The Invisible Handshake

In Oliver Stone’s 1987 movie Wall Street, the Nietzschean anti-hero Gordon Gekko proclaims, “greed, for lack of a better word, is good,” as if greed is the pinnacle of virtue for businesspeople.

This view is commonly attributed to Adam Smith’s famous invisible hand; but like most conventional wisdom, it is more conventional than actual wisdom, since Adam Smith never claimed that greed was good.

In fact, the term is properly credited to Bernard Mandeville (1670-1733), a Dutch psychiatrist and pamphleteer. In his work The Fable of the Bees [1714], Mandeville claims that “private vices are public benefits.” Adam Smith, in his mostly forgotten book The Theory of Moral Sentiments, disagreed with this, calling it “wholly pernicious” and the thesis “erroneous.”

Yet, who subscribes to the view that greed is good? Taken to the extreme, it would prevent anyone from starting a family––indeed, it would be a dagger in the heart of family life, marriage, friendship, partnership, entrepreneurship, and brotherhood.

Helplessness may be the only truly universal human experience, since all of us pass through infancy. The human race would not have survived one generation if every person acted as if he were unconnected to any other person. Most parents would die for their children, and this is not even considered heroic behavior but rather ordinary.

The Forgotten Adam Smith

Long before economics became a formal discipline, economists were known as moral philosophers. Smith wrote The Theory of Moral Sentiments, published in 1759––seventeen years before his more famous Wealth of Nations––wherein he theorized that moral sentiments are emotions or feelings––as opposed to pure logic––about right and wrong.

Taken together, these works attempted to integrate economics and moral behavior, since Smith thought there is no conflict between economic thought and moral philosophy. In the long run, the public interest depends on private virtue.

While many cite the writings of Smith as proof of capitalism’s selfishness and greed, his views were much deeper and more nuanced than simple self-interest. He dealt with human nature and psychology in The Theory of Moral Sentiments, which also studied human feelings and acts of benevolence. In the opening paragraph he wrote:

How selfish sovereign man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him though he derives nothing from it, except the pleasure of seeing it. …The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it."

Nor did Smith regard selfishness as a virtue:

To feel much for others, and little for ourselves, to restrain our selfish, and to indulge our benevolent, affections, constitutes the perfection of human nature."

Smith also lays out the following hypothetical thought experiment:

Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how many of humanity in Europe, who had no sort of connection with that part of the world, would be affected upon receiving intelligence of this dreadful calamity."

Then Smith asks this question: Suppose it were possible to prevent the loss of those hundred million lives by sacrificing his little finger, would a man of humanity be unwilling to make the sacrifice?

I have asked audiences around the world how many would be willing to sacrifice a pinky finger if the tragic events of 9/11 could be erased. I’m always astonished at the response: a clear majority of every audience says yes.

Smith argued that it was your conscience that made you do the right thing, and that man’s behavior couldn’t be solely explained by mere greed. It was not love of the Chinese (or victims of 9/11) that made you give up your finger, but the love for the dignity and superiority of your character.

We desire not only to gain the external praise of others, we desire to gain the internal respect and praise of ourselves. We ultimately want to be worthy of our praise. We desire to be praiseworthy.

Study Wealth, Not Poverty

Perhaps Smith’s most profound thesis was how wealth was created. Up until his seminal work An Inquiry into the Nature and Causes of the Wealth of Nations––published in 1776––the so-called “mercantilist” view was the conventional wisdom––that is, the notion that wealth consisted in money and gold.

Smith’s central insight was to study why some countries were wealthy, not why most countries were poor.

Poverty needs no explanation, nor do we learn much from studying it, since it is the natural condition of man since he emerged from the cave. What would we do once we discovered the root causes of poverty? Create more of it?

What needs to be explained is wealth, the only known antidote to poverty. Smith thought the creation of wealth and economic growth in the rest of the world would lead to the “greatest improvement” of the common man’s lot.

Smith explained that the division and specialization of labor was one of the most important elements in creating wealth. We simply take it for granted today that everything we need will be available when and where we need it. Smith explained why this was so:

He [the businessman] generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. …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. 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. …By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. …It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

"But man has almost constant occasion for the help of his brethren. ...He will be more likely to prevail if he can interest their self-love in his favour. ...Give me that which I want, and you shall have this which you want, is the meaning of every such offer."

Smith understood that there were only three ways to get another person to help another achieve his goals: love, trade, and force. Trade was obviously the most efficacious way to achieve these ends since each party to every trade has to better their condition in order for an exchange to take place.

Why is it that building houses, growing and delivering food, producing clothing and other goods and services is not labeled “public service” but instead greed? Greed implies sellers can set prices at any level they desire. But this is surely not the case, as most so-called “for profit” businesses do not even make a profit. Homes in Los Angeles near the ocean command a higher price than those inland. Does this imply that fresh air causes greed?

Smith spoke of an “Impartial Spectator (“the great inmate of the breast”)––i.e., your conscience and sentiments to do the right thing––and competition as the external spectator to ensure you serve the interests of others (the “invisible hand”).

The Invisible Handshake

The fundamental question that should be asked of any economic system attempting to organize a society’s resources is whether, taken as a whole and over the long term, it will encourage or discourage good conduct.

Adam Smith’s invisible hand––an internal spectator, conscience, and an external check on power, competition––has proven a very successful system for achieving the greatest good for the greatest number.

The market is only as moral or immoral as the people in it. So is the government. So is any profession or organization.

Gordon Gekko was wrong, greed is not good, and that is not what Adam Smith meant.

Capitalism is based on trust, and the overwhelming majority of market transaction are guided not just by Smith’s invisible hand, but also by an invisible handshake, harmonizing the interests of both buyer and seller, and making them each better off than in the absence of exchange.

It’s not a bad way to organize a society.

Photo: Public domain, via Wikimedia Commons