Explain Adam Smith's invisible hand.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The invisible hand that Smith wrote about is really just a metaphor for a market economy.  In such an economy, no one person or government entity really makes decisions about what will be produced and what will be consumed.  Yet, somehow, suppliers know what products to make.  Thus, the changes in a market economy are made by an "invisible hand" because there is no identifiable decision-maker.

In a market economy, the cumulative decisions of all consumers determine which things will be produced.  There is no central authority (that would be a visible hand) ordering businesses to make various things.  Instead, the consumers' decisions tell suppliers (in an invisible way) what sorts of things they should make because those decisions tell them what products can be most profitably sold.

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