As I mentioned in my previous two posts, Adam Smith’s famous “invisible hand” appears but once in the entire Wealth of Nations: in Book IV, Chapter 2. Is this magical hand a mere metaphor, a pious acknowledgment of divine benevolence, or just a wisecrack? Or is it something else entirely? Before we proceed to Book IV, Chapter 3 of Smith’s magnum opus, I would like to share some excerpts from my forthcoming book, Beyond Das Adam Smith Problem (with Salim Rashid), where we explore several possible interpretations of Smith’s unseen hand: divine, metaphorical, ironic, and Panglossian. (Footnotes are below the fold.)

1. Background: Three Invisible Hands

According to one Smith scholar (Harrison 2011, p. 33), “Centuries after Smith’s death, we are still struggling to fathom a two-word phrase that stands out in a thousand-page book.” In the words of another, “Few terms in the lexicon are less explanatory than Adam Smith’s ‘invisible hand’.”[1] Really? Although Adam Smith invokes an “invisible hand” only three times in the entire corpus of his works—not just in The Wealth of Nations but also in his Theory of Moral Sentiments and in his posthumously published essay on astronomy—it is no exaggeration to say that this mysterious manus has become the most famous, as well as one of the most contested, ideas in economics, and perhaps in of all the so-called “social sciences.”[2]

But is there a common thread that ties together this troika of invisible hands? Are these three sets of imaginary hands in Smith’s works reconcilable, or does the Scottish philosopher use the same words in different ways?[3] And regardless of the existence or not of a common thread, why does Smith invoke a hidden hand at all? Furthermore, whatever Smith’s motives were, what is the ontological status of this magical forelimb? Is it just a figure of speech, a metaphor standing in for equilibrium end states when competition is allowed and markets are left free?[4] Is it a divine entity, Providence?[5] Or is it a sardonic gag or punchline?[6] One of us (Rashid 1998), for example, subscribes to a rhetorical interpretation of this imaginary hand. In Rashid’s reading, Smith’s invisible hand was a mere rhetorical device, a piece of imagery, perhaps even a casual metaphor—rather than a scientific or systematic analytical tool. In short, is the invisible hand a divine entity, a mere metaphor, or a wisecrack?

2. The Divine Invisible Hand

For his part, Paul Oslington’s makes a strong case that Smith’s invisible hand refers to the guiding hand of a benevolent God.[7] According to Oslington, the term “invisible hand” was in common use during Smith’s lifetime, and its original meaning refers to the Christian idea of natural harmony through divine providence, i.e. “the possibility of special providential divine action in the economic system to guarantee its stability.”[8]

Alas, Oslington’s deistic reading of Smith’s invisible hand raises more questions than it answers. Do such invisible hand processes as language, markets, and the common law really depend on God’s benevolence or on the goodwill of a magical or godlike being? If so, if God or this divine entity is doing the work of the invisible hand, why does He (or it?) allow imperfections in these institutions, e.g. imperfect translations from one language to another, or market failures in economics, or unjust or poorly-reasoned judicial decisions in law?

3. The Metaphorical Invisible Hand

Yet another possible interpretation is that Smith invoked his invisible hand as a short-hand way of describing or standing in for the fundamental theoretical constructs in economics of “efficient markets” or “market equilibrium”, i.e. when prices are established through competition or when the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers.[9] On this reading of the invisible hand, Smith’s magical hand is just a metaphor or figure speech, for each individual, in pursuing their own private interests, is led “as if” by an invisible hand to increase the welfare of society overall.[10]

This standard “Econ 101” interpretation, however, has three defects. One problem, as Sarah Skwire points out, is that Smith himself never used the words “as if”![11] Another, even deeper, problem is that the concept of equilibrium in economics is itself a problematic one! Some economists even deny that there is such a thing![12] Yet another problem is the Coasian one that markets are rarely efficient or perfectly competitive. In the real world, markets are full of friction: so-called “transaction costs” can prevent some markets from clearing.[13] But perhaps the main problem with the standard economics reading of the invisible hand is this: in the one instance in which he uses the term “invisible hand” in The Wealth of Nations, it’s to describe the process of capital accumulation or wealth maximization, not market efficiency or the clearing of markets. One respected economist, Warren Samuels, went as far as to suggest that Smith’s invisible hand should be “erased” from economic textbooks altogether![14]

4. The Ironic Invisible Hand

So, which of these first two competing interpretations of the invisible hand—literal or metaphorical—is the correct one? To break this interpretive impasse, Emma Rothschild, a respected economic historian at Harvard, has proposed an alternative reading: the ironic or sardonic invisible hand.[15] According to Rothschild, Smith “did not particularly esteem the invisible hand and thought of it as an ironic but useful joke.”[16] Although Rothschild concedes that the evidence for her interpretation of the invisible hand is indirect,[17] she makes two important observations: Smith refers to invisible hands three times in all—not just in The Wealth of Nations, but also in his first published book, The Theory of Moral Sentiments, as well as a third time in his posthumously published essay on the history of astronomy—and each time Smith invokes his invisible hand, it is to gently ridicule or poke fun at others. In The History of Astronomy, for example, Smith refers to “the invisible hand of Jupiter” to describe the pre-scientific theories of primitive peoples during “the first ages of the world” in which “the lowest and most pusillanimous superstition supplied the place of philosophy”:

For it may be observed, that in all Polytheistic religions, among savages, as well as in the early ages of heathen antiquity, it is the irregular events of nature only that are ascribed to the agency and power of the gods. Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters. But thunder and lightning, storms and sunshine, those more irregular events, were ascribed to his favour, or his anger.” (HA, 3.2)

In contrast to his invisible hand reference in his astronomy essay, Smith invokes an invisible hand in Book 4 of The Theory of Moral Sentiments to poke fun at the rich. There, Smith invokes a trickle-down invisible hand to explain how the “natural selfishness and rapacity” of “the rich” somehow ultimately redounds to the benefit of the poor.[18] For reference, here is the complete passage:

The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.” (TMS, IV.i.10)

For Rothschild, these invisible hand references are not meant to be taken literally or even metaphorically but rather as a mild and ironic joke, a lighthearted moment of gaiety in his otherwise dense and dignified works.

