A textbook case

How to better understand Adam Smith's invisible hand metaphor

The concept in his book “The Wealth of Nations” was more about free trade than free markets

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The invisible hand: Capitalism's misunderstood metaphor
Photo: Mike Segar (Reuters)

This is the full transcript for season 4, episode 7 of the Quartz Obsession podcast on the invisible hand.

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Nalis: There are concepts out there that we never truly studied, but sort of just learned about, say… natural selection. I can do a pretty good job of pretending I’ve read On the Origin of Species, but like most people, I have not. What I know about Darwinian theory actually comes from an interpretation of it that frames natural selection as a competition where only the most ruthless survive. And that may or may not be what Darwin meant.

Another concept like that, is “the invisible hand,” famously posited by 18th century Scottish economist, Adam Smith, in his book, The Wealth of Nations, which I also have not read.


The invisible hand is typically understood as the natural force that moves the markets, driven by individuals acting in their own self-interest. Because it’s “natural,” it’s seen as a positive.

Former Republican candidate for US president Mitt Romney even used it in his campaign in 2012.


Jim: You’re not going to read it, like, in character?

Nalis, off-mic: No. You will.

Nalis: We couldn’t get the rights to the broadcast of Romney’s speech, so we’ve asked G/O Media CEO Jim Spanfeller to do his best Mitt Romney impression and read the quote:

Jim: “The invisible hand of the market always moves faster and better than the heavy hand of government.”

Nalis, off-mic: I think we got it.

Jim: I actually believe in the invisible hand! I think it’s the basis of capitalism. Whether he actually posited it the way we think about it, I’ll leave to your obsessions!


Nalis: But as it turns out, Adam Smith actually didn’t write about the invisible hand as a force for good. In fact, he barely wrote about it at all. So how did such a passing concept become so commonplace in economic discourse? What did Adam Smith actually intend when he wrote about it? Why did he pick such a metaphor?

I’m Annalisa Merelli, Nalis for short, and I am the host of this season of the Quartz Obsession. Today: the invisible hand.


To better understand how the invisible hand went from a passing reference in Adam Smith’s work to Mitt Romney’s presidential campaign, we have Quartz writer Julia Malleck, who has actually read many of the 1200 pages of The Wealth of Nations. She found the expression “invisible hand” occurred a whole total of exactly one time.

Nalis: Hi Julia!

Julia: Hi Nalis.

Nalis: So you’re here because you’re obsessed with the invisible hand. When and what did you first hear about it?


Economics 101

Julia: I probably first heard about it as a student, as I think many of us do in a Econ 101 class in college. It probably was something that showed up on a slide in a lecture when you’re learning about Adam Smith and sort of like foundational economic thinkers. And it ends up as being a flashcard that you probably memorize for a test. You know, invisible hand guides the market, determines the allocation of goods and services in the market, or something to that extent. And that was sort of the start and end of it.


Nalis: So then when did the doubt occur to you that it wasn’t as simple as that?

Julia: Yeah. I was on the internet and saw a clip of Noam Chomsky, as one does. And he has opinions, and he was giving an opinion on the invisible hand saying, “Guess what? Nobody’s read Adam Smith, but everyone talks about him. And whatever impression you have of the invisible hand is probably wrong. He didn’t intend, you know, to use the phrase as an endorsement of free market economics,” which is the impression that I think a lot of us have. “It means something else.”


And so I think I returned to the topic again as a student, wanting to figure out, OK, there’s this challenge to this preconceived notion that I didn’t even realize I had. And I wanted to dig a little deeper.

Nalis: I feel like it’s a very Noam Chomsky thing to do, to be like, “You think you know! But you don’t know! You haven’t read the books that you know were assigned to you in your curriculum!


Julia: Right. Exactly. And I think like, as a linguist as well, you know, he’s like the father of linguistics, seeing him sort of approach this phrase, this very powerful phrase, it immediately caught my attention. I was like, OK, he probably has a different take on it than, you know, mainstream economists because he’s coming at it from this different angle.

Nalis: So when do you think this concept started becoming so popular and, you know, and why, of all things, we are so attached to it?


How did the invisible hand concept become so popular?

Julia: I think it became popularized throughout the 20th century. Adam Smith was an 18th century Scottish moral philosopher, and he was an economist. He’s very often hailed as the “father of economics,” the “father of capitalism,” even though he never used the word “capitalism in his writing.” But the phrase was picked up in the 20th century by Chicago School economists, like Milton Friedman, George Stigler. And they almost cherry-picked this phrase out of thousands of pages of writing and changed its meaning, for their own sort of economic ideology.


Nalis: After that, so, like, a history of economists then taking this interpretation of the invisible hand and then adapting it to increasingly, you know, sort of like more black and white scenarios. Can you tell us a bit more about that?

