Alan Greenspan: Adam Smith's invisible hand still delivers the goods

From the Adam Smith Memorial Lecture, given by the chairman of the US Federal Reserve, in Kircaldy, Scotland

Adam Smith sought in his Theory of Moral Sentiments, published two decades before the Wealth of Nations, to delve into the roots of human motivation and interaction. He concluded that human sympathy, by fostering the institutions supporting human civil interaction and life, was a major contributor to societal cohesion.

To guide their own lives, people also exhibit a seeming inborn sense of right and wrong, presumably tested by the laws of nature. Those sentiments fashion each person's value preferences and their intensity. Rational thought, in Smith's thesis, emerges only in the contemplation and initiation of those actions that will make manifest the innate propensities.

Over the past two centuries, scholars have examined these issues extensively, but our knowledge of the source of inbred value preference remains importantly shaped by the debates that engaged the Enlightenment.

The vast majority of economic decisions today fit those earlier presumptions of individuals acting more or less in their rational self-interest. Were it otherwise, economic variables would fluctuate more than we observe in markets at most times.

One could hardly imagine that today's awesome array of international transactions would produce the relative economic stability that we experience daily if they were not led by some international version of Smith's invisible hand.

The inference is not that people always act rationally in commercial transactions. The periodic bubbles in product and financial markets prove otherwise. But, by and large, the description of economic process that Adam Smith developed, and others have since extended, does appear to adequately describe today's determinants of world commerce and the wealth of nations.