Has the whole world lost its head?

• Author: Marsh, Gerald E.
• Position: Economics

THE METAPHOR of the "invisible hand" is used by Adam Smith in The Wealth of Nations to argue that people, following their own economic self-interest, promote the interests of society as a whole:

"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."

Note that Smith talks about the "support of domestic to that of foreign industry," which raises serious questions about the "invisible hand" and its efficacy in a global economy of states having vastly different development and wealth. The paragraph above often is taken to mean, as put by Garrett Hardin in his famous 1968 article "The Tragedy of the Commons":

"In economic affairs, The Wealth of Nations (1776) popularized the 'invisible hand,' the idea that an individual who 'intends only his own gain,' is, as it were, 'led by an invisible hand to promote ... the public interest.' Adam Smith did not assert that this was invariably true, and perhaps neither did any of his followers. But he contributed to a dominant tendency of thought that has ever since interfered with positive action based on rational analysis, namely, the tendency to assume that decisions reached individually will, in fact, be the best decisions for an entire society."

This idea that economic decisions reached individually collectively will benefit society as a whole has been extended to many other areas of human thought and endeavor. It even has entered into evolutionary theory in biology: Stephen Jay Gould, in his monumental work, The Structure of Evolutionary Theory, states that Charles Darwin constructed the theory of natural selection "in conscious analogy with the laissez-faire theories of Adam Smith and the Scottish economic school. Darwin, without the impetus and challenge of the intellectual environment, might have become a country parson, with a beetle collection maintained by an ecclesiastical sinecure as the remnant of a childhood passion for natural history."

Jeremy Bentham (1748-1832) thought that the purpose of social effort is to achieve the "greatest possible good for the greatest possible number." Many have come to believe that Smith's "hidden hand" will achieve this for a market economy, and this belief is implicit in mathematical models of the economy, but there is a problem with the basic approach used to construct these models.

Mathematics long has played a role in economics. Every introductory economics class shows how, in a free market economy, graphs of the aggregate supply and demand are curves, which depend on price, and can be plotted so as to determine the optimal price. These curves are "functions" of the single variable of price: the higher the price, the more manufacturers are willing to increase the supply--but, of course, the demand from consumers decreases with increasing price. Thus, there is an optimum price (the supply and demand curves will cross at this price). The role of mathematical models in economics has grown dramatically in the last 50 or so years with the rapid development of computers able to host large and complicated models, and the migration of physicists--who could not find academic positions in the 1960s and after--into economics.

Participants in an exchange economy can be...