Friday, July 9, 2010

Adam Smith on presumption

As I read through Adam Smith's Wealth of Nations, I'm finding that Book IV, Chapter II is a gold mine for some of his most concise and powerful statements on economic freedom.

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Apparently, this is the famous "invisible hand" argument. It's kind of funny to me that its context is merely a chapter on why laws against imports are bad. However, it really is quite a beautiful idea: we can actually benefit the whole society, which is incomprehensible to us, by focusing on that which is entirely comprehensible to us, namely our own self-interest.

Smith goes on:

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, it is evident, can, in his local situation, judge much better than any statesman of lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would no-where be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

Ah, there it is! The presumption of state-led economic development.


  1. Glad you found WN IV.ii. because it is an important chapter but not as significant as it has been made out, mostly by modern economists. The only reference in Wealth Of Nations to 'an invisible hand' was not a general statement by Smith about 'an invisible hand' in markets. In his discussions on markets in Book I, he does not mention anything about invisible hands. Read Chapter 2, book IV carefully and note he is discussing how some but clearly not all, traders who prefer to invest locally because of the greater risks of overseas trade, add to national output (the 'whole is the sum of its parts), which Smith considered a public benefit (higher local employment). This has nothing to do with 'efficiency', 'welfare' or perfect competition, as claimed today.

  2. Thanks for your comment. You make an interesting point about putting Smith in historical perspective. The "invisible hand" is, as you say, not an image that he uses until this very particular point in Book IV, and here it really only comes up in passing. However, the overall argument he has been developing all the way through is not out of sync with this image. In general, Smith argues that the most profitable thing is to allow natural allocation of resources through individuals working out of self-interest. So I do think concepts such as efficiency come into play here.


I love to hear feedback!