What Adam Smith really said about the "Invisible Hand"
Keith Rankin, 26 October 1998
In his 1997 book In Stormy Seas, Brian Easton (p.248) repeats "the most quoted section of [Adam Smith's] classic book (1776), An Enquiry into the Nature and Causes of the Wealth of Nations":
Every individual endeavours to employ his capital so that its produce may be of the greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. 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. By pursuing his own interest he frequently promotes that of the society more effectually than he really intends to promote it.
Easton does not reference the above passage, but he does reference in full a later quotation from Smith's Theory of Moral Sentiments (1759). This suggests that Easton took his "most quoted" passage from a secondary source. Interestingly, Easton notes that the passage is "out of context ... almost an obiter dicta, and certainly not the theme of the [The Wealth of Nations]". Also we might note that Smith only uses the term "invisible hand" once in his 1776 book.
The above passage is actually a misquote. In fact it is a lie that completely misrepresents what Smith was trying to say.
The correct quotation from Chapter II of Book IV of The Wealth of Nations is:
As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; 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. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.
The key omission in the popular version is the double omission of the reference to "domestic industry". Smith was in fact arguing that possessors of capital are led to investing their capital in their domestic (ie national) economies, even though market signals might suggest that they might get a higher return from investing in foreign industry. In this passage, as in others, Adam Smith was arguing for economic nationalism.
Smith argued that capitalists have a deeper sense of their true self-interest than to greedily follow market signals as the only indicator of self-interest. It is clear from Smith's three references to the word "society" that the metaphorical hand is guiding capitalists towards their true self-interest; a self-interest which contains a social component that the capitalists may not be fully conscious of.
The message is, in essence, no different to the message periodically asked of New Zealand consumers: "buy New Zealand made products in preference to imports", which contains a sub-text that, by buying locally made goods, our jobs and hence our incomes will be more secure.
Easton comments on the importance of the interpretation of the word "frequently". The missing part of the quote which includes the word "always" clarifies Easton's query. "Frequently" means "many" rather than "most", as in 20% rather than 80%. Smith is arguing that the guidance of the invisible hand is an amelioration of the problem of greed rather than an absolution of it.
Smith's message is in fact very different from the popular understanding of it; namely that greed - including the following of market price signals for the sole purpose of maximising individual profit - is best both for individuals and their communities. Rather, his message is that our social consciences lead us to re-evaluate our self-interest, without our being fully conscious of the process.
Smith says subsequently (chapter III) that "the capricious ambition of kings and ministers has not, during the present and the preceding century, been more fatal to the repose of Europe than the impertinent jealousy of merchants and manufacturers" who " neither are, nor ought to be, the rulers of mankind". Cynical, yes. A supporter of commercial greed, definitely no.
One final message. Don't believe any "facts", "statistics" or "quotations" supplied by ideologues without checking their authenticity.
[ See Adam Smith, anti-business economist, written in 1996. ]
[ See Jonathan Schlefer, "Today's Most Mischievous Misquotation", from the Atlantic Monthly, March 1998, which was drawn to my attention after I wrote my article. ]
from Brian Easton
A friend sent on your email about the "invisible hand". Thanks for the correction. Thereby hangs a story.
I was stimulated by Roger Kerr, who used the quote but dropped the "frequently". (I have not got a precise reference to Kerr's paper , but I discuss it in my "Listener" column of March 15, 1997.) Knowing it was there, I checked my original source, which was Paul Samuelson's 4th edition of Principles (page 39), which I studied as a student.
I wrote all this up in the "Listener" column, but nobody drew attention that Samuelson had clipped the Adam Smith quote too. (The likely reason is he, or the person he took the quote from, did so is because they did not want to draw attention to the protectionist element in Smith's thinking, which you describe.) When I wrote it up for my book "In Stormy Seas", I did not go back and check Smith's original. My mistake, and I apologise to all readers.
Incidentally, my irritation arose from the fact that much of the last 200 odd years of economics has been an attempt to decide how often is "frequently". Complicated mathematical theories (e.g. the Arrow-Debreu model) have been constructed, which in general say that a whole set of conditions are necessary for the invisible hand to work in any rigorous sense. To omit the "frequently" is to deny the work of literally thousands of great and good economists, almost as though one is ignorant of both economic analysis and its point of the last two centuries.
Anyway, to repeat, thanks for the correction,
Rankin File | 1998 titles