Tuesday, March 23, 2010

The Invisible Hand

Adam Smith's complex and influential writings on philosophy, politics, and economics contain, among other concepts, his metaphor of an "invisible hand," the natural process by which an equilibrium or homeostasis is reached in everything from chemistry to economic, from biology to politics. This force directs human activity without the knowledge or consent of individuals, and thus merely self-centered actions are finally seen as part of the cosmic harmony:

The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.


Analyzing the passage above, we might imagine a wealthy person eating a meal in a restaurant, a meal which will cost many times what a simple meal, prepared at home by a poor person, would cost. At the end of the meal, both the rich man and the poor man will have approximately the same result - several hundred calories in their stomachs. But the rich man will have spent much more than what was necessary, in the process, have placed cash into the economic system: paying the wages of the waiters and waitresses, and other employees of the restaurant, the farmers and food-suppliers. The rich man's excess expenditures will have furnished the wages by which several poor people will have purchased their food.

Thus, even if an individual were purely selfish, and had no desire to aid others, his economic activity will, in fact, provide wages which effectively distribute wealth among his countrymen:

But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, 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 the society that it was no 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. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.


In fact, Smith argues, that by acting merely selfishly, the consumer does not only good, but the maximal good, because he will spend so as to maximize efficiency and gain, whereas someone who spent in an attempt to be unselfish will reward work which is less than optimally productive: attempts at economic altruism do not nudge the society toward equilibrium points, but it is precisely at those points that benefit and utility for every person in that society is maximized.