The Meaning of the Invisible Hand

I think Noam Chomsky is right on target when he states that Adam Smith is an economist that is admired but never read. At economics club during the Fall semester, we had 6 guest speakers, all people that have Phd’s in either Economics or Philosophy. I asked all six of those speakers, “Have you read Adam Smith before,” and “What is your interpretation of Adam Smith’s invisible hand?” And out of the 6 guest speakers, one speaker gave me the answer I was looking for, which I think is the correct interpretation to the concept of the invisible hand.

The mainstream answer to what the invisible hand means is an interpretation of welfare maximization. Milton Friedman, for example, explains that the invisible hand is a concept which people, motivated only by their self interest, are led by an invisible hand to promote welfare, which was no part of their intention. The way Freidman says this is almost word for word what Smith said, but I think Friedman missed the point of what Smith was saying. But nevertheless, Friedman’s interpretation of the invisible hand is the standard interpretation.  Even of we look at Joe Stiglitz interpretation of the invisible hand, it is the same interpretation as that of Friedman’s, Stiglitz claims that the concept means: the pursuit of self interest would lead, as if by an invisible hand, to the well being of everybody to society. Stiglitz goes a bit further in saying that the concept of Smith states that unfettered markets always lead to efficient outcomes.  And so the neoclassical debate about the invisible hand is the debate on whether free markets lead to efficient outcomes, or if self interest really promotes the well being, or welfare, in society.

The neoclassicals are wrong yet again. Adam Smith says that people pursue their self interest only by engaging in other’s interests via trade, each person would be “led by an invisible hand to promote an end which was no part of his intention.” Thats it, there is no statement about welfare here or market efficiency. As a matter of fact, if one actually reads the Wealth of Nations,  Smith does call for a strong role for government intervention when needed, so I am not quite sure where in the Wealth of Nations Stiglitz gets Smith’s concept of unfettered markets leading to efficient outcomes.

So what does the invisible hand mean? It is the exact same concept as the Austrian concept of spontaneous order. As Karen Vaughn states in Austrian Economics in America:

The invisible hand was Smith’s metaphor for describing the mutually beneficial aspect of trade in an exchange economy that emerged as the unplanned consequences of the prosecution of individual plans.

In other words, this was Smith’s metaphor in saying that the market order is an order that is the “result of human action, but not the execution of any human design.” So sure, Stiglitz can imply that the invisible hand is nothing more than a myth, if he interprets it as a concept that advocates free markets or under the assumption that it is talking about the well being of others, but it is certainly not a myth if we use the interpretation I think is correct, for the market is spontaneous order.

-Isaac Marmolejo

Here are Friedman and Stiglitz on the invisible hand.

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4 responses to “The Meaning of the Invisible Hand

  1. This is probably the only blog post you have written so far which I agree with. But mainly because this is more of a Hayekian insight than a Lachmann one

    • Lance,

      Hayek was a big influence on Lachmann. But nevertheless, this was not supposed to be something that Lachmann said or did, even though he accepted the spontaneous order concept, just like most Austrians.

  2. Pingback: How Many Economists Can Say They Read Adam Smith? | The Radical Subjectivist

  3. Pingback: 5 Links you should read: week of April 22-28 | The Curious Leftist

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