Many interpretations (and misinterpretations) of Adam Smith’s concept of “the invisible hand” have given rise to new economic schools of thought ranging from spiritualization to historicism of a plain social scientific theory of competition and market equilibrium. In my view, Thornton (2009) provides the most logical conclusion while making the fewest assumptions, when he concludes that the meaning of this “hand” is closely related to Cantillon’s theory of the isolated estate, which, before Cantillon’s publishing of his landmark work Essai, was unknown to Smith prior to his use of the phrase. Put another way, through Cantillon’s affirmation of Smith’s earlier use of the invisible hand idea, Smith was later confirmed by Cantillon through the reading of Essai, which helped to affirm traditional interpretations of the idea through the relationship with Cantillon’s theory of the isolated estate benefitting both the poor and elite classes, sometimes disproportionately so toward the working class.
Keywords: the invisible hand, interventionism, the isolated estate, theology
Does Political Interventionism Hurt Social Outcomes?: The Philosophical Economist Debate
Adam Smith’s concept of the “invisible hand” is overlooked as it diminishes the role and the ability governing bodies have over their constituents, especially when problems arise. Rather than trying to “mend” the economy, the government could allow the free market to resolve the issue itself. In doing so, deregulating would ensure that individuals would act out of their own self-interest rather than a governmental incentive.
An individual does not act out of the best interest of the government; rather, he acts out of his own volition to better his own circumstance. When the government subsidizes anything (or eases demand in any way), it consequently shifts the supply and demand equilibrium lower than what the free market provided, often resulting in shortages. The United States has recently allowed the distribution of portions of the Strategic Petroleum Reserve (SPR) resulting in disincentivizing additional petroleum production. Interfering with the hand can have detrimental effects on economic distribution of resources. With the ongoing SPR releases, the hand was not given the chance to resolve the problem, but simply averted. In doing so, this policy can create disastrous consequences for higher-level producers, ultimately being absorbed by the end consumer. When the government disincentives increased productive capacity through the SPR and the looming threats of a Windfall Profits Tax, it is no wonder that domestic petroleum producers increase dividend payouts and equity buybacks, thereby “failing” to invest in heightened levels of output.
If the hand were able to better act given the current circumstances, one can only assume that producers would want to capitalize on higher oil prices more expediently than their peer group, which would alleviate supply constraints which are the ultimate cause of this “demand shock” (in contrast to oil’s famous inelasticity where demand remains relatively constant irrespective of price over the long-term). Producers would be incentivized to invest in production quicker than their competitors, because the longer this investment was put off, the lesser the reward, resulting in diminishing marginal returns. Furthermore, when a project requires expediency, not doing so can be viewed as management being fiscally irresponsible .
Phraseological Context and Interpretation
The invisible hand in the context of economics is rarely employed on a professional and academic level and when it is, they brand its originator––Adam Smith––a crazed theologian given his interest in the intersection of philosophy and economics. The acting out of one’s self interest in the Neo-Keynesian era is demonized as being against the movement toward populism and collectivist ideas (Busch, 2017, p. 1). What these theorists forget is that one’s self interests are aligned with that of their neighbor because it is most advantageous to serve another’s interests (through a product or service) in order to fulfill your own (wealth, comfort, stability). Because self interest is inherently correlated to satisfying a want or need of a neighbor, Thornton notes it is inherently wrong to dismantle the motivation of individual freedom and liberty (Thornton, 2009, p. 36).
Much of the academic disregard for this idea is due to Smith (1776) using this term in multiple different contexts. On the whole, this has led to conjecture surrounding his authorial intent behind the use of this phrase. Since this is such a pivotal concept, its use and magnitude depend on its intended meaning. This is why perceived market equilibrium can be alleviated or exacerbated simply through the employment of a concept, which is why this subject is so heavily debated.
