Adam Smith lived from 1723 to 1790 and is widely regarded as the father of economics. He was a Scottish moral philosopher and taught at the University of Glasgow. His masterpiece, An Inquiry into the Nature and Causes of the Wealth of Nations was first published in 1776. This book is considered a seminal work in the field of Economics.
The Invisible Hand
No discussion about Adam Smith would be complete without a reference to his famous phrase, “the invisible hand”. I was surprised that the term did not figure more prominently in the book. I only found it once:
As every individual, therefore, endeavors 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 labors 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. (Smith, 1776, p. 572)
To me, this concept makes sense, but there is plenty of evidence to the contrary in recent history. I would like to think that, despite the seemingly irrational behavior of people, their general tendency to look out for their own best interest will work for the best in society at large. Then I see an event like the sub-prime loan disaster that almost takes down the country’s economy. The people who took out those loans knew that they could not pay the bills. The lenders who made the loans knew that the default rate would be sky high. Somehow, actions taken in self-interest did not benefit the society at large. Perhaps it is a case of the old adage, “If something sounds too good to be true, it probably isn’t.” Adam Smith was a professor of moral philosophy and a Scotsman. As such, he was likely accustomed to ordinary folk with the sense to know what was in their best interest.
I did most of my reading in The Wealth of Nations using a free audio book from LearnOutLoud.com. The free audio edition by Michael Edwards is very well done and made the book much more approachable.
Smith, A. (1776). The wealth of nations. New York, NY. Random House