Adam Smith’s Psychology
His “invisible hand” was only part of the story; so was morality!
Posted Feb 13, 2012
However, that's perfectly OK. "Man...is 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 not 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."
Indeed, later on in his masterwork Smith even seemed to provide a rationalization for unvarnished greed and a no-holds-barred predatory economy when he commented: "In spite of their natural selfishness and rapacity...[men] are led by an invisible hand to...advance the interest of the society..."
Modern economists often become lyrical about "the superiority of self-interest" over altruism in economic life and the virtues of competition and the "profit motive," while overlooking the fact that Smith's rendering of the invisible hand was quite contingent. As he said, the invisible hand is not "always the worse" and "frequently promotes" the general welfare. But this is not a sure thing.
More important, many of Smith's modern acolytes seem unaware of his cautionary warnings, especially in his earlier work, The Theory of Moral Sentiments, where (as a Stoic and a Christian) he stressed the fact that everything in a free market depends on a moral foundation of trust, honest dealing and, as he himself put it, "justice". (He defined justice as not doing "injury" to others.) "There can be no proper motive for hurting our neighbor." Smith was even a proponent of the Golden Rule and invoked the "invisible hand" simile in his earlier work to characterize our sense of charity toward those in need.
Accordingly, Smith argued that a moral framework and cooperation are essential prerequisites for a successful society. As he pointed out, "In civilized society [man] stands at all times in need of the cooperation of and assistance great multitudes....man has almost constant occasion for the help of his brethren.... without the assistance and cooperation of many thousands, the very meanest person in a civilized country could not be [provisioned]."
Smith also warned in The Wealth of Nations about the potential abuses associated with wealth and power. He spoke of the collusive nature of the business interests in his country. "Masters are always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their [prevailing] rate." Indeed, "masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate." Furthermore, business interests frequently engage in a "conspiracy against the public or in some other contrivance to raise prices." Smith also thought a true laissez-faire economy would be distorted by businesses and industry scheming to influence politics and legislation. The interests of manufacturers and merchants "...in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public."
So, the next time some politician starts lecturing you about the virtues of unrestrained (deregulated) free market capitalism and invokes the "invisible hand," you might respond by quoting from Adam Smith. It should make for an interesting dialogue.