Adam Smith and the Invisible Hand
If the word “economics” gives you a headache as soon as you hear it then congratulations. You and I have something in common. Economics is a very hard concept to grasp. So who came up with economics? The answer is a man named Adam Smith. In a book he wrote called “Wealth of Nations” he basically invents economics itself and comes up with a few other concepts such as a free market economy(sound familiar?) and the invisible hand. Most of us are probably familiar with a free market economy however the invisible hand may be a foreign concept to some. In this blog I will attempt to discuss both and explain how they are related to one another.
Who is Adam Smith?
To start off, let’s learn a little bit about the man behind the madness that is economics. Adam Smith was a very profound man who was named the father of economics after establishing it in his book “Wealth of Nations” that was published in 1776. Smith was a Scottish born professor and author who focused mainly on economic topics. He coined the term “economics” along with establishing the concepts of a free market economy and the invisible hand. Smith’s book served as one of the primary sources for the founding father’s in writing the Declaration of Independence and setting up a free market economy.
What is a Free Market Economy?
A free market economy, also known as a laissez-faire economy, is an economy that is free from extensive government control and is driven by competition between buyers and sellers. Free market economies are based on the concept of supply and demand which is the concept that the availability and desire or demand for a product help determine the prices. The idea is that sellers of a product will have competitors, and in order to ensure that consumers buy their product they will either have to provide a higher quality product or provide a product of equal quality for a lower price. It is important to remember that although the definition of a free market economy implies that there is no government interaction, there is a slight degree of government regulations in most all free market economies.
The Invisible Hand
The invisible hand is the concept that Adam Smith came up with that explains how the supply and demand of goods in a free market reach equilibrium on their own. The invisible hand is the unobservable force that controls this concept. The invisible hand basically represents the self interests off all involved in the economy. If there are two gas stations across the road from each other and one is 5 cents cheaper than the other, people are going to go to the one with cheaper gas. The one with the more expensive gas will most likely have little to no business unless they lower their prices. This is an example of the invisible hand at work. The owner of the gas station with more expensive gas will have to act in his own self interest and lower his prices in order to regain some of the business his competitor has stolen from him by lowering his own prices.
People have written entire books about economics, (Adam Smith for example) so there is no way we could cover all the topics of a free market economy in one post. However I hope that I was able to help you gain a little bit of insight into the world of economics and free market economies. If you’re interested to learn more about economics and the invisible hand that drives it, try picking up a copy of Smith’s book!