5. Conclusion: The Panglossian Invisible Hand

For our part (Guerra-Pujol & Salim, forthcoming), although we are willing to concede that her “wisecrack” theory is plausible for TMS and HA, Rothschild’s ironic interpretation of the invisible hand is far less plausible for The Wealth of Nations. Accordingly, we wish to propose a fourth possibility: what if Smith’s system of natural liberty and his invocation of an invisible hand are literary bookends, two metaphorical anchors that tie together all the many economic insights and historical digressions in The Wealth of Nations.[19] On this view, Smith invokes an “invisible hand” with the Panglossian intention of reassuring his readers that under his system of natural liberty everything will work out in the end. For reference, here is the famous (or infamous, as the case may be) “invisible hand” passage in The Wealth of Nations:

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. (WN, IV.ii.9)

In other words, society overall will be better off when self-interested actors, who intend only their own gain, are free to pursue any trade or occupation and accumulate capital without any unnecessary legal restrictions. Our alternative interpretation of Smith’s invisible hand emphasizes the unintended consequences of individual action, an idea associated with the so-called Austrian School of economics led by Carl Menger (1840-1921), Ludwig von Mises (1881-1973, and Friedrich Hayek (1899-1992). In fact, this Panglossian interpretation can be traced back to Adam Ferguson’s oft-cited insight in his 1767 essay on the history of civil society: “Every step and every movement of the multitude, even in what are termed enlightened ages, are made with equal blindness to the future; and nations stumble upon establishments, which are indeed the result of human action, but not the execution of any human design.”[20]

More simply put, in closing, the Panglossian view of the invisible hand celebrates how our most complex and pro-social human institutions—language, markets, and the common law—have emerged over time through “bottom up” (decentralized) in contrast to “top down” (centralized) processes of self-organization, i.e. from the myriad interactions of individuals pursuing their own goals, not through deliberate design or central planning.[21]

Nota bene: I will proceed to Chapter 3 of Book IV of The Wealth of Nations on Monday, 16 February (Presidents’ Day).

[1] Carey 2016, p. 106.

[2] See, for example, Robert Nozick’s survey of “invisible hand explanations” in Anarchy, State, and Utopia. Nozick 1974, pp. 18-22.

[3] By way of example, compare Grampp 2000, p. 464 (“the three invisible hands will continue to be, in the mind of at least one reader, three distinct ideas, each of them denoted by the same words”) with Kennedy 2009a, p. 258 (“The invisible-hand metaphor added nothing to what Smith, the analyst, and his attentive readers, knew. It was a device which he only used once in each of his books to keep the attention of his other readers who did not follow his analysis.”) with Dan Klein’s valiant attempt to reconcile the three occurrences of the invisible hand in Smith’s works. Klein 2009, pp. 265-271.

[4] Cf. Glory Liu’s vivid description of the “Chicago Adam Smith” in Liu 2022.

[5] See, e.g., Oslington 2012, 2021.

[6] See Rothschild 1994, 2002.

[7] See Oslington 2012.

[8] See, e.g., Oslington 2012, p. 433.

[9] See, e.g., Mankiw 2009, pp. 65-66. Cf. Horn 2024, p. 21: “Economists see the invisible hand as competition at work in a beneficial way (and do not ask whose creation this is)—or else the price mechanism, allocative efficiency, the market as such, or even capitalism ….”

[10] For a plethora of reformulations of Smith’s invisible hand passage with the words “as if” interpolated into the original passage, see Skwire 2024.

[11] See generally Skwire 2024.

[12] Cf. Dixon 1990, p. 356: “The problem posed by this topic is that there is no general concept of equilibrium: rather, there is a method of equilibrium analysis that is employed in most of economics. Thus, the subject of enquiry is as diverse as economics itself.”

[13] See generally Coase 1937. Cf. Stigler 1989, p. 631: “Ronald Coase taught us, what of course we should already have known, that when it is to the benefit of people to reach an agreement, they will seek to reach it. Reaching agreement can be costly in time and other resources, so many potential agreements will not be achieved, but these unachieved agreements will have been inhibited by the smallness of the benefits or the largeness of the costs of agreement.”

[14] Samuels 2011.

[15] See generally Rothschild 2002, pp. 116-118. See also Rothschild 1994.

[16] Rothschild 1994, p. 319.

[17] Rothschild 2002, p. 117.

[18] TMS, IV.i.10.

[19] See, e.g., Klein 2009.

[20] Ferguson 1996/1767, p. 119 (footnote omitted).

[21] By way of comparison, Smith presents a similar Panglossian version of the invisible hand in his first great work, The Theory of Moral Sentiments (IV.i.10), where Smith refers “an invisible hand” to present a kind of trickle-down theory of income distribution in which the “natural selfishness and rapacity” of the rich ultimately redounds to the benefit of the poor.