The ‘Invisible Hand’ and the ‘Night-Watchman’ State
Obviously, economic policy as a discipline could not have emerged in the absence of a diffuse position of economists in favour of state intervention to correct or substitute markets.
The birth of the economic science - if we date it back to Adam Smith - was characterised by a position opposed to such a wide involvement of the state in economic and social activity.[3] This was expressed by the founder of the discipline and can be indicated synthetically by the term ‘invisible hand' to refer to the unintended social benefits accruing from the actions of individuals pursuing their personal interest in a market.The term was first employed by Smith with respect to income distribution in his The Theory of Moral Sentiments (Smith 1759). Here he claims that increased wealth of the rich ‘trickles down' to the poor (a concept also used after World War II in the theory of development to sustain a line of action of the World Bank). Use of the term with reference to production is made in The Wealth of Nations (Smith 1776). The exact expression - but not the concept that it encapsulates - is used just three times in Smith's writings. The concept might have been borrowed from Richard Cantillon, who developed both economic applications (Cantillon 1755).
We are conscious that the prevailing interpretation of the meaning of Smith's ‘invisible hand', as a naive idea of Smith's fully pro-market position, is unfounded in his works. This interpretation has been criticised by a number of authors (e.g. Grampp 2000; Rothschild 2001; Roncaglia 2005; Marglin 2008). These critiques refer, first, to the inappropriateness of the use of the term ‘invisible hand'. This with respect to either the letter of Smith's work (particularly in The Wealth of Nations) or the context where Smith makes use of this term to argue in favour of the virtues of the market (typical is the case of the home bias in Smith 1776: book IV, chap.
2). Moreover, according to these critiques, the term is not fully representative of Smith's thought. From a substantive point of view, undoubtedly Smith gives a positive assessment of the market, whose operation - in his opinion - usually tends to pursue the public good in a number of ways, especially by favouring the division of labour. However, he also believes that governments play an important role not only in defence but also in fields that can be labelled as being more directly relevant to economic activity, such as infrastructure and education. In any case, for the sake of brevity, we will use the term ‘invisible hand' as a metaphor of the Smithian position as well as of later theories, in particular, neoclassical thinking, that have then prevailed, even if the latter are deprived of some social aspects of the working of the market that certainly were in the work of Adam Smith.The ‘night-watchman' position is advocacy of a minimal role for the state, which should be limited to ensuring defence of the members of a community from external assault and internal violence, theft, breach of contract and fraud. This position is also called ‘minarchism', a form of libertarianism, as it advocates for the state only the minimal protection needed to avoid chaos. This is indeed different from ‘anarchy’, which, apart from its many possible interpretations, we intend in essence as a community which is governed by members basing their action on ‘we rationality’ (with a homo reciprocans), where then a true state becomes useless, as cooperative behaviour arises and conflicts tend to disappear (see e.g. Smerilli 2007).
This position was inaugurated by Bastiat (1850) and Spencer (1850) and was later resumed by Pareto’s Cours d'Economie Politique (Pareto 1896-97), leading more recently to the economic and philosophical schools of evolutionists such as Hayek (1960) and Nozick (1974) and contractualists such as Buchanan (1975) and Tullock (1976). In Italy, the ‘minimal state’ doctrine had a number of followers, starting with Ferrara (e.g.
1859) and, as already mentioned, Pareto.The rationales for the night-watchman position may be numerous: defence of power relations, protection from the pressure of lobbies and parties, an attempt to reconcile laissez-faire with democracy, moral limitations on the use of state force and belief in the superior performance of institutions based on a market economy, with few external constraints. The practical issues behind some of these positions and the different arguments put forward in support of some minimal state doctrines are reconstructed by Romani (2015). According to Screpanti and Zamagni (1989: chap. 11), the post-World War II contributions having this same orientation can be considered as reappraisals of Smith’s project in favour of a minimal state as a consequence of comparing different institutions. After World War II this orientation reacted, on the one hand, to the negative experience of planned economies and, on the other, to the tendency of welfare economics to confine analysis of institutions to that branch of the economic discipline and in terms of efficiency only.
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