The invisible hand does not exist – at least in its modern incarnation. A return to the original texts of Adam Smith and a look at the theory of evolution can help us craft a better metaphor for how markets actually function. Cooperation is as important as competition.
Adam Smith famously observed that people neither intend to promote the public good nor know how much they are promoting it. Nevertheless, in pursuing their own selfish goals, they are led, as if by an invisible hand, to promote an end that was no part of their intention. Smith’s observation stands for one of the most fundamental questions in economics—the degree to which economies can run themselves without government intervention.
The two tenets of the invisible hand metaphor are (1) a society automatically functions well (2) without members of the society having its welfare directly in mind. These two tenets can be evaluated for any society, including the thousands of animal societies that have evolved by natural selection. The study of animal societies might seem far afield from the study of human economic systems, but a strong argument can be made for a new concept of the invisible hand that applies to both.
For any group (animal or human) to function well as a society, members must perform activities that typically do not maximize their relative advantage within the group. Natural selection within groups therefore tends to undermine the performance of the group. Whenever this happens, the society does not function well as a unit and the first tenet of the invisible hand metaphor does not apply. This is in contrast to the received economic version of the invisible hand metaphor, which assumes that the pursuit of individual self-interest robustly benefits the common good.
The evolution of group-beneficial traits requires a process of group-level selection. In a multi-tier hierarchy of social units, the general rule is “adaptations at level X require a process of natural selection at the same level and tend to be undermined by selection at lower levels.” What’s good for me can be bad for my family. What’s good for my family can be bad for the clan. What’s good for the clan can be bad for the nation. What’s good for the nation can be bad for the global village.