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What is meant by Adam Smith's "invisible hand" theory? Can you suggest an example where...

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mskitty43 | Student, Grade 11 | Honors

Posted November 3, 2009 at 1:30 AM via web

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What is meant by Adam Smith's "invisible hand" theory? Can you suggest an example where this seems true & economics works that way?

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krishna-agrawala | College Teacher | Valedictorian

Posted November 3, 2009 at 3:52 AM (Answer #1)

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The Idea of "invisible hand" was introduced by Adam Smith in his book Wealth of Nations first published in 1776. Smith uses this concept to describe a paradox of laizzes-faire or perfect completion, in which every person in an economy working to achieve his own selfish goals leads to benefit of all.The individual neither intends to promote the public nor he knows how much he is promoting it.Adam Smith compares this process as an invisible benevolent directing the whole process for benefit of all.

Based on belief of effectiveness of this so called invisible hand, the doctrine of laissez-faire which recommends that government should interfere as little as possible in economic affairs, guided the action of governments in many countries. However, beginning from the twentieth century, there has been growing feeling that the theoretical assumption on which the action of invisible hand is dependent, do not exist in reality.

It is not possible to give examples of the working of invisible hand as it applies to complete economies. However we can say that till start of the industrial revolution, this was the primary mechanism at work for the economic development and growth all over the world.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted November 3, 2009 at 1:36 AM (Answer #2)

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The idea of the invisible hand is the basic idea of laissez faire capitalism.  According to this idea, a capitalist society functions without anyone in control of it.  There is no "visible hand" telling companies what to make as there is in a more command-style economy.  Instead, entrepreneurs try to get rich by producing something they think customers will want.  Customers then determine what companies and products will survive.  They do this by either buying or not buying the companies' products.  Thus, there is an invisible hand (of consumers' will) that determines what happens in our economy.

An example of this would be Facebook.  No government official ever decreed "make a social networking site."  Instead, some people had an idea and tried it out.  The invisible hand of consumers started to use it.  When this was seen, advertisers started to use Facebook also.  In this way, Facebook became economically viable without anyone ever ordering it to be so.

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