Thornton’s (2009) evaluation of this phrase is directly linked to the works of Cantillon (as evidenced by the title). He points to the connection of Smith and Cantillon due to the former mentioning Cantillon in his work The Wealth of Nations (1776). Similarly, Smith and Cantillon shared viewpoints on the heavily contested Navigation Acts in the form of wage rate differentials. Because Smith was aware and drew insight from Cantillon, Thornton (2009) furthered his research into the intersection between the two renowned minds. Thornton (2009) seems to employ the Occam’s Razor test best when he states:
The fact that both of Smith’s economic applications of the invisible hand appear together in Cantillon’s model of the isolated estate and are explicitly driven by self interest makes Cantillon the most plausible source of Smith’s concept of the invisible hand. With Cantillon as the inspiration of the invisible hand, the phrase can now be shown to have a specific meaning. This resolution solves the problem of multiple meanings by eliminating all the modern interpretations that have appeared in academic journals…Therefore this solution provides a reasonable resolution to the long standing question asked recently by Khalil as to “why Smith used the term in such an inconsistent manner.” Smith was simply unaware of Cantillon’s manuscript prior to its publication in 1755 and then found the invisible hand in Cantillon’s model of the isolated estate. With this plausible solution in hand, the invisible hand can remain a useful economic construct and analytic device. However, before turning to this solution, we briefly visit the problems now facing the invisible hand. (Thornton, 2009, 29-30)
In alignment to what Thornton (2009) describes as “modern interpretations [appearing] in academic journals,” Hill (2001) aims to diminish the utility of Smith’s idea by grouping it with theological and teleological ideals dependent upon “Providentially endowed laws of motion” (Hill, 2001, p. 2). This reductionist view is critiqued by Thornton when he writes “Hill (2001), Waterman (2002), and Denis (2005) provide us with recent interpretations of the invisible hand with a spiritual glove” (Thornton, 2009, p. 31).
Furthermore, the over-spiritualization of the phrase is likely incorrect as Harrison (2011) points out by concluding, “The earliest reference that I have found occurs in a Greek liturgy which invokes God’s ‘‘invisible right hand which is full of blessing…the expression is relatively rare in subsequent patristic and medieval writings” (Harrison, 2011, p. 31). Seeing as the church empowered use of the phrase was rare at best, Hill’s assertions of modern theological concepts seem out of place.
Under Thornton’s (2009) logical conclusion of Cantillon’s theory of the isolated estate being the basis for Smith’s understanding of competition and natural pricing, the idea that “It is the self interest of the estate owner that maximizes output and income for the populace” makes sense (Thornton, 2009, p. 38).
Thus, with the interpretation of the hand as pursuance of self-interests via the avenue of liberty and ability to seek your neighbor’s chief need, it seems that any hindrance of this end would be immoral. In terms of the current oil supply issues that will likely evolve into a crisis, SPR releases are a blatant contradiction of this guiding hand and its ability to direct capital where it delivers the highest social outcome. The government is effectively diverting capital that would have been otherwise used in not only a more efficient manner, but a moral one.
Under the guise of interventionism lies the heart of a wounded hand that has puppeteer lines attached to it with the puppet master being the State at large. Whether this puppet is controlling the price of money (interest rates) or spending into oblivion (quantitative easing and monetization of government debts), the determinants are incalculable. By attributing growth to unproductive activities by way of forgoing unseen uses of former capital (the broken window fallacy), the government intervenes to the point where the problems it causes are met with more “solutions” that only worsen the problems it was solved to create.
In closing, the late Frédéric Bastiat was famous for distinguishing between the good and the bad economist. Bastiat notes that “the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil” (Bastiat, 1850, p.1). In other words, the interventionist (the bad economist) fails to acknowledge the effects of the unseen outcome. They do not ask the question, “what would happen if we did not release SPR inventory?”
