A Science of Markets: The Moral Dimension of the Invisible Hand

Abstract

Classical, neoclassical and Austrian economists assume that self-interest in exchanges is alone sufficient to make markets work, because of the invisible hand of Adam Smith. This assumption has motivated market deregulation. On the contrary, we argue that Adam Smith was not assuming or explaining that markets always work (or exist). Rather, when markets happen to work apparently through self-interest, Adam Smith was hypothesizing the possible existence of an invisible hand. Similarly, Christians of the Enlightenment who observed the orderly wonders of nature, believed in the invisible hand of God. This paper argues that the invisible hand behind the social order in markets observed by Adam Smith must have a moral dimension in addition to self-interest alone. We suggest that Adam Smith’s philosophy of functioning markets presupposed the influence of morality which economists have overlooked over the centuries, leading to a mistaken conflation of free markets with free-for-all markets. A scientific theory of markets is introduced to describe and classify different functions and types of markets, including market failures or collapses. In particular, we indicate that markets do more than allocate resources – they also distribute the benefits of exchange. This latter function is a social one which makes morality or fairness an essential ingredient in social interactions, as well-functioning markets distribute the benefits of exchange mutually, equitably and sustainably. We provide the rationale for an explicit role for morality in positive economic theory.