The Invisible Hand

Introduction to Adam Smith

Adam Smith. A world-renowned philosopher and economist who has forever changed the way we perceive economics. His contributions to the field have massively benefitted us from the time his theories and books were made, to the present. One such theory presented by him was known as the 'Invisible Hand'.

The Concept of the 'Invisible Hand

It is a metaphor for the unseen forces that drive the market. The metaphor gives an important idea of how voluntary trades in a free market unintentionally produce widespread benefits. The theory was first proposed in his book 'The Theory of Moral Sentiments', but the term 'Invisible Hand' was later mentioned in his book 'The Wealth of Nations' to describe how free markets can motivate individuals, acting in their own self-interest, to help produce what is societally necessary. In simple words, the self-interests of individuals is the main factor in driving the market.

Mechanisms of Market Dynamics

The constant interplay of individual pressure on market supply and demand causes the smooth movement of prices and the natural flow of trade. The theory advocates for a free market, one that has little to no restrictions on trade or any other economic activities, one that allows free exchange signals and shows which goods and services are valuable, and how difficult they are to bring to market. This theory brings out the best of what a capitalist economy could and should be.

Critiques of the 'Invisible Hand' Theory

But like everything, it has its own negatives. For starters, the theory if put into practice may not always reap socially beneficial outcomes, as it encourages greed, inequality, negative externalities and other harms. Whether the positives outweigh the negatives is your opinion, but it’s a point worth mentioning.

Conclusion: A Balanced Perspective

In conclusion the 'Invisible Hand' theory is the best scenario of a capitalist economy, one purely driven by self-interests, which unintentionally results in society as a whole reaping benefits, but as any economy does, it has its own negatives which should be considered.