Does Political Interventionism Hurt Social Outcomes?: A Discussion for the Average College Age Individual
The United States government has started releasing oil from the national reserve which is typically reserved for wartime and natural disasters. The Strategic Petroleum Reserve (SPR) release will likely have the outcome of increasing the cost of energy for the public on the whole but disproportionately so for poorer communities. Adam Smith, a Scottish economist and philosopher, coined the phrase the “invisible hand” to help explain that the greatest social outcomes are brought about by individuals pursuing their own self-interests. Interventionist policies can often impede the acting of this hand by incentivizing and disincentivizing actions deemed appropriate or inappropriate by the State.
When one attacks the symptoms of a problem, rather than the problem itself, not only will it cause confusion, but it may even lead to societal mayhem like such events as the 1973 Oil Crisis where petroleum shortages caused rationing and upheaval. The importance of free market initiative helps to promote the best social outcome regardless of circumstance via the employment of self-interest driven initiatives. Whether those initiatives are creating new products and services, or relieving supply-chain disruptions that currently debilitate the domestic economy.
Smith’s (1776) invisible hand solution to intervention is what I consider the building blocks of an economic skyscraper. If one builds on ground that holds interventionist policies to be the only solution to market phenomena, in my view, the building is inherently flawed and prone to any unaccounted-for gust of wind. Long-term price stability is best pursued when markets are allowed to act unimpeded by external influence (state control) that reorganizes what otherwise would have been an efficient use of resources. Without the government picking winners and losers in times of triumph and toil, individuals would be able to succeed based on merit, rather than artificially bolstered endorsement.
Phrase Meaning and Context
Much of the academic disregard for this idea is due to Smith (1776) using this term in multiple different contexts. On the whole, this has led to conjecture surrounding his authorial intent behind the use of this phrase. Since this is such a pivotal concept, its use and magnitude depend on its intended meaning. If the phrase’s implications are neglected and ill informed, its utility is greatly diminished, leading to a continuation of modern thought––the likes of which depend on constant “hands-on” economics where decision making is left to central planners.
Conversely, Thornton’s (2009) evaluation of this phrase is directly linked to the works of Cantillon (evidenced by the title). He points to the connection of Smith and Cantillon due to the former mentioning Cantillon in his work The Wealth of Nations. Similarly, Smith and Cantillon shared viewpoints on the heavily contested Navigation Acts in the form of wage rate differentials. Because Smith was aware and drew insight from Cantillon, Thornton (2009) furthered his research into the intersection between the two renowned minds.
By reducing this phrase to simple theology (in isolation of greater economic and moral implications) is simplistic and is critiqued by Thornton when he writes “Hill (2001), Waterman (2002), and Denis (2005) provide us with recent interpretations of the invisible hand with a spiritual glove” (Thornton, 2009, p. 31).
Additionally, with most modern interpretations falling short of what Smith’s landmark idea ultimately suggests, Thornton (2009) provides the most imaginable solution to the long-debated issue. By attributing the multiple uses of the phrase to Smith’s initial unknown existence of Cantillon’s work certainly seems unavoidable. Furthermore, neither of the other reputable sources cited even note the similarity between Smith and Cantillon furthering the idea that they missed a key piece of evidence that changes final outcomes.
With the definition of Smith’s phrase likely pertaining to individual liberty and the betterment of society by way of pursuing your own interests, modern economists have much to learn from this way of thinking. The current administration’s use of the SPR is not only dangerous (if we were to enter wartime or have a natural disaster etc.), but it is ill-informed. All past and future support by the government has/will have unforeseen effects that are not taken into account. The good economist not only looks at what happened, but he also looks at what did not (Bastiat, 1850, p.1). In this case, what did not happen (or has not yet) was the capitalization upon higher oil prices by oil producers who are worried about a windfall profits tax and subsequent SPR releases. This intervention by the State not only impedes future supply, but prolongs higher energy prices which comprise a disproportionate amount of the working poors’ budget. While the policy is aimed at helping “the little guy” it is doing the opposite.
