The Visible Hand: Adam Smith on Political Economy and State Power

By Marco Tulio Daza

In the domain of economic and philosophical discourse, few individuals have left such a lasting impact as Adam Smith. Renowned for his seminal contributions summarized in “The Theory of Moral Sentiments” and “An Inquiry into the Nature and Causes of the Wealth of Nations” (referred to as “The Wealth of Nations” henceforth), Smith’s philosophical tenets about individualism, the efficacy of free markets, and the merits of limited government intervention have exerted a profound and lasting influence upon the contemporary global landscape.

However, by the prevailing customs of his time, Smith’s manuscripts and personal possessions were destroyed upon his passing (Rasmussen, 2017). This lamentable practice rendered his unfinished third book and its core ideas a matter of conjecture for subsequent generations. 

Speculations abound regarding the possible content of this elusive work, often gravitating towards themes encompassing the realms of jurisprudence and governance. Clues can be found in the few surviving writings, and a significant hint may lie in his decision to work as a customs officer during his later years (Skousen, 2007), where he could closely study the role of government and regulation from a practical perspective. 

Consequently, several scholars have ventured to speculate that the title of this presumed third work could have been “The General Principles of Law and Government” (Chen, 2020a; Weingast, 2017). This intriguing possibility has sparked ongoing scholarly contemplation and discussion.

Given these insights, it is plausible to propose that if Adam Smith were alive today, his writings might focus on the intersections of natural order, liberalism, and individualism in the context of politics, state governance, and power dynamics.

Why would Adam Smith write about these topics?

One reason is philosophical continuity. Adam Smith’s intellectual journey began with moral philosophy and subsequently extended to economics and politics. In this progression, he explored themes of human behavior, ethics, economic systems, and governance. Given that liberalism encompasses economic, epistemic, social, and political dimensions, it would be natural for Smith to delve into the relationship between individualism and liberalism in the context of political power.

The first two books by Adam Smith are closely connected through the concept of the “invisible hand.” This elegant metaphor illustrates how the natural order tends to find balance on its own, like how virtue lies in the middle ground between two vices. In his work “The Theory of Moral Sentiments,” concerning human moral behavior, Adam Smith proposed that the “invisible hand” integrates selfishness and sympathy, thus guiding human moral sentiments (Chen, 2020b).

In his second book, “The Wealth of Nations,” Adam Smith introduces the concept of the “invisible hand” as the self-regulating mechanism within the market. Smith proposed that the “invisible hand” integrates egoism and altruism, serving as the guiding mechanism for pricing, demand and supply, and competition within industries (Chen, 2020b). This outcome is an unintended consequence of individuals pursuing their own self-interest(Taylor, 1996).

Given this continuity of thought, it is reasonable to assume that the notion of the “invisible hand” would also find a place in a hypothetical third work by Smith, thus closing the loop initiated by his first two books.

The second reason is to analyze the economic impact of his philosophy. Smith’s ideas have not only generated immense wealth and reduced global poverty but have also presented unexpected challenges and controversies. The application of his theories, sometimes to extremes or with improper implementation, has led to social inequalities and labor exploitation. Smith might want to address these challenges and offer nuanced perspectives on how to navigate the complexities of his own theories in practice.

Furthermore, a third reason that might have concerned Adam Smith pertains to the political implications of his work, specifically how autocratic governments employ economic wealth as a means to consolidate their power.

One compelling illustration of this concern can be found in the resurgence of authoritarian and, at times, outright autocratic regimes in recent decades. Some of these regimes have astutely exploited the inherent liberties present within liberal democracies to further solidify their grasp on power. Notable instances include the administrations of figures such as Hugo Chavez and Nicolas Maduro in Venezuela, Evo Morales in Bolivia, Tayyip Erdogan in Turkey, and Benjamin Netanyahu in Israel, all emblematic of this discernible trend. Additionally, the Chinese Communist Party has adeptly harnessed the advantages of free markets to advance its ambitions and perpetuate its authority.

These arguments could give rise to a series of profound inquiries in Smith: Can the relentless pursuit of maximizing individual rights and advocating for minimal government intervention lead to injustice and inequality? Can His ideas be used as a tool for oppression resembling those witnessed under absolutism and autocratic rule? This inquiry closely aligns with Smith’s deep-seated concern for safeguarding individual rights and maintaining limited government interference. 

