In Search Of The Invisible Hand

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.