This paper examines the relationship between Adam Smith's economic theories and his moral philosophy, arguing that the two cannot be understood in isolation. By tracing the intellectual continuity between The Wealth of Nations and The Theory of Moral Sentiments, the paper demonstrates that Smith's concept of the invisible hand is not a claim about self-regulating markets but rather a moral observation about how collective self-interest can produce social benefit — provided all individuals have equal market influence. The paper further contends that contemporary uses of the invisible hand, which strip the concept of its moral and behavioral foundations, fundamentally misrepresent Smith's original intent and obscure the role of inequality in shaping market outcomes.
"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: 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 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 one 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 from 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, pp. 1–2). In addition, one need only look at the opening quote 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 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 — uses that divorce it from any moral philosophy — end up perverting its original meaning. When invoked 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, because it severs the connection between individual self-interest and the actions of the invisible hand.
Specifically, in Smith's original formulation, he discusses 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 individuals decidedly unequal in terms of market power. In the context of Smith's original writing, however, 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. When the concept of the invisible hand is used in contemporary economics, however, 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 minuscule element of the total population, such that the invisible hand 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.
"Market inequality undermines the invisible hand's moral logic"
"Smith's unified view of selfishness and altruism"
Ultimately, the most important takeaway from a careful study of Adam Smith's life and work is the fact that economics cannot be understood or discussed outside the context of human behavior and moral decision-making, because the behavior of markets and economies is entirely dependent on the subjective calculations of individuals. Recognizing this forces one to consider the sorry state of contemporary economics, which for the most part fails to account for both the inequalities inherent in human societies and the centrality of subjective moral and self-interested calculations in individual economic decisions. Understanding the centrality of moral philosophy to Adam Smith's economic work should prompt contemporary economists to reevaluate the moral content of their own theories.
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