For many years you may have been hearing economists refer to a ‘modern version of the invisible hand’ as if they are merely extending the original argument of Adam Smith. The fact is that Adam Smith’s ‘invisible hand’ was always a fairy tale based on religious, ivory-tower speculation about the world. When Smith talked about ‘an invisible hand’, he meant ‘Providence’ (or God).
In 1759, Smith introduced the concept of an invisible hand in his book, “The Theory of Moral Sentiments”. The concept of ‘an invisible hand’ is found in Paragraph 10 of Part IV Chapter 1. (Part IV consists of only one chapter/section.)
Below is reproduced the entire Paragraph 10 with its preceding Paragraph 9 for further context. A careful reading reveals that what Smith describes has nothing to do with market forces. Smith talks about two things: (1) the ‘contemptible’ greed of a rapacious elite and (2) the physical capacity of a human belly. In psychological and economic terms, what Smith writes is arrant nonsense. He posits that unfeeling wealthy landlords produce huge fields of grain only because their eyes are bigger than their stomachs. Smith then asserts that those greedy landlords have no alternative but to distribute what they cannot eat to others (rather than maximizing their personal profit based on supply and demand, even if that means letting grains rot in silos).
As said above, what we read below is just religious, ivory-tower speculation. It has little or no relation to what actually happens in real life. In real life, the distribution of wealth is not at all “nearly the same distribution… which would have been made, had the earth been divided into equal portions among all its inhabitants”, not even in respect to the “necessaries of life” which Smith was specifically talking about. But when we go beyond the necessities of life – addressed by PROUT within a broader dimension of ‘people’s economy’ – then the distribution of wealth becomes even less balanced.
It is interesting to note that Adam Smith contemplates, albeit inadequately, some subjects that modern capitalist economists like to sweep under the carpet. Smith talks about “the sentiment of approbation”. Indeed, that is the very subject of Part IV of “The Theory of Moral Sentiments”. This “sentiment of approbation” is precisely what PROUT stresses when it comes to law (or property rights). According to PROUT, accumulation of wealth should be determined by the ‘approval of society’.
It is also interesting to note that Adam Smith recognizes the critical importance of distribution in economics. Smith also understood that ‘justice’ in respect to distribution means that everyone must receive the “necessaries of life”. In other words, Smith recognized that distributive justice means a more equal distribution. Of course, Smith’s economic analysis is incomplete. The goods and services produced by any economy go well beyond the mere necessities of life. Economies also produce many amenities (in PROUT, ‘atiriktam’), and over time those amenities tend to become recognized as part of the current minimum requirements for all (a broader concept than the necessities of life).
Modern capitalist economists have managed to develop some elements of what PROUT classifies as ‘commercial economy’. Unfortunately, however, they have lost sight of even the little bit of humanity that Adam Smith showed in his recognition of the importance of ‘people’s economy’ and the need for distributive justice. Modern capitalist economists promote the slogan that everyone should be ‘free to choose’ as a means to make the wealthy elite ‘free to exploit’.
Of the Effect of Utility upon the Sentiment of Approbation
Consisting of One Section
Chap. I Of the beauty which the appearance of Utility bestows upon all the productions of art, and of the extensive influence of this species of Beauty
But though this splenetic philosophy, which in time of sickness or low spirits is familiar to every man, thus entirely depreciates those great objects of human desire, when in better health and in better humour, we never fail to regard them under a more agreeable aspect. Our imagination, which in pain and sorrow seems to be confined and cooped up within our own persons, in times of ease and prosperity expands itself to every thing around us. We are then charmed with the beauty of that accommodation which reigns in the palaces and oeconomy of the great; and admire how every thing is adapted to promote their ease, to prevent their wants, to gratify their wishes, and to amuse and entertain their most frivolous desires. If we consider the real satisfaction which all these things are capable of affording, by itself and separated from the beauty of that arrangement which is fitted to promote it, it will always appear in the highest degree contemptible and trifling. But we rarely view it in this abstract and philosophical light. We naturally confound it in our imagination with the order, the regular and harmonious movement of the system, the machine or oeconomy by means of which it is produced. The pleasures of wealth and greatness, when considered in this complex view, strike the imagination as something grand and beautiful and noble, of which the attainment is well worth all the toil and anxiety which we are so apt to bestow upon it.
And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants. It is to no purpose, that the proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his brethren, in imagination consumes himself the whole harvest that grows upon them. The homely and vulgar proverb, that the eye is larger than the belly, never was more fully verified than with regard to him. The capacity of his stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. The rest he is obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, among those who provide and keep in order all the different baubles and trinkets, which are employed in the oeconomy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice. The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for.