Smith used the metaphor for the unintended social effects of individual action; the modern market-efficiency reading is a later interpretation.
Smith used the phrase only three times across his whole work, and never as the slogan it became. The modern claim that competitive markets generally turn self-interest into efficient social outcomes is a later interpretation rather than Smith's 1776 doctrine, and his own conditions matter: he devoted much of the book to cases where competition fails.
In practice
- A bakery opens at five because that is when it can sell bread, and the street has fresh bread at six without anyone having planned for the street.
- A commodity market clears efficiently with no coordinator; a market for medical care with one informed side and one desperate one does not, and Smith would have said so.
- Possible explanations
- One explanation for the modern reading is that the welfare theorems gave it a formal version, under conditions of competition, complete markets and no external effects. Another is rhetorical: a short image travels further than Smith's qualified argument.
- In its favour
- Where its conditions roughly hold, decentralised prices do coordinate production without anyone planning it, which is among the best-established results in economics.
- Against it
- Smith used the phrase three times and never as a general doctrine, and the conditions the formal version needs fail wherever there are external effects, market power or missing information, which is much of any economy.
- Standing
- Chandler's Visible Hand was written as the deliberate counterpart to this.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- The theories behind every argument about money