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The Disappearance of Adam Smith’s “Invisible Hand”

“What we are experiencing is not a crisis of capitalism,” writes Fareed Zakaria, a scholar, social commentator, and host of a weekly television news program on CNN. “It is a crisis of finance, of democracy, of globalization and ultimately of ethics.”1

In an article titled “The Capitalist Manifesto: Greed is Good (To a Point),” in the June 22 special issue of Newsweek, Zakaria maintains that “No system—capitalism, socialism, whatever—can work without a sense of ethics and values at its core. No matter what reforms we put in place, without common sense, judgment and an ethical standard, they will prove inadequate.”2

Zakaria is especially concerned about the decreasing devotion to the common good that he detects in all professions. He asks “that people steer themselves and their institutions with a greater reliance on a moral compass.”3 He believes that “There needs to be a deeper fix within all of us, a simple gut check. If it doesn’t feel right, we shouldn’t be doing it.”4

Zakaria makes sense as far as he goes. Yet he leaves underexposed a huge ethical challenge. This is that for several decades many influential leaders have been telling us that “greed is good” rather than that it is “good (To a Point),” as he says.

Previous columns in this series have suggested that this is partly because these leaders have overlooked the differences in the thought of Adam Smith—the so-called “father” of capitalism in eighteenth-century Scotland—between selfishness and self-interest, and also between benevolence and beneficence (albeit less conspicuously and consistently), with him explicitly condemning the first in each pair and condoning the second.

This column now adds that frequent portraits of Adam Smith’s “invisible hand” are also partly responsible. As many depict it, this is the doctrine that all things turn out the best they can when in our business transactions when at bottom none of us cares about anyone else and all of us care only about our selves. This is often the most memorable lesson in “Economics 101.”

Gavin Kennedy, a specialist in Adam Smith’s thought in Scotland today, confirms the suspicion that this was not his emphasis.5 Kennedy reports that in the more than one million words still surviving from what Smith wrote approximately between 1744 and 1790, he uses the metaphor “invisible hand,” which already had a rich heritage in English literature, only three times.6

One of these is irrelevant because it is a reference to ancient superstitions in Smith’s History of Astronomy. In the Theory of Moral Sentiments, he writes of an “invisible hand” when pointing out that even a greedy feudal lord distributes the harvest approximately how this allocation would occur if the land were distributed equally because he can eat only so much and because he needs his peasants to eat as well so that they can continue working his fields. In the Wealth of Nations, he refers to it after observing that merchants who are fearful of foreign trade often benefit their own countries without intending this by doing business at home.7

Three minus one equals two. That’s it!

Given this, it is not surprising that in Kennedy’s view “Smith had no ‘theory’ of invisible hands and that he showed no inclination to treat the invisible hand as anything more than an isolated, though well-known metaphor in mid-18th-century literature.”8 He sometimes makes his point more intensely:

The failure of the myth of the invisible hand to achieve what its proponents preached about it is embarrassing for those who taught its fallacies; it has been harmful to the long-term reputation of the wholly innocent Adam Smith, who never gave the metaphor anything remotely like what modern economists loudly and repeatedly claimed for it with that arrogance of certainty that Smith reserved for the ‘man of system…wise in his conceit’ (TMS VI.ii.2.17:233–4).9

This reinforces the conviction that Michael Novak was right a generation ago when he argued that a flourishing economy depends on three things: (1) a free market that rewards industriousness and innovation, (2) a political structure that effectively regulates it, and (3) a “moral—cultural system” that cultivates the private and public virtues apart from which it cannot long succeed. A free market is necessary but not sufficient.10

I believe that in recent years we have put too much emphasis on free markets and not enough on effective regulation and moral education and that we are now paying a very high price. We need a better balance.

The editors of The Economist agree, at least in part.11 In an editorial warning against too many new regulations in their June 5 issue, they concede that “Even the most stalwart defenders of the free market, including this newspaper, admit that it has shortcomings that only the government can address. The financial system requires close oversight or crises will destabilize it. In recent years, such oversight has often been absent or fragmented.”12

Such concessions signal the disappearance of many popular portraits of Adam Smith’s “invisible hand.” This is a good thing because what they depict never existed in the first place.

These remarks, and the series of five columns in which they fit, close with some often overlooked lines from Adam Smith about the moral necessity of fairness in all of our business transactions. The inner imaginary “spectators” whose reactions Smith describes correspond to Fareed Zakaria’s ”deeper fix within all of us, a simple gut check” and his personal “moral compass”:

In the race for wealth, and honours, and preferments, he may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit of. This man is to them, in every respect, as good as he: they do not enter into that self-love by which he prefers himself so much to this other, and cannot go along with the motive from which he hurt him. They readily, therefore, sympathize with the natural resentment of the injured, and the offender becomes the object of their hatred and indignation. He is sensible that he becomes so, and feels that those sentiments are ready to burst out from all sides against him.13

Notes and References

1. Fareed Zakaria, “The Capitalist Manifesto: Greed is Good (To a Point),” Newsweek, June 22, 2009, 42.

2. Ibid., 44.

3. Ibid.

4. Ibid., 45.

5. Kennedy is on the Internet at . He blogs at

6. Gavin Kennedy, “Adam Smith and the Invisible Hand: from Metaphor to Myth.” Lecture at the 40th Anniversary Conference on “The History of Economic Thought,” September 3–5, 2008. No page numbers. This is available on the Internet at

7. Ibid.

8. Ibid.

9. Ibid. For a detailed and interesting dissent from Kennedy’s interpretation, please see Daniel B. Kline, “In Adam Smith’s Invisible Hands: Comment on Gavin Kennedy,” Econ Journal Watch, 6.2 (May 2009): 264–79. This is available on the Internet at Kline is a professor of economics at George Mason University. His last two sentences are: “But it does not much matter whether Smith intended the phrase to serve as a tag for the comparative merit of freedom. The phrase is as worthy a tag as any for that worthy idea.”

10. Michael Novak, The Spirit of Democratic Capitalism (New York: Touchstone, 1982). Especially see pages 57 and 58.

11. “In part,” because they discuss effective regulation but not moral education.

12. “Piling On,” The Economist, 391.8633 (June 5, 2009), 13. Emphasis supplied.

13. Adam Smith, The Theory of Moral Sentiments, 6th ed. (London: A. Miller, 1790), Part 2, sect. 2, para. 11.

David Larson teaches in the School of Religion at Loma Linda University.

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