Recent from talks
Invisible hand
Knowledge base stats:
Talk channels stats:
Members stats:
Invisible hand
The invisible hand is a metaphor inspired by the Scottish economist and moral philosopher Adam Smith that describes the incentives which free markets sometimes create for self-interested people to accidentally act in the public interest, even when this is not something they intended. Smith originally mentioned the term in two specific, but different, economic examples. It is used once in his Theory of Moral Sentiments when discussing a hypothetical example of wealth being concentrated in the hands of one person, who wastes his wealth, but thereby employs others. More famously, it is also used once in his Wealth of Nations, when arguing that governments do not normally need to force international traders to invest in their own home country. In both cases, Adam Smith speaks of an invisible hand, never of the invisible hand.
Going far beyond the original intent of Smith's metaphor, twentieth-century economists, especially Paul Samuelson, popularized the use of the term to refer to a more general and abstract conclusion that truly free markets are self-regulating systems that always tend to create economically optimal outcomes, which in turn cannot be improved upon by government intervention. The idea of trade and market exchange perfectly channelling self-interest toward socially desirable ends is a central justification for newer versions of the laissez-faire economic philosophy which lie behind neoclassical economics.
Adam Smith was a proponent of less government intervention in his own time, and of the possible benefits of a future with more free trade both domestically and internationally. However, in a context of discussing science more generally, Smith himself once described "invisible hand" explanations as a style suitable for unscientific discussion, and he never used it to refer to any general principle of economics. His argumentation against government interventions into markets were based on specific cases, and were not absolute. Putting the invisible hand itself aside, while Smith's various ways of presenting the case against government management of the economy were very influential, they were also not new. Smith himself cites earlier enlightenment thinkers such as Bernard Mandeville. Smith's invisible hand argumentation may have also been influenced by Richard Cantillon and his model of the isolated estate.
Because the modern use of this term has become a shorthand way of referring to a key neoclassical assumption, disagreements between economic ideologies are now sometimes viewed as disagreement about how well the "invisible hand" is working. For example, it is argued that tendencies that were nascent during Smith's lifetime, such as large-scale industry, finance, and advertising, have reduced the effectiveness of the supposed invisible hand.
Alternatively, it can be misused or misinterpreted as a conspiracy to use a hidden mechanism to control markets or society, or as an existing conspiracy that a powerful "invisible hand" exists.
The term "invisible hand" has classical roots, and it was relatively widely used in 18th-century English. Adam Smith's own usage of the term did not attract much attention until many generations after his death. In his early unpublished essay on The History of Astronomy (written before 1758) he specifically described this type of explanation as a common and unscientific way of thinking. Smith wrote that superstitious people, or people with no time to think philosophically about complex chains of cause and effect, tend to explain irregular, unexpected natural phenomena such as "thunder and lightning, storms and sunshine", as acts of favour or anger performed by "gods, daemons, witches, genii, fairies". For this reason the philosophical or scientific study of nature can only begin when there is social order and security, so that people are not living in fear, and can be attentive. Because of this background, a wide range of interpretations have been given to the fact that Smith himself used the metaphor twice when discussing economic topics. On one extreme it has been argued that Smith was literally suggesting that divine intervention is at play in the economy, and at the other extreme it has been suggested that Smith's use of this metaphor shows that he was being sarcastic.
The modern conception of a free market causing the best possible economic result, which is now commonly associated with the term "invisible hand", also developed further, going beyond Smith's conception. It has been influenced by arguments for free markets found not only in Smith's works, but also by earlier writers such as especially Bernard Mandeville, and later more mathematical approaches by economists such as Pareto and Marshall.[citation needed]
The invisible hand is explicitly mentioned only once in the Wealth of Nations, in a specialized chapter not about free trade but about capital investment, which discusses the concern that international merchants might choose to invest in foreign countries. Smith argues that a self-interested investor will have a natural tendency to employ his capital as near home as he can, as long as the home market does not give much lower returns than other alternatives. This in turn means...
