David Warsh on Selling Expenses versus Invisible Hand
By David Henderson
The invisible hand is robust.
In his book Knowledge and the Wealth of Nations, David Warsh claims that there is a conflict between the fact of “selling expenses” (for example, advertising) and Adam Smith‘s Invisible Hand. He writes:
There could be no “selling expenses” of pins if the Invisible Hand was truly at work?
Is Warsh right? In a word, no.
If what he really meant was that there is a conflict between “monopolistic competition” and “perfect competition,” then of course he’s right. Under perfect completion, advertising is not required because everyone in a well-defined industry is selling the same identical good as everyone else in the industry, at an identical price. Under monopolistic competition, sellers differentiate their products and have some market power. They typically don’t sell identical products. They could, unlike in the case of perfect competition, raise their price one percent and not have their sales fall to zero.
But what Warsh is doing is what many modern economists do: interpreting Smith to be saying that the Invisible Hand is his version of perfect competition, even though Smith never said that or even hinted at it. Indeed, the concept of perfect competition came along well over a century after The Wealth of Nations.
Here are the two passages in Smith’s work where he discusses the Invisible Hand:
By preferring the support of domestick 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 no 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. (The Wealth of Nations, 1776.)
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 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. (The Theory of Moral Sentiments, 1759.)
Notice that nowhere in either passage does Smith say that producers or “the rich” are charging the same price as everyone else in an industry, the sine qua non of perfect competition.
There is in fact no contradiction between the invisible hand and selling expenses. I gain when Amazon, say, advertises its products, that is, spends money to sell, on its web site. The invisible hand is robust.