The Mystery of Adam Smith’s Invisible Hand Resolved1
Several new interpretations of Adam Smith’s invisible hand have
recently been published in leading general-interest economic
journals. These interpretations attempt to bring Smith forward in
time, to make him more modern, and to fashion him in the image
of the modern welfare theorist. Here we go back in time and find
the source for both of Smith’s economic applications of the
invisible hand in Richard Cantillon’s model of the isolated estate.
With this connection established, we know what Smith read and
dubbed the invisible hand.
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1 The author would like to thank DC, IHD, RBE, GSF, PM, JMJ, JT, DRT and PW for their comments and
The Mystery of Adam Smith’s Invisible Hand Resolved
Smith’s three explicit references to the “invisible hand” do not add up to a
unified notion. Maybe future research can unearth why Smith used the
term in an inconsistent manner. Meanwhile, we can only work with the
three texts, and these texts do not provide a uniform sense of the term. In
any case, none of these references lends support to the modern
understanding of the metaphor as (being) about the first law of welfare
We now know a great deal about the intricacies and details of Adam Smith’s life and
economics. Scholars have, for example, poured over his views on the organization of
religion,3 his views of the corporation,4 and even his tenure as a tax collector,5 and have
established definite conclusions. In contrast, Smith’s most famous concept—“the
invisible hand”—has in recent years been placed in an intellectual quagmire as a result of
a surprising resurgence of interest in the meaning of the concept. Several new
interpretations of the concept have been published in the leading general-interest
economic journals, as well as those that specialize in the history of economic thought.
This widespread effort to discover the “true” meaning of the invisible hand
appears to have muddied the conceptual waters almost beyond recognition. There are
now at least a dozen different versions of the invisible hand ranging from the more
traditional interpretations to those which attach the phrase to such things as slavery and
national defense. Smith’s invisible hand now suffers from multiple-conception disorder
2 Khalil, p. 54.
3 Ekelund, Hébert, and Tollison (2005).
4 Anderson and Tollison (1982).
5 Anderson, Shughart, and Tollison (1985).
and the lack of an acceptable definition could render Smith’s concept scientifically
useless. The opening quote from Khalil represents one of the few sensible modern
interpretations of Smith (the process theorist) because it shows both how far modern
interpreters have gone astray—painting Smith forward in time as a modern neoclassical
welfare (end state) theorist, and why there is so much confusion—Smith’s three different
uses of the phrase.
In order to resolve the mystery of the meaning of the invisible hand, we go
backward in time and show that Smith discovered the general conceptual framework for
the invisible hand in Richard Cantillon’s Essai sur la Nature du Commerce en Général
(hereafter, Essai).6 Cantillon’s model of the isolated estate represents a revolutionary
breakthrough in economic theory and both of Smith’s economic applications of the
invisible hand—which hitherto have been understood to be disconnected—can be found
in it. This linkage between Smith and Cantillon permits us to describe the invisible hand
as the processes that constitute price theory, competition, and distribution. First, however
we will briefly describe the heated debate in the general-interest journals over the
meaning of the invisible hand and then present the broader connections that scholars have
made between Cantillon and Smith.
6 Essai sur la Nature du Commerce en Général (hereafter, Essai) was written around 1730 and circulated
privately until it was published in 1755 therefore it might not have been available to Smith when he wrote
the History of Astronomy in 1749, but probably was available for writing Theory of Moral Sentiments and
was obviously available to him for the writing of Wealth of Nations. The Essai was also an important
impetus to the establishment of the Physiocrats in 1756. Page numbers for references to the Essai are given
for (the original French edition-1755/the Higgs translation-1931/the Brewer edition-2001)
Why all the Mystery?
Given that the concept has been around since the very beginnings of economic science
you would think that we would have a very definite notion of what the invisible hand is
all about. However, because the concept is so obviously nebulous, individual scholars
may have a very good idea of what the concept means to them, but that meaning can
differ from individual to individual. Some of the confusion can also be attributed to
Smith’s failure to describe the meaning of the phrase and from the fact that he used it in
three different ways in the History of Astronomy (1749, hereafter HA), the Theory of
Moral Sentiments (1759, hereafter TMS) and the Wealth of Nations (1776, hereafter
A veritable cottage industry has sprung up in recent years to define the true
meaning of Smith's phrase and to capitalize on its widespread recognition and use. For
example, Spenser Pack found that the invisible hand leads to increased destitution among
7 His first use of the phrase is in the History of Astronomy (1749, hereafter HA), where he scorned those
who attribute a divine presence for things that can be explained scientifically. This was written before
Cantillon’s Essai was published in 1755 and although others had read the Essai in manuscript form—
including in all probability Smith’s friend David Hume—it is less likely that Smith was influenced here by
Cantillon. The first application also differs fundamentally from the second and third which are economic
applications of the phrase. The second use is in the Theory of Moral Sentiments (1759, hereafter TMS),
where Smith described the vile landowner who is forced to distribute the majority of the bounty of his land
to the peasants in order to obtain their labor and the goods and services that he wishes. As a result, people
get almost the same sustenance as if the land was divided equally. By the time he wrote TMS Smith already
had a general notion of the universe as a type of divinely inspired machine (which he derived from
Hutchison and Newton), but it will be shown here that the specific content of this application is in
Cantillon’s Essai, most specifically in Cantillon’s model of the isolated estate. The third and most famous
use of the phrase appears in the Wealth of Nations (1776, hereafter WN), where the invisible hand is used as
a metaphor for self-interest—in that people pursuing their self-interest unintentionally promote the general
interest and the largest possible production. We know for sure that Smith had read Cantillon by this time
because in WN he references Cantillon concerning his estimate of the minimum wage necessary to
maintain a stable population. Cantillon’s “invisible hand” directly follows his estimate in the chapters on
entrepreneurship and the model of the isolated estate.
