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Understanding Adam Smith - The Invisible Hand

This is the 2nd of an eight-part series designed to explain several important aspects of Adam Smith’s writing, or at least correct widespread misconceptions regarding those writings. You can pick up the start of this series here.

Like the famous comedian and shock jock George Carlin, you may have some misconceptions about Adam Smith and his reference to the ‘invisible hand’. We ended the previous post with a promise to address what we term ‘invisible hand-wringing’. We suspect George Carlin, Adam Smith, and our readers will appreciate our efforts to right a few wrongs. Let’s get started.

Image Credit: AZ Quotes

How might an understanding of Adam Smith’s Moral Sentiments lead to a clearer reading of his Wealth of Nations and re-thinking of capitalism? There are many examples, from Smith’s perspectives on the pursuit of wealth to the core purpose of government, but for our exploration and purpose it’s enough that we take up the example of his phrase ‘invisible hand’. He uses that phrase exactly one time in the almost thousand-page entirety of Wealth of Nations. Used without definition and preceded by the clause “as in many other cases,” the phrase is frequently misconstrued by later interpreters to imagine or advance a host of unfettered theories, mostly associated with supposed phenomena that influence supply, demand, and competition.

Here’s the phrase ‘invisible hand’ from Wealth of Nations in context:

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. (Emphasis ours.)

This passage is found in Book IV, Chapter II, Paragraph 9 of Wealth of Nations. Since its meaning is neither clear from a plain reading nor from the context, and to avoid further speculation, let’s take the scholarly turn and look to Smith for his explanation of the phrase. In Moral Sentiments, the lens through which Smith wrote and we properly interpret Wealth of Nations, we are introduced and guided to an understanding of Smith’s use of the phrase ‘invisible hand’.

Here’s the phrase 'invisible hand' as found in Moral Sentiments, together with the two sentences before and after to provide context.

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, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ be the gratification of their own vain and insatiable desires, 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. (Emphasis ours.)

This passage is found in Part IV, Chapter I, Paragraph 9 of Moral Sentiments. Here we see that an invisible hand leads the rich to distribute, and not withhold, the necessities of life. A contextual reading of this section illustrates why this distribution is a desirable outcome. A broader contextual reading also firmly attaches the invisible hand to its invisible body—the empathic ‘impartial spectator’ introduced and discussed by Smith from the earliest pages of Moral Sentiments. Empathy is the point of the spear in today’s emotional intelligence and leadership circles. Who knew Smith was centuries ahead of us in his including empathy in our business dealings?

We don’t want to risk Smith’s message that the rich “are led by an invisible hand to make nearly the same distribution of the necessities of life” to be lost in too many of our words, explaining its plain meaning. So we’re going to bring this post to a close, but not before challenging you to understand what Smith himself wrote.

Clearly, we’re not asking you to just take our word for the meaning and purpose of the phrase ‘invisible hand’ but to see for yourself. Let us know what you think. Does what Smith write run counter to what you were told about Smith? If it does, we’re not surprised. That was our experience. But do you now see for yourself and how does it resonate with you? We’d love to hear from you about what you’re thinking.

In the next three posts we introduce the other invisible construct of Smith’s, the one he terms the ‘impartial spectator’ and we show how the invisible hand is attached to that impartial spectator. Stay tuned!

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