The Invisible Hand
Adam Smith and the invisible hand. Essentially, the invisible hand guides spending in a free market. Research online/internet and explain how the Invisible Hand works. Is this theory applicable to our society today? Why or why not?

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March 2001

Adam Smith and the invisible hand

by Helen Joyce

…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

In this passage, taken from his 1776 book “An Inquiry into the Nature and Causes of the Wealth of Nations”
Adam Smith set out the mechanism by which he felt economic society operated. Each individual strives to
become wealthy “intending only his own gain” but to this end he must exchange what he owns or produces
with others who sufficiently value what he has to offer; in this way, by division of labour and a free market,
public interest is advanced.

Smith is often regarded as the father of economics, and his writings have been enormously influential.
Nowadays, “invisible hand” explanations are invoked to explain all sorts of phenomena, from scientific

Adam Smith and the invisible hand

Adam Smith and the invisible hand 1

progress to environmental degradation. In the modern context, mathematicians study “invisible hand”
processes as part of Game Theory, the branch of mathematics that deals with payoffs and strategies (see Game
Theory and the Cuban Missile Crisis) in Issue 13 of Plus.

Smith was profoundly religious, and saw the “invisible hand” as the mechanism by which a benevolent God
administered a universe in which human happiness was maximised. He made it clear in his writings that quite
considerable structure was required in society before the invisible hand mechanism could work efficiently.
For example, property rights must be strong, and there must be widespread adherence to moral norms, such as
prohibitions against theft and misrepresentation. Theft was, to Smith, the worst crime of all, even though a
poor man stealing from a rich man may increase overall happiness. He even went so far as to say that the
purpose of government is to defend the rich from the poor.

Here is a description of the way Smith imagined the universe operates:

There is a benevolent deity who adm

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