THE INVISIBLE HAND

Smith’s views differed from Quesnay’s in one major respect: The source of wealth, Smith argued, was not the land, but labor. “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life,” Smith declared in his book’s Introduction. And the production of wealth was enhanced by dividing the labor into subtasks that could be performed more efficiently using specialized skills. “The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour,” Smith pronounced at the beginning of Chapter 1.4

Modern caricatures of Wealth of Nations do not do it justice. It is usually summed up with a reference to the “invisible hand” that makes capitalism work just fine as long as government doesn’t get involved. There is no need for any planning or external economic controls—if everyone simply pursues profits without restraint, the system as a whole will be most efficient at distributing goods and services. With his “invisible hand” analogy, Smith seems to assert that pure selfishness serves the world well: “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest,” Smith wrote. “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.”5

In fact, Smith’s ideas about a free-market economy were subtle and sophisticated, much more thoughtful than the knee-jerk free-market-to-the-max mantra that people promote, invoking his name, today. (Among other things, he noted that the invisible hand worked effectively only if the people doing business weren’t crooks cooking the books.) He did believe that government interference in business—either to assist or restrain—subverted the benefits of natural and free enterprise. By eliminating both preferences (or “encouragements”) and restraints, “the obvious and simple system



The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement