Question

The news reports the profits or losses of major businesses each quarter. What do you think when you hear that a corporation like Microsoft or BP has made billions of dollars in the last year? Does Adam Smith's Invisible Hand theory really help our economy and our society? Major corporations aside, what about the thousands of small businesses across the U.S. Are their profits justified, and do their profits help society through their taxes and corporate social responsibility? Last thought--if our country were to move to Socialism and our taxes increase, what effect will that have on our country's businesses?

Answer 1

Adam Smith through his famous theory on invisible hand stated, that an individual’s self-interest is at the core of economic development and Social upliftment in any economic nation. He said that through the concepts of self-interest and by allowing a free economy to run, the country can achieve tax revenues like none other forms of governance and managing an economy.

This is because when people consume with self-interest and in an environment wherein trade is encouraged, they get the best possible quality of products due to a constant innovation race between companies so as to enable them to get higher profit margins.

The government in this society is largely getting higher tax returns as the average consumption per user remains high and as profit margins increase producers also share a large part of the income as taxes.

This helps the economy in including marginal sections of the Society in the development of the economy, and higher growth rates along with inclusive growth is possible.

The likes of companies like Microsoft and BP have largely gained from this invisible hand which has allowed consumerism to rise in the United States and beyond. Small companies have also gained from higher interaction with consumers which with self-interest have begun the process of higher consumption.

Therefore, the invisible hand does indeed play a role. As customers have been constantly increasing their demand for goods and services due to self-interest, companies have been innovating, providing new services and technological innovations to the economy at large. This has also helped in the country collecting additional taxes be it from big or small players alike and have been able to constantly upgrade the standard of living for one and all in the society.

If the US economy on the other hand, created a Socialist society in which the central questions of what goods and services would be produced, in what quantities it would be produced and how it would be distributed among people are taken by the government, it would most likely lead to inefficiency as customers would not get maximum satisfaction from consumption and would thus no longer consume goods in equal value that they used to. It leads to inefficient outcomes for the markets, lower customer satisfaction and lower tax collections for companies as a whole.

Thus, we can conclude by saying, that an efficient economy is only one which has higher self-interests as it creates an efficient market system wherein the tax collections are higher and the overall income of people as well as their consumption, demand and total revenue of the government is maximum thus enabling it to spend on items such as healthcare, nutrition and social security for the poor which helps the economy have inclusive growth.

Please feel free to ask your doubts in the comments section if any.