The conditions under which Adam Smith's invisible hand operates

Abstract

We examine how Adam Smith introduces his notion of an invisible hand. It appears in chapter ii of Book IV of The Wealth of Nations when Smith is discussing the aspects of foreign trade. The terms ‘foreign’ and ‘home’ appear in the title to his chapter, and by the time Smith has introduced the concept of an invisible hand, we realise that foreign direct investment has been ruled out of the proceedings. We note that when Allan Greenspan referred to the concept of an invisible hand in his book some 230 years later (The age of turbulence), he sought to do so in an international context. The system of national accounts that has been in operation for almost a century was not, of course, available to Smith, and we need to consider what society he might have had in mind when he referred to the annual revenue of society. There has been some debate as to whether Smith includes or excludes intermediate goods when he examines annual revenue. For Smith’s invisible hand to operate, monopoly must be absent. To understand how Smith’s criticism of merchants and manufacturers can be reconciled with the benefits accruing to society if every individual is left free to pursue his or her own gain, we make use of Mittermaier’s re-interpretation of Smith. Mittermaier identifies a hand behind an invisible hand and asks us to consider whether that hand is also invisible. In the process, he identifies pragmatic as opposed to dogmatic free marketeers. JEL Codes: B12, B15, E01, E02