Asher Sisneros

Asher K. Sisneros

Prof. Thomas E. Woods, Jr. 

Western Civilization Since 1493

October 21, 2024

Economics did not truly become a social science until Adam Smith and his followers. Economic theories had existed before him, such as mercantilism, and even the University of Salamanca had theologians and scholars who pushed for laissez-faire principles, but none of them came close to providing a system as comprehensive as Smith’s. To this day, people still study his work Wealth of Nations, and the term he coined—invisible hand—is still popular. 

What is the invisible hand, according to Smith? The invisible hand is a metaphor for the cooperation between individuals in a laissez-faire economy, or to put a religious spin on it, the providence of God. It is the idea that economies do not need the temporal hand of man to govern them. This invisible hand ensures that highly skilled workers will receive high wages and efficiency in the market will be rewarded. 

For the invisible hand to work, there must be no centralized intervention. The economy must function organically as a pool of individuals pursuing their economic interests and cooperating with each other so everyone can attain their respective goals. This works because of the division of labor. By specialization, individuals can become incredibly efficient at one craft. Rather than waste time trying to satisfy all their needs, they can specialize in their one area of expertise and use the market to attain their other needs. For example, the baker might make phenomenal bread but be horrible at construction. There could be many reasons for this, including the lack of construction equipment and the lack of knowledge. Thus the baker would be better off selling his bread, which he can make efficiently, and using that money to hire a builder for all his construction needs. Likewise, the builder, rather than use his shovel to make concrete-infused bread, is better off by buying bread from the baker. This is the basic premise of the division of labor and specialization, a central concept in understanding Smith’s invisible hand metaphor. 

Naturally, in a world with specialization, some industries will be more sought after than others. This may be because of barriers to entry. For example, becoming a surgeon requires immense training and expertise. The barriers to entry include the costs of medical school, the time, and the equipment. Meanwhile, being a server at a restaurant has a much lower barrier to entry. All it requires is, as my pastor says, “maybe legs so you can walk and carry the food.” Given all the extra barriers to entry and the necessary expertise on the part of the surgeon, shouldn’t he receive a greater compensation than the food server? Most people would say yes. And in a laissez-faire system, he would (and does!) receive greater compensation than the server.

The reason higher-skilled workers receive greater compensation than lower-skilled workers in a free market is that buyers (or employers) are willing to give the person in greater demand a greater reward. Returning to the surgeon example, because there is a need on the part of consumers, and there is a limited supply of surgeons to satisfy that need, consumers will compete for the attention of the supplier by offering them greater rewards. Because of the nature of a free market economy, there is always mutual consent between the two parties: consumer and supplier, i.e., buyer and seller. If the seller demands an outrageously high price, the buyer will not buy the product. Similarly, if the buyer offers an outrageously low price for the product, the seller will not sell it. But of course, the seller wants to get the highest price for his product, while the buyer wants to get the lowest price. Competition between sellers ensures that the consumer receives the best deal. In industries with excessive profits, more people will enter the industry to capitalize on those profits. But to attract clientele, the growing number of supplies will eventually have to lower their prices to a sustainable level. The grand check on disproportionate prices: competition. Thus in a laissez-faire system, buyers and sellers will only engage in a transaction at an equilibrium point where both parties are satisfied, and outrageous profits will eventually correct themselves because of competition. 

This is the premise of the invisible hand. Without any guild or government setting fixed prices, buyers and consumers cooperate with each other to create a mutually beneficial system where everybody wins. The mercantilist outlook says the strength of a nation’s economy relies on centralized control. Adam Smith disagrees. In the long run, the invisible hand will always keep economies intact and result in the well-being of both the consumers and the suppliers.