DEFINITION: The metaphor of the “invisible hand” represents the totality of the myriad mostly unrecognized and even unknowable economic, technological, environmental, political, and other causal influences affecting the collective behavior of a free market economy.
The invisible hand operates through the individual’s pursuit of his own self-interest in circumstances in which he has the freedom to produce and consume as he pleases.
This continual interaction among the countless individual forces affecting market supply and demand is what creates the natural movement of prices and the flow of trade.
Many modern economists believe that the operation of the invisible hand—that is, of the economy under free market conditions with minimal government interference—results in optimal economic performance and in the long run is in the best interest of rich and poor alike.
ETYMOLOGY: The metaphor of the “invisible hand” was introducedin 1776 by the Scottish Enlightenment philosopher Adam Smith in his book, The Wealth of Nations.
The English adjective “invisible” is attested from the fourteenth century. The word in identical form derives from Middle English and Middle French, and, ultimately, from the Latin roots in-, meaning “non-” or “un-,” and visibilis, meaning “visible,” from in turn derives from the past participle vīsum, “seen,” from the verb video, vidēre, “to see.”
The word “hand” derives from Old English via Middle English. The word is akin to Old High German hant.
USAGE: Although the phrase “invisible hand” was introduced by Adam Smith in 1776, the basic idea may be traced back to (at least) two preceding works: (1) Essai sur la Nature du Commerce en Général [Essay on the Nature of Commerce in General] by the French businessman and banker, Richard Cantillon, composed around 1730 and published after his death in 1755; and (2) earlier still, The Fable of the Bees by the Dutch physician, poet, and author, Bernard Mandeville, published in 1714.
The latter book by Mandeville is particularly remarkable for the way in which the author likens the operation of human society to what we would now call the “self-organization” of a beehive.
The concept of the invisible hand is the intellectual foundation of the free-market or laissez-faire philosophy of political economy, especially as embodied by the Austrian school of economics.
In essence, Austrian economists, libertarians, and “neo-liberals” (those who hard back to the classic, nineteenth-century view) maintain that equilibrium conditions under conditions of the free market will naturally produce the best results for the overall economy, and thus for the common good.
According to this theory, any intervention in the economy on the part of the government will distort this theoretically optimal equilibrium, producing sub-optimal results.
Social and political purposes may dictate that we make a trade-off between optimal economic productivity and some other good (for example, armament production during wartime).
But we must do so with our eyes open and not delude ourselves that we are not forgoing significant economic benefits in pursuing our other goals through government intervention.
The metaphor of the invisible hand encapsulates two essential concepts.
First, every voluntary exchange within a free market generates valuable signals about the supply and demand of goods and services within that free market. In this way, voluntary trades produce far-reaching and generally advantageous consequences.
Second, these benefits outweigh those of a heavily regulated, planned, or “command” economy.
The signals about supply and demand generated by voluntary exchange within a free market become manifested through the price system. Prices generated in such a spontaneous way, then, naturally guide competing consumers, producers, and distributors in fulfilling the wants and needs of their customers as efficiently as possible, all the while pursuing their own individual interests.
In contrast, government bureaucrats far removed from market conditions are faced with an impossible task when it comes to setting prices efficiently for all the innumerable goods that constitute a given market.
This is the basic reason why socialist and communist societies experience chronic shortages of all categories of commodities, including even the most basic necessities of life. It is simply beyond human capability for one or a small number of individuals to gather the information that would be necessary to determine all those prices efficiently in the absence of the invisible hand (the “market mechanism”).
Smith’s Wealth of Nations was published during an early phase of the Industrial Revolution, the very year that the thirteen North American colonies declared their independence from the British crown.
Smith’s analysis of political economy, including his striking metaphor of the invisible hand, became one of the primary reasons for the adoption of a free trade policy and a generally free market economic system by the fledgling democracy that would become known as the United States.
As a result, from the very beginning US business and government leaders developed a broad consensus that the less the government intervenes in the economy, the more efficiently it operates and the more productive it is.
Historically, even when the US government has seen fit to intervene in the economy to achieve some specific political purpose, it has often done so by adopting rules that incorporate the invisible hand of the market to the greatest extent possible.