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Invisible Hand analysed

Three friends of mine, who I will for the sake anonymity name PJ, Mike1 and Mike2, were chatting over brews recently and got into a discussion about the meaning behind the term Invisible Hand.  They knew that it was coined by Adam Smith and that Milton Friedman had commented on it as well.

PJ had suggested that the Invisible Hand was short-hand for aggregate self-interest providing products and services efficiently via the market.  Mike1 had suggested that it was government regulations that was the invisible hand.  Mike2 wasn’t even there.  They cc’d me on a note after PJ did some Wikipediing*.  So I sat down and did some of my own quick thinking and replied to them with this entirely unexpurgated note:

Well, you’re likely not as wrong as either of you thought. When Smith wrote about the invisible hand in Wealth of Nations*, he described it as “government which afforded to industry the only encouragement which it requires.”

You could interpret this a couple of slightly different ways:

1. that the best government hand is so light as to be invisible
2. that the government merely facilitates the invisible hand

The latter is the more common colloquial answer, and in the end the cooler one, but the former is most likely what Smith meant.

Even though the latter is hip, it is often the reason that command and control types get so wiggy about the invisible hand - a la, “oh, shit! if it’s really invisible, it must not be there, which means that if I don’t put some kinda heavy shackles on everyone, somebody, somewhere (read: “me”) is gonna get right shafted.” This is usually followed by verbal statements like, “Don’t you care about the poor children?” and then some kind of coup happens from the far left or far right, depending on who really feels the shackles are needed.

The former also works with respect to the Smith quote in Wikipedia, since the light framework that good government puts in place - clear property rights, small government and legal equality - is the invisible hand that guides self-interest - but it’s not the government itself. It also fits Friedman’s quote well, since a light framework is one without direct government coercion, and where second-party coercion is constrained by equal application of property rights laws. It may be less cool to say, but it is the better, holistic, interpretation.

The light framework is the fine difference between free markets and anarchy.

Mike2, who wasn’t even involved, suggested that my response was nice and that I include some Hayek to round out the topic.  Maybe some stills from From Dusk Till Dawn.

* I used P.J. O’Rourke’s distillation since it so handily handed me the needed quote.
* who says Google’s the only one that can verb?

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