Invisible Hand
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(Created page with 'In economics, the '''invisible hand''' is used to describe the self-regulating nature of the marketplace. The invisible hand is a metaphor coined by the economist Adam Smith in "...') |
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== Origin of the Metaphor == | == Origin of the Metaphor == | ||
| - | Adam Smith uses the metaphor in Book IV of ''The Wealth of Nations'', arguing that people in any society will employ their capital in foreign trading only if the profits available by that method far exceed those available locally. In such a case, Smith argues, it is better for society as a whole if they so do. | + | Adam Smith (1723-1790) uses the metaphor in Book IV of ''The Wealth of Nations'', arguing that people in any society will employ their capital in foreign trading only if the profits available by that method far exceed those available locally. In such a case, Smith argues, it is better for society as a whole if they so do. |
: [An individual is] led by an '''invisible hand''' to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. | : [An individual is] led by an '''invisible hand''' to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. | ||
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== Interpretation == | == Interpretation == | ||
| - | Adam Smith argued that, in a free market, an individual pursuing his own interests tends also to promote that of the society as a whole through a principle that he called “the invisible hand”. | + | Adam Smith argued that, in a free market where actions are not orchestrated or organized by a central command, an individual pursuing his own interests tends also to promote that of the society as a whole through a principle that he called “the invisible hand”. Producers and consumers, in the pursuit of profits, are led, as if by an invisible hand, to do what is best for the community. This sounds paradox: a population of self-centered, selfish human beings, working in their own self-interest, can make the world a better place for the whole population. Everyone creates value for himself, and as a side-effect valuable contribution is made for the community as a whole. |
| - | Adam Smith's invisible hand can be considered as [[Self-Organization|self-organization]], but the mystery behind the invisible hand is just the free market and the principle of supply and demand. A market is a mechanism which finds for every lack of supply someone who is responsible to organize it, by connecting the interests of the individual (making profit) with the interests of the public (guarantee supply). A severe lack of supply is an irresistible incentive to make money by founding or opening a business because it creates a true market niche. | + | Adam Smith's invisible hand can be considered as [[Self-Organization|self-organization]], but the mystery behind the invisible hand is just the free market and the principle of supply and demand. A market is a mechanism which finds for every lack of supply someone who is responsible to organize it, by connecting the interests of the individual (making profit) with the interests of the public (guarantee supply). A severe lack of supply is an irresistible incentive to make money by founding or opening a business because it creates a true market niche. A surplus of supply an incentive to shut down a business, because the market niche closes and one can no longer make profit. Therefore greed will drive actors to beneficial behavior which is good for the society as a whole, because there is no lack of products and the supply is evenly distributed. And when all people constantly struggle to become wealthier, then they will increase therefore the total sum of wealth. |
Thus by pursuing their private self-interest, people can create a common public good as a side-effect. This works well if the interests of the self and the collective are closely connected. | Thus by pursuing their private self-interest, people can create a common public good as a side-effect. This works well if the interests of the self and the collective are closely connected. | ||
