The invisible hand is the most widely used metaphor in economics. What did Adam Smith (or William Shakespeare, who coined the phrase) really mean?
There are few images of Adam Smith, the founder of modern economics. The best is a caricature drawn by John Kay of Edinburgh, born in that city two centuries before I was. It therefore seemed particularly fitting that the National Portrait Gallery should ask me to offer a pen portrait of the great man for its exhibition, Heroes and Villains, that opens next week.
It led me to investigate the origins of his most famous phrase, “the invisible hand”. The common modern interpretation of Smith’s words is that self-interested actions tend cumulatively to lead to a better society.
In fact, the passage in The Wealth of Nations that contains the metaphor is hardly a song of praise for liberal economics. Smith is arguing that import restrictions are unnecessary, because British merchants will naturally prefer to buy from other British traders rather than entrust their fortunes to unreliable foreigners. Taken as a whole, it is neither the most profound nor the most elevating section of The Wealth of Nations and, but for that one observation, would have been entirely forgotten.
The phrase “the invisible hand” originates with Shakespeare, not Smith. Macbeth, having ascended the Scottish throne through the killing of Duncan, must cover his tracks by ordering the murder of Banquo. As dusk falls, the appointed time for the further crime approaches:
Come, seeling night,
Scarf up the tender eye of pitiful day,
And, with thy bloody and invisible hand,
Cancel and tear to pieces that great bond,
Which keeps me pale.
Macbeth goes on to muse that “things bad begun make strong themselves by ill”. This sentiment would have been recognised in the boardrooms of Enron and WorldCom. And Shakespeare accurately anticipated the events that were to unfold in these businesses. Macbeth’s hitmen kill Banquo, but his son escapes to England. The whistleblower exposes Macbeth’s activities and returns to Scotland with an invading army that deposes the murderous king. The pursuit of self-interest not only fails to add up to the overall betterment of society; it ultimately destroys those who engage in it.
I don’t know whether Macbeth was recently performed in Clintonville, Mississippi, or Houston, Texas. But Smith knew the play well: he delivered public lectures on Shakespeare’s imagery. Scholars such as Emma Rothschild and A.L. Macfie have argued that Smith was intrigued by the metaphor of the invisible hand, which recurs several times in his work.
What would Smith have thought today of the invisible hand that steered Bernie Ebbers and Kenneth Lay to ends that were no part of their intention, if not to the overall betterment of society? Not much, we know. “Commerce,” he wrote, “sinks the courage of mankind. The minds of men are contracted, and rendered incapable of elevation.” Smith, it should be acknowledged, was a sceptical observer of all human behaviour. Politicians, doctors and above all university professors felt the lash of his acerbic tongue.
We can be sure that Smith did not intend to applaud today’s Masters of the Universe. But we live in an economy inconceivably different from that of 18th-century Scotland and it is a mistake to foist parentage of modern ideas on him, or to seek insights into 21st-century business from careful exegesis of his text.
But we can learn from Smith and other figures of the Scottish enlightenment a lesson common to all interpretations of the invisible hand. These 18th-century figures discerned a spontaneous order in economic and social systems, which would ultimately reassert itself even in the face of disruptive change. In the words of Adam Ferguson, Smith’s contemporary, “nations stumble on establishments which are the result of human action, but not of human design”. The moral of Macbeth, and of Smith’s magnum opus, is not that selfish behaviour works for the public good. It concerns the follies of human ambition and the failures of grand design. It is as relevant for our time as for Smith’s or Shakespeare’s.