For those that still have their doubts, I have provided the details on how Adam Smith’s idea of the “invisible hand” was redacted and used in Paul Samuelson’s book titled “Economics” which was the beginning of neoclassical economics.
Although Adam Smith did not say that those that act selfishly always benefit society, this does not mean the neoclassical interpretation doesn’t have some value, which we will explore in the next post. As a preview, it’s insightful but not magical.
Paul Samuelson’s Concoction
Adam Smith only mentions the “invisible hand” once within the “Wealth of Nations”, and it can be found below verbatim. I have highlighted the portion that was cherry picked and used by Paul Samuelson.
But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. 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 not 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. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. [Book IV, Chapter II, paragraph IX of The Wealth of Nations.]
The bold above in the original text was redacted to form the excerpt below and was inserted in the textbook “Economics” by Paul A. Samuelson – the book that made economics a science. It appears that the role of self-interest was exalted but at the cost of excluding the sentiment of sympathy.
If we look at the italics in blue from the original, then we see what was omitted, namely the idea of domestic preference, or a “home bias”, which is an expression of compassion and camaraderie. Smith claims that England’s sympathy towards domestic interests – home bias – would trump any losses from not investing abroad.
Every individual endeavors to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. [Economics by Paul Samuelson]
Now let’s read Paul Samuelson’s take on the “invisible hand” which can also be found in his textbook “Economics”. This stands in stark contrast to what Adam Smith said and this could be what started the generalization that selfish behavior always leads to good outcomes and that government interference is always bad, or as Samuelson says “injurious”.
“The Wealth of Nations” (1776) , represents the beginning of modern economics or political economy-even he was so thrilled by the recognition of an 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. [Economics by Paul Samuelson]
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