Adam Smith: Self Interest and the Invisible Hand

Today, we celebrate the 300th birthday of Adam Smith, a prominent figure from the Scottish Enlightenment in the 18th century. Despite primarily being a moral philosopher, Smith’s contributions to economics have earned him the esteemed title of father of modern economics. His groundbreaking works, “The Theory of Moral Sentiments” and “The Wealth of Nations,” continue to be cherished and remembered even after three centuries. Among his many influential ideas, the concept of the “invisible hand” stands out, as it highlights the role self-interest plays in fostering societal prosperity through free market capitalism.

It is important to delve deeper into Smith, as he is often misunderstood, even by those who admire him. The ‘invisible hand’ of the market – probably the most know concept that he has given to the world – helps create societal benefits en masse. The beautiful part of the invisible hand is the understanding that it does create those benefits through force or top-down central plan done by the ‘man of system,’ but by individuals pursuing their own self-interest. Or, as he put it “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 interest.”

Think for a second longer about what Smith means by this, because it really matters. Smith does not advocate for a sole focus on self-interest. He emphasizes constantly the need for “sympathy” – what we call empathy today – throughout The theory of Moral Sentiment. However, if we accept humans as they are and allow them to care for themselves, pursue their own self-interest will not only bring them material wellbeing, but to their fellow-citizens as well.

While the markets themselves are not inherently virtuous, they are not bad either. However, as with all things in life, they can be corrupted by special interests and promote “immoral vices” and products. Nonetheless, when left to operate freely, the free market, based on voluntary choice and cooperation, tends to align with the needs of both consumers and producers. Consequently, efficient producers – that is, efficient in satisfying consumers’ needs and desires – shape the tempo and direction of the market. In turn, this necessitates wealth inequality, at the “cost” of ultimately enriching society as a whole. This dynamic reflects the essence of the market’s “double-thank you” principle.

We often wonder why, in a world so abundant, there are still millions suffering from poverty and hunger. However, even if we had a magic wand at our disposal and redistributed all that wealth (equally), we would run into a problem right away – wealth first has to be created and only then spent. And a society that emphasizes the spending (of other people’s money) over creating new wealth will soon have nothing to redistribute.

Once again, this does not (necessarily) mean that the poor will always be bound to the begging stick, nor that the rich will enjoy the splendor forevermore. Moreover, this doesn’t mean that the only way for a better life is of the poor if you redistribute the wealth of the rich downstream. Wealth in itself doesn’t create new and ever larger wealth. Some businesses fail. “Only” those that serve the needs of their costumers can enjoyed the newly created wealth directly. And the market doesn’t ask nor care whether it the already rich or the downtrodden they get to offer their services and become rich(er) in the process.

In honor of Adam Smith’s 300th birthday, Reason magazine paid tribute to him by asking prominent figures in the liberty movement about their favorite quotes from his works. The chosen quotes demonstrate the enduring brilliance of a thinker who wrote nearly three centuries ago. They encompass ideas related to free trade, the limited role of government in fostering a virtuous and prosperous society, justice, and benevolence. Three centuries later, Smith’s insights continue to hold tremendous relevance and offer invaluable wisdom.

If Smith, in The Wealth of Nations talks about the free markets and how they create prosperity all around, in The Theory of Moral sentiments he lays down the basis of the moral philosophy, justice and the necessary institutions needed for such a system to function. When you connect the two pieces, it becomes clear that enriching the poorest and the most needed in society plays a central role in his thinking. That is exactly what the free markets accomplish, through the division of labor and self-interest and by the power of the invisible hand. That is why we celebrate him today, three centuries after his birth.