The Roots of Adam Smith's Invisible Hand

How far back can one trace the origin of an idea? Adam Smith’s “invisible hand” may have hidden roots that stretch back to the days of nomadic hunting and gathering.

Readers of this blog are already familiar with the role of reciprocity in hunter-gatherer socioeconomic systems: “You do for me; I’ll do for you. You help me out. I’ll help you out when the hour of your need arrives.” In the reciprocity system, receiving engenders a debt. If I don’t pay it back when it comes due, I’ll lose face and might forfeit my place in exchanging gifts and favors.

The exchange created a web of relationships. Everyone in it was connected to everyone else. The web served to create a community of interests; everyone’s self-interest was linked to the self-interest of the others in the community.

The reciprocity system worked for many millennia because it served as what could be called the first “social security” system. The debts one had engendered in others had to serve as one’s safety net in case of injury, illness, old age, or bad luck in the hunt.

What happened to the reciprocity system once wealth and the ability to store value (grain, money, etc.) came into being? On the northwest coast of North America, the potlatch happened. The potlatch is a ceremonial feast where possessions are given away or destroyed. It’s a kind of competition to see who is the most generous. Why does anyone do such a thing? Because giving stuff away enhances the prestige—the status—of the giver. One gives to get. But what one gets is prestige, not a gift. The potlatch, therefore, is a device that produces a communal good by exploiting an individual’s desire for status.

The focus on getting status is a step away from the reciprocity and gift-giving of hunter-gatherers who lived in less bountiful environments, but the connection is clear. It may be that the northwest coast peoples, the Kwakiutl, Tlingit, and Haida among them, understood that selfishness would be a problem in their incredibly wealthy corner of the world. Perhaps they realized that good works weren’t going to happen all by themselves—at least not enough good works. So they found a way to offer prestige in return for unselfishness.

The potlatch lives, by the way. The ceremony still occurs, despite losing much of its socioeconomic importance. When I was last vacationing on the Olympic Peninsula in Washington State, I got breakfast in a small diner that happened to be full of Native Americans. At the next table, a group of men discussed organizing a potlatch. It was as if a myth came to life right before my eyes.

The spirit of the potlatch lives on in modern societies in the form of philanthropy. Billionaires fund massive projects and vie for the right to put their names on buildings. Less wealthy donors get their name on a brick in a walkway or a bench in the atrium or the park. Philanthropy, like the potlatch, transforms ego into communal good.

Smith’s “invisible hand” is based on the same transmutation: self-interest into the common good: If everyone in business strives to maximize their income, the result will be the best possible product at the best possible price. The untrammeled pursuit of self-interest will serve the common good. The idea has very ancient roots, but it has moved still more steps away from the reciprocity system of our ancestors.

Unlike the reciprocity system, Smith’s “hand” does not provide a safety net for individuals in need or trouble. If their boat doesn’t float in the modern economy, too bad. This is certainly a significant difference. Governmental programs are created to fill in for the invisible hand, but they often don’t address all the needs or all the people in need. Perhaps reciprocity as a system can only work in a relatively small group, where kinship ties supplement reciprocity when an individual is in need.