The 12 Economists of Christmas: Adam Smith

How the invisible hand brings us all our fruitcake

In the spirit of the holidays, we are examining the work of 12 great economists, specifically using the Christmas season to illuminate some of their core insights. Today, we reflect on Adam Smith, the 18th century Scottish thinker who coined the now oft-used phrase, “the invisible hand,” and who is widely regarded as the father of modern economics.

Our examination of Smith’s ideas begins in the nation’s stores, where, every November (and increasingly October), like clockwork, holiday loot begins piling up on shelves. Most people would probably point out that this is driven by the desire for profit: companies want to make money and, as their market research tells them, people like to get their Christmas shopping done as quickly as possible.

That this major rerouting of consumer goods goes off largely without a hitch each year, and without any kind of coordinating legislation or centralized bureaucracy, seems like magic. No one has to be ordered to reorient their operations in order to service our holiday cheer. It’s as if some special Christmas spell is cast shortly after Halloween candy sales die down, and stores’ once-earthy tones of fall transform to the greens and reds of the holiday season.

Today we know that it’s not magic that makes Christmas shopping take flight. Thanks to the work of Smith, we understand that this seemingly-enchanted dance of demand and supply is the product of market dynamics. What’s more, we know that this dynamic generally is very beneficial for society. Indeed, his seminal book, The Wealth of Nations, explains how each individual pursuing their own personal good leads to an outcome that serves society as a whole, usually far better than if that person tried to do something specifically for “the public good.”

As Smith wrote: “[The individual] 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.”

Smith goes on to argue that by pursuing his own interests and gain, a person often creates greater social benefit than if he were trying to promote the public interest. "By pursuing his own interest he frequently promotes that of the society more effectively than when he intends to promote it,” he wrote, adding: “I have never known much good done by those who affected to trade for the public good.”

His metaphor of the “invisible hand” as a coordinating mechanism for resource allocation proved a potent illustration of the force that converts our self-interested actions into beneficial social outcomes. If not for our desire to make money for ourselves and our family, those fruitcakes that perennially adorn grandma’s kitchen counter and those delicately wrapped gifts under the tree might never come to be.