how the invisible hand works
the invisible hand metaphor distills two critical ideas first voluntary trades in a free market produce unintentional and widespread benefits second these benefits are greater than those of a regulated planned economy each free exchange signals which goods and services are valuable and how difficult they are to bring to market these signals captured in the price system spontaneously direct competing consumers producers distributors and intermediaries each pursuing their plans to fulfill the needs and desires of others the invisible hand is part of the laissez faire policy concerning the market laissez faire translates to let do let go and this approach holds that the market will find equilibrium without government or other interventions forcing it into unnatural patterns scottish enlightenment thinker adam smith introduced the concept in several of his writings such as the economic interpretation in his book an inquiry into the nature and causes of the wealth of nations often shortened to just the wealth of nations published in 1776 and an earlier work the theory of moral sentiments published in 1759 the invisible hand concept was in use during the 1900s 12the term invisible hand only appears twice in the wealth of nations a volume of around 1 000 pages 1the invisible hand and market economiesbusiness productivity and profitability are improved when profits and losses accurately reflect what investors and consumers want this concept is well demonstrated through a famous example in richard cantillon s an essay on economic theory 1755 the book from which smith developed his invisible hand concept 3smith s the wealth of nations was published during the first industrial revolution and the same year as the american declaration of independence his invisible hand became one of the primary justifications for an economic system of free market capitalism as a result the business climate of the u s developed with a general understanding that voluntary private markets are more productive than government run economies even government rules sometimes try to incorporate the invisible hand former fed chair ben bernanke explained the market based approach is regulation by the invisible hand which aims to align the incentives of market participants with the objectives of the regulator 4examples of the invisible handconsider an example of a small business facing stiff competition to best position itself in the market the small business decides it will invest in higher quality materials for its manufacturing process as well as reduce its prices though the small business may be taking these steps out of self interest in this instance to drive sales and capture market share the invisible hand is at work because the market will have access to more affordable yet higher quality goods another example of the invisible hand is the ripple effect that a retail company can have when attempting to meet consumer demand consider a hardware store that anticipates demand for yard maintenance tools the hardware store will coordinate with a manufacturer to secure the appropriate goods meanwhile the manufacturer will communicate with a raw materials distributor to ensure it has the items it needs to meet the hardware store s demands each entity is acting in its own self interest however each is also creating economic activity for other parties in addition the entities are stringing together a process that results in consumers receiving a product that they need though each individual action taken by itself may not amount to much the invisible hand helps move resources along a process to deliver a final product 