The Invisible Hand of Adam Smith and Thomas Jefferson

This year marks the 250th anniversary of The Wealth of Nations. The occasion inspired me to meditate on two quotes that must be among Adam Smith’s most famous.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.

I particularly like that second sentence. It proves the point Smith lays out in the first. We all understand what motivates butchers, bakers, and brewers.

The second quote speaks to what this pursuit of individual self-interest means for the collective good:

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. . . . 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. . . . By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Though intending only private gain, the butcher, baker, and brewer (and even the banker) promote the interest of society, and do so far more effectively than they would via philanthropy or other intentional measures.

Apart from the important insights these quotes convey about the nature of market economies, they intrigue me for their moral vision as well.

To this day, a pervasive ethical opinion holds that making money is a grubby and immoral business. Billionaires can only earn some forgiveness for evil wealth accumulation by their philanthropy. After you’ve made your dirty money, do something good for society by giving it away. MacKenzie Scott is the saint; Jeff Bezos, the sinner.

Those ethics are rooted in the view that one person can only get wealthy by taking things from another. For thousands of years, that was not a bad approximation of reality. Roman emperors did not gain half the income of the empire by inventing iPhones. They took it by force.

But Smith points out that in a free-market system, this is exactly backward. The person who invents a personal computer, an iPhone, or a new and better retail format becomes a billionaire but also creates hundreds of billions of dollars for the rest of us. That tiny fraction they keep for themselves is usually reinvested in the company, where it generates more new products and employment. Here is the contribution to society, far more than some ham-handed effort at philanthropy, as that of billionaires usually is.

Smith, in establishing economics as a cause-and-effect discipline, turned this realization into a prescription for a wealthier society. Want greater national prosperity? Here’s what you need: economic freedom, under the rule of law and property rights, disciplined by the competition that freedom engenders.

And wow, did that recipe work. Note the log scale in the chart below. Average income is up by a factor of 20 from Smith’s time. And gross domestic product is a vast understatement of the benefits (consumer surplus) of growth. Lifespan and child mortality alone make the point. From thousands of years of misery, just a little economic freedom has brought us wonders. Even Smith’s Britain was full of restrictions on who could be in what business, what price they could charge, and so on. And the imperfect freedom we have now gives one hope that even more freedom can produce additional wonders.