What is meant by the "Invisible Hand"?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The phrase “invisible hand” is a metaphor for how free markets work.  It was coined by Adam Smith, the famous free market economist.  The invisible hand is the collective will of the market, of all the buyers and sellers, which allows the economy to know what to make and which tends to create the best possible economic situation for everyone.

In a command economy, there is no invisible hand.  In such an economy, we have “visible” government officials making all of the decisions.  They decide what things need to be made in a country.  They decide what factories should get what resources.  They often try to ensure that everyone has a certain standard of living. 

Free market economists argue that this sort of “visible” control of the economy is inefficient.  Instead, the best economy is one in which the “invisible hand” is in charge.  For example, in our economy, no government official tells us how many computers to produce.  They do not tell us how many pencils should be made.  They generally just leave the market alone in many ways.  Instead, the invisible hand decides how many computers should be made.  People either buy or do not buy computers.  This sends signals to computer makers about how many computers to make (and what sort of computers should be made).  The computer makers know what to do without being told what to do by any single person or bureaucracy.

The “invisible hand,” then, is the collective will of all the consumers and producers in an economy.  It, rather than government planners, determines what happens in a market economy.

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