Adam Smith was born in Kirkcaldy,
Scotland, in 1723, the son of a local lawyer.
He studied moral philosophy in Glasgow University and later
Oxford which he disliked because of disinterest of the Professors.
Return to Scotland in 1746 to teach first at
Edinburgh and later in Glasgow as Professor of Philosophy.
As befits a believer in the free market,
he let his students pay what they thought his lectures deserved.
The invisible hand refers to the forces that allow a system that is fueled by
personal satisfaction and the pursuit of profit
to produce results that are beneficial for society as a whole.
It is a competition between buyers and sellers,
each motivated by the maximalization of
their own satisfaction that serves to stimulate innovation and drive down costs.
Adam Smith saw it as a self-regulating system that didn't
require governments to direct it toward socially beneficial ends.
Ironically, Smith only used the term invisible hands three times in all of his writings.
And never directly linking it to the free market as obviously as I've suggested here.
In fact, he was using the term on the case of the decision to
sell at home or abroad in attack on mercantilism.
Mercantilism was where the state tried to direct
foreign trade to maximize a trade surplus.
But if Adam Smith didn't make this point,
there were plenty of others who did it for him.
And the metaphor of the invisible hand was too good to miss.
The mechanism through which it works is that customers choose freely
what they want to buy and producers choose freely what to sell and how to make it,
and the market then will decide the quantity that's bought and the price in
such a way as to maximize the preference of
both parties and therefore society as a whole.
Competition among producers will stimulate efficiency to maximize profits,
will prompt lower prices to beat competitors,
and will promote investment to draw income to businesses promising higher returns.
Free marketeers and hyper globalists would still largely adhere to
this analysis whether they use the metaphor of the invisible hand or not.
Now, far be it for me to criticize
such a mainstream ideology in the time available to me.
Every student of economics has drawn supply and demand diagrams that underpin this logic.
But we do need to stand still at the conditions that need to be met for it all to
work: Perfect knowledge between consumers and producers,
no entry barriers to markets,
no transport or other transaction costs.
Now, none of these conditions ever exist in practice.
Much business practice is designed to ensure that they won't exist in the future.
Since these imperfections are for the source of market segmentation,
collusion and cartels, and local protectionism.
The second observation is that this analysis is all blind to size and therefore to power.
Different players in the market: the buyers and the sellers are not opposites on a graph.
They also differ among themselves.
There are different degrees of dependence on
the market as well as different capacities to withstand change.
And then you have to consider those who fall beneath
the equilibrium point we all like to draw on the graph.
What about those whose consumption falls?
Perhaps falls all together as prices rise.
And what about those whose output drops away or is wiped
out because they can't compete in the so-called free market?
For them, possibly, a helping hand might not be misplaced.
