Seeing The Invisible Hand

Adam Smith’s “invisible hand” is certainly the most wondrous, astounding and marvelous concept in all of economics, and there are quite a few doozies in the dismal science. I go further than that. The invisible hand ranks as high or higher, in terms of pure beauty, than even the smile of a baby, the music of Mozart or the most beautiful sunset that ever took place. In terms of what it means for our potential prosperity, it has no upper bounds whatsoever.

Bastiat was reputed to have looked down from a tall building, etc.

Bastiat was reputed to have looked down from a tall building, looked down at the people scurrying around far down below him, and marveled at the fact that Paris got fed, without any central direction at all. This was the invisible hand (that is, free enterprise) at work; you can’t see this “hand,” but you can discern its effects.

We all marvel at the teamwork of the championship basketball team, the winner of the eight-person shell in the regatta, a 100-member orchestra playing 64^th notes without a hair’s breath of discord. But this pales into total insignificance compared to the teamwork made at least potentially possible by the invisible hand; all eight billion of us cooperating producing goods and services and thus fighting poverty. These other accomplishments have a coach, a coxswain or a conductor; in contrast, when the human race bans protectionism and regulation, the invisible hand will take over without any central direction at all. If that is not a miracle, then nothing is (Adam Smith thought that the invisible hand was God’s hand). If that does not at least slightly shake up the atheists of the world, then nothing will.

The claim that “competition tends to bring about a better product” is also profound, and, also, part and parcel of the invisible hand. It explains, as if an explanation were necessary, the inefficiency of the post office and the motor vehicle bureau. Thomas Sowell said it best when he averred: “It is hard to imagine a more stupid or dangerous way of making decisions that by putting those decisions in the hands of people who pay no penalty for being wrong.” He, too, is herein channeling the invisible hand.

The reason we have pretty good fast food, given the prices we must pay for it, is due to competition. McDonalds, Burger King, Wendy’s, and all the other participants in this industry, are continually trying to figure out better ways to satisfy customers, whether it is by shortening queues and thus wait times, or introducing newer and better products, or providing scrupulously clean restrooms (hey, they are only human, and we don’t pay all that much; lighten up, they do a pretty good job here too). Why? Profit seeking. I know this is a dirty word in some circles, but it is an honorable part and parcel of the invisible hand.

What about when there are few competitors? Does the invisible hand still function? Consider the only restaurant, grocery store or bowling alley in Duckburg, USA, a village of 500 population located 100 miles away from the nearest city or even town. Can they give the middle finger to customers? Not if the invisible hand is still operating, and it operates everywhere. No, the proprietors of these establishments will still strive to earn profits and the only way they can attain this goal is by providing good products and service relative to the prices they charge. If they do not, Duckburgers will eat more meals at home, seek other forms of entertainment, or in the extreme move elsewhere. There is always the “danger” of new entrants arriving in the village; that is, potential competition counts too.

Suppose bridges were privately owned (work with me here!). Establishment A was convenient, but dangerous. B was safe, but out of the way. Would the invisible hand function even in this example? You bet your boots it would. There are always motorists on the verge of patronizing the two. They can be knocked off the fence by A’s behavior. An improvement in safety of A would attract more paying customers, and garner more profits for the owner, provided, only, that the costs of so doing, all things considered, were lower than the value placed on this improvement by the marginal bridge user.

Hint: don’t bet against the invisible hand. It is a losing proposition.


Originally published at https://www.econlib.org/seeing-the-invisible-hand