What Adam Smith originally meant by the “invisible hand”

Julia: Yeah, so I guess we should start with what Adam Smith originally maybe meant by the “invisible hand,” which within academia, it turns out is hotly debated. He uses the phrase “invisible hand” three different times across all of his works that we know of. The first usage showed up in a lecture that he gave in the 1750s. At the time, he was the chair of moral philosophy at the University of Glasgow, and he was talking about it in a very different context from what we know today. He was talking about the beliefs of primitive peoples and was almost mockingly saying they believed that everything, you know, the planets and nature and everything was guided by an invisible hand, rather than some sort of logic or science. And then the phrase shows up again in his theory of moral sentiments, which is sort of his long exploration of what human nature is. And the most famous usage as, as you said earlier, was in The Wealth of Nations. And in that passage, he’s talking about international trade.


So at the time Adam Smith was alive, the dominant form of trade was mercantilist. So what that meant was: The world was carved up into these spheres of influence. We had private corporations that were backed by states, and they’d have exclusive rights to certain trade routes or to certain regions of the world, and it was monopolistic. And…

Nalis: Is this—just to give an example—would this be like the East India Company or the West India—


Julia: Yeah, exactly.

Nalis: You know, like private corporations that are literally owning countries/continents or have, or like, fractions of continents.


Julia: Exactly. Yeah. And so you had companies like the East India Company who were advocating for a balance of trade where there would be higher exports and lower imports. So there’s trade protectionism during Adam Smith’s time. So when he was writing about international trade in The Wealth of Nations, which was a book on political economy, he’s thinking about, “OK, how do you increase the collective wealth of nations?” He’s basically arguing against mercantilism. He’s arguing against these trade monopolies that these merchant guilds have around the world. And he’s arguing that this is actually preventing nations from becoming wealthier and from increasing collective wealth.

And another dominant theory of wealth at the time was called physiocracy, which is the belief that wealth in a nation comes from agriculture. And Adam Smith was arguing, “It’s not only agriculture, it’s also manufacturing. It’s also laborers who produce wealth.” So the usage of Invisible Hand has to, I think, be understood within this sort of context.


Nalis: So what he’s saying isn’t so much “let the markets do what the markets do,” but rather “we don’t need trade monopolies,” which is quite a different thing!

Julia: Yeah, exactly. He is, you know, as every thinker is, a product of their time, and he’s reacting to what he sees as these sort of greedy merchants who are creating favorable conditions for them to reap more profits. But he’s not seeing this going to the rest of the nation and helping the rest of the people in Britain and the UK.


So when he uses “invisible hand” a third time, he is arguing, in international trade, saying, “If you have free trade, if you have no protections, people will still favor their domestic market.” He’s saying there’s a home bias, as if guided by an invisible hand, they will make investments in their home market. So this argument is less, as you said, about, “market knows best,” you know, “let things be guided by the market,” but it’s more of a way of allaying fears that free markets will destroy a domestic economy.

Nalis: So, how did this idea become so popular?

What role did economics textbooks play?

Julia: So there were two economists who in 1948 published probably one of the most widely read economics textbooks. It’s used in colleges around the world. It’s been translated into 40 languages. It’s called Economics, and it was written by William Nordhaus and Paul Samuelson. And the textbook has this passage from The Wealth of Nations, basically, abbreviating the passage or they were pushing together sentences without ellipses and sort of like crafted a condensed version of what Adam Smith was saying there.


And some people have said that that passage, taken out of context, has misled a lot of people on what the invisible hand actually means. As I said earlier, I feel like you need that sort of historical background and understanding to know what Adam Smith was really arguing there.

Nalis: And then what happened after? Like, what are, who are some of the prominent figures who’ve sort of made it into the commonplace term that it is now?


Which prominent figures popularized the term?

Julia: Yeah, so, the Chicago School economists are the ones who really popularized it. So Milton Friedman, George Stigler, they took this phrase, which Adam Smith was using kind of to describe unintended consequences. And then they turned it into a policy prescription in a way. And they were really focused on the invisible hand as talking about the price system or the price mechanism. So the idea that consumers and producers come together in the market and their actions influence supply and demand, and that influences prices. And the idea that this, you know, is self-regulating. It doesn’t require intervention. So it was very much laissez-faire economics.


Nalis: So before Adam Smith used it in his book, what are some of the other places where this concept came up and this expression was used?

Where else does the invisible hand expression come up?

Julia: So it shows up in Ovid’s Metamorphoses, depending on translation, and that was actually in Adam Smith’s library. There was a translation of it. It’s within the realm of possibility that Smith may have gotten inspiration from that. It also appears in Shakespeare’s Macbeth in one line. And it shows up in a lot of religious writings starting around the 17th century. But even before then, there was a 12th century Benedictine monk named Peter Cellensis, who referenced it in one of his works.


