Adam Smith and The Invisible Hand Theory

Perhaps one of the greatest economists of all time, Adam Smith, author of the renowned “Wealth of Nations”, introduced what is called the “Theory of the Invisible hand.” In definition, the term “Invisible Hand” serves as a metaphor for how, in a free market economy, self-interested individuals operate through a system of mutual interdependence to promote the general benefit of society at large (Investopedia). This theory has served as the foundation for the development of free market economies across the world. Smith emphasized two opposing, but complementary economic forces within this model: Self-interest and competition.

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Self-Interest: The Economic Catalyst

In simple terms, to be self-interested is to seek your own personal gain. You go to work to get paid so you can buy the things you want. You go to college to get a better job to make more money to buy the things you want. If you think about it, most of the economic activity we see is the result of self-interest. Adam described it like this in his book: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” In other words, the baker, while serving his own interest, has produced a product that is very valuable to you. Therefore, the magic of a free market economy is that self-interest produces behavior that benefits others.

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Competition: The Market Regulator

You might have reservations concerning the productivity of self-interest in the marketplace. Sometimes self-interest may lead to corruption, fraud, price-gouging, and cheating — But most of the time that is held in check by competition. The reason for that is simple. Because other self-interested people are competing in your marketplace, your self-interest is held in check. For example, if you are a business man or woman, the only way you would be able to make more money is to produce a product that is better, cheaper, or more convenient than the product produced by other competitors within your niche. Essentially, in order to maintain coninuity and prosperity for your business, you must be able to provide a high quality product or service at a reasonable price — otherwise, consumers will go elsewhere. So, competition serves as a powerful regulator, more powerful than any governmental regulation, because it restrains your ability to take advantage of your customers.

Conclusion

Self-interest and competition are two extremely powerful economic forces. Self-interest is the catalyst of economic activity. Competition is the regulator of economic activity. Together they form what Adam Smith called “The Invisible Hand”. While producers and consumers are not behaving with the intent of helping others or society, necessarily, they do. It’s like an invisible hand that guides resources to their most valuable use. So, I call on you, the reader, to be self-interested and motivated. Don’t be afraid to spend your money on what you need and want. You’e not just helping yourself!

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References

https://www.investopedia.com/terms/i/invisiblehand.asp

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