Rethinking Adam Smith in the Age of AI

 

One of the most celebrated ideas in economics was proposed by Adam Smith. In 1776, he introduced the concept of the "invisible hand" in his seminal work "An Inquiry into the Nature and Causes of the Wealth of Nations."  This metaphor for self-regulating markets has guided economic thinking for centuries. His real contribution was his observation of the dynamics of a market when an innovation appears. He observed that whenever an innovation occurs, self-interested owners of rival firms are quick to try to clone it to capture the market they might have lost to competitors. But individuals and firms pursuing self-interest unintentionally promote social welfare through market dynamics.

What is most interesting wasn’t all about the competition between the rival businessmen or their business houses, but the net result of it. Smith stated that consumers are the ultimate beneficiaries: they enjoy cheaper, better products, while competing firms incur a lower cost of production. Smith understood that simultaneous private gains by different firms on the same merchandise ultimately benefited the whole society, as they brought prosperity to every section, thereby flattening monopolies. But he also noted that innovations and competition can bring about disruptive forces in society due to the inherent nature of firms’ selfishness and greed. 

In the wake of the India AI Impact Summit 2026, the century-old Adam Smith’s ‘The Invisible Hand’ metaphor comes to my mind tonight. The multitude of innovators, technocrats, politicians, and the public who had gathered in Delhi were trying to find common ground on which to build a future for the implementation of AI in society.  The question one must ask is,  “How would ‘the invisible hand’ work in this AI-Spring in progress?” or “Where do we place AI in this context?”

Firms and innovators adopt AI to maximise efficiency, reduce costs, and gain a competitive advantage. In theory, this could benefit society—cheaper goods, better services, faster innovation, less crime, safer business, longer life expectancy, faster learning, faster decision-making, and much more. This can, in return, bring us more profits and consumer benefits. But where can these ‘invisible hands’ go wrong? When mega AI firms dominate and create a monopoly, it can lead to negative market dynamics and destabilise the market, with unbearable consequences.

A major problem with the use of AI and thinking machines is their reliance on algorithms. As these are lifeless physical objects, they may fail to understand the human emotions which control and operate the biological world of humans. Something originally defined for the public good by an algorithm in an AI application can harm its very ecosystem if that algorithm fails to understand the changes (the worms) that might have crept into its dynamics. 

Smith’s metaphor assumes competition, transparency and dispersion of goodness. But AI can challenge these basic assumptions hidden in Smith’s ‘invisible hand’  metaphor. It is here that the need for a visible hand is necessary. This visible hand is the adaptation of Smith’s ‘invisible hand’ in the AI era. 

Society may need to establish collective oversight to guide AI, using a visible hand of authority, such as government, across all areas of human activity. Adapting Smith’s ‘invisible hand’ with visible oversight is essential today, whether in New Delhi or New York.

FINE