Nalis: I wanted to add actually to Ovid that, if I’m not mistaken, the way that he used it in his text was actually like—it was meant to mean someone who cowardly would stab you in the back. So, not exactly, like, you know, not exactly the sort of force for good that we’re thinking about. It really had some ominous, or like some negative connotations attached to it.

All this to me is almost a lesson in the importance of reading source material. I wonder, while you were thinking about that, did you come up with a better understanding or even a theory as to why concepts like this become so misunderstood so easily?


Julia: Yeah, I mean, I’m no expert on this. As I said, I’ve come to this as a student, but I think very often in the classroom we kind of just learn these nuggets of passed-down wisdom or ideas. And I think being able to cite someone like, “Oh, somebody in the 18th century was saying this,” it almost adds the weight of history and this element of credibility for whatever reason, you know, because so-and-so said it before and now we are saying it today. And I think it can be effective in a debate setting and especially in like ideological discussions—if you can get this person on your team, you know and add weight to your team, that helps convince people.

Nalis: Yeah, I guess like, you know, it’s one of those.. as, as Gandhi once says, “Stop quoting Gandhi.” You know? It’s just like, you can always like find someone older.


I found it quite surprising that Adam Smith only uses the expression invisible hand once. Like what are some of the other surprising facts that you came across when studying his work?

What were Adam Smith’s other ideas and beliefs?

Julia: So, yeah. Adam Smith was a man who had many different ideas. A lot of them, I think contemporary economists who are fans of free market economics would not agree with.


So he was a fan of a progressive tax system. He believed the rich should be taxed more than the poor. He was in favor of the state providing goods and services, including building roads, investing in education... He also endorsed financial regulation. He believed that there should be rules regulating banks, which he likened to fire codes. So a lot of these things I think today would be considered sort of overstepping for those who ascribe to small government, sort of politics and ideology. But Adam Smith was in favor of it.

Nalis: I really feel like: challenge for anyone who hears someone talk about the invisible hand would be like, “Stop! No! Actually, he did not mean the invisible hand this way, but do you know what Adams liked to talk about? How rich should be paid more than the poor. Just like go have a, like, a counter lesson and you know, I guess like against neoliberal economy.


Julia: No, I feel like it’s the best now because you can kind of pull this card like, “Oh, you played the Adam Smith card. Guess what? I have, like, the Uno Reverse Adam Smith card because I’ve read more of the text.”

Nalis: “So you’ve only read the Economics 101 text? Well, let me tell you, I’ve listened to the Quartz Obsession.”


I’m gonna end on a fun note or, or try. I found a little sketch by a British comedian Andy Zaltzman who has a joke specifically about the invisible hand, you know, as every comedian is wont to do. And it kind of gets at the core of our discussion. So he’s talking about the invisible hand, and then he says, “Well, you know, before you assume that the invisible hand is a force for good, maybe you should stop and ask yourself, what would you do if you had an invisible hand?” And so to end our conversation, I’m gonna turn the question to you, Julia. If you had an invisible hand, what would you do with it?

Julia: I feel like I would pull pranks on people. This sounds awful, but I’m a huge fan of haunted houses and ghosts. Like, I feel like I could make a full career out of being, like, hired full-time to spook people, you know? During Halloween maybe, but I could make it a year-round thing.


Nalis: Yeah. I feel similarly. I feel like I would definitely…I mean, no, like clearly I would steal stuff, but like, you know.

Julia: Oh yeah. I mean, of course you don’t even mention...

Nalis: But within the realm of legality and being nice.

Julia: Yeah. And then, you know, if you wanna make money above board, become a professional ghost.


Nalis: Yeah. I would be down for that. Thank you so much. This was so interesting, and I feel like I will never misuse Adam Smith ever again. And in fact will go around correcting people, which is an excellent pastime of mine.

Julia: Thank you so much, Nalis!

Nalis: And that’s our Obsession, folks. The Quartz Obsession is a podcast hosted by me, Nalis Merelli. Katie Jane Fernelius is our producer, and George Drake mixes and does our sound design. Music is by Taka Yazusawa and Alex Suguira. Additional production support provided by multi-platform editor extraordinaire Susan Howson, research wizard Julia Malleck, and audience insight genius, Ashley Webster. Shivank Taksali and Diego Lasarte are our natural born sound engineers.


Special thanks to our brilliant guest, Julia Malleck, who is not invisible and very much a force for good, especially when it comes to this podcast’s support.

If you like what you heard, please review this on Apple Podcasts or wherever you listen to your podcasts. Tell your friends about us. Then head to qz.com/obsession to sign up for Quartz’s Weekly Obsession email and browse hundreds of interesting backstories.


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