Invisible Hand Theory |
| Credit: The Korea Times |
What is The Invisible Hand?
The invisible hand is a metaphor for the unseen forces that move the free market economy. Through individual self-interest and freedom of production as well as consumption, the best interest of society, as a whole, are fulfilled. The constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade.
Understanding The Invisible Hand
• Scottish Enlightenment thinker Adam Smith introduced the concept in "The Wealth of Nations" published in 1776 and in "The Theory of Moral Sentiments" published in 1759. He assumed that an economy can work well in a free market scenario where everyone will work for his/her own interest.
• The invisible hand is part of laissez-faire, meaning "let do/let go," approach to the market. The approach holds that the market will find its equilibrium without government or other interventions forcing it into unnatural patterns.
• He describes how the division of labor is not the result of far-seeing wisdom but a gradual outcome of a natural "propensity to truck, barter, and exchange one thing for another." Later in the same treatise, he delineates how individuals are so guided by prices that the supply of goods tends to meet demand.
• Although Smith often refers to economic agents as self interested, he does not mean to suggest that their motivations are selfish. Rather, the agents are motivated by beliefs and intentions.
Understanding The Invisible Hand (An Example)
• You predict that when you go to the supermarket there will be eggs and milk for sale. The supermarket in turn predicts that the distributors will deliver eggs and milk regularly to their warehouses and lastly the distributors predict that farmers will offer eggs and milk for sale. All of this has to happen regularly.
• Who controls this process? No one, it turns out. It happens because each person or company is predictable enough in their behavior to make the whole system run. This is what Adam Smith was referring to as the "invisible hand" of the market.
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