Invisible hand

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The invisible hand is Adam Smith's name for the economic trend towards productivity and efficiency that results when government stops interfering in markets trying to steer them and allows individuals and corporations to fend for themselves and reap the benefits of their own hard work and innovation.

  • Every individual necessarily labors to render the annual revenue of society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own gain, and he is, in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention. [1]

Smith's promotion and popularization of the concept in his 1776 book The Wealth of Nations, and it propelled the British Empire to become the greatest power in the history of the world in the 19th century.

He theorized that the self-interest of individuals acting independently will lead to a socially optimal outcome:[1]

"[B]y directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good." (Emphasis added)

However, the occurrence of market failures suggest that this is not always true. In circumstances where property rights are not well-defined, firms or individuals have market power, or there is incomplete information, each economic actor acting in their own self-interest does not result in the socially optimal outcome. One such example is the tragedy of the commons.

The invisible hand in nature

The invisible hand is seen outside of an economic context in nature. There is no EPA appointed czar who insists that fish only be found in rivers lakes and ponds, and no bureaucrat that dictates that the kingfishers only be found where fish live. A complete ecosystem can assemble from wreckage and have the illusion of having been assembled together with out having ever experienced disaster.


References

  1. Wealth of Nations, Book IV, Chapter 2

See also

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