Adam Smith: The Invisible Hand

Release Date
August 29, 2011

Topic

Basic Economics
Description

Why are some countries wealthy while other nations are poor? Prof. James Otteson, using the ideas of Adam Smith, explains how the division of labor is a necessary and crucial element of wealthy nations. Additionally, Otteson explains Smith’s idea of the invisible hand, which explains how human beings acting to satisfy their own self interest often unintentionally benefit others.

I, Pencil (video): An exploration of unplanned, spontaneous order and the invisible hand.

Adam Smith: The Invisible Hand
Adam Smith was one of the principals of an astonishing period of human learning, called the Scottish Enlightenment, during the 18th century. He’s the author of two books. In 1759, The Theory of Moral Sentiments was his first book. In 1776, the one he’s more famous for now, An Inquiry into the Nature and Causes of the Wealth of Nations. Those two books together almost singlehandedly began the discipline of political economy.
Adam Smith called himself a moral philosopher. For him, moral philosophy encompassed all of the investigation that had to do with human behavior. So he’s now principally known as the father of economics, and that’s because of the book, The Wealth of Nations. If you’ve heard anything about The Wealth of Nations, the one phrase you may have heard of is “invisible hand.” It’s about halfway through the book.
It’s 1,000 pages long, chock full of information. About halfway through the book, he uses this phrase, “invisible hand.” And that phrase is very important, because what Smith thought he had discovered was that commercial societies—markets—could enable human beings who are seeking to satisfy their own self-interest to actually benefit other people, even if unintentionally. That’s really an amazing insight and one of the key pieces of our understanding today of markets and commercial society.
But what might be even more interesting, at least to me, about that Wealth of Nations is at the beginning of it. Remember that the title of the book was An Inquiry into the Nature and Causes of the Wealth of Nations. So, what Smith was interested to know was, why are some places wealthy and other places are not?
Well, what Smith didn’t say is almost as important as what he did say. It’s not because of natural resources. It’s not because some races are superior to others. Both of those are explanations that were available and heard at that time. That wasn’t it for him. What he thought the key to the difference between wealthy and nonwealthy places was whether they allowed division of labor. Could a person focus on something?
Why would that matter? Because if you were allowed to focus on a fairly narrow range of activities, this could unleash your human ingenuity. For Smith, this was really the key to explaining why some places were wealthy and other places were not. It was not those other factors. It was whether the society, whether the community, whether the nation, allowed people’s individual ingenuity—scope—to investigate, entrepreneurially figure out new ways to do things to satisfy their interests better. Those societies that allowed individuals scope for their ingenuity, they succeeded; they flourished. That was really the key to human prosperity.