Invisible Hand

Invisible Hand in the United States

Invisible Hand in the Political and Economic Sciences

Adam Smith used the phrase invisible hand just once in Wealth of Nations from which you may infer the meaning:

“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 invisible hand has become perhaps the most famous phrase of economics. It is often generalized to suggest that independent decisions taking into account only one’s self-interest leads to the common good, a notion that is demonstrably false (e.g. the Prisoner’s Dilemma from Game Theory, and Garrett Hardin’s article The Tragedy of the Commons). Nonetheless, Smith’s observation is appropriate and useful in limited contexts.

F. A. Hayek, in his book “Law, Legislation and Liberty: Rules and Order” observes that:

“When . . . we do not know in advance the facts we wish to discover with the help of competition, we are also unable to determine how effectively competition leads to the discovery of all the relevant circumstances that could have been discovered. All that
can be empirically verified is that societies making use of competition for this purpose realize this outcome to a greater extent than do others—a question which, it seems to me, the history of civilization answers emphatically in the affirmative.”

He also argues that it “would be patently absurd to sponsor a contest if we knew in advance who the winner would be. . . . The only reason we use competition at all has as its necessary consequence the fact that the validity of the theory of competition can never be empirically
verified for those cases in which it is of interest.”

Invisible Hand in Legal Theory

Theorists have offered invisible-hand justifications for a range of legal and political institutions, including the separation of powers, free speech, the adversary system of litigation, criminal procedure, the common law, and property rights, observes Adrian Vermeule in an article (96 Va. L. Rev. 1417 (2010)). “These arguments are largely localized, with few comparisons across contexts and no general account of how invisible-hand justifications work. This essay has two aims. The first is to identify general conditions under which an invisible-hand justification will succeed. The second is to identify several theoretical dilemmas that arise from the structure of invisible-hand justifications and that cut across local contexts. These are the dilemma of norms, which arises because norms of truth-seeking, ethical action or altruism can both promote and undermine the workings of the invisible hand; the dilemma of second best, which arises because partial compliance with the conditions for an invisible-hand justification can produce the worst of all possible worlds; and the dilemma of verification, which arises where theorists claim that an invisible-hand process functions as a Hayekian discovery procedure — a claim that is empirical but pragmatically unverifiable.”

Resources

Further Reading

Jon Elster, Explaining Social Behavior: More Nuts and Bolts for the Social Sciences
282 (2007).
F. A. Hayek, Law, Legislation and Liberty: Rules and Order (1973).
Gerald F. Gaus, Hayek on the Evolution of
Society and Mind, in The Cambridge Companion to Hayek 232, 238–39 (Edward Feser
ed., 2006).

Invisible Hand in the International Business Landscape

Definition of Invisible Hand in the context of U.S. international business and public trade policy: The idea that the pursuit of profit in a free market leads to the material advantage of society as a whole.


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