The Invisible Hand

| March 29, 2024

While having drinks at a hole-in-the-wall café, a friend said to me that “those greedy oil companies should stop charging so much for gas.” Knowing that she had just sold her house, I asked her if she had lowered the price. After all, I said, “people really need a place to live.” My wife hates it when I do that, and I am trying to be better.

Obviously, we sell our property for as much as we can. Which takes me back to Adam Smith. I promised last week to write about the pin factory, but in looking through my worn copy of The Wealth of Nations, * I found myself rereading his description of the invisible hand.

As every individual, therefore, endeavors 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…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.

When we invest to increase our capital, we are inadvertently adding to the national wealth. This presupposes that we are operating in a world of unfettered competition. Smith knew that we don’t. Tariffs are one way that government stifles competition and Smith described them as a “monopoly against their own countrymen.” When I asserted that greedy corporations did not cause inflation, I did not mean that corporations were neither greedy nor above enriching themselves at the public’s expense. Of course, they are and do.

Smith admitted that tariffs could be worthwhile when trying to force other countries to remove their own restraints of trade. The problem is that the removal of tariffs depends upon “the skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs.” Smith lamented that “to expect, indeed, that the freedom of trade should ever be entirely restored in Great Britian is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it.” This is why America once excelled at antitrust enforcement. Those days are mostly gone.

I take solace in reading Smith since he reminds me that the challenges we have today are not unique or new. Politicians pander because the population demands to be pandered to. Problems are unsolvable because there are so many unconquerable interests. We demand monopolies against ourselves. Smith lamented that “the monopoly which our manufacturers have obtained against us…has so much increased the number of some particular tribes of them that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature.” We will see a lot of that over the next eight months, this being an election year.

Adam Smith may have been Scottish, but we can claim him too. The introduction to my copy of The Wealth of Nations notes that Smith “enlisted the help of well-informed persons such as Benjamin Franklin by reading parts of his manuscript to them and then revising it in the light of their comments.” Notably, The Wealth of Nations was published in 1776 and had a great influence on the development of our system of government.

The Wealth of Nations is not my favorite work by Smith though. The eminent thinker was first a moral philosopher. My favorite Smith book is his 1759 The Theory of Moral Sentiments. Most people will not want to slog through it. Fortunately, the economist Russ Roberts published a short and accessible synopsis and commentary titled How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness. The title says it all and I highly recommend it.

* Smith, Adam, and D. D. Raphael. The Wealth of Nations. New York: Knopf, 1991.