Question

Describe what Adam Smith meant by the “invisible hand.” Smith first used this metaphor in the context of how capitalists make decisions to invest in the most profitable activities. Why do you think many economists think this metaphor is very useful to explain the mechanism underlying a presumed compatibility between selfish interests and a successful social provisioning in capitalist economies? Do you think the fact that Smith used the words “invisible hand” very sporadically (only three times) in his work deserves some kind of scrutiny?

Answer 1

Definition :

The invisible hand is the uncontrollable market force that helps to automatically balance the demand and supply of goods in a free market.

Description :

Adam Smith introduced the term invisible hand in his book "wealth of nation ". He hypothesised that an economy could work well in a free market environment where everyone would work for his /her own interests. He explained that an economy would work relatively well if the government let people were allowed to trade freely, the existing self-interested traders in the market would complete with each other and lead the markets to positive production with the help of an invisible hand. In a free market situation where there are no restrictions or regulation imposed by the government, if someone charges a low price, the consumer will buy from him. Therefore, you should lower your price or offer better than your competitor. Whenever people ask for something, the market distributes it and everyone is happy. The seller ends and getting the price and buyer gets the best goods at the desired price. The invisible hand is part of the laces -fair, meaning "let-/go". In other words, the approach claims that the market will force its equilibrium into unnatural patterns without government or other intervention. The parable of the unseen hand contains two crucial ideas:

First, spontaneous trading in a free market produces unprecedented and widespread gains. Second, these benefits outweigh the benefits of a regulated and planned economy.

Invisible hand Explained

Each free exchange creates signals about which goods and services are valuable and how different they are to bring to market. These signals captured in the price system ,spontaneously direct competing consumers, producers, distributors and intermediaries each pursuing their individual plans to fulfil the needs and desires of others.

Mercantilism belief in the benefits of profitable trading. This is exactly what Adam Smith explains.

Adam Smith says government intervention could lead to a market crash. If there is no government intervention in the market, supply can create it's own demand. Smith's theory of the invisible hand is able to understand the workings of the market.