Stanford Chaparral

Everybody knows about Adam Smith’s theory of the “Invisible Hand.” Individuals, by nature self-interested and rational, act to maximize their own well being. In doing so, they accidentally maximize societal well being also. “It is as if,” Smith wrote, “They were guided by an invisible hand.”

What you probably don’t know is that economist John White added an important caveat to Invisible Hand Theory. White observed that individuals seemed not to be guided by an invisible hand, but rather, chased away by invisible monsters. White claimed that self-interested and rational individuals were surrounded by invisible monsters whispering fallacies into their ears. By running away from these monsters and towards profit individuals unwittingly promoted the societal interest. More importantly, White understood that through rigorous mathematical modeling, human behavior could be modeled. “Some day,” wrote White, “mathematics will provide us with the exact location and source of these most wonderous beasts so that we may destroy them.”

The last step came from Ralph Black, who added the final piece of the puzzle. Black observed that in their haste to run away from the monsters, people invariable tripped over each other and fell into the mud. “If everyone could just cooperate and run away in a calm, collected manner, society wouldn’t have so many problems.” Black elucidated this idea with the example of the prisoner’s dilemma. “If two men are held hostage by monsters in a prison, they stand a better chance of surviving if they don’t confess and work together to escape.” Thus, in some cases, self-interest must yield to cooperation. With these deviations taken into account, all of human history seemed explained, and economists looked forward to an exciting new future.