Busch, C. (2017, January 4). Towards a more enlightened kind of capitalism. World Economic Forum.https://www.weforum.org/agenda/2017/01/21st-century-leadership-towards-an-enlightened-self-interest-model-of-capitalism/
Busch explains that society should enter a “new” form of capitalism which, in turn, ends up sounding like rhetoric used by socialist movements. Busch advocates for a common form of capitalism where one is more concerned about his neighbor than himself, a slippery slope.
Harrison, P. (2011). Adam Smith and the History of the Invisible Hand. Journal of the History of Ideas, 72(1), 29–49.
Harrison is intimately familiar with historical usage of the phrase “the invisible hand” and walks the reader through its possible meanings given its context in similar time periods. He analyzes and accounts for settings, such as liturgical and marketplace arenas where the phrase may have been present. Harrison, most aptly points out that the phrase was used in Macbeth, which Smith was likely to be aware of.
Because the phrase has usage outside of Smith’s work, Harrison makes the case for its nature implying divine intervention and providentialist notions. According to Harrison, the most likely explanation of this verbiage was in reference to the providentialism of the hand of God. His incorporation of Newtonian physics and Smith’s acceptance and mention of them speak to Smith’s perceived knowledge that the “hand” was that of God and a symbol of His constant activity.
Hill, L. (2001). The hidden theology of Adam Smith. European Journal of the History of Economic Thought, 8(1), 1–29. https://doi.org/10.1080/713765225
This article encompasses much of modern economics interpretation of the aforementioned phrase. Hill points to the link between theology and philosophy, given that Smith had interest in the latter. Using dismissive language, Hill attempts to dissuade readers from applying the “hand” in a modern context with any weight. While Hill includes ample citations about her claims, they seem to present a one-sided argument, not countering a logical argument against her initial assertion. Hill (2001) is highly regarded in the field but seems to miss the mark in terms of relieving ambiguity. To her credit, Thornton’s (2009) review of Hill’s (2001) work was many years later, so it is possible that Thornton (2009) was able to uncover evidence which she did not originally pursue.
This source plays a great “devil’s advocate” to more conservative literature like that of Thornton (2009) and Harrison (2011). With the intersection of these three sources, Hill (2001) is used as a “homebase” for how modernity interprets this often disenfranchised philosophical idea. Furthermore, even if Smith’s idea is rooted in theology or not, as someone with a Christian worldview, this may even enhance its personal usefulness and weight.
Thornton, Mark. (2009). Cantillon and the Invisible Hand. The Quarterly Journal of Austrian Economics, 12(2), 27–46.
In this journal article, Thornton discusses different historical interpretations and the effects of those understandings on the phrase “the invisible hand” most famously attributed to Adam Smith. With innumerable contemporary interpretations on what this phrase could mean, Thornton notes that with so many different possible meanings, scholars have rendered the utility of the phrase unintelligible by using the academic condition of multiple-conception disorder (Thornton, 2009, p.31). Thornton makes the case that the meaning of the idea is closely related to work written by Cantillon around the same time period mostly due to the knowledge that Smith had read Cantillon’s landmark piece, Essai.
Thornton (2009) has an extremely comprehensive evaluation of surrounding works in the context of the phrase. His incorporation with Cantillon is not only plausible but, to my understanding, most likely given Smith’s intimate familiarity with the work of Cantillon. With the thought of “the isolated estate” and “the invisible hand” being so similar in philosophical assumptions, this solution’s clarity and comprehensive nature are hard to rebuttal.
Bastiat, F. (1850). Ce qu’on voit et Ce qu’on ne voit pas (Unknown, Trans.). Unknown Publisher. (Original work published in 1850)
Bastiat (1850) is best known for describing the phenomenon of the broken window fallacy. This idea is that the opportunity cost of seemingly productive actions (like war-time economies) are in reality poor uses of capital because it otherwise would have been invested and put to productive use. Even if war increases production of goods across the country, the capital spent to produce those items would have been better employed in absence of a war. Logicians of this caliber are few and far between in the modern era of central planners.