The Invisible Hand

The 'invisible hand' is a phrase initially created by Adam Smith (father of modern economics) in his renowned article “The Theory of Moral Sentiments” describing the factors of self-centeredness, competition in supply and demand that regulates the limited resources in the social order. This metaphor proceeds to be applied by economists to illustrate the self-determining character of a market economy. He wrote that persons acting in self-centeredness are guided as if by a hand that is invisible to support the public concern. However, Adam Smith was not suggesting that all forms of private endeavors produce public goods. Individuals who benefit through causing harm to others indirectly fracture the public interest. The invisible hand theory is only applicable where social life rules guard the life, liberty, and property of persons. This procedure is not of some supernatural power or occurrence, but the normal result of human instincts and physical laws. It becomes real where the environment allow free exchange and disappears slowly where people are excluded from exchanging or are compelled into unwilling transactions by intrusive governments. This conditional correlation is the foundational lesson of economic history. Individuals willing to support the invisible hand ought to be aware of the character of the factors that deteriorate it.

Towards the end of the eighteenth century, Adam Smith suggested a theory that indicated that in an unregulated and free market, where there is no restriction of production or consumption, there emerges a self driven equilibrium in production of various commodities against people’s demand. Moreover, there will be optimal allocation of people’s capital for production and consumption of various goods for the good of the society. He analyzed the market trends of production and consumption, in which he resolved that if the markets were left alone, they contain intrinsic potential forces of demand and supply which will attain the most effective level of production and consumption, as well as allocation of commodities in the society. He proposed that this process is maneuvered by an invisible hand that seem to direct the market to a level that is favorable for the entire society. His theory was based on the assumption that an attempt of individuals to maximize their own benefits and achievement of wealth through trade and entrepreneurship will always leave the society at an advantageous end. The thought of markets being controlled by an invisible hand to the best results of the society established a firm reason to uphold and maintain free markets. Standard argument on this issue has concluded that the involvement of the government in managing production or consumption would hamper the free market.

Controversy over Invisible Hands Theory

The economic arena of 20^th century have seemed to convert Adam Smith’s “Inquiry into the Nature and Causes of the Wealth of Nations” to drive it into what was not his ultimate intention of the metaphor ‘invisible hands’. There are quite ubiquitous references in articles and books from media and scholarly sources that relate to Adam Smith’s ‘invisible hand’. It is quite outlandish because there is controversial evidence that Smith didn’t acclaim the invisible hand metaphor with the significance indicated by authors from the mid-twentieth century onwards. In this context I will portray that smith had no idea of invisible hand and that he demonstrated no inclination to mean anything more than a remote, though popular fictional metaphor of eighteenth century. Conversely to the allegations of modern consensus, Smith did not give any role to invisible hand, in his idea of competitive markets as stipulated in his books I and II of Wealth of Nations. Modern economics have solely relied on their own assertions and interpolations since 1950 to propose such roles as being indications of invisible hands without any support from Smith’s texts. The issue of invisible hand materialize only once in his text on History of Astronomy (Smith, 1980).

Nevertheless, it can be an issue of controversy that there is no such a thing as invisible hand as far as competitive markets are concerned. This resolution can be obtained since after a couple of years of seeking the validity of invisible hands, the economists and theorists researching the matter resolved in 1070s that there is no basis to ascertain that markets are guided as if by an invisible hand to any optimal equilibrium at all. Although the point never convinced their apparently practical associates who fervently push the opinion about almost anything. Some seem to have decidedly ignored what the theorists said.

Precisely, the dynamic though unstable history of capitalism disproves any invisible hand, as recently evidenced by the global economic crisis that emerged in 2008, as well as the debt crises facing Europe. Focusing on the Mexican crisis in 1994, it is a matter of practical fact there wasn’t any invisible hand. The shocking thing rather is that turning on economic theory; there is proposed practical evidence on this matter.

