July 2023
“He is led by an invisible hand to promote an end which was no part of his intention.” Adam Smith
In 1776, the year America declared its independence, Adam Smith, a Scottish economist, published his magnum opus; An Inquiry into the Nature and Causes of the Wealth of Nations. Smith’s brilliant manuscript laid the groundwork for forthcoming economic thinkers, such as Frederic Bastiat, Ludwig von Mises, Friedrich Hayek, Milton Friedman, and Thomas Sowell.
While Smith introduced the concept of the invisible hand in his previous work, Theory of Moral Sentiments, the concept didn’t gain traction until Wealth of Nations was published seventeen years later. Since then, however, it’s become the subject of much academic debate.
The invisible hand metaphor reveals both the morality and simplicity in which a free economy operates; we, as individuals, are not guided by some altruistic vision for the greater good, but rather the fulfillment of self-interest, or greed, if you will. By pursuing our own self-interest (constrained by the laws of the land), society benefits. In order to get what we want, we must voluntarily trade with one another; first, our time for money, then our money for goods or services. And the only way voluntary trade can happen is if each individual perceives value in what the other has to offer. If a merchant wants your money he must provide value to you, the customer. If not, you take your dollars elsewhere.
Prior to a free market system (capitalism), the only means by which to acquire wealth was to either inherit it or take it by force; plunder. There was no middle class and no way for the poor to climb the socioeconomic ladder. However, a market system, based on voluntary exchange, changed that, and created unprecedented opportunities for the lower class to finally break the shackles of poverty and rise to whatever level of prosperity their efforts and ideas deserved.
The alternative to a free economy is a centrally planned, top-down, government controlled one. Karl Marx, the Father of Communism, subscribed to the notion of to each according his ability, to each according to his need, which is antithetical to a free economy, if not freedom itself. Marx’s notion of equity is the north star by which current government determines the merit of public policy. This is a new development in the United States and one that is diametrically opposed to the Founders belief in the pursuit of happiness. The Declaration of Independence makes clear that it’s not the role of government to guarantee happiness. That’s for us to figure out.
In stark contrast to the free market’s invisible hand is the iron fist of a centrally planned economy. Rather than trust its citizens to make prudent decisions in matters such as employment, wages, benefits, education, purchases, and the like, authoritarian governments instead want to make those decisions for you. But economic freedom (capitalism) and political freedom are two sides of the same coin. You cannot have political freedom without economic freedom; the freedom to succeed or fail based on your own merit.
Government bureaucrats, not trusting the market (meaning you), instead prefer to control/regulate prices, wages, production, and consumption, which is tantamount to social engineering. This is devastating prosperity but makes perfect sense if the goal is equity, or equality of outcome.
There is no equal outcome in nature. Rather, we are all unique. Some are smarter, more creative, work harder, take more risks, willing to practice thrift as well as defer gratification. In a merit-based system, those are the people who innovate, create, and produce more value to society. Therefore, it shouldn’t come as a surprise when Bill Gates, Elon Musk or Steve Jobs ends up with more than the rest of us. However, in a capitalistic system, wealth is not a zero-sum game. Yes, the disruptors/innovators can become billionaires, but their ideas and inventions raise living standards for all of society.
To paraphrase Smith, it is not from the benevolence of the baker that we get our bread, but from their regard to their own interest. Said another way, the invisible hand of the free market, guided by voluntary exchange, translates the subjective interests of individuals into the common interest. In other words, absent the heavy hand of government interference, the natural trajectory for a free society is ever-increasing prosperity.
In summary, unlike socialism, which prioritizes equity over prosperity, the invisible hand produces unintended social benefits and public good brought about by individuals acting in their own self interests. The beauty of which is that it’s simply human nature to desire a better tomorrow, for ourselves and our children. Human flourishing doesn’t require the heavy hand of government, but merely the freedom to operate in a manner aligned with self-interest, as opposed to the special interests of government.
Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
pathwaytoprosperity.com
The Invisible Hand
July 2023
“He is led by an invisible hand to promote an end which was no part of his intention.” Adam Smith
In 1776, the year America declared its independence, Adam Smith, a Scottish economist, published his magnum opus; An Inquiry into the Nature and Causes of the Wealth of Nations. Smith’s brilliant manuscript laid the groundwork for forthcoming economic thinkers, such as Frederic Bastiat, Ludwig von Mises, Friedrich Hayek, Milton Friedman, and Thomas Sowell.
While Smith introduced the concept of the invisible hand in his previous work, Theory of Moral Sentiments, the concept didn’t gain traction until Wealth of Nations was published seventeen years later. Since then, however, it’s become the subject of much academic debate.
The invisible hand metaphor reveals both the morality and simplicity in which a free economy operates; we, as individuals, are not guided by some altruistic vision for the greater good, but rather the fulfillment of self-interest, or greed, if you will. By pursuing our own self-interest (constrained by the laws of the land), society benefits. In order to get what we want, we must voluntarily trade with one another; first, our time for money, then our money for goods or services. And the only way voluntary trade can happen is if each individual perceives value in what the other has to offer. If a merchant wants your money he must provide value to you, the customer. If not, you take your dollars elsewhere.
Prior to a free market system (capitalism), the only means by which to acquire wealth was to either inherit it or take it by force; plunder. There was no middle class and no way for the poor to climb the socioeconomic ladder. However, a market system, based on voluntary exchange, changed that, and created unprecedented opportunities for the lower class to finally break the shackles of poverty and rise to whatever level of prosperity their efforts and ideas deserved.
The alternative to a free economy is a centrally planned, top-down, government controlled one. Karl Marx, the Father of Communism, subscribed to the notion of to each according his ability, to each according to his need, which is antithetical to a free economy, if not freedom itself. Marx’s notion of equity is the north star by which current government determines the merit of public policy. This is a new development in the United States and one that is diametrically opposed to the Founders belief in the pursuit of happiness. The Declaration of Independence makes clear that it’s not the role of government to guarantee happiness. That’s for us to figure out.
In stark contrast to the free market’s invisible hand is the iron fist of a centrally planned economy. Rather than trust its citizens to make prudent decisions in matters such as employment, wages, benefits, education, purchases, and the like, authoritarian governments instead want to make those decisions for you. But economic freedom (capitalism) and political freedom are two sides of the same coin. You cannot have political freedom without economic freedom; the freedom to succeed or fail based on your own merit.
Government bureaucrats, not trusting the market (meaning you), instead prefer to control/regulate prices, wages, production, and consumption, which is tantamount to social engineering. This is devastating prosperity but makes perfect sense if the goal is equity, or equality of outcome.
There is no equal outcome in nature. Rather, we are all unique. Some are smarter, more creative, work harder, take more risks, willing to practice thrift as well as defer gratification. In a merit-based system, those are the people who innovate, create, and produce more value to society. Therefore, it shouldn’t come as a surprise when Bill Gates, Elon Musk or Steve Jobs ends up with more than the rest of us. However, in a capitalistic system, wealth is not a zero-sum game. Yes, the disruptors/innovators can become billionaires, but their ideas and inventions raise living standards for all of society.
To paraphrase Smith, it is not from the benevolence of the baker that we get our bread, but from their regard to their own interest. Said another way, the invisible hand of the free market, guided by voluntary exchange, translates the subjective interests of individuals into the common interest. In other words, absent the heavy hand of government interference, the natural trajectory for a free society is ever-increasing prosperity.
In summary, unlike socialism, which prioritizes equity over prosperity, the invisible hand produces unintended social benefits and public good brought about by individuals acting in their own self interests. The beauty of which is that it’s simply human nature to desire a better tomorrow, for ourselves and our children. Human flourishing doesn’t require the heavy hand of government, but merely the freedom to operate in a manner aligned with self-interest, as opposed to the special interests of government.
Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
pathwaytoprosperity.com