Adam Smith’s Invisible Hand

The invisible hand is a theory explained by Adam Smith, a phenomenal Scottish thinker, and philosopher, in his famous book ‘The Wealth of Nations’ in 1776. This theory argues that the state should not interfere with the market and that the individuals of the society should stay true to their nature by being selfish and profit-seeking as them being so, according to Smith, would benefit the society as a whole. No intervention of the state in the market, specialization/ division of labor increases productivity, and the pursuit of self-interest will facilitate the economy and unintentionally benefit the society as if lead by an invisible guiding hand.

“This theory is the mechanism by which the economic activities of profit-seeking individuals result in the greatest economic good for the society as a whole. As Smith wrote of the profit-seeking individual: ‘… 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’ (Smith, 1976b, p.456). Although each individual is intending his own gain, it is argued that the overall effect is the promotion of the interest of society as a whole.” (Brown, 1991)(p. 146)

The excerpt above further expands on the invisible hand, which people argue, means that Smith was using a metaphor to refer to divine interventions that would occur on their own and guide people to work in such a way that society as a whole would be the best ever in terms of economy. Furthermore, according to Vivienne Brown, this theory believes in a harmony that exists between the profit-seeking individuals and the general good of society as a whole. Not only this, this theory is also believed to be the start of the modern capitalist market economy that we’re experiencing and this is the reason for Smith being regarded as the ‘high priest of capitalism’.

It is believed that this theory of the invisible hand gives the economic liberation and independence from the state when it gives importance to the profit-seeking and self-interests of the individuals. Smith believes that the individuals in the economy know better about the market mechanism, i.e. the allocation of goods and resources by the free interplay of demand and supply and that goods are produced only if they are thought to be profitable. The questions that the economy usually faces such as “What to produce?” (supply), “How to produce?” (efficiently), and “For whom to produce?” (demand) should be answered by the people themselves according to their interests and judgments for, Smith believes, they will make the best decisions to fulfill their greed. This would lead the markets to produce the best outputs and the most outputs they’ve ever had, unintentionally benefitting the society as if lead by an invisible guiding hand. So, the betterment of the society calls for free trade and goes against the state intervening in the economy for the economy is a separate domain of social life that has the ability of self-regulation and does not require the state to intervene. Despite this ability of state regulation, Smith knows that the economy still cannot cater to all the needs of human life and therefore, permits the state to provide the individuals their natural rights such as education, transport, and health services. This means that Smith believes in the state and economy doing their parts in making the society better.

Division of labor is the economic concept of dividing the tasks of a good’s manufacturing procedure among the laborers (Pettinger, n.d.). So, the work is divided among the laborers also means that each labor works on a particular step of the manufacturing process and becomes a master of it. This concept is called specialization. These concepts were praised by Smith in his book The Wealth of Nations as they maximize economic advantages. This is because one person does not have to perform all of the processes of manufacturing a single product instead, he just performs one single task of the whole procedure over and over again. The workload is divided among the workers means that less time is spent on moving from one task to another. This is why the production rate increases by 240 times (Brown, 1991)(p.150). Moreover, the range and quality of the products improve as the workers now working on the products are well-experienced masters who can perform their tasks even with their eyes closed. Furthermore, due to the easy availability of the products in the market, the division of labor improves the living quality of the society on the whole including the lives of these workers while serving consumerism as seen in Britain before the Industrial Revolution. Moreover, migration to urban areas with larger markets is preferred as a division of labor largely depends on the market size. Larger markets mean there is more competition for profit and so more space for laborers is created so that they specialize a particular task so that they can dominate the market by producing more range of quality products. Despite all of these advantages, Smith does not ignore the harmful effects. He also writes that due to the division of labor the laborers lack imagination and become close-minded as they keep repeating the same task for years and for this the state should provide basic education which can reduce these harmful effects of the division of labor. So, one can say that Smith was not entirely an anti-state person.

Smith being a philosopher who had experienced Enlightenment, gave scientific and rational reasons to back his argument of the invisible hand by explaining the pursuit of self-interest of the individuals in a society. He says, “It is not from the benevolence (kindness) of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest (Smith, 1776)(p.20).” This means that it is the ambition to get better at something that drives people to give their best in their work. It is to seek profit and to be approved by the others in the society that gives maximum economic profit and brings a harmonious social order. This points out Smith was after all a philosopher writing about a harmonious social order like Hobbes and Locke but ended up being the father of the modern economy.

In a nutshell, Adam Smith’s invisible hand is a concept that is considered as a beginning of a new capitalist market economy. It talks about harmonious social order brought about by the people working for their interests. The free market, division of labor, and the pervasiveness to the motive to better one’s condition’ assist the invisible hand in achieving maximum economic surplus. Moreover, the state is responsible for fulfilling the natural rights of individuals which the economic system fails to provide.

Bibliography:

Brown, V. (1991). The Emergence of the Economy. In Formations of Modernity. Wiley.

Pettinger, T. (n.d.). Division of Labour — Economics Help. Retrieved from Economics Help: https://www.economicshelp.org/blog/glossary/division-of-labour/

Smith, A. (1776). Wealth of Nations.