THINKER'S ALMANAC - June 5

What was Adam Smith’s “Invisible Hand,” and how did he argue that this “Hand” is at work in a capitalistic society?

Subject:  Economics - Smith’s Invisible Hand

Event:  Birthday of Adam Smith, 1723

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.  -Adam Smith

Adam Smith was born on this day in 1723 in Kirkcaldy, Scotland.  Today Smith is recognized as the father of modern economics, a title he earned by writing the most influential economics manifesto ever published, The Wealth of Nations (1776).

ADAM SMITH

- Image by scotlandstudycentre from Pixabay

In his work, Smith presents his economic theory that if the government does not interfere with the economy, the free market can regulate itself.  According to Smith, the forces of supply and demand will guide the “Invisible Hand” of the market.  Free trade, free markets, and the individual motivation to make a profit will provide the necessary impetus to create collective wealth and prosperity (1).

Commenting on Smith’s influence on the capitalist economy, the historian Yuval Noah Harari says the following:

...Smith’s claim that the selfish human urge to increase private profits is the basis for collective wealth is one of the most revolutionary ideas in human history -- revolutionary not just from an economic perspective, but even more so from a moral and political perspective.  What Smith says is, in fact, that greed is good, and that by becoming rich I benefit everybody, not just myself.  ‘Egoism is altruism.’ (2)

According to Smith, it is, therefore, the forces of individual self-interest that guide “The Invisible Hand,” producing benefits for the greater public good.

In 1958, Leonard Reed, the founder of the Foundation of Economic Education (FEE), wrote an essay called “I, Pencil” to concretely illustrate the market forces behind Adam Smith’s Invisible Hand.  Reed writes his essay by personifying a pencil and having this humble pencil tell its story, the story of how multiple market forces worked independently in different parts of the world to produce a single pencil.  No single mastermind can be credited with the production of a single pencil; instead, its existence, just as the existence of other products like cars and toasters, is the result of the Invisible Hand at work (3).

Recall, Retrieve, Recite, Ruminate, Reflect, Reason:  In economics, what is meant by “the invisible hand”?

Challenge - The Persuasive Pencil: Read the essay “I, Pencil,” and summarize the story that Reed tells about the pencil relates to Adam Smith’s economic philosophy.

Sources:

1-Hart, Michael H. The 100: A Ranking of the Most Influential Person in History.  New York:  Citadel Press, 1978: 218-221.

2-Harari, Yuval Noah.  Sapiens:  A Brief History of Humankind. New York:  Harper Perennial, 2015: 310.

3-Reed, “I, Pencil” 1958 The Foundation for Economic Education.