Adam Smith’s “invisible hand” is the most famous metaphor in economics. Smith used the phrase three times, most famously in The Wealth of Nations in 1776, when he wrote that as each individual tries to invest, “he intends only his security. . . . 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.”1
Exactly what Smith meant by the invisible hand is excitedly debated by scholars to this day.2 But for modern economists, the metaphor has a taken on a life well beyond Smith’s intentions. It now describes the idea that when individuals and companies compete in the marketplace, the outcome is socially beneficial: products are produced efficiently, and they’re consumed by the people who value them most.
Perhaps there are a few free-market fans who think this is an accurate description of how markets actually work. But the mainstream of the economics profession views it more as a useful starting point. Markets do tend to allocate resources well, but that tendency isn’t a guarantee. The invisible hand does not always guide us: sometimes we need the visible hand of government, too.
We’ve seen many examples of this. Radar is now an indispensable civilian technology, but it was developed for military purposes and generously funded by governments. The iPhone is a work of capitalist genius, by some measures the most successful product ever produced—but it rested on government funding of computing, the Internet, GPS, and the World Wide Web.
Some of the most important inventions that shaped the modern economy weren’t just helped along the way by government, but were entirely the creation of the state—for example, the limited liability company, intellectual property, and, most obvious, the welfare state itself.
If markets can fail, however, so too can government regulators. Japanese women were denied access to the contraceptive pill for decades because regulators refused to approve it. One of the major obstacles that Malcom McLean faced in introducing container shipping was the bureaucracy of U.S. freight regulators, who seemed to feel that the only acceptable option was that nothing should ever change. And when researchers developed public-key cryptography, the remarkable technology that makes Internet commerce possible, the U.S. government tried to shut them down.
Sometimes the state provides the foundations for new ideas; sometimes it’s the chief obstacle. And sometimes, as we’ll see, the relationship between the state and a new invention is more complicated than that. The dance between the state and the market continues to fascinate. Sometimes the state steps in, sometimes the state steps back, and sometimes the state simply tramples on everyone’s toes.