashley Cooper, 1st Earl of Shaftesbury (1621-1683) Anthony Ashley Cooper, 2nd Earl of... Francis Hutcheson was the name of a famous father and son: Francis Hutcheson (philosopher) (1694-1746) Francis Hutcheson (songwriter) This is a disambiguation page — a navigational aid which lists other pages that might otherwise share the same title. ...


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. Rational selfishness, a term generally related to Ayn Rands philosophy of Objectivism, means to seek to make yourself happy before others. ...


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.” The Theory of Moral Sentiments written by Adam Smith in 1759, was one of the most important works in the theory of capitalism. ...


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. The Tragedy of the Commons is a type of social trap, often economic, that involves a conflict over resources between individual interests and the common good. ...


Moreover, a free market 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. The tobacco industry comprises those persons and companies engaged in the growth, preparation for sale, shipment, advertisement, and distribution of tobacco and tobacco-related products. ...


Examples and arguments

A very simple real world example of how the invisible hand is supposed to work is the queue for a supermarket 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. (This examples also illustrates the ties between economics and game theory.) Note that to reap these benefits, the market should at least exist --- in the total absence of regulation, if people were allowed to cut the queue, the result of selfish pursuit of interests would be a crowded mess. Also, as this example also illustrates, economists have a particular understanding of efficiency. If a woman in the supermarket seeking to checkout is pregnant, carrying a crying child who is diabetic and who needs to eat dinner in the shortest amount of time possible, then it may be more efficient to allow her to jump the queue. Packaged food aisles in a Fred Meyer store in Portland, Oregon A supermarket is a departmentalized self-service store offering a wide variety of food and household merchandise. ... Game theory is a branch of applied mathematics that is often used in the context of economics. ...


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. Marie-Ésprit-Léon Walras (December 16, 1834 in Évreux, France - January 5, 1910 in Clarens, near Montreux, Switzerland) was a French economist, considered by Joseph Schumpeter as the greatest of all economists. He was a mathematical economist associated with the creation of the general equilibrium theory. ... General Equilibrium (linear) supply and demand curves. ... Vilfredo Pareto Vilfredo Federico Damaso Pareto [vilfre:do pare:to] (July 15, 1848, Paris – August 19, 1923, Geneva) was a French-Italian sociologist, economist and philosopher. ... In economics, an Edgeworth box, named after Francis Ysidro Edgeworth, is a way of representing various distributions of resources. ...


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. Ludwig Heinrich Edler von Mises (September 29, 1881 – October 10, 1973) (IPA: ) was a notable economist and a major influence on the modern libertarian movement. ... Human Action: A Treatise on Economics is the magnum opus of the Austrian economist Ludwig von Mises. ...


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. Robert Nozick (November 16, 1938 – January 23, 2002) was an American philosopher and Pellegrino University Professor at Harvard University. ... Anarchy, State, and Utopia is a work of political philosophy written by Robert Nozick in 1974. ... For other uses, see Natural selection (disambiguation). ... Daniel Clement Dennett (born March 28, 1942 in Boston, Massachusetts) is a prominent American philosopher whose research centers on philosophy of mind, philosophy of science and philosophy of biology, particularly as those fields relate to evolutionary biology and cognitive science. ... cover Darwins Dangerous Idea: Evolution and the Meanings of Life (1995) is a controversial book by Daniel Dennett that argues that Darwinian processes are the central organising force not only in biology (which is not controversial), but also in most other aspects of the Universe, including the human mind... Social Darwinism is the idea that Charles Darwins theory can be extended and applied to the social realm, i. ...


Tawney’s Interpretation

Christian socialist R. H. Tawney saw Smith as putting a name on an older idea: Topics in Christianity Movements · Denominations Ecumenism · Preaching · Prayer Music · Liturgy · Calendar Symbols · Art · Criticism Important figures Apostle Paul · Church Fathers Constantine · Athanasius · Augustine Anselm · Aquinas · Palamas · Luther Calvin · Wesley Arius · Marcion of Sinope Pope · Archbishop of Canterbury Patriarch of Constantinople Christianity Portal This box:      Christian socialism generally refers to those... Richard Henry Tawney (R.H. Tawney) (1880 - 1962) was an English writer, economist, historian, social critic and university professor and a leading advocate of Christian Socialism Born in Calcutta, India, Tawney was educated at Rugby School and Balliol College, Oxford where he studied modern history. ...

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 insofar 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: For other uses, see Alexander Pope (disambiguation). ...

Thus God and Nature formed the general frame,
And bade self-love and social be the same.
Naturally, again, such an attitude precluded a critical examination of institutions, and left as the sphere of Christian charity only those parts of life which could be reserved for philanthropy, precisely because they fell outside that larger area of normal human relations, in which the promptings of self-interest provided an all-sufficient motive and rule of conduct. (Religion and the Rise of Capitalism, page 195.)

Other Usages of the Phrase

Adam Smith used the phrase two other times in his writings, once published and once unpublished. The unpublished reference simply says that practitioners of Polytheistic religions did not attribute gravity or fire to the invisible hand of Jupiter, and the idea clearly has no relation to the invisible hand of the market. Polytheism is belief in, or worship of, multiple gods or divinities. ... For the planet see Jupiter. ...


The other is in his published work, Theory of Moral Sentiments (1759). Here, Smith uses the invisible hand to explain the distribution of wealth. The invisible hand is active in economics because the landlord cannot consume all of the products himself and is thus forced to distribute them in exchange for work and for other goods.


Criticism

Joseph E. Stiglitz

The Nobel Prize economist (2001) Joseph E. Stiglitz says: "the reason that the invisible hand often seems invisible is that it is often not there." (Making Globalization Work, 2006) [1]. Stiglitz explains his position: Joseph Stiglitz (born February 9, 1943) is an American economist and a member of the Columbia University faculty. ...

