Manuel Velasquez's explanation of "the invisible hand" as another name for competition (Business Ethics: Concepts and Cases [Prentice-Hall, 2002], chapter 3) seems superficial and misleading. If that is the end of the story, why didn't Smith himself substitute "competition" or some familiar synonym of "competition" for "invisible hand"? The phrase "invisible hand" is clearly a metaphor that depends on the prior idea of the visible hand of a central planner who has knowledge of a social organization's aims and resources, and allocates resources—say, by pointing and saying, "these resources here, those resources over there"—to one or another department of the organization so as to produce the best results. The planner knows that the outputs of some departments are inputs for others and is concerned to coordinate them in ways that waste neither resources nor time. This is not such a strange idea because, even in Smith's day, capitalist manufacturers were arranging the internal operations of their own firms by means of similar reasoning.

The "invisible hand" metaphor evokes the alleged ability of Smith's preferred economic system to produce an optimal result, as if it were directed by such a very wise planner, without having to assume the actual existence of this being. The model plausibly has this capacity only if all of Smith's assumptions about the ideal economy obtain; probably it also requires a few other premises that did not occur to him, but which have been made explicit by economists in the 20th century. (See this 20th Century Reconstruction of the Smithian model.)

The "invisible hand" idea is not unique in intellectual history. Darwin's notion of natural selection, developed in his Origin of Species, is a similar metaphor, parasitic on the experience, fairly common among breeders of domesticated plants and animals in 19th century England, of artificial selection. Just as there need not be any actual single mind behind the invisible hand in Smith's economic model, so there need not be any actual single being doing the selection Darwin calls natural selection in his account of "descent with modification."

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Perhaps there is more to the metaphor than this. In his recent book, Debt: The First 5000 Years, David Graeber provides the following historical context for understanding Smith's idea:

[What was Adam Smith] trying to do when he wrote The Wealth of Nations [?] …[T]he book was an attempt to establish the newfound discipline of economics as a science. This meant that not only did economics have its own peculiar domain of study—what we now call "the economy," though the idea that there even was something called an "economy" was very new in Smith's day—but that this economy operated according to laws of much the same sort as Sir Isaac Newton had so recently identified as governing the physical world. Newton had represented God as a cosmic watchmaker who had created the physical machinery of the universe in such a way that it would operate for the ultimate benefit of humans, and then let it run on its own. Smith was trying to make a similar, Newtonian argument. God—or Divine Providence, as he put it—had arranged matters in such a way that our pursuit of self-interest would nonetheless, given an unfettered market, be guided "as if by an invisible hand" to promote the general welfare. Smith's famous invisible hand was, as he says in his Theory of Moral Sentiments, the agent of Divine Providence. It was literally the hand of God.*

Once economics had been established as a discipline, the theological arguments no longer seemed necessary or important.…(David Graeber, Debt: The First 5000 Years [Brooklyn, New York: Melville House Publishing, 2011], 50-51)

* [Graber's note: . . . [I]n Theory of Moral Sentiments IV.1.10, [Smith] is explicit that the invisible hand of the market is that of "Providence."]

Here is the paragraph from Theory, published in 1759, to which Graeber refers in his note:

And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants. It is to no purpose, that the proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his brethren, in imagination consumes himself the whole harvest that grows upon them. The homely and vulgar proverb, that the eye is larger than the belly, never was more fully verified than with regard to him. The capacity of his stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. The rest he is obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, among those who provide and keep in order all the different baubles and trinkets, which are employed in the oeconomy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice. The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. The rich only select from the heap what is most precious and agreeable. They 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 [my emphasis—J.G.] 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. When Providence [i.e., God.— J.G.] divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. 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 now it seems that Smith's "invisible hand" was originally a theological notion referring to God's capacity as a divine planner, although in its most famous occurrence in the later (1776) Wealth of Nations the theological reference is not explicit.

