Invisible Hand: The Invisible Hand, Unveiling the Secrets of Economic Influence

By Fouad Sabry

What is Invisible Hand

The phrase "the invisible hand" is a metaphor that was developed by Adam Smith, a Scottish moral philosopher. It is used to explain the incentives that free markets frequently generate for individuals who are motivated by their own self-interest to act in the benefit of the public. In the beginning, Smith only offered particular examples when he invoked the phrase. It is mentioned once in his Theory of Moral Sentiments, which was published in 1759, as a component of an argument that defends monopolistic land ownership through the trickle-down effect. However, it is also used once in his Wealth of Nations, where he explains that foreign traders can be trusted provided the incentives are appropriate, which frequently eliminates the need for governments to intervene. This is the most famous usage of the phrase.

How you will benefit

(I) Insights, and validations about the following topics:

Chapter 1: Invisible hand

Chapter 2: Adam Smith

Chapter 3: David Ricardo

Chapter 4: Economics

Chapter 5: Free market

Chapter 6: Homo economicus

Chapter 7: Index of economics articles

Chapter 8: Laissez-faire

Chapter 9: Capital (economics)

Chapter 10: Classical economics

Chapter 11: The Wealth of Nations

Chapter 12: History of capitalist theory

Chapter 13: Productive and unproductive labour

Chapter 14: Returns (economics)

Chapter 15: History of economic thought

Chapter 16: Preference (economics)

Chapter 17: Economic liberalism

Chapter 18: Perspectives on capitalism by school of thought

Chapter 19: Justice and the Market

Chapter 20: Economic democracy

Chapter 21: Economic opportunism

(II) Answering the public top questions about invisible hand.

(III) Real world examples for the usage of invisible hand in many fields.

Who this book is for

Professionals, undergraduate and graduate students, enthusiasts, hobbyists, and those who want to go beyond basic knowledge or information for any kind of invisible hand.

• Language: English
• Publisher: One Billion Knowledgeable
• Release date: Jan 6, 2024

Book preview

Chapter 1: Invisible hand

The invisible hand is a metaphor used by the Scottish moral philosopher Adam Smith to express the incentive for a merchant to retain his wealth at home, so growing the domestic capital stock and bolstering military strength, both of which are in the public good but were not his intention. The word was first introduced by Smith in his 1759 book Theory of Moral Sentiments, but it was popularized by his 1776 work The Wealth of Nations, where it is cited just once in relation to import limitations.

Before Smith, other Enlightenment intellectuals such as Anders Chydenius in The National Gain (1765) and Bernard Mandeville had offered similar concepts. Liberal philosophers attempted to demonstrate that society may thrive without the feudal era's hierarchical structure. There are just three instances of the term throughout Smith's works.

Smith may have gotten the two definitions of the term from Richard Cantillon, who created both economic uses in his concept of the isolated estate. Interpretations of the phrase have expanded beyond Smith's use, and some academic sources assert that Paul Samuelson established the present understanding of the idea to support spontaneous order much more recently.

Some see an early reference to the concept of the invisible hand in seventh-century Arabia, where the Islamic prophet Muhammad, when asked by a merchant to fix the prices of goods whose prices have skyrocketed, replied, It is only Allah [God] Who makes the prices low and high. In another Hadith, Muhammad is quoted as saying, Allah [God] is the one who fixes prices..

Anders Chydenius, a Swedish-Finnish physicist, philosopher, and politician, authored The National Gain in 1765. In it, he sets forth the foundations of liberalism and free markets, such as free commerce and industry, and defines what Adam Smith would later refer to as the Invisible hand. Chydenius criticizes the export subsidies as an illustration of the negative impacts of government involvement on the home economy.

In Part IV, Chapter 1 of The Theory of Moral Sentiments (1759), Smith characterizes a greedy landlord as being guided by an unseen hand to divide his crop to those who labor for him:

The arrogant and heartless landlord surveys his vast estate, and without regard for the needs of his neighbors, imagines consuming himself the entire harvest... [Yet] the capacity of his stomach does not correspond to the magnitude of his desires... the remainder he will be compelled to distribute among those who prepare, in the most exquisite manner, the little that he himself consumes, among those who furnish the palace in which this little is to be consumed, among those who furnish the palace in which this little is to be .. The wealthy choose from the heap just the most valuable and desirable items. They consume little more than the poor, and despite their inherent selfishness and avarice, and despite the fact that the sole purpose of the labors of all the thousands whom they employ is the satisfaction of their own vain and insatiable desires, they share the fruits of all their improvements with the poor. They are led by an invisible hand to make nearly the same distribution of life's necessities that would have been made if the earth had been divided into equal portions for all of its inhabitants, and thus, unwittingly and unknowingly, advance the interests of society and provide the means for the propagation of the species. When Providence divided the world among a few of lordly lords, it neither ignored nor abandoned those who seemed to be excluded.

