Origins of the Myths of the Invisible Hand

I was looking for a reference in a book in my library and came across, at the back, as you do, my rather battered copy of Paul Samuelson’s popular textbook, ‘Economics’ (which I had looked unsuccessfully for many years).

In the 1960s, later edition of this book was the class textbook at my university, and I had also bought a first edition of it in a book fair in the 70s.

I knew that Samuelson had mentioned the ‘invisible hand’ in his textbook and he is, in my view, more than anyone else, responsible for popularising the incorrect notion that Smith believed there was an invisible hand at work in the general economy, which in the minds of modern economists somehow, mysteriously, was behind the undoubted success of capitalism in masking possible unprecedented living standards. (The Cold War was on and many academics and their students were more impressed with Marxism than capitalsm.) …

…Smith did not proclaim ‘the mystical principle of “the invisible hand” ’. He was so reticent about it that he mentioned it only once in Wealth Of Nations, more than half-way through his book, buried in a chapter about how some cautious (risk-averse) merchants preferred the ‘home trade’ to ‘foreign trade’ in pursuit of their ‘own security’.

Smith never proclaimed in favour of ‘selfishness’, nor did he describe the actions of such merchants ‘selfish; he always recognised self-interest’ which he never confused with ‘selfishness’.

Smith never regarded or stated that ‘any interference with free competition by government was almost certain to be injurious’; he identified the circumstances where government policies, such as the dominant policy of mercantile political economy since the 15th century, had slowed ‘progress towards opulence’ and identified which of these policies should be changed.

Smith didn't think much good came from sovereigns and legislators telling merchants what to do – he didn't think governments were up to the task

In fact, Smith identified that the main ‘interference’ with ‘free competition’ came from the ‘merchants and manufactures’ themselves, with their agitation for legislators, and those who influenced them, to demand monopolies and trade protection, which were against the public interest in general and the interests of consumers in particular.

I conclude, given the misunderstanding of Adam Smith’s political economy that began in the mid-twentieth century, which led to ideological protection of much corporate behaviour (not much different from their behaviours in his day) that if Samuelson had read Moral Sentiments and Wealth Of Nations for himself, instead of recalling what he was taught as a student in the 1930s, he could have prevented tens of thousands of students, who in the 16 editions of his textbook were taught by it well into the 1970s, from ‘remembering’ the same error he passed on to them, many of whom became teachers of yet more students.