Smith appears to make some questionable assumptions in offering the theory of the invisible hand. The following passage encapsulates the problem:
Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society. (IV.2.4)
It is unclear that every individual actually strives for the most efficacious “employment” of his capital, even granting that the measure of efficacy is not necessarily objective, and could be based on an individual’s subjective assessment. A relevant and unavoidable issue in this regard is the asymmetry of information that results in the potential discrepancy between subjective evaluation and the objective reality. As Hahn puts it, “agents on one side of the market have information which is superior to that possessed by agents on the other” (7). But this level of analysis is already assumes one step more than it is necessary; in fact, there seems to be nothing that would prevent one from engaging in a transaction that is “detrimental” insofar as it fails to maximize profit—a simple act of charity, for example. Of course, one could convincingly argue that charity might merely be a prelude or a tactic to secure greater future gains, but this is certainly not the only modality through which charity can manifest itself.
Assuming, however, that individuals are nonetheless predominately motivated by the particular configuration of self-interest that Smith has in mind, it is unclear whether the “society” to which advantage accrues is necessarily the immediate and “entire” society to which the individual belongs. It seems quite plausible that the benefits thus obtained might be concentrated in very few hands within a society. Do these beneficiaries represent the interests of society in general? Smith clearly privileges the total sum of “benefits,” but in this case there seems to be some ambiguity in the meaning of “benefit,” especially when some elements within society may actually experience substantial “losses” in the process.
Lastly, what is the main thrust behind invoking the putatively collective interests of society? Is it to justify action based primarily on self-interest? It is a strange moment when Smith writes, “I have never known much good done by those who affected to trade for the public good” (IV.2.9). If Smith is right that society receives the greatest benefit even when every individual works to advance his own advantage, and if such a theory informs this egocentric modality, it seems that maximizing the public good is precisely the goal—why must it be hidden?
Due to an apparent technical issue, the following comment originally appeared under a different post. I’ve copied them over.
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Gavin Kennedy Said,
February 12, 2011 @ 07:51 · Edit
Adam Smith did not have a “theory” of “an invisible hand”. That was a an idea invented by modern economists from the 1950s. Smith used ‘”an invisible hand” as a metaphor in Wealth Of Nations (Book IV, chapter 2, p 456) for some, but not all, merchants, who were concerned with the security of trading with foreign countries or the colonies, and, therefore, preferred to trade “domestically”.
It was their concern for their own security that ‘led them’ to invest in “domestick” industry, which Smith correctly noted added to “domestick annual revenue and employment” – a purely limited arithmetic outcome (the whole is the sum of its parts) – which Smith believed was a public benefit. The idea that this was a general benefit across all participants to the same degree was invented by, among others, Paul Samuelson in his Economics text, 1948, p 36, and in Arrow and Debrue’s theories of General Equilibrium.
You quoted a few lines from paragraph 9 and missed the particular and limited meaning Smith gave to it, as well as ignored the previous 8 paragraphs in which Smith makes clear his meaning. Metaphors express “in a more striking and interesting manner” their “objects” (see Adam Smith’s own “Lectures in Rhetoric and Belles Lettres” [1763] 1983, p 29.
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Bourgeoisiologist Said,
February 12, 2011 @ 11:29 · Edit
Technical preamble: Somehow the comment did not appear under the original post to which it refers. I’ll attempt to move it or copy it over.
Back to the topic: I believe we may actually be in agreement as to the attribution of the “invisible hand” to Smith. The admittedly unspecified context of my question is precisely the mobilization of Smith as the putative progenitor of such a theory. Yet, even were we to assume that Smith is in fact the genuine authority on this matter, the theory itself seems to imply certain tendentious overtones that lack justification. As you mention, Smith is explaining a specific and limited phenomenon, which arguably related only incidentally to “public good.” It is a curious appropriation, then, that this should be taken to be a main thrust of the argument.
Thanks for the clarification on the matter and for the references you noted.