The Giant Hands or, the Reward of Industry

Invisible hand

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Elsewhere in The Theory of Moral Sentiments , Smith has described the desire of men to be respected by the members of the community in which they live, and the desire of men to feel that they are honorable beings.

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But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value, every individual necessarily labours to render the annual revenue of the society as great as he can.

He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, 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, and 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.

Nor is it always the worse for the society that it was not part of it. 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 an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

Only in The History of Astronomy written before Smith speaks of the invisible hand , to which ignorants refer to explain natural phenomena otherwise unexplainable:. Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters.

In The Theory of Moral Sentiments Smith uses the concept to sustain a "trickling down" theory, a concept also used in neoclassical development theory: The gluttony of the rich serves to feed the poor. The rich … consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements.

They are led by an invisible hand [emphasis added] to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.

These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for. So the landlord's gluttony in The Theory of Moral Sentiments is denounced in the Wealth of Nations as unproductive labour. Walker , the first president to 92 of the American Economic Association , concurred:.

The domestic servant … is not employed as a means to his master's profit. His master's income is not due in any part to his employment; on the contrary, that income is first acquired … and in the amount of the income is determined whether the servant shall be employed or not, while to the full extent of that employment the income is diminished. As Adam Smith expresses it "a man grows rich by employing a multitude of manufacturers; he grows poor by maintaining a multitude of menial servants.

Smith's theoretical U-turn from a micro-economical to a macro-economical view is not reflected in The Wealth of Nations.

Large parts of this book are retaken from Smith's lectures before his visit to France. So one must distinguish in The Wealth of Nations a micro-economical and a macro-economical Adam Smith. Whether Smith's quotation of an invisible hand in the middle of his work is a micro-economical statement or a macro-economical statement condemning monopolies and government interferences as in the case of tariffs and patents is debatable. The concept of the "invisible hand" is nearly always generalized beyond Smith's original uses. The phrase was not popular among economists before the twentieth century; Alfred Marshall never used it in his Principles of Economics [8] textbook and neither does William Stanley Jevons in his Theory of Political Economy.

Even Adam Smith, the canny Scot whose monumental book, "The Wealth of Nations" , represents the beginning of modern economics or political economy-even he was so thrilled by the recognition of an order in the economic system that he proclaimed the mystical principle of the "invisible hand": This unguarded conclusion has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their college course in economics.

In this interpretation, the theory is that the Invisible Hand states that if each consumer is allowed to choose freely what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution and prices that are beneficial to all the individual members of a community, and hence to the community as a whole.

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The reason for this is that self-interest drives actors to beneficial behavior in a case of serendipity. Efficient methods of production are adopted to maximize profits. Low prices are charged to maximize revenue through gain in market share by undercutting competitors. All these effects take place dynamically and automatically. Since Smith's time, this concept has been further incorporated into economic theory.

Vilfredo Pareto used an edgeworth box contact line to illustrate a similar social optimality. Ludwig von Mises , in Human Action uses the expression "the invisible hand of Providence", referring to Marx 's period, to mean evolutionary meliorism. Milton Friedman , a Nobel Memorial Prize winner in economics, called Smith's Invisible Hand "the possibility of cooperation without coercion.

Some economists question the integrity of how the term "invisible hand" is currently used. Gavin Kennedy, Professor Emeritus at Heriot-Watt University in Edinburgh, Scotland, argues that its current use in modern economic thinking as a symbol of free market capitalism is not reconcilable with the rather modest and indeterminate manner in which it was employed by Smith. Moreover, even if Smith did not intend the term "invisible hand" to be used in the current manner, its serviceability as such should not be rendered ineffective.

If the term is to be used as a symbol of liberty and economic coordination as it has been in the modern era, Kennedy argues that it should exist as a construct completely separate from Adam Smith since there is little evidence that Smith imputed any significance onto the term, much less the meanings given it at present. MacGregor , argued that:. The argument of the two capitals [ clarify ] was a bad one, since it is the amount of capital that matters, not its subdivision; but the invisible sanction was given to a Protectionist idea, not for defence but for employment.

It is not surprising that Smith was often quoted in Parliament in support of Protection.