The potential misappropriation of his ideas could have troubled Smith, prompting him to consider the unintended consequences of his philosophical framework within the economic and political realm.

What might the contents of a hypothetical third book by Smith entail?

The concept of the invisible hand and natural order would be a central theme. However, the analysis of this phenomenon from the perspective of power, the state, and politics could be very different from the first two works of Smith.

The operation of the invisible hand assumes certain conditions, and it may not work optimally in situations with a significant power imbalance. For instance, the existence of monopolies or oligopolies, on which competition may be limited or distorted. Situations like externalities (e.g., pollution), public goods (e.g., national defense), and natural monopolies (e.g., utilities) could lead to market failures. In these cases, the invisible hand alone may not address the issues efficiently, necessitating government intervention to correct these failures.

If we contemplate that the state inherently wields authority, creating a power asymmetry in its favor, then it becomes apparent that the application of the invisible hand and natural order cannot be uniform across both contexts. 

Additionally, just as individuals in the market seek to maximize their economic well-being, political actors, including government officials and policymakers, often act in their own self-interest, leading to both intended and unintended consequences in governance.

Legal Positivism, a principle primarily applicable to government officials and institutions, stands in contrast to individuals’ freedom, where they can do anything not explicitly prohibited by the law. However, government entities are bound by the principle that they can only wield authority and take actions expressly authorized by law. 

Similarly, when we transpose Adam Smith’s notion of the “invisible hand” into the sphere of political power, it takes on the form of a conspicuously visible hand, acting as a restraint on authority. This viewpoint recognizes the dual roles played by market mechanisms, steered by the invisible hand, and a well-regulated state, bound by a visible one, in forging a fair and equitable society.

Moreover, this work could delve into the political developments of recent decades. For instance, the Brexit process, involving the United Kingdom’s departure from the European Union, would likely capture his attention, considering his support for economic openness and criticism of protectionist policies.

Additional topics that might find a place in his work could include a critique of Marxism. Smith’s staunch advocacy for liberalism and individualism starkly contrasts Marx’s theory of historical materialism and the inherent class struggle. Given his aversion to controversy (Rasmussen, 2017), Smith might not engage in personal attacks. Instead, he would likely critique the central tenets of Marxism, emphasizing the value of private property, market-driven economies, and individual incentives.

The concept of the “end of history,” as proposed by Francis Fukuyama (2012), could profoundly intrigue Smith. Fukuyama’s proposition that liberal democracy might signify the culmination of humanity’s ideological development, only to subsequently witness the emergence of new ideological conflicts, would undoubtedly prompt Smith to reflect on the intricacies of human behavior.

Furthermore, Smith could engage with contemporary scholars like Robert Putnam and Daron Acemoglu, who investigate the interplay between social trust, economic prosperity, and governance. Smith’s emphasis on trust and morality and his assertion that commerce fosters trust would align with discussions on the significance of social trust in fostering economic development.

In the realm of economic and political thought, Adam Smith’s influence is undeniable. His advocacy for free markets, individual rights, and limited government intervention has led to unprecedented wealth creation and significant advancements in human living standards. However, these ideas have also brought challenges, including increasing inequality and a disbalance in power wielded by the state, corporations, and the people. 

If Adam Smith were to write a third book today, it would likely address the relationship between individualism, liberalism, politics, state, and power. Smith would provide a nuanced perspective on the application of his ideas, acknowledging both their successes and their potential pitfalls, all while championing the importance of individual liberty and economic freedom. Ultimately, his work would serve as a valuable guide for navigating the complexities of the modern world.

  • Chen, Y. (2020a). New Economic Engine: Effective Government and Efficient Market.
  • Chen, Y. (2020b). What Could Be the Contents of Adam Smith’s Third Book? [Bookitem]. In New Economic Engine: Effective Government and Efficient Market (pp. 1–9). Springer Nature Singapore.
  • Fukuyama, Francis. (2012). The end of history and the last man. Penguin.
  • Rasmussen, D. C. (2017). The infidel and the professor: David Hume, Adam Smith, and the friendship that shaped modern thought. Princeton University Press.
  • Skousen, M. (2007). The Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes. M. E. Sharpe.
  • Taylor, T. (1996). Legacies of great economists. Teaching Company.
  • Weingast, B. R. (2017). Adam Smith’s “General Principles Of Law and Government”: Istvan Hont’s Contribution.

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