Smith explains what Adam Smith meant by the “invisible hand” and how he used this explanatory method throughout his writings.
When libertarians think of Adam Smith, they usually think of economics, as presented in An Inquiry Into the Nature and Causes of the Wealth of Nations, a two‐volume masterpiece that Smith published in 1776. But though Smith made a number of important insights in economics, many of his technical theories are dated–and this gives free‐market types an excuse to praise the Wealth of Nations without bothering to read it. Why, after all, should we read a somewhat antiquated account of free‐market economics (except from a purely historical interest) when we can get more reliable information from later economists?
In this essay I discuss the other Adam Smith–the non‐economist who made fascinating observations and developed social theories that retain their value today. Some of this information is contained in Wealth of Nations, which covers far more than economics, but for much of it we must turn to Smith’s other works, both published and unpublished.
Adam Smith is known for using the metaphor of an “invisible hand” to explain the spontaneous evolution of social institutions. In order to understand why Smith found this mode of explanation so appealing, we must understand his epistemological and psychological views about the nature of explanation. And for these we need to consult some of his lesser known works, some of which were never published during his lifetime.
In his Lectures on Rhetoric, Smith discusses two ways that a system of ideas may be presented. The first method is to list in sequence every idea in a theoretical system, while providing a separate principle to explain each idea. The second method is to “lay down one or a very few principles by which we explain the several rules, or phenomena, connecting one with the other in a natural order.”
Smith prefers the second approach, calling it “the more philosophical one.” He also calls it “the Newtonian method,” because Newton had derived the laws of celestial mechanics from a few basic principles, such as the law of gravitation. It is by justifying a few basic principles and then using those principles to explain a wide range of phenomena that we impart unity to a system of ideas–“connecting,” as Smith put it, “all together by the same chain.”
The Newtonian method, in addition to its cognitive merit, is also recommended by Smith for its aesthetic appeal.
The Newtonian method…is undoubtedly the most philosophical, and in every science, whether of morals or natural philosophy, is vastly more ingenious and for that reason more engaging than the other. It gives us a pleasure to see the phenomena which we reckoned the most unaccountable all deduced from some principle (commonly a well‐known one) and all united in one chain, far superior to what we feel from the unconnected method where everything is accounted for by itself without any reference to the others.
Smith elaborates on this theme in another of his unpublished articles, The History of Astronomy, in which he argues that explanations fill an important psychological need. We feel uncomfortable when confronted with something out of the ordinary, something that does not fit into our customary causal framework. We desire to link the unknown to our present store of knowledge, and we can satisfy that desire by referring to basic principles. Thus does Smith depict causal principles as a “bridge” and as an “invisible chain” that enable us to connect the unexplained to what we already know.
Philosophy is the science of the connecting principles of nature. Nature, after the largest experience that common observation can acquire, seems to abound with events which appear solitary and incoherent with all that go before them, which therefore disturb the easy movement of the imagination; which makes its ideas succeed each other, if one may say so, by irregular starts and sallies; and which thus tend, in some measure, to introduce those confusions and distractions we formerly mentioned. Philosophy, by representing the invisible chains which bind together all these disjointed objects, endeavors to introduce order into this chaos of jarring and discordant appearances, to allay this tumult of the imagination, and to restore it, when it surveys the great revolutions of the universe, to that tone of tranquility and composure, which is both most agreeable in itself, and most suitable to its nature.
These remarks help us appreciate what Smith meant by “the system of natural liberty”–a phrase that recurs throughout Wealth of Nations. By “natural liberty,” Smith meant how humans will typically act in furthering their own desires when they are not hindered by unnecessary laws and regulations, and so may pursue their own interests as they see fit. The principle of self‐interest is analogous to Newton’s law of gravitation. It serves the same explanatory function in the human sciences, which study human action in its various aspects, that the law of gravitation serves in the natural sciences. The egoistic principle serves as a bridge or invisible chain that enables us to integrate complex phenomena into a comprehensive explanatory scheme. This is the epistemological foundation of spontaneous order theory and a fundamental task of philosophy.
What role did spontaneous order theory play in Smith’s overall approach? This question was addressed by Dugald Stewart, who, after studying under Smith at the University of Glasgow, went on to become one of Britain’s most influential philosophers. In his Account of the Life and Writings of Adam Smith, Stewart claims that Smith shed new light on the evolution of social institutions, many of which were the unintended consequences of egoistic actions and not the result of design. As Stewart put it, Smith showed that such institutions “took their rise, not from any general scheme of policy, but from the private interests and prejudices of particular orders of men.”
Smith, Stewart explains, was animated by a desire to explain the progressive development of social institutions. How is it that language has evolved from its primitive beginnings to its present complexity and “systematical beauty”? How can we explain the progress of science and the arts from their rudimentary beginnings to their present state of refinement? How can we account for the emergence of sophisticated economic institutions, such as money, from their primitive origins?
Stewart contends that history alone is unable to provide satisfactory answers to such questions, because many of the important steps in social and intellectual progress had already occurred before humans were able to keep records of their activities. He then pinpoints the valuable role that spontaneous order theory can play in filling the gaps of our historical knowledge: “In examining the history of mankind, as well as in examining the phenomena of the material world, when we cannot trace the process by which an event has been produced, it is often of importance to be able to show how it may have been produced by natural causes.”