Far from celebrating the advantages of the invisible hand, this statement examines the distribution of wealth and laments the reality that the poor obtain life's needs after the wealthy have satisfied their own shallow and insatiable cravings. Although elsewhere in The Theory of Moral Sentiments, Smith describes the desire of men to be respected by members of their society and the need of men to feel that they are honorable people, he does not mention these desires here.

There is just one explicit reference of the invisible hand in The Wealth of Nations: Book IV, Chapter II, Of Restraints Upon the Importation from Foreign Countries of Such Goods as Can Be Produced at Home..

Adam Smith begins by introducing the concept of self-interest and laying the groundwork for the conclusion he would arrive at the chapter's end, namely that self-interest leads to public benefit:

Every person strives ceaselessly to obtain the most lucrative work for whatever cash he may command. In actuality, he has just his personal benefit in mind, not that of society. But the study of his own benefit drives him naturally, or rather inevitably, to seek the occupation that is most beneficial to society.

Then, he argues that, given equal or comparable earnings, there is a bias for using capital in home-trade over foreign-trade and carrying trade over foreign-commerce:

First, every person strives to invest his money as close to home as possible, and thus as much as possible in the support of domestic industry, provided that he can receive the usual, or not a great lot less than the ordinary profits of stock. Consequently, when earnings are equal or nearly equal, every wholesaler favors the home-trade over the foreign trade of consumption and the foreign trade of consumption over the carrying trade.

He contends that this is because the longer capital travels, the higher the risk and transaction costs. Consequently, it is not only in the best interest of the person to utilize their wealth in home-trade as opposed to other options, but it is also the most advantageous choice for society. Thus, the interests of the man and his community are aligned:

But, as has already been demonstrated, a capital employed in the home-trade necessarily stimulates a greater amount of domestic industry and provides income and employment for a greater number of the country's inhabitants than an equal capital employed in the foreign trade of consumption; and one employed in the foreign trade of consumption has the same advantage over an equal capital employed in the carrying trade. On equal, or nearly equal, earnings, every person has a natural tendency to deploy his money in a way that will provide the most support for domestic industry, as well as the highest income and employment for the greatest number of people in his own nation.

It is essential to highlight that the preference for the local economy has nothing to do with nationalist views or prejudices; rather, it is simply the home-trade preference outlined above.

Adam Smith continues by arguing that the self-interest of people determines which sectors provide the most value. Since they are likewise susceptible to self-interest, business owners will attempt to spend their money in sectors where the anticipated output would be of the highest value (i.e. profit seeking):

Second, every person who spends his wealth to support domestic business endeavors to guide that industry so that its output is of the highest possible quality. The product of industry is what it contributes to the topic or materials upon which it is used. In proportion to the value of this product, the employer's earnings will also increase or decrease. But it is only for the purpose of profit that a man uses a capital in the support of industry; and he will always strive to employ it in the support of that industry whose output is likely to be of the highest value, or to exchange for the largest amount of money or other products.

Finally, ninth paragraph, Smith ends his case by using the idea of the invisible hand; Since people seek the optimal use of their wealth, they will invest in domestic enterprises, Which one delivers the biggest social benefits?, Moreover, they will steer the industries towards the most valuable tasks, thus every individual is employing his capital in the most optimal way as to increase society’s wealth, notwithstanding his special concern for the general good:

But the yearly income of any society is always exactly equal to or identical to the exchangeable worth of the whole annual output of its industry. As a result of the fact that each person strives as much as possible to utilize his capital in the support of domestic business and to lead that industry so that its output is of the highest value, each individual must work as hard as possible to maximize the yearly income of the society. In general, he neither aims nor understands the extent to which he promotes the public interest. 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 way that its products are of the highest value, he intends only his own profit; and in this, as in many other cases, he is led by an invisible hand to promote a goal that was not part of his original intention. It is not necessarily negative for the society if something was never a part of it. By following his own interest, he often advances the society's interest more effectively than when he seeks to do so. I have never seen a significant amount of good done by people claiming to trade for the public good. It is an uncommon affectation among businessmen, and relatively few words are required to persuade them to abandon it.

The invisible hand refers to the unanticipated benefits that self-interest has on the promotion of the public good.

It is also crucial to note that, although the term invisible hand only appears explicitly here, This essential concept is prevalent throughout The Wealth of Nations, and the instance discussed in this chapter seems to be an illustration of it, instead of the principle itself, according to Smith, is in this, as in several instances, guided by an unseen hand to promote a goal that was not in his plans"

Adam Smith continues by emphasizing that bureaucratic directives cannot replace this mechanism.:

What kind of domestic business his capital can employ and whose output is likely to be of the highest value, every person, it is apparent, may determine in his local environment much better than any government official or legislator. The statesman who attempted to dictate to private individuals how they should spend their capitals would not only burden himself with an unnecessary responsibility, but also assume a power which could be entrusted not only to no single person, but to no council or senate at all, and which would be most perilous in the hands of a man who was foolish and presumptuous enough to believe he could wield