The academic economists embarked seriously in attempts to create what they termed as general equilibrium replicas to verify the existence of invisible hand in 1870s. They intended to demonstrate that market trading between individuals and firms pursuing self-interests in order to maximize profit may direct an economy to a most favorable and constant equilibrium. In 1954, Gerard Debreu and Kenneth Arrow established the canonical form of general equilibrium. Creating suppositions to describe competitive markets, they evidenced that there subsist some set of prices that would poise the demand and supply for all commodities. Nevertheless, none of them ever demonstrated that markets would be moved by some invisible hand up to that level. In essence, it is just a condition that could stabilize demand and supply if by any chance they cropped up.

In 1960 Herbert Scarf demonstrated that the establishment of Debreu and Arrow can rotate unstably hence leading to a steady darkening of the picture. Furthermore, any dejected hope was eliminated by Debreu in his seminal papers in 1970s. A renowned theorist of Cambridge University Frank Hahn proposed at one time that there isn’t any adequate rationale to presume that there are forces that drive the economy to equilibrium.

Developed in the 1960s, the General-equilibrium thesis compares economies to fighter jets which move in a gust which without proper electronic guidance would result into inevitable disaster. The inability to model the invisible hand is paradoxically great. A given economic model might be doubtful. But if the best economists for a century could not illustrate how some invisible hand was able to shift markets towards equilibrium, doubt is cast over the existence of such a mechanism.

The Taoist "Invisible hand"

Wu Wei means "non-action" translated literally. Basically refers to "action less action". One does not need to be very aggressive to win battles to make things happen. Wu wei means that individual should not do anything which does not maintain the unknowable, mystical flow of nature. It’s the Taoist explanation of Invisible hand and goes along with Taoist virtue of non-aggression/non-competition. Everything according to wu wei is considered to be self regulating and self expressing in their natural mode or form.  Basically Wu wei does not refer to or signify not taking action, but more specifically not forcing things. According to Tao principals actions should be done without over eagerness, exaggerations so that they become non obstructive leading to overall balance and harmony in nature. Wu wei is a state of inner individual tranquility, which brings out the right effortless action at the required right time. Wu wei brings out harmonious and orderly complexity of ecosystem in nature (Tao) works correctly without intervention of man made changes. Wu wei can be explained by characterizing it with adaptability of flowing water in a stream, it flows naturally, without awareness. Ones blocked by an object like a stone; it finds a way around the stone. Water acts without any motive just like wu wei. Any action should be in accordance with circumstances, the surrounding and means. In this manner, wu wei does not inter fear with anything “non action”.

 Generally wu wei is characterized by action undertaken to identify the Tao to conform oneself to its "way” and within all things. In Taoist believes, efficacy and practice of wu wei are fundamental.  The objective of “wu wei” or “non-action” is to reveal the soft, invisible power in nature that controls all things. The main virtues of wu wei are naturalness, which means behaving according to the way nature dictates, naturalism meaning leaving nature to use its own devices, and Nonaggression where the ruler observes a passive rule, allowing nature of the people to take course and welfare should only occur when necessary. Wu wei compares to Adam Smith’s invisible hand in nature though much of wu wei is related to social life and Chinese religion while smith’s invisible hand connects to a free, unregulated market.

Laissez-faire Economic System

Literally translated, the term laissez-faire means “let do” or “let it be” and it is a policy that employs minimal interference from the governmental in the economic dealings of persons and the society. In economics, the phrase means allowing the industrial economy to be free or to have minimal state intervention.  These interferences are mostly in form of tariffs and monopolies control from the government. The term is believed to have originated from the answer that Jean-Baptiste, the finance manager in the French kingdom, got when he offered to help industrialists and they asked him to leave them alone. The laissez-faire policy is more often than not linked with a group of economists branded Physiocrats. The Physiocrats thrived in France in the 1760s.

The laissez-faire economic viewpoint promotes minimal government control on economic issues, which means free markets, reduced taxes, few regulations, private ownership of property and free circulation of labor. The policy promotes certain types of negative freedom contrary to positive independence, such as redistribution of wealth given by the state.

