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Warped interpretation of Adam Smith’s phrase, the “invisible hand,” undermines economic justice

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It would be nearly impossible to quantify the number of times that pro-corporate, laissez-faire activists have used the phrase “invisible hand” to justify economic policies which never seem to favor the average person, but instead favor rich and powerful elites. It seems that the “invisible hand” has assumed almost God-like status, whose outcomes the free-market faithful shall never question.

The actual phrase “invisible hand” is correctly credited to the 18th century philosopher, economist, and political scientist Adam Smith. As we shall see, the phrase as actually used by Smith was intended to convey something rather different from the glorified, unrestricted pursuit of personal monetary profit. Nevertheless, free market activists have distorted Smith’s message, and have hijacked his legacy to achieve an enormous intellectual legitimacy and advantage. Proponents of economic justice, who see laissez-faire economic theory as a cover for policies that benefit the rich and powerful at the expense of the average person, would do well to unravel this distortion.

The legitimacy of unregulated corporate power is entrenched by largely unchallenged claims that laissez-faire capitalism—regulated only by the “invisible hand”— is the closest incarnation of the Enlightenment values of rationality, freedom, human rights, and political self-determination. For example, Andrew Bernstein, writing in Capitalism Magazine, states “The Enlightenment upheld three fundamental principles: the rational mind, the rights of the individual, political-economic freedom. These principles form the essence of capitalism. Capitalism is – historically and philosophically – the political/economic system of the Enlightenment.”

Such grandiose claims allow economic conservatives to lift the banner of “reason,” enabling them to denounce all opponents, without debate, as “irrational.” Underlying the maneuver is the legitimacy accorded by selective interpretations of famous free thinkers like Smith. Proponents of economic justice find themselves framed out of any constructive debate. Yet the debate may be easily reentered. The key lies in answering the following question: Is Bernstein actually correct?

Is capitalism really “the political/economic system of the Enlightenment?”

It is useful to consider what Adam Smith, the Enlightenment free thinker, actually thought about capitalists, political and economic freedom, and human rights. Such a study is not difficult or obscure. All that is required is to actually read Smith’s writings, easily available online at, for example, where a search by this author yielded 8 titles representing summaries or different editions of Smith’s most famous works.
Did Smith really describe capitalism as the promoter and protector of Enlightenment values? The answers will surprise those who have never questioned the corporate-funded, laissez-faire activists who have constructed the popular image of Adam Smith.

Smith became chair of logic at Glasgow University in Great Britain in 1751, and then chair of moral philosophy in 1752. He was appointed commissioner of customs in 1778, two years after the American colonies declared independence from King George III. In 1776 he published his famous economics tome, An Inquiry Into the Nature and Causes of the Wealth of Nations, commonly referred to as Wealth of Nations, to which the remainder of this essay will refer.

To be fair, it would be a distortion to ignore legitimate points raised by the advocates of private power and corporate largess as they read Smith.

Smith opens Wealth of Nations with a lengthy description of how the division of labor, or specialization, benefits and increases trade. Many anti-capitalist workers and philosophers, such as Marx, objected to the division of labor and the wage system, claiming that they alienated producers from their work. In contrast, Smith seems to approve of the division of labor wholeheartedly. He writes in the first paragraph of the first chapter that “The greatest improvement in the productive powers of labour…seem to have been the effects of the division of labour.” Division of labor makes workers more efficient, but specialization is limited by the size of the market. Higher wages are the product, not of the total wealth of a society, but of the rate at which wealth is expanding.

One of the early advocates of free trade, Smith deplores the use of tariffs and other protectionist measures. He argues, for example, that constraining imports sacrifices the good of the consumer to the profit of manufacturers. Smith rails against regulations meant to enhance domestic industries, claiming that they actually harm the nation. He objects especially to subsidies and monopolies. Trade conducted freely is always beneficial. “That trade which, without force or constraint, is naturally and regularly carried on between any two places is always advantageous…”

Bounties (limits on imports) hurt the economy because they force trade into much less efficient channels than if there were no subsidies. Other types of regulation hurt the economy because they enforce monopolies that misallocate resources. The private interests of individuals naturally lead them to allocate resources most efficiently. Protectionism against foreign companies actually hurt the home country more in the long run: “The unjust oppression of the industry of other countries falls back…upon the heads of the oppressors…”

While Smith believed it was better for the nation if individuals did employ their investment capital nearer to home than far away, Smith was adamantly opposed to regulating such deployment of capital: “What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual…can, in his local situation, judge much better than any statesman or lawgiver can do for him.” Favoring domestic industry with regulation interferes with private individuals’ right to deploy their own capital as they see fit. Such regulation “must, in almost all cases, be either a useless or a hurtful regulation.”

Smith inveighs at length against mandatory apprenticeships, and he regards regulations requiring apprenticeships as infringement upon the rights of both employers and employees. The mandatory apprenticeship is “a manifest encroachment upon the just liberty both of the workman, and of those who might be disposed to employ him.” Smith also argues against restrictions on the movement of labor. “The policy of Europe, by obstructing the free circulation of labour and stock both from employment to employment, and from place to place, occasions in some cases a very inconvenient inequality…”

Smith does not particularly object to the inequality between laborers and proprietors; he believes that proprietors suffer greatly if general prosperity declines, stating “The order of proprietors may, perhaps, gain more by the prosperity of the society, than that of labourers: but there is no order that suffers so cruelly from its decline.”

Finally, the Smith-based case for economic conservatism appears to be closed when one reads “Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct. The whole, or almost the whole public revenue, is in most countries employed in maintaining unproductive hands.” But private individuals display a “frugality and good conduct…sufficient to compensate, not only the private prodigality and misconduct of individuals, but the public extravagance of government.” This counterbalancing effect is due to the “uniform, constant, and unintrerrupted effort of every man to better his condition.”

It would seem, with such statements, that Smith firmly supported today’s right-wing conception of free trade, with as little interference from regulation as possible.

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Warped interpretation of Adam Smith’s phrase, the “invisible hand,” undermines economic justice

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