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His background, like ours today, was private enterprise; but any dogma of non-intervention by government has to make heavy weather in The Wealth of Nations. Harvard economist Stephen Marglin argues that while the "invisible hand" is the "most enduring phrase in Smith's entire work", it is "also the most misunderstood. Economists have taken this passage to be the first step in the cumulative effort of mainstream economics to prove that a competitive economy provides the largest possible economic pie the so-called first welfare theorem, which demonstrates the Pareto optimality of a competitive regime.

But Smith, it is evident from the context, was making a much narrower argument, namely, that the interests of businessmen in the security of their capital would lead them to invest in the domestic economy even at the sacrifice of somewhat higher returns that might be obtainable from foreign investment. It would have to be shown that the gain to the British capital stock from the preference of British investors for Britain is greater than the loss to Britain from the preference of Dutch investors for the Netherlands and French investors for France. According to Emma Rothschild , Smith was actually being ironic in his use of the term.

Smith uses the metaphor in the context of an argument against protectionism and government regulation of markets, but it is based on very broad principles developed by Bernard Mandeville , Bishop Butler , Lord Shaftesbury , and Francis Hutcheson. In general, the term "invisible hand" can apply to any individual action that has unplanned, unintended consequences, particularly those that arise from actions not orchestrated by a central command, and that have an observable, patterned effect on the community. Bernard Mandeville argued that private vices are actually public benefits.

In The Fable of the Bees , he laments that the "bees of social virtue are buzzing in Man's bonnet": Bishop Butler argued that pursuing the public good was the best way of advancing one's own good since the two were necessarily identical. Lord Shaftesbury turned the convergence of public and private good around, claiming that acting in accordance with one's self-interest produces socially beneficial results. An underlying unifying force that Shaftesbury called the "Will of Nature" maintains equilibrium, congruency, and harmony. This force, to operate freely, requires the individual pursuit of rational self-interest , and the preservation and advancement of the self.

Francis Hutcheson also accepted this convergence between public and private interest, but he attributed the mechanism, not to rational self-interest, but to personal intuition, which he called a "moral sense. In The Theory of Moral Sentiments , vol. II, page , he says, "By acting according to the dictates of our moral faculties, we necessarily pursue the most effective means for promoting the happiness of mankind.

Contrary to common misconceptions, Smith did not assert that all self-interested labour necessarily benefits society, or that all public goods are produced through self-interested labour. His proposal is merely that in a free market, people usually tend to produce goods desired by their neighbours. The tragedy of the commons is an example where self-interest tends to bring an unwanted result. The invisible hand is traditionally understood as a concept in economics, but Robert Nozick argues in Anarchy, State and Utopia that substantively the same concept exists in a number of other areas of academic discourse under different names, notably Darwinian natural selection.

In turn, Daniel Dennett argues in Darwin's Dangerous Idea that this represents a "universal acid" that may be applied to a number of seemingly disparate areas of philosophical inquiry consciousness and free will in particular. Tawney saw Smith as putting a name on an older idea:. If preachers have not yet overtly identified themselves with the view of the natural man, expressed by an eighteenth-century writer in the words, trade is one thing and religion is another, they imply a not very different conclusion by their silence as to the possibility of collisions between them.

The characteristic doctrine was one, in fact, which left little room for religious teaching as to economic morality, because it anticipated the theory, later epitomized by Adam Smith in his famous reference to the invisible hand, which saw in economic self-interest the operation of a providential plan The existing order, except insofar as the short-sighted enactments of Governments interfered with it, was the natural order, and the order established by nature was the order established by God.

Most educated men, in the middle of the [eighteenth] century, would have found their philosophy expressed in the lines of Pope:. Naturally, again, such an attitude precluded a critical examination of institutions, and left as the sphere of Christian charity only those parts of life that could be reserved for philanthropy, precisely because they fell outside that larger area of normal human relations, in which the promptings of self-interest provided an all-sufficient motive and rule of conduct. Religion and the Rise of Capitalism , pp. The Nobel Prize -winning economist Joseph E. Adam Smith, the father of modern economics, is often cited as arguing for the "invisible hand" and free markets: But unlike his followers, Adam Smith was aware of some of the limitations of free markets, and research since then has further clarified why free markets, by themselves, often do not lead to what is best.

