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How the Chicago School changed the meaning of Adam Smith’s ‘invisible hand’

Smith wasn’t warning about government intervention in the market; he was warning about government capture

- April 18, 2019

You don’t have to look very far to find people invoking Adam Smith’s name in U.S. political debate. These days, trade policy with China, the Green New Deal and even energy policy have all led people to rally around his purported legacy: the virtues of free markets, the harmful effects of government intervention in economic affairs.

At the same time, political theorists and historians like me have argued that the Scottish moral philosopher didn’t just stand for free markets and that, in fact, Smith’s invisible hand wasn’t a warning about state intervention but state capture. Rather unlike the caricature of Smith who espouses unchecked economic growth, they’ve also argued that Smith was deeply worried about the moral consequences of growing inequality.

So how did Adam Smith become such a popular icon in the first place? And why did the “invisible hand” become such a powerful political catchphrase?

The Chicago School popularized today’s Adam Smith

In a recent article published in Modern Intellectual History, I suggest that we can trace the popular version of the “free-market Smith” to the “Chicago School” of economics in the 20th century. Today the Chicago School (the economics faculty at the University of Chicago) is simultaneously famous for being one of the most decorated economics departments in the world (it can claim more Nobel Prizes in economics than any other institution) and infamous for its degree of free-market fundamentalism.

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The early Chicago School had complicated views of Smith

Chicago economists’ interest in Adam Smith was not purely ideological. They held different views about the nature and scope of economic science in the 20th century and in turn held different views about Adam Smith and his significance, not just for economics but also public policy.

For example, pioneering Chicago economists Frank Knight (1885-1972) and Jacob Viner (1892-1970) read, taught and wrote at a time when many economists seriously questioned whether free markets could adequately self-regulate following the Great Depression. Against this backdrop, they treated Smith as a complex thinker whose ideas could not — and should not — be reduced to the doctrine of “laissez-faire.” They cautioned against thinking of Smith’s works as a “mixture of science and propaganda” or calling “The Wealth of Nations” a “political pamphlet.” Viner — one of the first U.S. economists to insist on reading Smith’s earlier work, “The Theory of Moral Sentiments” (1759), alongside “The Wealth of Nations” (1776) — famously argued that “Adam Smith was not a doctrinaire advocate of laissez faire.” Instead, Smith was an eclectic thinker who was prepared to defend a “wide and elastic range of activity for government” where necessary.

Their heirs took a simpler approach — and made Smith famous

Though they were both students of Knight and Viner, Milton Friedman (1912-2006) and George Stigler (1911-1991) had very different views about the nature and purpose of economics — and hence, of Smith — from their predecessors. For Friedman and Stigler, economics’ scientific power came from its ability to predict outcomes based on two central insights, both of which could be found in “The Wealth of Nations.” The first was self-interest, or what Stigler called the “crown jewel” of “The Wealth of Nations.” According to Stigler, Smith’s idea of self-interest was so powerful that it was “Newtonian in its universality” and had unlimited explanatory power.

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The second was, of course, the invisible hand. According to Friedman, Smith’s master metaphor represented “the way in which voluntary acts of millions of individuals each pursuing his own objectives could be coordinated, without central direction, through a price system.” Taken together, self-interest and the invisible hand represented the core axioms of scientific economics. The political implications were clear. Once individual behavior was reduced to utility-maximizing self-interest, promoting Smith’s invisible hand of the market — and restraining the heavy hand of government — was the ultimate goal. Few economists were as successful as Friedman in spreading this interpretation of Smith’s ideas to the public. In numerous op-eds in major news outlets, speeches and public television (where he sometimes sported an Adam Smith tie), Friedman popularized this interpretation of Smith’s invisible hand for an overtly conservative political agenda.

To be sure, there were many other economists who also paid lip service to Smith and the invisible hand. The economist Paul Samuelson, for example, cornered the market in economics textbooks in 1948 with the publication of “Economics.” Now in its 19th edition, one can imagine the millions of students who encountered Smith and the “mystical principle” of the invisible hand in this format. Professional economists today are probably also familiar with the 1971 publication of Frank Hahn and Kenneth Arrow’s landmark “General Competitive Analysis,” which claimed to have discovered a mathematical proof of the invisible hand (under certain special conditions).

What makes the Smith of Milton Friedman and George Stigler so interesting — some people might say problematic — is not that they aligned Smith with a particular political agenda. It’s that they “economized” Smith in a way that obscured if not precluded the relevance of his moral philosophy and political theory. Stigler once famously quipped that “the correct way to read Adam Smith is the correct way to read the forthcoming issues of a professional journal.” In other words, Stigler believed that you had to read Smith as if he were a modern, 20th-century economist, not (as Smith originally was) an 18th-century moral and political thinker. What’s more, the power of Friedman’s version of the invisible hand derived from the seemingly objective scientific authority of its author, the “father of economics,” Adam Smith. It’s clear, however, that impulse to portray economics — even Smith’s version of economics — as an objective science is deeply embedded in the history and politics of the discipline.

Smith’s relevance has always been political. Whether his political value stems from the idea that he is an economist or moral philosopher or something else, however, is something that we — Smith’s readers — get to decide.

Glory Liu (@miss_glory) is a postdoctoral research associate at the Political Theory Project at Brown University.