Studying the history of economics taught me a priceless lesson: there’s no substitute for the horse’s mouth.
Many thousands of people have been taught that economics was born in 1776 with the publication of “The Wealth of Nations,” the book in which Adam Smith expounded his theory that the free market always works, the theory he named the “invisible hand of the market.”
It’s a strange teaching. For nowhere in “The Wealth of Nations” does Smith refer to any theory as the “invisible hand of the market.” Nowhere in the book do the words “invisible hand of the market” even appear. Only once in Smith’s tome of more than a thousand pages do the words “invisible hand” appear. They appear as a metaphor, not for a market or any feature of markets, but for the desire to reduce risk in the specific case of a merchant deciding to employ his capital at home rather than abroad.
Smith was an exceptionally careful writer who lectured on rhetoric as a professor and wrote on the proper use of metaphor. If Smith had wanted to advance a theory that he identified by “the invisible hand” metaphor, he would have said so clearly and explicitly, and more than once. He didn’t. Not once.
Nowhere in “The Wealth of Nations” does Smith argue anything comparable to “the free market always works.” Smith argued that self-interested behavior in markets often, inadvertently, benefits society. Smith also argued that self-interested behavior in markets often benefits society more than behavior intended to benefit society.
But Smith was anything but dogmatic. The first three sections of “The Wealth of Nations” alone offer 70 examples of self-interested behavior that inadvertently harms society.
So, here we are. Academics routinely teach that the invisible hand metaphor carried special meaning for Smith, though it didn’t, and that the special meaning was the free market always works, a view Smith never held.
Who is responsible for this absurdity?
For starters, Paul Samuelson.
Paul Samuelson received the Nobel Prize in economics in 1970 for analyzing economic life with rigorous mathematical theorizing. According to Samuelson’s rigorous mathematical theorizing, markets are efficient only under conditions that are impossible in real life.
Samuelson was not the first to misrepresent Adam Smith. But compared to Samuelson’s, earlier misrepresentations were bush league.
Samuelson’s misrepresentation appeared first in 1948 in a textbook he wrote for a basic college economics course. On page 36, we read: “…he (Adam Smith) was so thrilled by the recognition of order in the economic system that he proclaimed the mystical principle of the “invisible hand”: that each individual in pursuing his own selfish good was led, as if by an invisible hand, to achieve the best good of all, so that any interference with free competition by government was almost certain to be injurious.”
Samuelson’s textbook, still in print in its 19th edition, has sold four million copies. The bogus invisible hand story got more bogus with each edition.
Why Samuelson misrepresented Smith is unclear. His distorted Smith certainly served as a foil to advance Samuelson’s own position about markets, but speculating on motivation is best avoided.
Over the years, most economists accepted Samuelson’s misrepresentation, and most still do today. This is for two reasons. One is Samuelson’s exalted standing in economics. The other is, few economists have any interest in the history of their discipline. For every economist who has read the Wealth of Nations, there are thousands who haven’t. Historians of economics have been calling out bogus invisible hand stories for decades. The audiences have been very small.
Reg Murphy Center