Adam Smith, the father of modern economics, is often cited as arguing for the “invisible hand” and free markets: firms, in the pursuit of profits, are led, as if by an invisible hand, to do what is best for the world. But unlike his followers, Adam Smith was aware of some of the limitations of free markets, and research since then has further clarified why free markets, by themselves, often do not lead to what is best. As I put it in my new book, Making Globalization Work, the reason that the invisible hand often seems invisible is that it is often not there.
Whenever there are “externalities”—where the actions of an individual have impacts on others for which they do not pay or for which they are not compensated—markets will not work well. Some of the important instances have been long understood—environmental externalities. Markets, by themselves, will produce too much pollution. Markets, by themselves, will also produce too little basic research. (Remember, the government was responsible for financing most of the important scientific breakthroughs, including the internet and the first telegraph line, and most of the advances in bio-tech.)
But recent research has shown that these externalities are pervasive, whenever there is imperfect information or imperfect risk markets—that is always.
Government plays an important role in banking and securities regulation, and a host of other areas: some regulation is required to make markets work. Government is needed, almost all would agree, at a minimum to enforce contracts and property rights.
The real debate today is about finding the right balance between the market and government (and the third “sector”—non-governmental non-profit organizations.) Both are needed. They can each complement each other. This balance will differ from time to time and place to place. [1]

Noam Chomsky

The American linguist and political analyst Noam Chomsky points out that Smith's metaphor from this book is wildly taken out of context by many of today's mainstream economists. Besides Adam Smith only used this expression once, and it did not have the meaning that is given today: Avram Noam Chomsky (Hebrew: אברם נועם חומסקי Yiddish: אברם נועם כאמסקי) (born December 7, 1928) is an American linguist, philosopher, political activist, author, and lecturer. ...

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: that under conditions of liberty they would lead to equality, an obvious desideratum. Or his one use of the term "invisible hand" in "Wealth of Nations," in an argument for what economic historians call "home bias," in effect an argument against what is now called "neoliberalism" or "neoclassical economics." Smith argued that the English economy, what he cared about, would be wrecked if British capitalists were to invest abroad and import from abroad, but it would not be a problem, because "home bias" would lead them to invest at home and use domestically-produced goods, and therefore, by an "invisible hand," Britain would be saved from the ravages of international markets. Or his argument against division of labor, and insistence that in any civilized society, governments would intervene to constrain it, because it would turn working people into creatures as stupid and ignorant as a human creature can be -- essentially on von Humboldt's assumptions. Yes, Smith is very much worth reading, whether one agrees with his interesting work or not. Reading, not worshipping on the basis of concocted mythology. [1]

Another critique could be that the actual grounds for the invisible hand "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." is in public reduced to "Every individual naturally inclines to employ his capital in the manner in which it is likely to afford the greatest profit" and has most individuals acting accordingly, which does not include employing the greatest number of people in his own country with shortsighted profit-maximising strategies.


See also

Books
Articles

... I, Pencil by Leonard Read I, Pencil is Leonard Reads most famous essay. ... Leonard E. Read (1898 - 1983) was the founder of the Foundation for Economic Education, which was the first modern libertarian think tank in the United States. ... The National Gain is the main work of Anders Chydenius published 1765. ... Anders Chydenius Anders Chydenius (26 February 1729 – 1 February 1803) was the leading classical liberal of Nordic history. ... The Theory of Moral Sentiments written by Adam Smith in 1759, was one of the most important works in the theory of capitalism. ... Adam Smith An Inquiry into the Nature and Causes of the Wealth of Nations is the magnum opus of the Scottish economist Adam Smith, published on March 9, 1776 during the Scottish Enlightenment. ... Enlightened self-interest is a philosophy in ethics which states that persons who act to further the interests of others (or the interests of the group or groups to which they belong), ultimately serve their own self-interest. ... A free price system or free price mechanism (informally called the price system or the price mechanism) is an economic system where prices are not set by government or a central planning board but by the interchange of supply and demand, with the resulting prices being understood as signals that... Laissez-faire is short for laissez faire, laissez passer, a French phrase meaning to let things alone, let them pass. First used by the eighteenth century Physiocrats as an injunction against government interference with trade, it is now used as a synonym for strict free market economics. ... Market fundamentalism (or free-market fundamentalism) is a conviction that free markets are generally beneficial. ... Philosophy of social science is the scholarly elucidation and debate of accounts of the nature of the social sciences, their relations to each other, and their relations to the natural sciences (see natural science). ... Rational egoism is the philosophical view that it is always in accordance with reason to pursue ones own interests. ... Rational selfishness, a term generally related to Ayn Rands philosophy of Objectivism, means to seek to make yourself happy before others. ... Spontaneous order (sometimes called self-organization) is a phenomenon that happens when individuals each follow a set of self-interest-based rules without a central authority designing a plan for everyone. ...

External links

“PDF” redirects here. ... A kibibyte (a contraction of kilo binary byte) is a unit of information or computer storage, commonly abbreviated KiB (never kiB). 1 kibibyte = 210 bytes = 1,024 bytes The kibibyte is closely related to the kilobyte, which can be used either as a synonym for kibibyte or to refer to...

References

  1. ^ a b [ALTMAN, Daniel. Managing Globalization. In: Q & Answers with Joseph E. Stiglitz, Columbia University and The International Herald Tribune, Oct 11, 2006 05:03AM.

  Results from FactBites:
 
Invisible hand - Wikipedia, the free encyclopedia (2654 words)
The invisible hand is a metaphor created by Adam Smith to illustrate how those who seek wealth, by following their individual self-interest, inadvertently stimulate the economy and assist the poor.
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.
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.
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