The invisible hand

Coined by Adam Smith; the famous use is in The Wealth of Nations, 1776

Economics — Adam Smith and the case for self-interest

Adam Smith's metaphor for the way individuals pursuing their own advantage can, without intending it, produce an outcome that benefits society at large. Smith used the phrase only three times in all his writings, and just once in The Wealth of Nations of 1776, where it describes a merchant who prefers to invest at home and so unintentionally supports domestic industry. It has since become the shorthand for the whole case that markets coordinate themselves, formalised in the twentieth century as the theorems of welfare economics — though Smith himself devoted many pages to the ways merchants conspire against the public, and some scholars read the phrase as half a joke.

How to spot them

▸A Scottish moral philosopher, Professor at Glasgow, who later became a Commissioner of Customs
▸Used exactly three times across his works, and only once in the famous one
▸The butcher, the brewer and the baker, who feed us out of regard to their own interest
▸He appeared on the Bank of England twenty-pound note from 2007

Key facts

A merchant who prefers home to foreign industry and is led to promote an end that was no part of his intention (1776)

Book IV, chapter 2 of The Wealth of Nations — the single occurrence in that book

The proprietors of the soil, dividing the produce of their improvements with the poor despite their natural selfishness (1759)

The Theory of Moral Sentiments, Part IV — an earlier and quite different use of the same metaphor

An essay on the history of astronomy, mocking the superstitious for crediting thunderbolts to Jupiter (1795)

Published posthumously; the third and earliest use, and plainly ironic

'It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner' (1776)

Book I, chapter 2 — the clearest statement of the underlying argument, made without the metaphor

'People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public' (1776)

The same author on cartels — often forgotten by those who quote him on markets

Proved in the 1950s as the First Fundamental Theorem of Welfare Economics (1951)

Kenneth Arrow and Gérard Debreu gave the metaphor a formal, and heavily conditional, mathematical form

Key ideas

The claim is about unintended consequences, not about intentions: the baker is not trying to feed you, and the merchant is not trying to enrich the nation.
The formal version holds only under strong conditions — complete markets, no externalities, no market power, full information. Every recognised market failure is a failure of one of those conditions.
Emma Rothschild and other historians of thought have argued the phrase was used lightly, even ironically, and that the weight later placed on it is out of all proportion to its role in Smith's argument.

Quick-fire facts

•An Inquiry into the Nature and Causes of the Wealth of Nations was published on 9 March 1776
•Adam Smith was born in Kirkcaldy, Fife, in 1723 and died in Edinburgh in 1790
•He held the chair of Moral Philosophy at the University of Glasgow and had earlier studied at Balliol College, Oxford, which he disliked intensely
•The phrase occurs once in The Wealth of Nations, once in The Theory of Moral Sentiments (1759), and once in the posthumous essay on the history of astronomy
•Smith spent his last years as a Commissioner of Customs in Scotland — an ironic post for a champion of free trade
•He ordered most of his unpublished manuscripts burned shortly before his death
•He appeared on the reverse of the Bank of England £20 note from 2007 until it was replaced by J. M. W. Turner in 2020
•The Wealth of Nations opens not with markets but with the division of labour in a pin factory
•Smith is buried in the Canongate Kirkyard on Edinburgh's Royal Mile

Drill it — 7 cards

1 / 7new card

Sources

Adam Smith — An Inquiry into the Nature and Causes of the Wealth of Nations 1776
Adam Smith — The Theory of Moral Sentiments 1759
Emma Rothschild — Adam Smith and the Invisible Hand American Economic Review Papers and Proceedings, 1994; the case that the phrase was used ironically. Cited without URL.