Sabotaging the Invisible Hand: Adam Smith Predicted Modern Policy Failures

A statue of Adam Smith in Edinburgh, Scotland, in a file photo. Travel Telly/Shutterstock

Commentary

In chapter 10 of “The Wealth of Nations,” Adam Smith dissected the symbiotic relationship between economic inequality and political intervention in the economy. While unhindered competition typically drives markets toward equilibrium—balancing supply and demand to yield maximum efficiency—Smith never indulged in utopian fantasies. He acknowledged that wages diverge from perfect equilibrium because inherent occupational traits dictate labor dynamics:

“... the agreeableness or disagreeableness ... the easiness and cheapness, or the difficulty and expense of learning ... the constancy or inconstancy of employment ... the small or great trust which must be reposed ... [and] the probability or improbability of success in them.”

Modern welfare economists label market imperfections in a system of liberty and free competition “market failure.” Then they weaponize the study of market failures to justify sweeping state interventions. Those who claim Smith would condone these interventions are wrong; he explicitly warned that state distortions trigger far more severe systemic damage.

Rather than seeing market imperfection as a reason for government action, Smith championed natural liberty and he opposed most government interventions in the economy. Although market failures were real, Smith thought that policy restrictions were nearly always worse (inefficient). They were the far greater threat to prosperity and to human flourishing. For example, he explains how the policies of Europe contributed to inequality:

“Such are the inequalities in the whole of the advantages and disadvantages of the different employments of labor and stock, which the defect of any of the three requisites above-mentioned must occasion, even where there is the most perfect liberty. But the policy of Europe, by not leaving things at perfect liberty, occasions other inequalities of much greater importance.

“It does this chiefly in the three following ways. First, by restraining the competition in some employments to a smaller number than would otherwise be disposed to enter into them; secondly, by increasing it in others beyond what it naturally would be; and, thirdly, by obstructing the free circulation of labor and stock, both from employment to employment and from place to place.”

The institutional failures Smith excoriated—supply restrictions, state-sponsored overproduction, and laws penalizing poor workers—remain rampant today. Modern government intervention sabotages efficiency through the exact same three channels.

In the United States, protectionist state power insulates incumbent industries from new competitors. Certificate-of-need laws permit existing hospitals to block the entry of new medical competitors. Exclusionary municipal zoning laws choke housing construction. Restrictive occupational licensing rules shackle professions ranging from hair stylists and plumbers to medical doctors.

As Smith observed, the state triggers massive inequalities by “restraining the competition in some employments to a smaller number than might otherwise be disposed to enter into them.”

When the state uses “bounties” or subsidies to pick winners and losers, it forces capital into politically favored sectors. These subsidies bloat costs in higher education, housing, and healthcare, or they massively overbuild such that the marginal costs become far greater than the marginal benefits, clogging markets with excess solar panels, electric vehicles, and agricultural surpluses. By distorting market processes, the state binds the invisible hand, preventing prices, profits, and losses from coordinating beneficial social outcomes.

Finally, Smith heavily criticized Europe’s old “poor laws” for restricting worker mobility. Modern states enforce similarly destructive boundaries through social safety nets. Punitive “benefits cliffs” abruptly strip assistance the moment a recipient increases their earnings, discouraging lower-skilled individuals who attempt to work and improve their condition.

Furthermore, credentialing and occupational licensing cartels artificially inflate the cost of entering the workforce, snatching opportunity from the very people who need it most. Not only is this inefficient, Smith also argues it is unjust:

“The property which every man has in his own labor, as it is the original foundation of all other property, so it is the most sacred and inviolable. The patrimony of a poor man lies in the strength and dexterity of his hands; and to hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbor, is a plain violation of this most sacred property. It is a manifest encroachment upon the just liberty both of the workman, and of those who might be disposed to employ him. As it hinders the one from working at what he thinks proper, so it hinders the others from employing whom they think proper. To judge whether he is fit to be employed, may surely be trusted to the discretion of the employers whose interest it so much concerns. The affected anxiety of the law-giver lest they should employ an improper person, is evidently as impertinent as it is oppressive.”

In case after case, these aspiring central planners worsen conditions for ordinary people while lining the pockets of politically connected corporations. Modern state interventions are not merely economically paralyzing—they are flagrantly unjust. State actors violate the basic rights of poor laborers, earning the deep moral disapprobation that Smith leveled against the state over two centuries ago.

Misguided policy interventions consistently shackle liberty, distort market signals, and enrich vocal special interests at the expense of the public good. Smith fiercely condemned the overweening conceit of politicians who believe they can manipulate society the way a hand directs pieces on a chessboard.

Two and a half centuries later, Smith’s insights remain a vital diagnostic tool for modern economic malpractice.

Reprinted from The Daily Economy, a publication of the American Institute for Economic Research (AIER)

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.