The passage from Theory uses two terms that evoke the experience of human planning: there is a reference to the "oeconomy of greatness," that is, the set of decisions, typically involving money, that a rich person makes to display his supposed superiority to the poor and confirm his social status as a member of the aristocracy, which depends on the ancient understanding of "oeconomy" as household management already found in Aristotle; then there is the description of God as "Providence," that is, as a wise planner who cares for the welfare of his creatures (mainly people); this is already metaphorical because it depends on the prior notion of a providential, i.e., wise and prudent head of household, who makes choices that benefit himself and other members of his household. "Oeconomical science" was the ancient name for this kind of wisdom, when it was attributed to humans.

But is it a mistake to call attention to the activity that anybody involved in, or visiting, one of the (from our later perspective quite modest) capitalist manufacturing firms of Smith's day could have observed? I don't think so. It is a natural move from the prudence of the good household manager to the prudence of the manager of an 18th-century manufacturing firm. The analogies are obvious and cannot have escaped observers of 18th-century life, especially since in a not-yet-forgotten earlier period production for the market took place within the housheold and only recently were business people increasingly separating the places of production physically from the living quarters of producers.

One possible disanalogy is that unlike an ideally benevolent deity, the capitalist may be motivated by his own self-interest rather than the interests of everyone under his supervision. Indeed, Smith assumes self-interested motivation on the part of everyone who participates in markets. So, the theological metaphor is important for Smith's argument in a way in which the idea of a household manager or a prudent manufacturing capitalist is not. Smith's point in Wealth is that the market operates, where certain minimum conditions are present (including but not limited to non-favoritism on the part of the state), to produce the greatest happiness for the members of the society (or at least those who participate as buyers and sellers). And the theological argument presupposes a loving, or benevolent deity who would, of course, aim to produce the greatest happiness for his human creatures.

Experience of the planning capacity of the prudent business manager, however, would provide a relatively concrete, yet nontrivial example of decision-making in light of an intelligible goal, financial success. While nobody may be able to clearly picture how a benevolent deity makes the world work to promote the happiness of everyone, many people can partly see and partly imagine how the many decisions of certain intelligent business managers might work together to promote their (comparatively limited) goals.

The challenge for Smith and his more recent supporters is to show how the economy-wide version of this process works, in detail and in ways that can be confirmed; otherwise the claim that the metaphorical hand of the economy as a whole is invisible— that is, not empirically observable—will have to serve them as an apology for lack of evidence.

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Note on Graeber's sentence "It was literally the hand of God." It is a bit odd that Graeber should use the word "literal" in this context. Arguably, all the positive things people say about God are metaphorical rather than literal. The description of God as Providential is normally part of theodicy, a religious argument to justify the description of God as good and benevolent toward humankind. In describing God in that way, the point is being made that like an intelligent monarch who cares for his subjects, God arranges the universe so that we will benefit from that arrangement, which, in some versions of the argument, is superior to any other possible arrangement. God's management of the universe is providential, i.e., intelligently far-sighted (or prudent—the word "prudent" is closely related to "provident") in the same way a wise household manager who aims at the happiness of household members is providential.

But Theory IV.1.10's use of the "invisible hand" metaphor may seem less metaphorical than Wealth's because the latter work contains an additional shift from the invisible hand of God in the universe to the production and flow of goods in the newly discovered, or invented, category of the economy or economic order. There is little sense in the 1759 Theory that the social or economic order is different from, or a distinct subset of, the natural order. (The social sciences had not yet been invented. The invention of the modern concept of the economy—promoted by Smith himself in the 1776 Wealth—helped to create one of them.)

Smith's claim about the "invisible hand" in Wealth pertains to the operation not directly of God in the scheme of nature as a whole but of something like a goal-directed activity in a distinct, somewhat smaller, scheme consisting of all the voluntary actions of people who engage in buying, hiring, producing, consuming, and selling, typically mediating these actions by exchanges involving money. God may secretly stand behind these actions but Smith's point in Wealth is that, if certain conditions are met, these actions will collectively produce a result that a benevolent God would wish for us. There is no attempt in the later work to prove that He himself makes the economy perform well.