ONE of the most often distorted passages in economic literature is surely Adam Smith's aside about the invisible hand of the market. In Economics, which has been the leading college text on the subject since the 1950s, Paul A. Samuelson and William D. Nordhaus concocted a typical variant of Smith's actual remarks. They pulled them from the midst of a paragraph hundreds of pages into The Wealth of Nations, presumed to streamline the prose by chopping and splicing without using ellipses, and elevated the result into the theme of Smith's entire thousand-page book.
Every individual endeavors to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. [italics added]
This makes Smith sound as if he thought that the invisible hand always leads individuals who are pursuing their own interests to promote the good of society. He did not. He saw the interests of large capitalists as conflicting with those of the public: capitalists seek high profits, which corrupt and impoverish society. In another example the famous division of labor increases factory output but erodes the intelligence, enterprise, and character of workers. Smith's passage on the invisible hand says only that it operates "in this as in many other cases" -- not always, not even mostly.
The "case" that Samuelson and Nordhaus edited out is about trade, and on this Smith said something indeed strange to modern economists' ears. Before the passage that Samuelson and Nordhaus excerpted, Smith had argued that investment at home produces more "revenue and employment" than investment in foreign trade. In the key sentence about the invisible hand, which Samuelson and Nordhaus reworked into the italicized portion of the quotation, Smith further argued that self-interest does lead the entrepreneur to invest at home rather than in foreign trade.
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.
The invisible hand promotes the good of society by leading entrepreneurs to invest at home rather than abroad.
Was Adam Smith not a free-trader after all? That is the wrong question. We tend to lump trade policies into either of two categories: free trade or protectionism. Smith was concerned with a third category: mercantilism, a system and ideology, fostered by merchants, that both promotes and manages trade. The Wealth of Nations is an extended polemic against mercantilism.