Invisible Hand

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The Invisible hand is a metaphor created by Adam Smith to illustrate the principle of "enlightened self interest". Today this principle is associated with psychological egoism. In The Wealth of Nations, Adam Smith makes the claim that, within the system of capitalism, an individual acting for his own good tends also to promote the good of his community. He attributed this principle to a social mechanism that he called the Invisible Hand.

Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it... 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 society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

Smith uses the metaphor in the context of an argument against protectionism and government regulation of markets, but it is based on very broad principles developed by Mandeville, Butler, Shaftesbury, and Francis Hutcheson. In general, the term "Invisible Hand" can apply to any individual action that has unplanned, unintended consequences, particularly those which arise from actions not orchestrated by a central command and which have an observable, patterned effect on the community. Bernard Mandeville claimed that private vices are actually public benefits. In The Fable of the Bees (1714) he laments that the "bees of social virtue are buzzing in Man's bonnet": that civilized man has stigmatized his private appetites and the result is the retardation of the common good. Bishop Butler claimed that pursuing the public good was the best way of advancing one's own good since the two were necessarily identical. Lord Shaftesbury turned the convergence of public and private good around, claiming that acting in accordance with one's self-interest will produce socially beneficial results. An underlying unifying force that Shaftesbury called the "Will of Nature" maintains equilibrium, congruency, and harmony. This force, if it is to operate freely, requires the individual pursuit of rational self-interest, and the preservation and advancement of the self. Francis Hutcheson also accepted this convergence between public and private interest, but he attributed the mechanism, not to rational self-interest, but to personal intuition which he called a "moral sense". Smith developed his own version of this general principle in which six psychological motives combine in each individual to produce the common good. In The Theory of Moral Sentiments, vol II, page 316, he says: By acting according to the dictates of our moral faculties, we necessarily pursue the most effective means for promoting the happiness of mankind. A contemporary example of such an effect could be the far-reaching social benefit realized via the proliferation of computers and software; goods which have been produced almost entirely by people trying to maximize their own economic gain. Presumably those producers didn't manufacture the computers and develop the software out of a love for humanity or an altruistic desire to promote society's collective fortune. Any social benefits that have accrued therefore, according to Smith's doctrine, are simply a by-product of their striving for selfish reward.

Contrary to common misconceptions, Smith did not assert that all self-interested labor necessarily benefits society, or that all public goods are produced through self-interested labor. His proposal is merely that in a free market, people usually tend to produce goods desired by their neighbours. The tragedy of the commons is an example where self-interest tends to bring an unwanted result.

Moreover, capitalism arguably provides numerous opportunities for maximizing one's own profit at the expense (rather than for the benefit) of others. The tobacco industry is often cited as a good example of this: the sale of cigarettes and other tobacco products certainly brings a very good revenue, but the industry's critics deny that the social benefits (the pleasures associated with smoking, the camaraderie, the feeling of doing something 'cool,' etc.), can possibly outbalance the social costs.

Some would claim that another counter-example to Smith's theory could be Wikipedia, including the article you are reading right now. The observed benefit to society — this encyclopedia — is not associated with any material gain for any of the thousands of contributors. This, however, raises the issue of psychological rewards and other non-economic gains, something that Smith did not ignore.

Since Smith's time, the principle of the invisible hand has been further incorporated into economic theory. Leon Walras developed a four equation general equilibrium model which concludes that individual self-interest operating in a competitive market place produces the unique conditions under which a society's total utility is maximized. Vilfredo Pareto used an edgeworth box contact line to illustrate a similar social optimality.

See also

External link

eo:Nevidebla mano fi:Näkymätön käsi he:היד הנעלמה pt:Mão invisível sv:Den osynliga handen


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