Why the Invisible Hand Works


PJ Picture
By Paul L. Jones
, Founder,
Director, Financial Advisory Services for Emerald Skyline Corporation

This post has been over two weeks in the writing. Yes, two weeks. For me, the anniversary of the adoption of the Declaration of Independence has always been a source for inspiration as the principles on which the United States of America is based continue to be a source of pride and reflection as well as a call to action.

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”

By these words, the Continental Congress established a moral standard that became the cornerstone of the US Constitution – our contract with each other that establishes the basis for our governance.

Of course, we have not realized these goals and they continue to be a guideline for our actions – as individuals and as a country. It is the mutual respect of our individual Rights that enables this pact among men and women to provide the freedom Americans enjoy.

In the same year the British-American Colonies declared their independence from England by establishing a new standard for the governance of a nation-state, Adam Smith published his A Wealth of Nations which provided the basis for modern free market economics. This was serendipity for sure.

As discussed in an earlier post, Smith introduced the concept of the Invisible Hand wherein he states that the market had an “automatic mechanism that allocated resources with great efficiency.”

It is difficult to realize how radical this concept was in 1776. Prior to the formation of the United States with an economy based on a free market, the allocation of labor was established either by tradition wherein the son was expected to follow in the trade of the father, or by command whereby an autocratic ruler (e.g., a king, pharaoh, emperor, etc.) dictates the economic activity to be pursued and the allocation of labor. In this way, humanity made sure there were enough farmers, carpenters, bakers, fishermen.

In describing the Invisible Hand, Smith says: “it is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Accordingly, the Invisible hand facilitates the interdependence of human workers while maintaining their independence. The precarious nature of human survival – and the ability of individuals to enjoy the unalienable Rights the Founding Fathers so bravely declared – would be exposed if the invisible hand had not worked.

It works because we are both independent and interdependent.

I, like most Americans, was raised to believe that America was built by rugged individuals who were as driven and as hardened as John Galt, Francisco d”Anconia, Hank Reardon and Dagny Taggart in Atlas Shrugged, the 1957 novel written by Ayn Rand.

The American history that I was taught told me that it was the titans of industry that built this country alone and the rest of us were along for the ride. Just like the characters in Ayn Rand’s famous novel, this is a myth and a fiction. To quote John Donne from Meditation #17 written in 1623:

“No man is an Island; every man is a piece of the continent, a part of the main.”

It seems that in the propagation of the myth of the rugged individualist, we have forgotten that we are all in this together….America became an economic force because it had rich and abundant natural resources, a governmental model that promoted trade, an ever-expanding labor force by immigrants drawn from every nation on earth, scientific advances that led to the industrial revolution among other contributing factors.

Especially in this post-industrialized era of specialization when each of us have one primary trade or profession from which we earn a living. I would not have my breakfast if not for the farmer, the trucker, the grocer, the clerk and all the people who facilitate the production, processing, shipping and distribution of the food I ate. The market works because there is both a seller and a buyer. Without a buyer (market), no enterprise can survive.

America is built on our interdependence as well as our independence. I have thought about this seeming paradox. Here is what I have concluded: We are independent in what we offer the world as God has endowed each of us with a unique set of talents and capabilities which we then refine through education and experience to become skills and proficiencies that sustain us. But, we are interdependent in what we need or take from the world.

We each are an individual with a unique life, values, talents, capabilities, perspectives, relationships, but like a drop of water in the ocean or a snowflake in a snow drift, we quickly join with other droplets or flakes and become greater, and better, than we could alone. Individual contribution and group synergy form the basis for the modern business enterprise, the sports team, the nation-state and most human endeavors.

Therefore, the basis for all civilized human interaction has to be respect for our human dignity and our personal right to our identity, our ideas, and the fruits of our labor.

As stated above: the Invisible Hand works because we are both independent and interdependent. So, as we celebrate our independence, it is right and good that we also celebrate our interdependence – an American tradition since 1945.

Original Declaration of INTERdependence

By Will Durant, 1945

Human progress having reached a high level through respect for liberty and dignity of men, it has become desirable to re-affirm these evident truths:

  • The differences of race, color and creed are natural, and that diverse groups, institutions and ideas are stimulating factors in the development of man;
  • That to promote harmony in diversity is a responsible task of religion and statesmanship;
  • That since no individual can express the whole truth, it is essential to treat with understanding and good will those whose views differ from our own;
  • That, by the testimony of history, intolerance is the door to violence, brutality, and dictatorship; and
  • That the realization of human interdependence and solidarity is the best guard of civilization.

Therefore, we solemnly resolve, and invite everyone to join in united action,

  • To uphold and promote human fellowship through mutual consideration and respect;
  • To champion human dignity and decency, and to safeguard those without distinction of race or color or creed;
  • To strive in concert with others to discourage all animosities arising from these differences, and to unite all groups in the fair play of civilized life.

Rooted in freedom, children of the same Divine Father, sharing everywhere a common human blood, we declare again that all men are brothers, and that mutual tolerance is the price of liberty.