Invisible Hand

Invisible Hand

In economics, the invisible hand of the market is a metaphor conceived by Adam Smith to describe the self-regulating behavior of the marketplace. The exact phrase is used just three times in Smith's writings, but has come to capture his important claim that individuals' efforts to maximize their own gains in a free market benefits society, even if the ambitious have no benevolent intentions. Smith came up with the two meanings of the phrase from Richard Cantillon who developed both economic applications in his model of the isolated estate.

He first introduced the concept in The Theory of Moral Sentiments, written in 1759. In this work, however, the idea of the market is not discussed, and the word "capitalism" is never used. By the time he wrote The Wealth of Nations in 1776, Smith had studied the economic models of the French Physiocrats for many years, and in this work the invisible hand is more directly linked to the concept of the market: specifically that it is competition between buyers and sellers that channels the profit motive of individuals on both sides of the transaction such that improved products are produced and at lower costs. This process whereby competition channels ambition toward socially desirable ends comes out most clearly in The Wealth of Nations, Book I, Chapter 7.

The idea of markets automatically channeling self-interest toward socially desirable ends is a central justification for the laissez-faire economic philosophy, which lies behind neoclassical economics. In this sense, the central disagreement between economic ideologies can be viewed as a disagreement about how powerful the "invisible hand" is. In alternative models, forces which were nascent during Smith's life, such as large-scale industry, finance, and advertising, reduce its effectiveness.

Read more about Invisible Hand:  "The Theory of Moral Sentiments", The Wealth of Nations, Economists' Interpretation of The "invisible Hand" Quotation, Understood As A Metaphor, Examples and Arguments, Tawney's Interpretation, Home Bias Interpretation, Other Uses of The Phrase By Smith, Abusing Smith's Statement of an Invisible Hand

Famous quotes containing the words invisible hand, invisible and/or hand:

    Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the publick 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 no part of his intention.
    Adam Smith (1723–1790)

    Did men but consider that the sun, moon, and stars, and every other object of the senses, are only so many sensations in their minds, which have no other existence but barely being perceived, doubtless they would never fall down and worship their own ideas; but rather address their homage to that eternal invisible Mind which produces and sustains all things.
    George Berkeley (1685–1753)

    His leanings were strictly lyrical, descriptions of nature and emotions came to him with surprising facility, but on the other hand he had a lot of trouble with routine items, such as, for instance, the opening and closing of doors, or shaking hands when there were numerous characters in a room, and one person or two persons saluted many people.
    Vladimir Nabokov (1899–1977)