There could be different share structures where dividends attract a higher tax rate depending on how long you hold shares. There are options if you really want to address that issue. This is the right time to do that.

The Giant Hands Or, the Reward of Industry (Paperback)

Polman says CEOs on their own cannot significantly influence the financial markets, and given that Unilever is a consumer goods company, it makes more sense to focus the company's attention on changing the behaviour of its two billion customers, who account for the majority of the company's environmental footprint. One aspect is to encourage customers to use resources more efficiently, such as taking shorter showers and washing clothes in lower temperatures.

The other is encouraging them to switch to more sustainable products. Polman says some clear lessons have already been learnt, such as consumers will not buy 'green' products unless their performance is as good and they do not have to pay a premium: But he believes we are now entering a new era when consumers will stop buying products from companies they see are not behaving responsibly.

Consumers recognise they can drop a company instantly. This is not utopia, it is enlightened self interest. Polman, like other business leaders, is frustrated by the lack of clear incentives to support the transition to a sustainable society, and is a firm believer in progressive regulation that is based on incentives. I am a free enterprise person but that is not the only solution. A system where you can have positive reinforcement for the long term is more effective than rules and regulations. If I had to run my company with bibles of guidelines I would not be in business long term.

Polman acknowledges there is a new generation of CEOs, brought up in the s, who have a more rounded view of the role of business in society. But he believes previous generations would also have responded to the challenges facing the world "because the clarity of the issues we are facing now are so transparent. When we went into the Second World War, the business leaders combined took a decision for the greater good of the UK to fight for freedom and when they came out, to get the economy back on track. When the challenges are big enough people respond in a responsible way.

It's one thing a CEO putting his weight behind a leading-edge sustainability strategy, but how is Unilever embedding this across a company with nearly , employees operating in countries, owning hundreds of brands and directly touching the lives of million people across its supply chain.

Polman points to the importance of preparing the groundwork before going public, Cancelling quarterly reporting and changing the way employees are incentivised were two key ways of moving the company away from concentrating on the short-term. Measurement of impacts has also been critical in understanding where the company's key impacts are and being able to set intelligent targets for improvement. Making more money or being bigger means less and less," he says. Our buying people have KPIs on the percentage of sustainable sourcing, we measure how many small-holder farmers we employ, we measure the full impact of water, carbon, packaging, waste, of all of our products and reward our people for moving in the right direction.

Polman is delighted by the way staff have responded, although more work needs to be done to push change down into the middle management layers. The engagement score in the regular staff survey leaped by 10 percentage points after the Sustainable Living Plan was launched. Polman says this shocked the survey company because they had never seen this level of change before. Every country I visit I go to consumers and retailers to look at the impact of our products, the contribution our products make to society.

While some people worry that the pace of change is far too slow to address the scale of problems the world is facing, Polman cautions against pessimism and suggests that the foundations for transformation are being put in place. In the corporate world, he points to the growing number of companies reporting on their impacts and disclosing their carbon emissions and he points to the rapid growth of socially responsible investment funds in the financial markets. Beyond that he says investment banks are coming together to help halt illegal deforestation and that they are starting to think about their business models, although he recognises they are doing this under pressure from critics rather than voluntarily.

Within the field of corporate responsibility, Polman is considered to be the most influential advocate for challenging the status quo and showing that business as usual is not an option. But he brushes aside this reputation and points out he could not have taken the position he does if the values of responsibility were not already embedded in the company's culture.

We are seeking to stay close to society to guarantee our future. We'll be live streaming the debate on Guardian Sustainable Business, if you'd like us to send you a reminder when the event is about start then register your interest below. You can also pose questions to Paul in advance and we'll endeavour to get them answered on the day.

This content is brought to you by Guardian Professional. Become a GSB member to get more stories like this direct to your inbox. The role of government He believes government has a role to play here and argues for a progressive taxation system for share ownership, pointing out that equities in FTSE companies are held for on average just eight months. You can also pose questions to Paul in advance and we'll endeavour to get them answered on the day This content is brought to you by Guardian Professional. Topics Unilever sustainable living sustainable living.

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