Laissez-faire disagreement to wealth allocation is founded on the idea that capital is taken from the most productive economic sectors and redistributes to the less productive economic sectors. This process is seen as imposing economic equality, which minimizes productivity and the motivation to work. The policy further debates that any short-term social equality of product acquired through reallocation rapidly collapses without compulsion since individuals contain different incentive levels and natural skills and therefore are bound to have different preferences depending on their different values.

The policy goes on to debate that inequality based on material wealth is an important result of the liberty to choose an individuals self-driven actions without imposing on others. It is more favorable to states that have a neutral position between various groups in competition for privileges and political strength in any given state for its interference for instance regulations, legal monopoly creation, protectionism, laws on competition or taxes and price and utility intervention.

Laissez-faire capitalism is a form of economic system. The system of Capitalism entails the ownership of property by individuals. These individuals aim at using the possessions mainly in form of capital (buildings, machines, and other assets used to produce goods and services), to generate income. Private entities and firms compete to earn income. This competition determines the amount of goods produced and the prices for these goods. Although the economies of the United States and many other industrialized nations are highly capitalistic, there is no pure capitalist system because national governments regulate business to some extent making the system of laissez-faire quite impossible to implement.

Classical economists view of laissez-faire economy

The Classical economic hypothesis is based on the model of a laissez-faire economic market. The classical economy like the laissez-faire market policy requires minimal government intervention. It also permits private entities to operate according to their own self interest concerning economic choices. According to the policy, distribution of resources is possible according to individual preference and tastes in the market.  Laissez-faire economists believe that government policies do not affect economic activity and that the state can implement policy proposals that can positively impact the economy but insist that most government policies are likely to worsen positions of the market. However, government interference in the market is essential for an easily working economy.

Classical economists believed that the economy was capable of maintaining full levels of employment through its own mechanisms. This belief led to their favoring and eventually adoption of the laissez-faire, or government by nonintervention policy. They advised individuals to depend on the market system to cater for the economy and to limit the function of government to the areas where it could make a positive contribution. Since the classical economists supposed that supply produced its own demand, they did not suppose that a generalsurplus of goods and services was capable of existing throughout the economy. However, they speculated that there could be an oversupply of individual products. .  One of the main classical supporters of laissez fair was Jean-Baptiste Say. His most renowned work A Treatise on Political Economy, largely expounded laissez-faire economic theory and principles, including Smith’s theory of supply. He argues in favor of free trade and competition and removal of business restraints

Adam Smith: Naturalism and Laissez Faire

A careful examination of the articles An Inquiry into the Nature and Causes of the Wealth of Nations (1776) and The Theory of Moral Sentiments (1759), Adam Smith can be seen as a regular advocate of naturalism. In his theoretical grounds—a principle in a innate, agreeable world populated by men adjusted by a natural moral logic to play their role in society, and a natural harmony of welfare between non-rights violating individuals—Smith sticks to ideologies which Robbins categorized as belonging entirely to the Continental individualist custom. However, it is clear that when it came to his debates of allowed state actions, Smith became much more practical and apparently utilitarian.

There is a higher function to this slight criticism over the classification of Smith as either a naturalist or a Utilitarian. If one fails to differentiate between Adam Smith as a theoretical naturalist and the ensuing Utilitarianism of his economic successors, then one can only give details of the slow transition from quasi-laissez faire to quasi-statism as an outcome of social factors.

Adam Smith advocated for a condensed state, restricted in its purpose to protecting its citizens against foreign and internal hostility, and generating and maintaining certain essential public works and institutions. Such cannot be in the interest of a few individuals to maintain as the benefits or profits gained would not repay the expenses. This eliminates the allegation that Smith was laissez-faire purist or an advocate of natural occurrence of interests.

But its insertion was an indication of things ahead, and that is its greatest importance. If this system of natural freedom broke down in certain, Smith implies that individuals must be realistic instrumentalists in implementing governmental solutions. He was of the idea that the state might interfere to offer such public works as roads, bridges, canals, lighthouses; to shield by tariffs industries necessary to defense and to react against foreign tariffs; to award temporary monopolies to joint-stock companies in new areas; to control the banking industry; to forbid usury; and to give state funded education to children of the needy; and to collect taxes—but they set a conspicuous model for advocating involvement in future cases where markets were seen to run in-expeditiously.

