The Invisible Hand is perhaps the most well-known economics turn of phrase. During a recession, it may seem not only invisible, but missing altogether. What does it really mean? And, where is it these days? This post will cover the first question and we will explore the second question in a part 2 post.
Here’s economist Peter Leeson, author of The Invisible Hook: The Hidden Economics of Pirates, on the first question:
“In 1776 Scottish moral philosopher Adam Smith published a landmark treatise that launched the study of modern economics. Smith titled his book, An inquiry in the Nature of Cause of the Wealth of Nations. In it he described the most central idea to economics which he called the “invisible hand.” The invisible hand is the hidden force that guides economic cooperation. According to the Smith, people are self-interested; they’re interested in doing what’s best for them. However, often time, to do what’s best for them, people must also do what’s best for others.
The reason for this is straight forward. Most of us can only serve our self-interests by cooperating with others. We can achieve very few of our self-interested goals, from securing our next meal to acquiring our next pair of shoes, in isolation. Just think about how many skills you’d need to master and how much time you’re require if you had to produce your own milk or fashion your own coat, let alone manufacture our own car.
Because of this, Smith observed, in seeking to satisfy our own interests, we’re led, “as if by an invisible hand,” to serve others’ interests too. Serving others’ interests gets them to cooperate with us, serving our own. The milk producer, for example, must offer the best milk at the lowest price possible to serve his self interest, which is making money. Indirectly he serves his customers’ self-interest, which is acquiring cheap, high-quality milk. And on the other side of this, the milk producers’ customers, in their capacity as producers of whatever they sell, must offer the lowest price and highest quality to their customers, and so on. The result is a group of self-interest seekers, each narrowly focused on themselves but also unwittingly focused on assisting others.”
Here’s what Adam Smith, author of The Wealth of Nations, wrote:
“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 own necessities but of their advantages.”
That is, we pay the butcher and the baker a monetary price for their effort. We don’t tell them we are hungry and hope for the best; we give them the means to satisfy their own needs when we pay them. Thus, we ourselves had better find a way to satisfy someone else’s needs or else we won’t have the resources to pay for diner.
So that’s the invisible hand, the order in society generated by many people freely seeking their own, but only able to do so successfully by serving others.
In troubled economic times, the second question, ‘where is the invisible hand?’, comes to mind because something about the system seems not to be working. What’s blocked it or made the unseen force disappear? Has something bound the hand, or blocked its effect?
Part 2 will cover the question of why the invisible hand seems to be missing these days.