The academic economist’s dry prose usually benefits from an evocative metaphor. But we would all be better off if Adam Smith had skipped the bit about “the invisible hand.” He meant little, if anything, by it—he used the term only once in the entire two volumes of The Wealth of Nations, as he had a single time, in an entirely different context, in The Theory of Moral Sentiments.
But in the second half of the 20th century, economists built an entire worldview around it, engendering the baseless assumption that, in the words of Pat Toomey, a former US senator, “capitalism is nothing more than economic freedom,” that, left untended, it just works. Like the cartoon character Wile E. Coyote, they marched forward with plans lacking any means of support. Except it is not the economists who fell to the bottom of the ravine when their folly was discovered, it was the average citizen.
Understanding the term requires first visiting it in its natural habitat: “By preferring the support of domestic to that of foreign industry, he intends only his own security,” Smith wrote, “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.” The invisible hand did not refer to a magical force, but to the preference for domestic industry and the determination to direct industry toward produce of the greatest value.
And so, for most of its history, the invisible hand was given precisely the little attention it deserved. But drop “led by an invisible hand” into Google Ngram, plotting the frequency with which it appears across all English-language books since 1800, and just after World War II the phrase begins an inexorable march upward. Determined to defend democratic capitalism from enthusiasm for communism’s central planning, economists like Paul Samuelson and Friedrich Hayek adopted Smith’s metaphor and placed it at the center of their free market’s logic.
Blind faith
Jonathan Schlefer, longtime editor of the Massachusetts Institute of Technology’s Technology Review, has shown how Samuelson’s Economics, first published in 1948 and the discipline’s leading textbook for decades, contorted this modest insight into a declaration of blind faith and placed it at the center of the economist’s worldview. Students learned that Smith had written, “He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention.” Not even an ellipse.
Hayek elevated the principle to a religion, professing “faith” in “spontaneous forces.” He was proud to “assume that, especially in the economic field, the self-regulating forces of the market will somehow bring about the required adjustments to new conditions, although no one can foretell how.” By the 1990s, economic historian Amity Shlaes could write in the New York Times that Adam Smith had created the “powerful image” of the “‘invisible hand,’ the hand of free commerce that brings magic order and harmony to our lives.” What had been a description of the conditions under which markets can advance the common good became a claim that, regardless of conditions, they miraculously and automatically would.
Release Smith’s conditions, though, and the logic immediately falls apart in theory, and has indeed collapsed in practice. If the hard, capital- and labor-intensive work of extracting natural resources, practicing agriculture, building infrastructure, and manufacturing products offers the best return on capital, businessmen pursuing their private interest will indeed advance the common good. If those activities consistently offer a less attractive investment profile than trying to build a unicorn cloud-based application that might scale to millions of users in a year or two with just a few employees, capitalism may generate a facsimile of GDP growth, but it will not work in the sense Smith described and that a nation requires.