Invisible Hand

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The invisible hand was an expression used by the 18th-century philosopher Adam Smith to describe the way that free market economies tend to correct themselves without any deliberate influence from outside forces. Smith said that buyers and sellers act out of self-interest but inadvertently perform actions that result in the marketplace continuing to balance itself. He said it was as if buyers and sellers are guided by an invisible hand. Smith saw this market correction as a naturally occurring event. In contrast, he saw government intervention of the economy as unnatural and he argued against it in most cases.
Neither can be seen but both are responsible for survival. No outsider tells animals when it is time to fly south, hibernate, or swim upstream. The animals are guided by self-interest. That is similar to free market economies. Generally, no one tells companies what they can sell and generally no one tells customers what they can purchase. They, too, are guided by their own interest, which we call the invisible hand.
What is the Invisible Hand?
The invisible hand is the concept that economies work best without direct governmental control or planning. Supporters of the invisible hand approach believe that if the economy is left alone, it will regulate itself in most cases.
Individual buyers and sellers will act according to what is in their own best interests. Their actions will result in correcting and improving the marketplace – as though an invisible hand directs the buyers and sellers to do exactly the right thing in the public interest and to boost the overall economy.
When an economy works under the concept of the invisible hand, shop owners choose which products they want to offer. Naturally, they are going to choose items that they believe have the best chance of selling. They may want their customers to be happy, but they are still primarily operating out of self-interest. The owners are selling those items because they want to make money. So, self-interest is the motivating factor.
Customers are likewise typically looking out for their self-interests. They do not want to waste their money on products that are not right for them. They will purchase from a shop owner who stocks the items they like and offers them at reasonable prices. However, they will soon stop shopping at places that do not carry the merchandise that they want or that they feel are overcharging.
The self-interests of the buyer and seller determine the marketplace. When a savvy shop owner notices that certain items are no longer popular, they will replace them with merchandise that is in demand. The buyer then rewards the shop owner by making purchases. The market becomes more efficient as buyers and sellers move in the same direction – as if directed by an invisible hand.
Why is the Invisible Hand important?
The concept of the invisible hand allows sellers the freedom to meet the demands of buyers. If a seller currently offers a product that is no longer popular, they have the option to switch to an item that customers are willing to purchase. They can also set their own prices for those products.
Conversely, buyers are free to bypass sellers who offer items in which they have no interest or that they feel are priced too high. They can choose to spend their hard-earned money only with sellers who are willing to offer them products that they want at a price they are willing to pay.
Both the supporters and critics of the invisible hand theory can influence the way that nations tackle economic downturns. Some believe that if you leave market forces alone, it will help everyone. Detractors argue that if you allow business owners great freedom, they will behave in a manner that will harm more vulnerable people.
Those who believe in the invisible hand are more likely to favour a hands-off or laissez faire approach by the government regardless of the condition of the economy. Those less inclined to put faith in Smith’s invisible hand economic model tend to believe that government action can mitigate and even prevent national and local economic struggles such as during recessions.
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