What Is the Invisible Hand?

What Is the Invisible Hand?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

The invisible hand is a term used by the renowned economist Adam Smith to demonstrate the concept of indirect economic guidance. Economic systems, rather than relying on government intervention, are seen as self-regulating by the forces of the market. This metaphorical “invisible hand” is a market system that automatically channels individual self-interest towards socially useful ends. Individuals, as they strive to maximize their own advantage, inadvertently benefit society as a whole. It shows that if markets are left mainly to their own devices, they will generate efficient results that benefit all.

Related Questions

1. What was Adam Smith’s philosophy?

Adam Smith is recognized as the founder of modern economics. His philosophy revolved around free market economics. He believed that economic systems work best when they are left to work naturally, without unnecessary intervention. His philosophy was the basis of classic economic liberalism.

2. Why is the invisible hand significant in economics?

Want More Financial Tips?

Get Our Best Stuff First (for FREE)
We respect your privacy and you can unsubscribe anytime.

The invisible hand is significant because it implies that economies can function efficiently without heavy involvement by governments or other regulatory bodies. It suggests that individual self-interest can ultimately result in communal benefit, given the right market conditions.

3. Is the invisible hand always beneficial?

No, the invisible hand is not always beneficial. While it generally leads to efficient market outcomes, these may not always align with societal goals or values. For example, free markets can sometimes lead to increased inequality or environmental challenges.

4. Does the invisible hand concept still apply today?

Yes, the concept of the invisible hand still applies today. Many economists believe that markets function best with minimal intervention. However, others argue for more regulation to address issues like income inequality and environmental degradation. Thus, while the invisible hand concept is still relevant, its application varies around the world.

5. What are examples of the invisible hand in action?

One common example of the invisible hand is the supply and demand structure that operates in most markets. When a product is in high demand, suppliers typically increase the price. This encourages other producers to enter the market, increasing competition and lowering prices over time. Similarly, if a product is not in demand, suppliers will stop producing it, meaning resources can go towards other more popular products. These adjustments happen automatically, guided by the ‘invisible hand’ of the market.