Invisible Hands In Economics

The invisible hand in economics refers to the hidden market forces that lead individuals' actions out of self-interest to benefit society. It was first coined by the economist Adam Smith. He used the concept in his two books, The Theory of Moral Sentiments and The Wealth of Nations. 

The concept shows favoritism towards capitalism. The various forces of capitalism pooled together, like personal interest and, in some ways, humanity greed, are what, in the end, will be needed for society's evolution and progress. That is, the concept disfavors too much government intervention. The government should provide only essential public goods and leave resource allocation decisions to the private sector.

• Invisible hand in economics refers to the unobservable market forces that lead individuals' actions out of self-interest to benefit society.
• The concept aligns with the capitalist economy. Therefore, it favors a free market without government intervention, and supply and demand determine the market equilibrium.
• One of the famous examples is introduced by the economist Richard Cantillon. It explains how converting a single real estate into multiple lease units increased production.
• The concept is important because it discloses the market's self-regulatory capacity to attain equilibrium.

The invisible hand concept in economics exemplifying an unobservable market force helps the supply and demand of goods in a free market attain economic equilibrium. A free market manifests a scenario without government intervention; hence the prices of goods and services are self-adjusted when buyers and sellers negotiate in an open market. The market forces of supply and demand stabilize the economic system.

When private entities own a significant portion of resources, it is easy for them to gain control of production and resource allocation. A free market with minimal government intervention motivates people to produce or consume resources based on their interests. Producers can benefit from market opportunities by supplying the product in demand, and competition encourages them to innovate. These activities will ultimately revamp the economy.

The idea in invisible hand in market economy is that competition and self-interest will drive to offer the best products at the lowest prices to attract consumer demand, essential for securing profits. All this will contribute to raising social welfare. However, the reason behind this betterment of the human condition is ultimately selfish. Hence competition and self-interest will create a productive society contributing to the economy.

While it's difficult to practically prove how such unseen forces may influence and shape the world economy, neo-classical economists have tried to do so for the past century and more. They believe that the old toolbox of government interference favoring protectionism and massive government spending will also harm the nation's financial health along with its consequence on open market competition affecting international trade partners.

To better understand the concept of the invisible hand in the market economy by Adam Smith, let's look into the famous example introduced by the economist Richard Cantillon in his book An Essay on Economic Theory. He described how a real estate property when divided into multiple lease units, brought more revenue compared to the return obtained when a single owner controlled the entire real estate property. 

The desire for success and competition triggered the farmers of independent units to introduce new technology, better farming tools, and procedures to a circumscribed market. It led to growth in revenue for all parties involved since the products were better. The race to the top meant more satisfied customers, which led to better market practices and even more satisfied customers in a theoretically never-ending cycle of progress and innovation.

There are various reasons why the theory of the invisible hand concept in economics is so critical. Let us analyze the importance critically.

• The most important of them has already been showcased in this article: It is not only a theory that affects the market. All aspects of life are directly tied to an ungrabbable hand since technological and societal progress means better conditions for humanity as a whole, and this theory drives the end goal of capitalism.
• In economics, the result produced by this theory has aroused interest above all concerning its application to the market and, more precisely, to the possibility that individuals motivated solely by the objective of maximizing their material benefits (in particular, for producers, profits) may be led by the forces of the market to contribute to the well-being of society as a whole.
• In fact, on the one hand, the invisible hand concept in economics is referred to as a system of decentralized decisions in which each agent pursues their interests by taking prices into account exclusively, and, on the other hand, social benefits are identified with the efficiency corresponding to the Pareto efficiency. The invisible hand theorem, also known as the first theorem of welfare economics, determines the conditions under which this result can occur and, therefore, allows us to state that in the market, in a sense specified above, an invisible hand operates for the progression of the world as a whole. 
• The concept argues about the importance of limitation to government interference in the economy. Adam Smith believed that the market will give the kind of outcome need in a natural way if there is very limited interference of the government. It does not need heavy regulations. Government should only interfere for property related issues, contact enforcement or detection and prevention of fraud and resource misutilization.
• It is believed that the concept of invisible hand principle economics leads to adoption of changes in the field of technological advancement, consumer choices and preferences. Market conditions are continuously changing. Therefore the businesses also need to change their production methods and types of goods and services that they offer to customers. The invisible hand concept allows the economy to adapt to these changes and accept challenges.
• The invisible hand principle economics brings efficiency, quality improvement and cost reduction and benefits consumers. The businesses can pursue their interest in the economy and compete with each other to produce goods and services as per the demand but at the lowest cost possible.

This has been a guide to Invisible Hand Theory in Economics & its Meaning. Here we explain how it works along with examples and its importance. You may also have a look at the following articles to learn more –

• Underemployment
• Macroeconomics
• Microeconomics