"The invisible hand of the market": the concept and principle of operation

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:42

At the end of 1775 and the beginning of 1776, the first edition of the famous two-volume work of the Scottish economist Adam Smith, devoted to the study of the causes and nature of the we alth of nations, was published in England. In this fundamental work, the main mechanisms and principles of foreign trade were first described. The author of the work, in his discussions on the dependence of the annual income of the nation on the amount received for the result of labor by each person, formulated a very important principle, which is now called the “invisible hand of the market.”

Its essence is that people direct all their efforts and energy to that sector of the national industry that can give them the maximum income. Thanks to this, underdeveloped industries are rising, and where an excess of supply has formed at the moment, there is an outflow of capital to more profitable and promising areas. SoThus, each inhabitant of the country, thinking that he satisfies only his own needs, actually serves the interests of the whole nation. Since that time, the expression "invisible hand of the market" has firmly entered the economic literature and is often found today. In other words, these are the economic forces known to us as supply and demand that are constantly trying to reach equilibrium.

How Smith's "invisible hand" works

The laws of the market force sellers and buyers to act in accordance with mutual interests. So, an entrepreneur will never produce goods that are suitable only for him, and in which consumers are not interested. And he will not be able to set a sky-high price - in this case, competitors will easily bypass him. It turns out that only those who manage to satisfy the needs of the population with goods of the best quality and at the lowest possible cost win and receive the maximum profit.

Entrepreneurs do not care about the welfare of society at all, but their selfishness is useful to all citizens. Therefore, Smith believed that government intervention in the economy is harmful: the "invisible hand of the market" itself is the best way to cope with all current tasks and problems. Every individual should be allowed to freely pursue his economic interests, and this will best contribute to the growth of national we alth in a given country. According to the theory put forward by Adam Smith, the "invisible hand" includes six main elements:

1. Market prices formed during balancingsupply and demand.
2. The fluctuation of norms and the mass of profits, i.e. the possibility of capital leaving low-profit areas and pouring into highly profitable business areas.
3. Free competition to produce only what the market needs.
4. Demand, which is a powerful engine for the entire economy.
5. An offer of goods that can satisfy all existing demand.
6. CBR lending to commercial banks and lending to the latest households and firms.

The invisible hand of the market and current conditions

It should be taken into account that A. Smith created his theory at a time when the world economy did not yet know what large-scale crises, the Great Depression, large financial frauds, transnational corporations, integration processes, environmental disasters, etc. In addition, a fully market economy is not able to think strategically, solve social problems, protect the environment, provide people with services that do not bring profit (building infrastructure, maintaining the country's defense capability, etc.), smooth out the wave nature of economic development. That is why in our time the intervention of the state is simply necessary. The only question is to what extent and with what tools it will be implemented.