Adam Smith and the Invisible Hand

Introduction

Adam Smith was a pioneering economist who used the metaphor of ‘the invisible hand’ to describe how unrelated human actions can benefit the overall social and economic welfare. The invisible hand, as defined by Adam Smith, is a guiding principle that has an immense impact on the concept of the free market and the nature of modern-day capitalism.

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The metaphor of the invisible hand has been frequently misunderstood by various entities who have blamed Smith for perpetuating greed and individualism, but the economist meant that “individuals try to maximize their own good, and by doing so through trade and entrepreneurship, society as a whole is better off” (Brewer 521).

The Invisible Hand

Adam Smith used the metaphor of the invisible hand in three different contexts. The phrase itself might have come from Richard Cantillon, another economist who used economic theories and models for application into his entrepreneurship. The metaphor was first used in an uneconomical context in Smith’s essay on astronomy, where thunder and lightning were attributed to ‘the invisible hand’ of Jupiter. Smith then used the metaphor of ‘the invisible hand’ in his 1759 book “The Theory of Moral Sentiments.”

In this first usage of the metaphor, Smith alluded to an income distribution model without reference to market environments. In “The Theory of Moral Sentiments,” Smith talks about ‘the invisible hand’ that prompts a selfish landlord to give out a part of his harvest to his workers.

Smith uses the metaphor a second time in his 1776 book “The Wealth of Nations,” and this usage is the one that is applied in subsequent economic theories and models. In “The Wealth of Nations,” the metaphor of the invisible hand is used in the context of politics of economy where the authors tried to illustrate that under parallel economic environments, traders and investors will desire to use their resources for home trade as opposed to international investments.

Interpretations of ‘The Invisible Hand’

It is apparent that the concept of Smith’s metaphor of the invisible hand has been stretched past its intended limits through various interpretations. One noble economist interpreted Smith’s concept of the invisible hand to mean that there can be ‘cooperation without coercion.’ Nevertheless, the overall principle in the theory of the invisible hand is that individuals have the right to purchase and/or produce the products that they want.

The other factors that govern this free market will ensure that the society is able to access goods and services at an affordable rate. On the other hand, individuals can improve their economic and social welfares by engaging in the economic activities of the free market. The invisible hand, as described by Adam Smith, ensures that all activities happen dynamically and automatically.

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Some scholars have sought to examine how the 1776 principle of the invisible hand factors in today’s economic environment. One school of thought argues that Smith’s theory is too simplistic for it to be applicable to the modern economic environment. Another faction disputes the issue of simplicity in reference to Smith’s theory and argues that the underlying notions of the theory of the invisible hand are still applicable to the current economic environment.

Nevertheless, Smith’s inclination toward the theory of the invisible hand is informed by the fact that there are unseen natural forces that have a direct impact on economics. Consequently, the invisible elements in Smith’s theory affect various human instincts, including basic passions such as selfishness, social, and unsocial passions. Smith addressed various economic theories and models in the course of his career, but the theory of the invisible hand is his most memorable economic notion.

Although the theory of the invisible hand has been the subject of various misinterpretations, Smith wanted to “understand the instincts of human nature that attract, bind, or repulse humans in the society” (Wight 345). The interpretation of the invisible hand should not be concentrated on humanity’s base urges because Smith did not base his theory on this notion.

Smith based his theory on the fact that human beings behave in a manner that is characterized by their natural urges but within moral, institutional, and economic considerations. This definition nullifies the notion that Smith’s theory is based on simplistic behavioral and economic notions.

Economic Relevance of the Invisible Hand

One of the main explanations of the economic theory depends on the fact that Smith wrote about the invisible in an era where capitalism and its subsequent luxury was not necessarily a positive social issue. However, the modern economic environment has little to no qualms with the concept of luxury. It is easy to see why economists and philosophers of the 17th century were trying to reconcile the society with the idea of capitalism and luxury.

By adhering to the concept of the invisible hand, individuals have strived to create institutions that harness their basic needs and urges. Using this line of thinking, one can conclude that the institutions that currently govern economic progress are formulated within the confines of the invisible hand. For instance, the theory of the invisible hand mirrors Charles Darwin’s ‘theory of natural selection’ where nature governs everything that happens in this world.

Human instinct is undoubtedly the invisible hand that is described by Smith. Other economic theories that came after Smith’s concept of the invisible hand utilize the element of human instinct. The usage of Smith’s concept is pegged on the notion that “the invisible hand produces outcomes (that are) thought favorable to society in the specific instances mentioned, but whether the invisible hand works well or poorly depends on historical circumstances and path dependency” (Wight 347).

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Furthermore, this concept aids economists when they are trying to identify the environments under which a society’s output can be maximized. According to Smith, social optimization occurs naturally without necessarily relying on incentives from outside forces.

The concept of social optimization leads to consideration of contextual economic policy and religious influences. The relationship between political and religious views and economic policy on the one hand, and the concept of invisible hand on the other prompts debate. Smith’s economic theories and models also borrowed heavily on the French concept of ‘Laissez-Faire’. This concept makes several assumptions based on the notion that markets can be defined in theoretical terms and models.

However, the complexity of market definition sometimes goes beyond basic theories and models. On the other hand, Smith is observed to defend the concept of ‘Laissez-Faire’ “not because he believed markets to be perfect but because, in the context of history and the institutional structure of England of his time, markets produced better results than did government intervention” (Landreth and Colander 107).

The element of competitive markets has survived for several centuries as they were first outlined by Smith. Competitive markets, as outlined by Smith, are made up of both ‘market prices’ and ‘natural prices.’ According to Smith, natural markets featured a crowd of sellers and resource owners who had the right economic knowhow.

Consequently, the “self-interest of resource owners would lead to long-run natural prices that would equalize the rates of profits, wages, and rents among the various sectors of the economy” (Landreth and Colander 108). The dynamics of Smith’s description of natural markets can be easily applied to various aspects of modern economies. On the other hand, competitive markets are often considered to be the deciding factors in the achievement of liberal markets that are often favored in various places across the world.

Conclusion

Although Smith’s theory was meant for the seventeenth-century audiences and economic environments, its validity as an enduring economic model is evident. The theory of the invisible hand leans on ‘human instinct’ as the overall deciding factor in the affairs of human behavior in regards to economics. Furthermore, some of Smith’s most influential arguments within the concept of the invisible hand can easily be applied to other topics and disciplines.

There are various criticisms to Smith’s concept of the invisible hand, including the argument that the theory is too simplistic for it to be useful in modern times. On the other hand, the underlying themes in the concept of the invisible hand-carry more weight than the criticisms of some scholars and economists. One can conclude that Smith’s metaphor of the invisible hand is one of the pioneering economic concepts, and various modern economists have based their research on this outstanding concept.

In economics, the metaphor has been used to study and analyze markets and commodity prices throughout the world. It is quite plausible that basic human instinct will continue to be the deciding factor when it comes to economic-centric behaviors.

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Works Cited

Brewer, Anthony. “On the Other (Invisible) Hand.” History of Political Economy 41.3 (2009): 519-543. Print.

Landreth, Harry, and David Colander. The History of Economic Thought, Toronto: Houghton Mifflin Company, 2015. Print.

Wight, Jonathan. “The treatment of Smith’s invisible hand.” The Journal of Economic Education 38.3 (2007): 341-358. Print.

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