the poor and slaves while benefiting the wealthy.8 Syed Ahmad offers us four "invisible
hands" and William Grampp reviews ten different possibilities.9 We are told that the
invisible hand derives from Smith’s theology, that it is an important secular device, and
that it is an ironic, but useful joke.
Whatever its true meaning, the issue is important enough that the American
Economic Review (AER), Journal of Economic Perspectives (JEP), and Journal of
Political Economy (JPE) have all recently published articles on the meaning of the
invisible hand. Add to that the numerous articles and book-length treatments of the
subject—including an entire book of entries from the New Palgraves10 published under
the title The Invisible Hand and you have not only a major debate, but a puzzle regarding
the true importance of it all.
Because we are taking an entirely different route to the meaning of the invisible
hand, it is not necessary to survey all the various interpretations or to provide a complete
set of critiques and refutations. However, to get the flavor of the disparity between the
interpretations, a summary of Grampp’s survey of ten invisible hands and his critiques is
Self-interest promotes the general interest. This is the most common interpretation
according to Grampp, but he claims this only holds true in competitive markets
when capital is maintained domestically and only when people actually follow
their self-interest (and Grampp gives several reasons why they often do not).
8 See Pack (1996).
9 Ahmad (1997) and Grampp (2000).
10 Eatwell, Milgate and Newman (1989).
The invisible hand is the price mechanism. This is another common interpretation
that Grampp rejects because Smith’s equilibrium only maximizes welfare when
wealth is maximized by traders who restrict their trading to domestic markets.
Grampp labels the Neo-Austrian view of the invisible hand as the metaphor for
how beneficial social orders emerge from the unintended consequences of
individual actions. To the extent that it is a true rendering of the Neo-Austrian
view, it tells us nothing of value for the economist—the hand essentially remains
The invisible hand is competition. Grampp finds that Smith did not discuss
competition when describing the invisible hand and did not declare it present in
all competitive markets or self-interested acts.
The invisible hand is the mutual advantage from exchange. This mutual advantage
is not at all invisible in Smith and he does not discuss it in describing the role of
the invisible hand.
The invisible hand is a joke. A recent and novel interpretation in the AER11 based
on the idea that the meaning of the term is not consistent in its three uses. While
there are three uses with distinct meanings, this hardly means the term is a joke or
Acquiring skills and knowledge in business leads to increases in wealth. You
could use an invisible-hand explanation for this process, but this process has
nothing to do with Adam Smith’s use and like #3 provides nothing of use for the
The invisible hand is God. In one use Smith condemns religious explanations for
natural phenomena, in the TMS he makes a deistic reference, and in WN it is
clearly not a religious reference—he does not write “as if”—but is referring to
tangible human forces so this interpretation is on weak grounds.
The invisible hand promotes the national defense by preventing the export of
capital. Grampp likes this explanation best of all because it is most like his own
(i.e. #10). This interpretation is based on Smith’s use of the phrase in WN, it refers
11 Rothchild (1994).
to what the invisible hand does, and it relates to the geographic location of wealth.
The only problem is that it is not complete.
Grampp’s interpretation, which he claims is Adam Smith’s own interpretation, is
that when individuals’ self-interest leads them to keep their capital at home, rather
than exporting it, this promotes the national defense. In his own words, the
“invisible hand then is self-interest operating in this circumstance, the
circumstance in which a private transaction yields a positive externality that
augments a public good.”12
From my perspective, this list proceeds from the most commonly held and most
plausible interpretations to the least common and least plausible interpretations. With the
possible exception of number three, the first five interpretations are the most common
and plausible explanations for what Smith meant by the invisible hand. For example, if
you asked an economist to explain the invisible hand you would likely hear a response
that involved some combination of the first five interpretations.13
The second five range from the silly and non-economic to the contrived. The
seventh interpretation is just an application from evolutionary psychology and can be
dismissed as only necessary for the list of interpretations to reach the magic number ten.
Number six, which was published recently in the AER, declares that the invisible hand is
a joke. Number nine—published in the JEP—provides the phrase with a taste of both
mercantilism and public goods theory by claiming the invisible hand was about retarding
the export of capital to enhance the national defense.
