THE INVISIBLE HAND THEORY

Adam Smith, a historically famous economics philosopher, was undeniably famous during the 18th century. He had a profound impact on United States economics and many argue that his philosophies played a major role in the Industrial Revolution. One of the arguably most impactful theories of Smith’s was the Invisible Hand Theory. The core idea in this theory was that when individuals are able to pursue a competitive market with their own interest in mind, then they would be able to unintentionally promote the good of society, led by an invisible hand.

Smith first introduced the concept of the invisible hand in his text, “The Wealth of Nations”, written in 1776. Inspired by the idea of being able to be free from kings (largely caused by the Englightenment), Smith argued that markets could align with an independent country on its own without authoritarian control.

Let’s go over how the invisible hand works. There are 4 key principles. The first is that every person acts to improve their own life, such as desiring profit. Second, the person must act how people want in order to get that profit. Third, the person unintentionally benefits the community by giving them what they desire. Finally, this leads to not only individual gain but also the betterment of society. An example of this philosophy applied is one with a baker. First, the baker wants to earn profit. Second, the baker has to sell bread that everyone wants in order to make that profit. Third, the baker unintentionally gives the community delicious bread and food that they like. Finally, society has delicious bread and the individual person has the money that they want.

However, the invisible hand principle only works under 4 key conditions. The first is that the market has to be competitive; in other words, there can’t be monopolies. The second is that consumers must be aware of the product that they are buying. Third, people must have sympathy and a conscience. Finally, people must have the freedom to produce, trade, and innovate.

Unfortunately, the invisible hand theory comes with some common misinterpretations. Some people oversimplify this philosophy and believe that greed is good; however, the invisible hand theory assumes that everyone is moral and has a conscience. Therefore, the invisible hand theory doesn’t survive in that scenario and is therefore not applicable.

The invisible hand can be widely applied to our economy today. One example is market failures, where we can see where the invisible hand misses. Another example isthe stakeholder theory that updated the invisible hand theory showing how the invisible hand also needs to include socio-environmental impacts.