Overblowing ‘invisible hand’

THE study of history teaches us that context is central to interpreting any idea, event or person. Context gives us a fuller account of how things emerge and why they relate to other phenomena in human history.

Typically, when context is evoked, it is to treat historical phenomena within the confines of their own, space, and culture.

What is key for the historian is to keep a delicate balance between the significance of “context” and the significance of that historical phenomenon in all of human history.

With this in mind it is interesting to read Adam Smith’s notion of the “invisible hand” within its context in his classic text, An Inquiry into the Nature and Causes of the Wealth of Nations.

In contemporary popular economics, Smith’s notion of the “invisible hand” is used as a metaphor to describe the way in which the combined social and economic motivations of people bring about markets which supply their needs and wants without the need for the heavy hand of the state to intervene.

In its popular usage, the term “invisible hand” is evoked as a metaphor of market efficiency in arguing for the minimal regulation of corporations and markets.

Smith uses the term in two of his books, rather minimally at that. In the Wealth of Nations, he only uses the term once and reading it in context is important. In the chapter entitled “Of Restraints upon the Importation from Foreign Countries of such Goods as can be Produced at Home”, Smith argues against the imposition of tariffs on imported goods.

His argument is interesting, because it is fixed in the time and space of the late 18th century. Smith argues, in essence, that the 18th-century merchants he is observing are likely to always favour production closer to the home market because of the high logistical costs of doing business in multiple trading ports. This meant it was rational to invest in the domestic economy.

Smith argues that “every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry . . .

“A merchant . . . who is engaged in the foreign trade of consumption, when he collects goods for foreign markets, will always be glad, upon equal or nearly equal profits, to sell as great a part of them at home as he can. He saves himself the risk and trouble of exportation . . .

“Home is in this manner the centre, if I may say so, round which the capitals of the inhabitants of every country are continually circulating, and towards which they are always tending.”

He invokes the invisible hand logically from this argument: “By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, 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. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

Clearly, Smith could not conceive of the still coming world where transportation and technology created the possibility of living in multiple global cities and having a corporate machinery that could easily communicate across the globe once the telegraph was invented.

The context in which Smith wrote has now passed, and it is clear that business people and corporations have been unchained from the national context.

Technology and financial instruments allow corporations to accumulate and distribute capital wherever they wish – to the detriment of local industries and markets.

Read contextually, one realises that the contemporary popular use of the term “invisible hand” is grossly distorted.