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. (Smith, 1869, p. 28)
The above quote, taken from book four of Adam Smith's seminal work The Wealth of Nations, introduced the world to one of the most important concepts in modern economics, namely, the notion of an invisible hand guiding the market. Though the term "invisible hand" is mentioned only this one time in the entirety of Smith's work, it has become his most lasting legacy, and the concept of the invisible hand of the market has underlined many contemporary economic discussions and debates. However, the success of The Wealth of Nations has also turned out to be a kind of double-edged sword, because Smith's popularity as an economist has ultimately overshadowed his work as a moral philosopher, even though cannot fully comprehend the meaning of Smith's economic work without also appreciating how it functions as part of his larger moral philosophy. In particular, by examining Smith's life and work in conjunction, it becomes clear that some of his most important ideas, such as the invisible hand of the market, may only be used effectively when considered in the larger context of how individuals make moral decisions.
Though to contemporary audiences Smith is most well-known for The Wealth of Nations, his own writing suggests that he considered his other major work, The Theory of Moral Sentiments, to be his most important (Smith, 1998, p. 2). Indeed, if one reads The Wealth of Nations closely, it becomes clear that practically all of Smith's major economic discoveries and theories ultimately stem not from a quantitative, purely scientific examination of markets and commodities, but rather a moral examination of human nature. In other words, Smith was trying to explain economics through the lens of human behavior and decision-making, rather than approaching the field as an objective, morally-neutral space.
For example, Smith explains the development of commodities and money as a side-effect of humans' propensity to barter out of their own self-interest, such that the markets and societies which developed as a result can be seen as a kind of happy accident (Smith, 1998, p. 1-2). In addition, one need only look at the quote included above to see how central the notion of human morality is to Smith's economic theory, because the whole point of his "invisible hand" is to point out that economies are the product of human self-interest and a kind of moral calculation. The invisible hand is not some magical, invisible entity that inherently guides the functioning of money, but rather is the unconscious embodiment of human beings' collective desires and self-interests. Thus, while the individual in Smith's example acts out of his own self-interest by preferring local industry and attempting to get the most value out of it, the collective self-interest of all the individuals in a society coalesces to form a kind of unspoken rudder that guides the trajectory of economies.
Understanding that the invisible hand is the result of countless individual calculations regarding self-interest helps one see how contemporary uses of the concept that divorce the notion from any moral philosophy end up perverting its original meaning. When used in contemporary economic and policy discussions, the notion of the invisible hand is frequently used to suggest that markets and economies will regulate themselves, because whatever does not work will eventually be weeded out through the forces of supply and demand. However, this interpretation completely ignores the context in which Smith proposed the notion of the invisible hand, because it severs the connection between individual self-interest and the actions of said hand.
Specifically, in Smith's original formulation, he is discussing the actions of the individual as if each participant in an economy or market has equal influence and power (Smith, 1869, pp.27-29). This is of course not true in practice, as there are countless inequalities that make it so individuals are decidedly not equal in terms of market power, but in the context of Smith's original writing this oversimplification is not a real problem, because, at least when he is discussing the invisible hand, he is largely concerned with generating general theoretical principles rather than specific, concrete examples. However, when the concept of the invisible hand is used in contemporary economics, this reality is not acknowledged, and so people are allowed to pretend that markets are actually self-regulating in the service of a greater good as if every individual had equal influence over the trajectory of that market. In reality, the trajectory of any given market is almost always controlled by a proportionally miniscule element of the total population, such that the invisible hand of the market is not actually made of the collective self-interested decisions of the entire population, but rather the limited and specific self-interested decisions of a relative few.
Recognizing this disconnect is important because it demonstrates the centrality of Smith's life as a moral philosopher to his economic theory. Were every individual to have equal influence over the market, then the invisible would in fact be acting in what might be called the most optimally moral fashion given the constraints of human society, because the conflicting self-interests of the population would ultimately be canceled out such that society as a whole benefits. This is what Smith means when he says that "by pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it" (Smith, 1869, p. 28). In the same way that social contracts in general work towards a common benefit by canceling out the conflicting desires of individuals, so too does the invisible hand (in a market with equal access and influence for individuals) work towards the good of society as a whole by canceling out individual self-interests. However, when access and influence is not equal, the invisible hand no longer works for the good of society, and thus can no longer be considered moral in the sense that Smith originally conceived it.
One cannot understate the centrality of moral philosophy to Smith's economic theories, because by his own admission his approach to economics is based entirely on an examination of human nature. In this sense one may view Smith as one of the earliest evolutionary behaviorists, even though the theory of evolution had yet to exist. That is to say, Smith attempted to explain economics by examining historical human behavior in order to understand "why human nature appears to be simultaneously self-regarding and other-regarding" (Smith, 1998, p. 3). Smith's focus on morality makes sense, considering that there is evidence to suggest he originally went to college to become a member of the Anglican clergy, and although later writings indicate that he was an atheist or deist, the fact remains that his life's work was ultimately focused on human morality and the process by which individuals and societies come together to make decisions and regulate their interactions (Smith, 1998, pp. 3, 17). Thus, Smith's interest in economics was in reality an interest in how the evolution of individual and social behavior led from simple societies to the kind of globe-spanning empires and economies that existed at the time of his writing.
Understanding this allows one to appreciate a kind of continuity within Smith's life and work that might be readily apparent to the casual observer. Specifically, upon first glance it appears as if The Wealth…