Invisible Hand

Adam Smith and others

Adam Smith invokes the phrase, on two occasions, to illustrate how a public benefit may arise from the interactions of individuals who did not intend to bring about such a good. (Smith also employs the phrase in a third instance—in the essay “History of Astronomy”—to describe how the god Jupiter produces disorder.) In Part IV, Chapter 1 of The Theory of Moral Sentiments of 1759, Smith explains that as wealthy individuals seek their own interests, employing others to labor for them, they “are led by an invisible hand” to distribute the necessities that all would have received had there been an equal division of the earth. In Book IV, Chapter 2 of The Wealth of Nations of 1776, arguing against import restrictions and explaining how individuals prefer domestic over foreign investments, Smith uses the phrase to summarize how self-interested actions are so coordinated that they advance the public interest. In these two instances, a complex and beneficial structure is explained by basic principles of human nature and economic interaction. However, there are other occasions in which Smith employs the idea of the invisible hand without invoking the phrase itself. In the opening paragraph of Chapter 2 of Book I of the Wealth of Nations, he describes how the division of labor is not [Page 1194]the result of far-seeing wisdom but a gradual outcome of a natural “propensity to truck, barter, and exchange.” Later in this same treatise, he delineates how individuals are so guided by prices that the supply of goods tends to meet demand. More generally, Smith explains how the patterns of commerce, including the overall creation of wealth, arise out of individuals responding to and endeavoring to succeed in their own local circumstances. Although Smith often refers to economic agents as self-interested, he does not mean to suggest that their motivations are selfish. Rather, the agents are motivated by beliefs and intentions that manifest their local knowledge and particular concerns (including those relating to their families) rather than some broader conception of a public good.

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