Adam Smith Reveals His (Invisible) Hand

Article excerpt

"Adam Smith had one overwhelmingly important triumph: he put into the center of economics the systematic analysis of the behavior of individuals pursuing their self-interest under conditions of competition."

- George Stigler (emphasis added)

Critics of laissez faire - from Cambridge economic historian Emma Rothschild to British Labor Party leader Gordon Brown - have recently attempted to wrestle Adam Smith out of the hands of the free-market camp and into the camp of the social democrats. According to Iain McLean, professor of politics at Oxford University, and Samuel Fleschaker, professor of philosophy at the University of Illinois at Chicago, the Scottish philosopher was a "radical egalitarian" who, while endorsing economic liberalism, had a lively appreciation of market failure and ultimately rejected "ruthless laissez-faire capitalism" in favor of "human equality" and "distributive justice."

These critics are quick to claim that Smith was no friend of rent-seeking landlords, monopolistic merchants, and conspiring businessmen, and that he advocated an active State authority in support of free education, large-scale public works, usury laws, progressive taxation, and even limits on free trade.

What about the metaphor of the "invisible hand," the famous Smithian idea that "by pursuing his own self-interest, [every individual] frequently promotes that of the society"? Free-market economists from Ludwig von Mises to Milton Friedman have regarded it as a powerful symbol of unfettered market forces, what Adam Smith called his "system of natural liberty." In rebuttal the new critics belittle Smith's metaphor as a "passing, satirical" reference and suggest that he favored more of a "helping hand." They emphasize that Smith used the phrase "invisible hand" only once in each of his two major works, The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776). The references are so sparse that commentators seldom mentioned the expression by name in the nineteenth century. No notice was made of it during the celebrations of the centenary of The Wealth of Nations in 1876. Until well into the twentieth century, no subject index listed "invisible hand" as a separate entry. It was finally added to the index in 1937 by Max Lerner for the Modern Library edition. Clearly, it wasn't until the twentieth century that the invisible hand became a popular symbol of laissez faire.

Could the detractors be correct in their assessment of Adam Smith's sentiments? Is the metaphor central or marginal to his "system of natural liberty"?

Friedman refers to Adam Smith's symbol as a "key insight" into the cooperative, self-regulating "power of the market to produce our food, our clothing, our housing . . . without central direction." Economist George Stigler calls it the "crown jewel" of The Wealth of Nations and "the most important substantive proposition in all of economics."

On the other hand, economist Gavin Kennedy contended in earlier writings that the invisible hand is nothing more than an afterthought, a "casual metaphor" with limited value. Rothschild, the Harvard University economic historian, even goes so far as to declare, "What I will suggest is that Smith did not especially esteem the invisible hand. ... It is unSmithian and unimportant to his theory" and was nothing more than a "mildly ironic joke."

Who's right?

A fascinating discovery by Daniel Klein, professor of economics at George Mason University, may shed light on this debate. Based on a brief remark by Peter Minowitz, the Santa Clara University political philosopher, that the "invisible hand" phrase lies roughly in the middle of both of Smith's books, Klein made preliminary investigations. He next recruited Brandon Lucas, then a doctoral student at Mason, to investigate further. Klein and Lucas reported in Economic Affairs (March 2011) that they found considerable evidence that Smith "deliberately placed 'led by an invisible hand' at the centre of his tomes" and that the concept "holds special and positive significance in Smith's thought. …