Invisible hand

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The invisible hand is a metaphor inspired by the Scottish moral philosopher Adam Smith that describes the incentives which free markets sometimes create for self-interested people to act unintentionally in the public interest. 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 The Theory of Moral Sentiments (1759) and in The Wealth of Nations (1776) 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 create economically optimal outcomes, which can't 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.^[1]

In a context of discussing science more generally, Smith himself once described "invisible hand" explanations as typical of unscientific discussion. He also 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.^[2] 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.^[3] Smith's invisible hand argumentation may have also been influenced by Richard Cantillon and his model of the isolated estate.^[4]

Because of 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.^[5]