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 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]

Smith himself described the term "invisible hand" as something only appropriate for unscientific discussion, and did not use 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] While Smith's arguments against government management of the economy were very popular, the ideas were 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 to refer to a key neoclassical assumption, a central disagreement between economic ideologies is sometimes viewed as a disagreement about how well the "invisible hand" works. For example, it is argued that tendencies that were nascent during Smith's lifetime, such as large-scale industry, finance, and advertising, now reduce its effectiveness.^[5]