Adam Smith's "invisible hand" metaphor is beloved by free market economists, not because they actually know or care what Smith wrote, of course, but for its utility toward justifying their otherwise obviously deluded and destructive "greed is good" ideology: it makes them sound smart to reference a venerated book they've never read, Smith's
An Inquiry into the Nature and Causes of the Wealth of Nations (1776), and because the US media is even more stupid than they are, they are allowed to get away with it. It is precisely through this process of mutually-affirming laziness and deception that the American Right Wing is able to not only exist (which wouldn't happen in a critical-thinking society with a robust press), but thrive. Their outrageous highjacking of Enlightenment thinkers like Smith is an intellectual crime that long ago would have been prosecuted in a healthy and politically engaged society.
But this is nothing new, nor unique to America. Economists latched on to Smith's "invisible hand" metaphor, supposedly put forth in support for laissez-faire capitalism, in the late 19th Century, and from the importance with which they've subsequently attached to it, you would think it was the central idea of The Wealth of Nations. Therefore one is surprised to find that it was actually just a light-hearted metaphor for unintended benevolence, mentioned only once in that 1000-page book, tossed off with no special gravitas by the author. He uses it with greater aggressiveness (though still only once) in his earlier book, The Theory of Moral Sentiments. Nowhere is the idea central to Smith's ideas about economics or philosophy.
A great deal of obfuscation and confusion has grown up around the "invisible hand," as one would expect from free market economists who don't read. Smith's meaning is fairly clear if one simply reads the context of Book 4, Chapter 2. The chapter's title, "Of Restraints upon the Importation from Foreign Countries of such Goods as can be produced at Home," already gives away that it is not going to be a defense of laissez-faire, dependent as it is on goods produced in Third World sweatshops under the worst possible conditions.
Smith begins by writing:
BY restraining, either by high duties or by absolute prohibitions, the importation of such goods from foreign countries as can be produced at home, the monopoly of the home market is more or less secured to the domestic industry employed in producing them. Thus the prohibition of importing either live cattle or salt provisions from foreign countries secures to the graziers of Great Britain the monopoly of the home market for butcher's meat.
The government protects domestic industry either through laws or duties. This is a good thing in Smith's view.
Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.
We see here the groundwork of the upcoming "invisible Hand" metaphor. The citizen's self-interest "naturally" guides him toward employment that benefits society as a whole. But this is only possible because the not-so-invisible
government has protected home industries rather than deported them to Singapore (the "free market" solution).
First, every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry; provided always that he can thereby obtain the ordinary, or not a great deal less than the ordinary profits of stock.
Thus, upon equal or nearly equal profits, every wholesale merchant naturally prefers the home trade to the foreign trade of consumption, and the foreign trade of consumption to the carrying trade. In the home trade his capital is never so long out of his sight as it frequently is in the foreign trade of consumption.
Merchants also prefer home industry to foreign since his capital is more secure, though Smith adds the ominous caveat "provided always that he can thereby obtain the ordinary, or not a great deal less than the ordinary profits of stock."
But a capital employed in the home trade, it has already been shown, necessarily puts into motion a greater quantity of domestic industry, and gives revenue and employment to a greater number of the inhabitants of the country, than an equal capital employed in the foreign trade of consumption: and one employed in the foreign trade of consumption has the same advantage over an equal capital employed in the carrying trade. Upon equal, or only nearly equal profits, therefore, every individual naturally inclines to employ his capital in the manner in which it is likely to afford the greatest support to domestic industry, and to give revenue and employment to the greatest number of people of his own country.
Smith here reasserts earlier thoughts, adding that a crucial benefit of domestic industry is the revenue and employment it brings to the largest number of the employer's countrymen. Here, as everywhere in his thought, a concern for the public good is at the forefront.
The produce of industry is what it adds to the subject or materials upon which it is employed. In proportion as the value of this produce is great or small, so will likewise be the profits of the employer. But it is only for the sake of profit that any man employs a capital in the support of industry; and he will always, therefore, endeavour to employ it in the support of that industry of which the produce is likely to be of the greatest value, or to exchange for the greatest quantity either of money or of other goods.
Smith here asserts -- not with approval -- that the businessmen is only interested in profit, and therefore most likely to invest in the most profitable industry. This tension between private profit and the good of society, having been produced by the monopoly on home industries that the government has provided, leads to resolution in the "invisible hand" metaphor.
But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. 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. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.
The businessman usually does not intend to promote the public interest, but by preferring domestic trade (which is made possible by government regulations and duties on foreign goods), he is led by an "invisible hand" that magically achieves the public good
in spite of his self-interest in profits,
not because of them (a crucial distinction economists never make). As is made clear from the previous paragraphs, Smith's whole argument is built around the idea that
domestic trade is good for everyone, even merchants whose interests in profits over people may otherwise have a destructive effect. His argument hinges over a concern for the public good. Shipping jobs to Singapore (laissez-faire as it is practiced today) does not serve the public good.
Economists don't even pretend to read Smith's earlier book, The Theory of Moral Sentiments (1759), which also uses the 'invisible hand' metaphor, though with much stronger language than in The Wealth of Nations.
Everyone desires to be wealthy and great, he writes in Part 4:
And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants. It is to no purpose, that the proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his brethren, in imagination consumes himself the whole harvest that grows upon them. The homely and vulgar proverb, that the eye is larger than the belly, never was more fully verified than with regard to him. The capacity of his stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. The rest he is obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, among those who provide and keep in order all the different baubles and trinkets, which are employed in the economy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice. The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for.
In words that could have been taken from Marx, Smith here castigates the "proud and unfeeling landlord," devoid of humanity, concerned only for himself and his opulence, who is led by an "invisible hand" to pay their workmen enough to live on, and thus, "without knowing it, advance the interest of the society, and afford means to the multiplication of the species." This expresses pretty much the same idea as in
The Wealth of Nations, but more strongly reinforces how Smith really felt about the private businessmen solely motivated by a lust for profit. Contrary to what is taught students at Business schools, it is not a positive picture.
Did Smith intend for God to be the arm of "the invisible hand" guiding otherwise unfeeling businessmen toward acting beneficially toward his fellow man? Smith scholars I've read doubt it, due to his often irreligious views later in life. I'm not so sure. References to the guidance of God and "Providence" are sprinkled throughout The Theory of Moral Sentiments, as Smith argues for an ethic that marries Christian charity with Stoicism.
We need to take back Enlightenment thinkers like Adam Smith. He has been unfairly used and abused by the Right Wing long enough.