Adams Smith invisible hand theory

May 30, 2015
Why Economists Cling to

The dynamics of the invisible hand in global trade is explained in Book 4, Chap 7, Par 173 (simple version):
If the profit rises higher in those distant, less advantageous employments than in the nearer employments, this superiority of profit will draw stock from the nearer employments to the distant one, until the profits of all return to their proper level. This superiority of profit is a proof that:

  1. Those distant employments are under-stocked relative to other employments.
  2. The stock of society is not distributed in the properest manner among the employments in it.
  3. Something is bought cheaper or sold dearer than it should be.
  4. Some class of citizens is oppressed by paying more or by getting less than what is suitable to that equality which should take place. This inequality naturally does take place among all the different classes of citizens.

The same capital will never maintain the same quantity of productive labour in a distant as in a near employment. Yet a distant employment may be as necessary for the welfare of the society as a near one. The goods from the distant employment may be necessary for the maintenance of the nearer employments. But if the profits of those who deal in distant goods are above their proper level, those goods will be sold dearer than natural. All those in the nearer employments will be oppressed by this high price. Their interest requires that some stock be withdrawn from those nearer employments, and turned towards that distant one, to reduce its profits to their proper level and reduce the price of those goods to their natural price. In this extraordinary case, the public interest requires that some stock should be withdrawn from the nearer, more advantageous employments and turned towards the distant, less advantageous one to the public. The natural interests of men in this extraordinary case coincide exactly with the public interest in ordinary cases. It will lead them to withdraw stock from the near to be turned towards the distant employment.

It is thus that the private interests naturally dispose them to turn their stocks towards the employments which ordinarily most advantageous to society. But if they turn too much of their stocks towards the more advantageous employment, their profits will fall in that employment and rise in all others. It will immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, private interests naturally lead them to divide and distribute the stock of every society among all the employments carried on in it as nearly as possible in the proportion which is most agreeable to the interest of the whole society.

All the regulations of the mercantile system deranges this natural and most advantageous distribution of stock.

When China opened up, it was poor. So Western capital flowed into it to take advantage of its low costs, until it became rich and now capital is flowing out of China into other countries that are poor, such as Africa. However, because of mercantile profit maximization (or the selfish-hand which deranges the invisible-hand), the capital that flows to resource-rich African countries is only used for extraction and not for development or self-processing, since this would compete with their own industries.

This selfish hand is also happening in the chocolate industry. Ideally, capital should flow to the Ivory Coast so that it can make its own chocolates and stop child labor. But this would create competition for the chocolate corporations, and so child labor goes on.


The Invisible Hand
The Invisible Hand
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