Hub AI
Invisible hand AI simulator
(@Invisible hand_simulator)
Invisible hand
The invisible hand is a metaphor inspired by the Scottish economist and moral philosopher Adam Smith that describes the incentives which free markets sometimes create for self-interested people to accidentally act in the public interest, even when this is not something they intended. Smith originally mentioned the term in two specific, but different, economic examples. It is used once in his Theory of Moral Sentiments when discussing a hypothetical example of wealth being concentrated in the hands of one person, who wastes his wealth, but thereby employs others. More famously, it is also used once in his Wealth of Nations, when arguing that governments do not normally need to force international traders to invest in their own home country. In both cases, Adam Smith speaks of an invisible hand, never of the invisible hand.
Going far beyond the original intent of Smith's metaphor, twentieth-century economists, especially Paul Samuelson, popularized the use of the term to refer to a more general and abstract conclusion that truly free markets are self-regulating systems that always tend to create economically optimal outcomes, which in turn cannot be improved upon by government intervention. The idea of trade and market exchange perfectly channelling self-interest toward socially desirable ends is a central justification for newer versions of the laissez-faire economic philosophy which lie behind neoclassical economics.
Adam Smith was a proponent of less government intervention in his own time, and of the possible benefits of a future with more free trade both domestically and internationally. However, in a context of discussing science more generally, Smith himself once described "invisible hand" explanations as a style suitable for unscientific discussion, and he never used it to refer to any general principle of economics. His argumentation against government interventions into markets were based on specific cases, and were not absolute. Putting the invisible hand itself aside, while Smith's various ways of presenting the case against government management of the economy were very influential, they were also not new. Smith himself cites earlier enlightenment thinkers such as Bernard Mandeville. Smith's invisible hand argumentation may have also been influenced by Richard Cantillon and his model of the isolated estate.
Because the modern use of this term has become a shorthand way of referring to a key neoclassical assumption, disagreements between economic ideologies are now sometimes viewed as disagreement about how well the "invisible hand" is working. For example, it is argued that tendencies that were nascent during Smith's lifetime, such as large-scale industry, finance, and advertising, have reduced the effectiveness of the supposed invisible hand.
Alternatively, it can be misused or misinterpreted as a conspiracy to use a hidden mechanism to control markets or society, or as an existing conspiracy that a powerful "invisible hand" exists.
The term "invisible hand" has classical roots, and it was relatively widely used in 18th-century English. Adam Smith's own usage of the term did not attract much attention until many generations after his death. In his early unpublished essay on The History of Astronomy (written before 1758) he specifically described this type of explanation as a common and unscientific way of thinking. Smith wrote that superstitious people, or people with no time to think philosophically about complex chains of cause and effect, tend to explain irregular, unexpected natural phenomena such as "thunder and lightning, storms and sunshine", as acts of favour or anger performed by "gods, daemons, witches, genii, fairies". For this reason the philosophical or scientific study of nature can only begin when there is social order and security, so that people are not living in fear, and can be attentive. Because of this background, a wide range of interpretations have been given to the fact that Smith himself used the metaphor twice when discussing economic topics. On one extreme it has been argued that Smith was literally suggesting that divine intervention is at play in the economy, and at the other extreme it has been suggested that Smith's use of this metaphor shows that he was being sarcastic.
The modern conception of a free market causing the best possible economic result, which is now commonly associated with the term "invisible hand", also developed further, going beyond Smith's conception. It has been influenced by arguments for free markets found not only in Smith's works, but also by earlier writers such as especially Bernard Mandeville, and later more mathematical approaches by economists such as Pareto and Marshall.[citation needed]
The invisible hand is explicitly mentioned only once in the Wealth of Nations, in a specialized chapter not about free trade but about capital investment, which discusses the concern that international merchants might choose to invest in foreign countries. Smith argues that a self-interested investor will have a natural tendency to employ his capital as near home as he can, as long as the home market does not give much lower returns than other alternatives. This in turn means...