Under the Thumb of the Invisible Hand

Adam Smith
Adam Smith (1723-1790)

The metaphor of the “Invisible Hand of the Market” was first introduced by Adam Smith in The Theory of Moral Sentiments (1759). It was further developed in An Inquiry into the Nature and Causes of the Wealth of Nations (1776). It metaphorically attributes a “will” to the market, which seems from the outside to make economic decisions about factors such as pricing.

The “Invisible Hand” metaphor is invoked when people discuss the decisions that seem to be made by market forces. It says that as people acting in the marketplace attempt to maximize their own profits, this has an overall self-regulatory effect.

For example, as a price for a commodity goes up, fewer people will be interested in buying it. This will then bring the price back down. Thus demand will regulate shifts in price. The “Invisible Hand” is meant to describe a “perfect” unregulated market.

Descriptive, not Proscriptive

It’s important to recognize that Adam Smith was a moral philosopher–a philosopher and scientist. He wasn’t telling capitalists what to do, but describing their already existing behaviors. Using Adam Smith’s words to justify questionable economic behavior is therefore a category mistake.

Worse, it’s like using the sixth-grade excuse “everybody’s doing it.” Smith is describing the actions of an unregulated market–not suggesting that it would be really cool if we had one.

In scientific inquiry, some variables need to be held steady so that others can be measured. Metaphorically, Adam Smith held the variable of “human nature” steady by declaring that all people are inherently “rational maximizers“–that all people, under all circumstances, seek to maximize profit.

In Smith’s work, profit is considered the a priori goal of humans: humans serve the market, not the other way around. Yet we know from everyday life that acting in this way is a choice, not the singular, defining human drive. Economists may claim that people are simple and driven by one goal, but marketing experts certainly know better. People make economically irrational choices every day, and for a host of other reasons.

The Honey Badger of the Market

Because the “Invisible Hand” is an aggregate of human choices, it bears similarity to mob mentality and groupthink. In other words, people in groups will do things that no individual would choose to do openly.

Sometimes we see people (often politicians) suggesting that the “Invisible Hand” will take care of such problems as a poor economic situation. They argue that if we would just free (deregulate) the market, it will create wonderful growth, solve poverty, pay off the national debt, etc.

But here’s the part people either don’t mention, or don’t understand: the free market doesn’t care about individuals. Much like other forms of mob mentality, the free market doesn’t care if people live or die, if they have enough to eat, a place to sleep, or even rule of law.

The perfect “free market” is like the honey badger. It doesn’t care about forms of government, stability, raising the next generation, deforestation, murder, war, or much of anything else. The free market doesn’t care if 10% of the population is wiped out, as long as it doesn’t affect profits. And if it does affect profits, the market will correct–but not until after the people are dead.

The “perfect” free market is predicated on one value: maximizing profits. All other values are seen through that lens. So, when someone gets up and says that a free market will “solve problem x” through deregulation, ask if all of your values are in line with the market’s single driving goal.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s