Stewart calls this approach “theoretical” or “conjectural” history. This kind of history, which becomes necessary when our historical data is woefully incomplete or nonexistent, cannot establish its conclusions with certainty; but it can render probable conjectures, based on our knowledge of human nature and social interaction. For example, we don’t know for certain the early steps by which a particular language was formed, since written records presuppose that a given language has already developed to a fairly sophisticated level. But “if we can show, from the known principles of human nature, how all its various parts might gradually have arisen, the mind is not only to a certain degree satisfied, but a check is given to that indolent philosophy, which refers to a miracle, whatever appearances, both in the natural and moral worlds, it is unable to explain.”
Here Stewart was probably thinking of the biblical story of the Tower of Babel, which attributes the origin of different languages to an act of God. Such miraculous accounts, which were still widely believed during the eighteenth century, are what Stewart meant by “that indolent philosophy” that posits a miracle whenever it cannot explain something by rational means. Stewart credits the French philosopher Montesquieu with being among the first to provide a naturalistic explanation of social institutions. In Spirit of the Laws (1748), Montesquieu repudiated the traditional “great man” theory of law that attributed legal institutions to single lawgivers, such as Lycurgus, Solon, and Romulus. “The advances made in this line of inquiry since Montesquieu’s time have been great.” Indeed, naturalistic, evolutionary explanations of social phenomena were a hallmark of the Scottish Enlightenment, as exemplified in the writings of Adam Ferguson, Lord Kames, and John Millar, and they are indispensable if we wish to understand Adam Smith’s overall approach.
In Mr. Smith’s writings, whatever be the nature of his subject, he seldom misses an opportunity of indulging his curiosity, in tracing from the principles of human nature, or from the circumstances of society, the origin of the opinions and the institutions which he describes.
This statement could not be more on point. Smith’s interest in spontaneous order theory, which he uses to explain the undesigned evolution of social institutions, is a strong undercurrent in almost all his writings, both published and unpublished. Smith’s first book, The Theory of Moral Sentiments, which has as much to do with social psychology as it does with ethics proper, is a fascinating and sophisticated account of how human emotions adjust themselves spontaneously during the normal course of social interaction, resulting in a common system of moral sentiments that was not designed or intended. Similarly, in Lectures on Jurisprudence (which were published from notes taken by two students who attended his lectures at the University of Glasgow), Smith endeavors to show how legal institutions and practices also evolved spontaneously, without an overall plan or design. And, to pick just one more example, Smith’s interest in the evolution of language is illustrated in his essay Considerations Concerning the First Formation of Languages, where he applies spontaneous order theory to that subject.
As I said, Adam Smith is best known for An Inquiry Into the Nature and Causes of the Wealth of Nations, but some libertarians may be surprised to learn that Smith refers to the “invisible hand” only once in that book. Smith also employs the metaphor once in his earlier book, The Theory of Moral Sentiments. The reference in Wealth of Nations pertains to the social benefits of capital investments that are motivated by the desire for profit rather than from any desire to advance the public good. Investors, despite their egoistic motives, are led, as if by an “invisible hand,” to contribute to an end (i.e., the public good) that was no part of their intention.
The reference to the “invisible hand” in The Theory of Moral Sentiments concerns the unintended economic benefits that are caused by rich people–which, in Smith’s day, referred primarily to the landed aristocracy. Smith had few kind words for members of the aristocracy, many of whom had acquired their wealth through inheritance and enjoyed the legal protection of primogeniture and entail. This unearned wealth had spawned a culture of vanity, pretentious superiority, and intellectual shallowness. Yet the wealthy, whatever their personal flaws, had to spend their money somewhere in order to satisfy their vanity. A rich man, after all, cannot personally consume all the goods that his money can buy, so much of his wealth is spent on trinkets and baubles.
The rich select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labors of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvement. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society.…
A primary cause of economic progress, according to Smith, is the division of labor. The division of labor creates what may be called an economic order, or system, in which we find highly specialized and interdependent roles. This economic order developed spontaneously, without conscious planning or design.
This division of labor, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility: the propensity to truck, barter and exchange one thing for another.
Smith suggests that the human tendency to truck, barter, and exchange is “a necessary consequence of the faculties of reason and speech,” but he does not elaborate on this idea in Wealth of Nations. We do find a pertinent passage, however, in The Theory of Moral Sentiments.
The desire of being believed, the desire of persuading, of leading and directing other people, seems to be one of the strongest of all our natural desires. It is, perhaps, the instinct upon which is founded the faculty of speech, the characteristical faculty of human nature. No other animal possess this faculty, and we cannot discover in any other animal any desire to lead and direct the judgment and conduct of his fellows. Great ambition, the desire of real superiority, of leading and directing, seems to be altogether peculiar to man, and speech is the great instrument of ambition, of real superiority, of leading and directing the judgments and conduct of other people.
The desire to persuade others is especially relevant if we are to understand the motive for economic interaction. We require a good many things from other people in an advanced economy in which it is impossible to produce everything we need from our own labor. And though we might get some of those things by appealing to the benevolence of our friends and family, we also require the cooperation and assistance of many more people than we can possibly befriend. In those cases, therefore, we must appeal not to the benevolence of strangers but to their own self‐interest. Every voluntary exchange involves persuading others to give us what we want.
[M]an has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self‐love in his favor, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self‐love, and never talk to them of our own necessities but of their advantages.
Smith’s “invisible hand” explanation of economic institutions, such as money, is based on his belief that such institutions arose spontaneously rather than by design. The transition from barter to the use of gold and silver to the use of coined money–all such historical developments promote the common good, but they did not originate with that purpose in mind. Rather, they arose from man’s self‐interested actions, from a desire to improve his own economic condition.