The Invisible hand of Adam Smith

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The invisible hand describes the unintended social benefits of an individual’s self-interested actions, a concept that was first introduced by Adam Smith in The Theory of Moral Sentiments, written in 1759, invoking it in reference to income distribution. By the time he wrote The Wealth of Nations in 1776, Smith had studied the economic models of the French Physiocrats for many years, and in this work, the invisible hand is more directly linked to production, to the employment of capital in support of domestic industry. The only use of “invisible hand” found in The Wealth of Nations is in Book IV, Chapter II, “Of Restraints upon the Importation from foreign Countries of such Goods as can be produced at Home.” The exact phrase is used just three times in Smith’s writings.

The idea of trade and market exchange automatically channeling self-interest toward socially desirable ends is a central justification for the laissez-faire economic philosophy, which lies behind neoclassical economics. In this sense, the central disagreement between economic ideologies can be viewed as a disagreement about how powerful the “invisible hand” is. In alternative models, forces that were nascent during Smith’s lifetime, such as large-scale industry, finance, and advertising, reduce its effectiveness.

Smith uses the metaphor in the context of an argument against protectionism and government regulation of markets, but it is based on very broad principles developed by Bernard Mandeville, Bishop Butler, Lord Shaftesbury, and Francis Hutcheson. In general, the term “invisible hand” can apply to any individual action that has unplanned, unintended consequences, particularly those that arise from actions not orchestrated by a central command, and that have an observable, patterned effect on the community.

The theory of invisible hand can be considered as the first theory of the firm.

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