12 Grampp (2000, p. 451, emphasis added).
13 For example: “The invisible hand is individuals who pursue their self interest, who make exchanges of
labor and goods with others to their mutual benefit. These exchanges result in the development of markets
and competition between buyers and sellers and this competition drives the price system resulting in
maximum production and consumer satisfaction.”
The tenth interpretation is an elaboration of ninth that includes an externality
argument. While it is certainly true that wealthier nations are better able to defend
themselves, this has nothing to do with what Adam Smith meant by the invisible hand
itself. It is not worth cataloging all the problems with this position as it has already been
subjected to a withering and lengthy critique that details most of the problems—certainly
enough of them—to dismiss the matter.14 One is tempted to label this interpretation a
“blind man’s bluff” in that it seems to be based largely on the few words that surround
the phrase in WN and ignores almost everything else in order to impress the imprint of
modern economics onto Smith.
What is worth noting is how badly three of the top general interest journals in
economics have presented Adam Smith’s invisible hand. It would seem that the journals
and their contributors are trying to paint Adam Smith in their image of a modern
economist. Astoundingly, another depiction in the AER even uses the invisible hand as a
description of how bureaucrats and entrepreneurs interact.15 Ironically, of the five
implausible or non-economic interpretations (6-10), the one that best holds its water is the
one that sees God as the invisible hand. At least this interpretation tells us something
about Adam Smith himself and gives us some connection to the system of natural liberty
(based on natural law) that Smith described and espoused.16
Also worth noting is the problematic entry on the invisible hand in the New
Palgraves by Karen Vaughn (the basis of interpretation number three). This prominent
14 Minowitz (2004).
15 Frye and Shleifer (1997).
16 For an interesting attempt to expose a religious interpretation of Smith’s invisible hand see Denis (2005).
It was Thorstein Veblen that most famously interpreted Smith’s invisible hand as natural law. See Jackson
(2005) for an important recent application of Smith thought and Evensky’s (1993) article in JEP on the
ethical dimension of the invisible hand.
reference work is often the first source scholars and students consult when researching a
topic. Here they will find a black hole where the invisible hand is described—over and
over again—as the emergence of social orders that were unintended. The actual
economics of the invisible hand are mostly ignored, except for minor references to self-
interest. Here the concept is said to be composed of three “logical” steps: 1. Human
action leads to unintended consequences, 2. Invocation of the law of large numbers and
evolutionary time and you get what appears to be intelligent design, and 3. the end result
is beneficial and desirable even though it was unintended. Step one is unnecessary, step
three is normative, and step two is devoid of economic content. It is normally not a
problem to invoke phrases like “spontaneous order” and “invisible hand,” but when
presenting such concepts in a dictionary, it should be pointed out (and well illustrated)
that it refers to a step-by-step real-world process of individual actions that are generally
very much intended and very much designed.17 Hand waving expressions of the invisible
hand should probably be condemned as Smith similarly did in his HA.
It is also worth noting that even before these modern interpretations were
“discovered,” the invisible hand already had a major image problem because while the
phrase was appreciated by many, it is also widely disparaged as mere apologetics for
capitalism. This is where invisible hand’s “Vaughn problem” comes into play: leaving
the concept vague and nebulous and not based on specific real-world processes. For
example, David Hull—coming from the philosophy of science perspective—found that
“the real problem with invisible-hand explanations is the specification of the mechanism
that is supposed to bring about the result.” Philosophers of science have found that for
17 To distinguish the invisible hand of the Scottish Enlightenment from others views it should be pointed
out that all the relevant human action need not be “purposeful” and that all unintended consequences need
not be the result of a spontaneous order.
invisible-hand explanations to be successful they must make explicit the mechanisms or
processes that they are based on and how the results are achieved, or as Hull asks:
Can the mechanisms responsible for this behavior in science be set out
explicitly? Are these mechanisms adequate to bring about the effects I
claim for science, or do they merely appeal to mysterious coincidences
that serve only to paper over these anomalous states of affairs?18
Therefore, making explicit the mechanisms of the invisible hand will lead to a
better understanding of the term by its proponents and will also reduce the level of
normative disagreement between the forces and foes of Smithian economics. A good
application of the invisible hand is provided by Selgin and White.19 They describe the
mechanisms of several competing visions of what the invisible hand might look like in
the area of money and banking.
Where is the Invisible Hand?
Adam Smith was not the first person to use the phrase the invisible hand, as it was
already in use to describe supernatural action.20 Indeed, that is how Smith (1980, p. 49)
used the phrase—derisively—in his History of Astronomy where he used the “invisible
hand of Jupiter” to describe the beliefs of polytheism, savages, and the superstitious who
would attribute all the irregular events in nature, like thunder and lightning, to the
invisible gods. Smith was scorning those who concoct special explanations, when in
18 Hull (1997, p. S119).
19 Selgin and White (1994).
20 Spengler (1984, p. 73) shows that seventeenth century writer Joseph Glanville used the phase. Rothbard
(1995) argues that Smith got the general conception of what the invisible hand is from his teacher Francis
Hutchinson and it certainly is true that Hutchinson was a critical influence on Smith in terms of the system
of natural liberty that both espoused.