One analogy used by Adam Smith has been inflated into a full-blown economic mythology. If there is an "invisible hand", it drives concentration of wealth and power instead of economic equilibrium. There is also a corresponding "invisible foot" that leads to production of harmful externalities.
Why do people prattle about "as if an invisible hand" when it is government alone that visibly constrains the businessmen to mere economic competition rather than the violence, monopoly and theft of mafias? It is government that visibly constrains the consumer to mere purchase rather than ignoring the system of property and anarchistically using whatever is desired, either peacefully or forcefully. It is that government coercion that redistributes from the businessman to the consumer a large part of the consumer surplus. It is that government coercion that allows the accumulation of property that permits civilization.
Incredible, pervasive coercion is necessary to create markets. Coercive threats are necessary to property: they limit the power and freedom of individuals to use the wealth that surrounds us that belongs to others. Coercive threats limit the power and freedom of businesses to become mafias. If this seems like an "invisible hand", it is only because it is all-pervasive like the air we breathe at all times.
An apt analogy for the invisible hand of capitalism is the cattle chute. Cows are prodded from a truck into the cattle chute and they exit at the slaughterhouse. There is no prodding in the cattle chute, so you might say that it is as if "an invisible hand" is guiding the cattle. Yet the cattle's behavior is controlled by the walls of the chute, which are too close together to allow the cattle to turn around, and by the continual entrance of other cattle behind them that forces them to go forward. This institution brings about the desired social benefit of getting the cattle into the slaughter house. Our government-created capitalist institutions are similarly restrictive of choices, and there are continual new entrants forcing those ahead of them to keep moving. Why is it that we think the cattle chute is visible, while capitalist institutions are invisible hands?
According to Google Books Ngram Viewer, usage of this term has increased threefold since 1960. This might have to do with increasing promotion of capitalism as neoliberal propaganda.
- Invisible Foot (1 link)
- A term used by E. K. Hunt to describe the second half of the capitalist incentives to privatize gain and socialize costs. It increases private gain to create negative externalities (such as pollution) rather than bear their costs: thus negative externalities will be maximized "as if by an invisible foot". See also the propaganda term Invisible Hand.
- Invisible hand (Wikipedia) [More...]
- Wikipedia (8/2013) documents many interpretations and criticisms of the neoliberal propaganda usage of Smith's metaphor.
- Markets: Guided by an Invisible Hand or Foot? [More...]
- "Adam Smith and his disciples today see markets working as if they were guided by a beneficent, invisible hand, allocating scarce productive resources and distributing goods and services efficiently. Critics, on the other hand, see markets working as if they were guided by a malevolent, invisible foot, misrepresenting people's preferences and misallocating resources."
- There Is No Invisible Hand [More...]
- "But if the brightest economic minds failed for a century to show how some invisible hand could move markets toward equilibrium, can any such mechanism exist? [...] In a tribute to academic insularity, most supposedly practical economists are dimly aware, if at all, of theorists' instability results."
There has never once been an outcome attributed to the Invisible Hand of the Market in which the Heavy Hand of the State did not play an indispensable part, and in which all too many are not sure to discern the Hidden Hand of Conspiracy.
Dale Carrico, "Dispatches from Libertopia: An Anthology of Wingnut Chestnuts and Democratizing Remedies"
[...] the advantages of bigness have outweighed the disadvantages, and companies have been led, "as if by an invisible hand" to get big and take over.
Michael Goodwin, "Economix: How Our Economy Works (and Doesn't Work), in Words and Pictures"
Jim Crow laws were not the primary cause of segregation in the South. In many places few laws, if any, explicitly restricted blacks from entry into desirable social positions, from purchasing property in white neighborhoods, from entering private schools and colleges, or from using hospitals, restaurants, hotels, and other private businesses frequented by whites. Still, these events rarely occurred due to tacit (often explicit) agreement among whites. Because of privately imposed restrictive covenants, discriminatory business practices, and blacks' abject economic status, there was little need for laws imposing segregation and discrimination. It could be left up to the invisible hand.
Samuel Freeman, "Illiberal Libertarians: Why Libertarianism Is Not a Liberal View" pg. 135
The invisible hand of the market makes a very good pickpocket.
Adam Smith used the phrase “invisible hand” only once in “The Wealth of Nations,” and he probably didn’t mean to say what most people now think he said. But never mind: Today the phrase is almost always used to mean the proposition that market economies can be trusted to get everything, or almost everything, right without more than marginal government intervention. Is this belief well grounded in theory and evidence? No.
Paul Krugman, "The Dismal Science: 'Seven Bad Ideas,' by Jeff Madrick"
Williamson borrowed from Coase the concept of "transactions costs" the idea that the market price in any transaction may fail to incorporate the full costs to the seller or buyer because of the very conditions of exchange. In particular, whenever there is uncertainty or the need for long-term relationships, the parties to a transaction are unlikely to be able to write contracts complete enough to cover all the contingencies or hidden costs. Furthermore, incomplete contracts encourage one or the other party to behave opportunistically, deliberately withholding information or broadcasting disinformation to get a better deal. In such cases, the transaction is likely to occur under a single roof, inside a "hierarchy" (that is, firm). This solution "internalizes" or reveals to the decision makers those otherwise hidden costs. Williamson showed that there are, even in pure theory, situations in which the inefficiencies of bureaucratic organization are offset by the greater predictability of the outcome. This is showing quite a lot, at least to academic economists. It says that under rather common circumstances it is efficient (maximizing of profits, minimizing of long run average costs) for explicit rules, regulations, commands, organization charts, and social contracts to replace the invisible hand.
Bennett Harrison, "Where Private Investment Fails"