‘The Invisible Hand’ is a theory that has been used as a metaphor for the unseen forces that move the free market economy. According to the aforementioned theory, self-interest is and should be the core of economic thought, as it is the most powerful incentive known to humanity. Individualism, when combined with the freedom in relation to what to produce and consume, make for a mighty duet that suits our economy and even society. The popular metaphor refines two principles – that voluntary trades and transactions within the free market produce extensive benefits for society at large, and that such benefits would be unattainable in a planned economy.
According to Investopedia, “The invisible hand is part of laissez-faire, meaning “let do/let go,” approach to the market. In other words, the approach holds that the market will find its equilibrium without government or other interventions forcing it into unnatural patterns.”
Adam Smith – hopefully I need not introduce him – personally formed this concept of The Invisible Hand and mentioned it in several of his writings; notably, it found its current economic interpretation in his book An Inquiry into the Nature and Causes of the Wealth of Nations published in 1776.
Now, as a famous man once stated, “everything you said is true, however…” neither Smith’s doctrine nor the whole Laissez-Faire ideology sincerely imply what Investopedia and other similar sources would indicate they do.
A useful prelude would be to mention that Adam Smith (creator of The Invisible Hand theory) and the Physiocrats (creators of the Laissez-Faire ideology) are somewhat linked. Obviously, they were classical political economists. The Father of Economics was heavily influenced by the French group and in particular their leader François Quesnay (1694–1774); A.Smith even travelled to France to meet with them, and he later adopted many Physiocratic approaches.
Let me present a description of Laissez-Faire, including its origins and meaning, as reported by Professor Michael Hudson in his recent book ‘J is for Junk Economics’ –
- “Coined by the French Physiocrats, Laissez faire meant “let us be,” free from the royal taxes shifted onto labor and industry. The Physiocratic alternative was the Single Tax (L’Impot Unique) falling on the land held by France’s hereditary aristocracy and royal family. Adam Smith advocated such a tax on Britain’s (absentee) landlords, and subsequent economists extended it to include rentier income in general”
- “Today’s right-wing libertarians have reversed this original idea of laissez faire to mean freeing the rentier class from taxes. This shifts the fiscal burden onto labor and consumers – the reverse of what the Physiocrats, Adam Smith and other classical economists meant. Libertarian anthropologists draw pictures of a mythical age in which no public sector existed with no palace or temples to regulate economies and levy taxes or fees for basic public services. Such junk archaeology about a “natural” or “primordial” society provides a faux-historical rationalization for junk economics.”
In other words, land rent – the central driver of Economic Surplus in 18th century France – was produced by forces of nature, rather than that of the nobility’s labour or enterprise, therefore the Physiocrats advocated for the landed aristocracy’s groundrent to be taxed instead of labour and industry. What free market economists (in their usual ways) have done was actually to reverse the meaning of the French term from making the working class and others “free from the royal taxes shifted onto labour and industry” to actually mean “freeing the rentier class from taxes.” This turnaround is most outrageous.
Now, sources such as the one cited at the start of this essay communicate the fact that Adam Smith’s The Invisible Hand theory came into fruition among the pages of The Wealth of Nations. In reality, the term dates back to Smith’s Theory of Moral Sentiments (1759) in which he essentially stated that individuals should achieve higher prosperity by seeking their own self-interest. Yet by the time he wrote the famous Wealth of Nations he had actually discovered that hereditary land ownership, monopolies and kindred rent seeking are incompatible with such a balance.
In fact, the Scott disclosed another Invisible Hand – which took the form of insider dealing and conspiracy against the commonwealth which occur when businessmen gather and scheme against the public good by seeking monopoly power and rent.
Smith’s famous theory did fully form along the pages of The Wealth of Nations as websites such as Investopedia preach, yet the content of his hypothesis was entirely differing. Below is some evidence extracted from the original source –
- “The dearness of house-rent in London arises … above all the dearness of ground-rent, every landlord acting the part of a monopolist” (Wealth of Nations, Book 3, Chapter 10)
- “People of the same trade seldom meet together, even for merriment and diversion, to raise prices … though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary” (Wealth of Nations, Book 1, Chapter 10)
Yet free market economists have tried to appropriate Adam Smith as their mascot, stripping away his critique of ground-rent and monopolies to depict him as a patron saint of deregulation and lower property taxes – although he never truly aligned himself with such policies.
Remember when General Motors’s CEO Charles Wilson proclaimed that what’s good for GM is good for the United States? Smith observed that almost every private interest represents its gains as a public benefit, as if predicting the absurd comments from top managers and CEOs such as Charles Wilson that would follow soon after the great economist’s death. The Scott eventually decided to oppose the idea that socially compatible outcomes derive from free market operations, while accepted definitions of his own theory of The Invisible Hand declare that he preached the exact opposite.
A further comment on these topics comes from the very same Professor Michael Hudson –
- “Financial wealth long was called “invisible”, in contrast to “visible” landed property. Operating on the principle that what is not seen will not be taxed or regulated, real estate interests have blocked government attempts to collect and publish statistics on property values. Britain has not conducted a land census since 1872. Landlords “reaping where they have not sown” have sought to make their rent seeking invisible to economic statisticians. Mainstream orthodoxy averts its eyes from land, and also from monopolies, conflating them with “capital” in general, despite the fact that their income takes the form of (unearned) rent rather than profit as generally understood”
To this day, the big corporations and organizations collude to exploit consumers, especially through established weak points, such as insurance and real estate. They use their power and money to lobby (individually and collectively) for whatever suits them best – they get together to extract favours, privatization giveaways and special subsidies from government. Such misdeeds remain unpunished due to the law of The Invisible Hand and Laissez-Faire policies, as both terms have been adopted into the free market economics collection and detached from their original meanings (a common practice for free marketeers and their client academics, who create their own economic history and economic jargon). Landlords, monopolists, banks and various insatiable capitalist organizations succeed in shifting taxes and regulation away from themselves and abundantly moving the fiscal burden towards labour and industry, while manipulating the choking economy. The nature of many economic concerns has remained unchanged since the 18th century. Adam Smith would turn in his grave upon hearing of such catastrophe.
P.S. The purpose of this blog post was primarily to describe and explain the origins and various meanings of the terms Laissez-Faire and The Invisible Hand; Following essays will discuss topics such as debt peonage, monopolists, privatization, rent seekers, economic rent, etc. in more detail.
- Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, 1776
- Adam Smith’s Theory of Moral Sentiments, 1759
- Michael Hudson’s J is for Junk Economics, 2017