The Ironic Misinterpretation of Adam Smith’s Invisible Hand

The idea of an invisible hand that guides the free market to produce mutually beneficial outcomes is perhaps Adam Smith’s best-known idea. It has been interpreted to mean that acting in self-interest can be virtuous. But this would be an odd interpretation, given Smith explicitly says that virtue consists of thinking less about yourself and more about others:

And hence it is, that to feel much for others and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone produce among mankind that harmony of sentiments and passions in which consists their whole grace and propriety. (Theory of Moral Sentiments, Part 1, Section 1, Chapter 5)

What, then, is Smith trying to get at with the invisible hand metaphor? In interpreting this, it’s important to understand that Adam Smith really didn’t like rich people. In Theory of Moral Sentiments he makes it clear that they have mistaken wealth for virtue and are therefore likely to be less virtuous than the common man (Theory of Moral Sentiments, Part I, Section III, Chapters 2-3 ). Even within Wealth of Nations he argues that we shouldn’t trust profit seeking merchants when it comes to setting public policy. And while he certainly thinks that trade in mutual self-interest can be beneficial, he points out in Wealth of Nations over 70 cases where acting in self-interest is harmful to society. By contrast there’s only one mention of an invisible hand, so let’s look at the case Smith had in mind when he used the invisible hand metaphor.

Smith is discussing an individual merchant’s decision to engage in domestic trade instead of foreign trade (Wealth of Nations, Book IV, Chapter 2). The key tell here is that Smith is not arguing that a decision that’s clearly good for the merchant is also happens to be good for society. He’s arguing that a decision that’s clearly good for society (domestic trade) also happens to be good for the merchant (he spends a long time explaining the disadvantages of foreign trade to the merchant). In other words, while we might be tempted to think of the merchant as a virtuous individual for choosing to engage in socially beneficial activity, we shouldn’t, because as far the merchant is concerned it’s just incidental that he wound up helping society.

It’s just so deliciously ironic that a passage which Smith intended to point out a lack of virtue among wealthy merchants is now widely cited as a justification for their virtue. If it weren’t so serious, it would be hilarious.  So, why is Smith so badly misinterpreted? The short and cynical answer is that an economic system that justifies self-interest is incredibly appealing, particularly to the people who are in the best positions to actualize their self-interest. So they saw what they wanted to see in Smith’s writings and left the rest. (You probably thought I was going to compare the short and cynical answer to a longer and more nuanced one….I’m not. Sometimes the short and cynical answer is also the correct one).


2 thoughts on “The Ironic Misinterpretation of Adam Smith’s Invisible Hand

  1. Pingback: The Ironic Misinterpretation of Adam Smith’s Invisible Hand | Faith and Public Policy | The Sustainable Adam Smith

  2. Pingback: Rational Fools: Amartya Sen’s Critique of Economic Theory | Some Things Considered

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