Ricardo and Malthus: Interventionism vs. Laissez Faire

For Smith's direct followers, David Ricardo and Thomas Robert Malthus, the assumption not of market beneficence as such but of state incapability continued to be quite strong. Given Malthusian population theory coupled with Ricardo's wages and rent theories, there was relatively little impulsion to expand government's purview. Certainly, it is worth mentioning Malthus's peculiarities, particularly his refusal of Say's law (i.e., that supply creates its own demand, thus denying any pervasive disequilibrium within a general market). This divergence from the point of view of the Classical School led Malthus to recommend government intervention to correct the market during depressions, including the approval of government debts and large public works projects for the unemployed. Later Malthus writes that complete laissez faire was not a policy certified by Smith and that such a cover conviction of all administration regulation is irrational. Therefore, it is impossible for a government firmly to allow things obtain their innate path; and to advocate such a line of behavior, without restrictions and exceptions, would not fail to bring shame upon general values, as entirely unsuitable to put into practice.

David Ricardo presents an inquisitive argument of an economist whose wholesome hypothesis could have motivated him to advocate interventionism, but who on the other hand, approved a reasonably moderate and steady non-interventionism. Ricardo's hypothesis of rent and its outcrop of aggressive class interests and his prognostication of an ultimate inactive condition did not guide him to desert laissez faire. Despite his tough attachment to Bentham, there existed a huge quantity of moralistic individualism and mistrust of government in Ricardo that had apparently little to do with his pure economic policy. When it came to the protester campaigns of his day, Ricardo had a tendency to stick to noninterventionist doctrine: he conflicted state provision for the deprived, preferred the cancellation of the Corn Laws, hypothetically opposed schemes to tax legacy, boasted of never voting for a raise in taxes while a member of Parliament, and favored speedy payment of the national debt. Ricardo's one momentous deviation was his support of a national bank, which finally came to completion under Robert Peel's ministry in 1844. Despite this notable exception, Ricardo's adherence to laissez faire was more pronounced than any of his fellow Classical economists, with the exception of Adam Smith.

Bentham: Utilitarian Erosion of Laissez Faire

Jeremy Bentham a melioristic social engineer put down the hypothetical foundation for the enervation of the fee market or "let alone" theory. It is hard to uphold that Bentham expanded on a negative outlook of the state's role, for according to his principle of utility the laws and institutions of government are to be judged and justified simply by their usefulness. Bentham's clearly affirmed loyalty to Smithian economics was not meant to manipulate posterity. On the contrary, the heritage Benthamism would leave to posterity was stimulated not by the individualist threads in Bentham's writings, but rather by his communalist doctrine. Bentham, while definitely not the first expositor of the utility principle, was unquestionably its most enthusiastic. If every suggestion for governmental activism must be assessed on its virtues according to the utilitarian "felicific calculus," then it is only a matter of time before the laissez-faire principle is caused to be nugatory in the wake of one weakened, rear-guard battle after another. Bentham provided a widespread catalogue of what he termed program for government.

In conclusion Adam smith Invisible hand has been one of major economic controversies in economics, particularly among classical and Keynesian economics.  Smith used invisible hand as a metaphor to refer a free self regulation of the market economy. Advocating that as people act on their own self interest they are guided by an invisible hand towards support of the public.  Wu wei on the other hand is the Taoist explanation of Invisible hand and goes along with Taoist virtue of non-aggression/non-competition. Everything according to wu wei is considered to be self regulating and self expressing in their natural mode or form. It’s much similar to Smith’s invisible hand though it acts on social and religious perspective compared to Smith’s invisible hand that regulates the market economy. To further support the theory of invisible hand is the theory of laissez fair which from economic viewpoint promotes minimal government control on economic issues, which means free markets, reduced taxes, few regulations, private ownership of property and free circulation of labor. The policy promotes certain types of negative freedom contrary to positive independence, such as redistribution of wealth given by the state. However, Smith theory of Invisible hand has faced controversy with Keynesians and modern economist who advocate for government intervention to regulate the economy.