Viva the Invisible Hand! The Enduring Effectiveness of the Impersonal Market

Adam Smith

While I would wholeheartedly argue for personal integrity, character, and love as critical elements of human interactions and the human experience, the essay Everybody Loves Mikey by Mike Munger humorously and concisely reveals that what makes the world function from an economic perspective is the impersonal and unknown forces of the market – in essence the profit motive trumps love, but is nonetheless beneficial to society. This essay echoes and adds modern examples to concepts developed by Adam Smith, who is known to anyone who has begrudgingly taken Economics 101 as the author of the capitalist manifesto The Wealth of Nations and the coiner of the term the “Invisible Hand.”

What may be less well known is Adam Smith’s moral philosophy work in The Theory of Moral Sentiments, a book that explores the “impartial spectator” within us that keeps most individuals from straying too far outside the bounds of acceptable behavior and that guides us towards treating fellow man with love and respect where it is due and reviling and justice for evils done when it is deserved. While Smith may be revered or reviled based upon perceptions of authoring a work that ushered in the concept of impersonal laissez faire economics, Adam Smith was very much concerned with and authored a powerful work on how morality within us prevents the majority of mankind from harming one another, given that gaining the love, respect, and admiration of our fellow man is something that “Providence” (to use a frequently used term of Smith) embedded within us and which most of mankind effectively pursues in their individual interactions with one another.

Thus, I would submit that any serious reader of Smith, and I would argue any defender of capitalism needs to complement their understanding of Smith’s “Invisible Hand” (and Munger’s essay provides a great effective Cliff’s notes to the tenets revealed in Wealth of Nations) with the understanding of morality regulated by the “Impartial Spectator.” On the former, we are presented with impersonal and at times destructive forces (recall Schumpeter’s creative destruction concept since in this blog I seem fond of terms coined by economists and philosopher) that describes how large and complex systems are most effectively governed by the informal pricing mechanisms required for an economy based upon freedom of choice and liberty, in essence indicating that no government or board of experts could ever match the effectiveness of the pricing mechanism as defined by the free market. Within his Theory of Moral Sentiments, he makes the case for why in our individual interactions and dealings at a micro level should be and in many cases are subconsciously guided by a moral compass. The conclusion of reading both works by Smith is that for a free society to function in the long run, moral underpinnings are essential. The intertwining of the impersonal free market with morality is eloquently articulated with the statement of political scientist James Q. Wilson that,

Free-market systems require, obviously, certain personal qualities, including trust in those who borrow from you, a willingness to invest (that is, to defer present enjoyments for future benefits), and a readiness to take the demands of customers seriously. This social capital arises from long-sustained competition, from a culture that assigns a high value to making human character decent, and from a political system that refrains from rewarding people for their power rather than for their performance.

Capitalism alone cannot produce sufficient social capital. Culture and government must add their share by giving people incentives to be civil, by rewarding savings, and by encouraging trust. Because culture and government are so important, successfully capitalistic nations tend to be democratic states with a strong culture. This is why democracy and capitalism together make some nations so much richer than others.”

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