THEORY OF THE INVISIBLE HAND

The theory of the invisible hand

Theory of the Invisible Hand

Introduction

The invisible hand is the idea that producers and consumers guide the economy which, in turn, leads to prices and the amount of quantities produced for a specific good. Whether producers and consumers are conscious or not about their actions and choices, they still affect the economy either way. Smith even says, “Man is led by an invisible hand to promote an end which was no part of his intention (Smith, 1982 p. 456).” The invisible hand is not only the foundation of a free market economy but, it is a fundamental idea to economics as a whole. In general, most people want to be wealthy and they will only benefit themselves with the money that they have earned. However, they will have to exchange that money for a good or service that they desire and in turn, not only will their interest be satisfied, but the producers who made the good or who are providing the service, will also be satisfied. Smith observed that producers will always try to sell their goods at a high price in order to generate a high profit, which is what the Law of Supply states.

Strengths & limitations

In Smith's expression, an "invisible hand" of the marketplace legalize such competition a self-checking system that control millions of individual decision makers in provisions of the laws of supply and demand, producing and distribute goods and services that a society wants, in the quantities a society required, and at cost a society would able to pay. In his writings, Smith also commence the thought of the division of labor as a process of production and the irony of self-interest serving the public good, and give details about the philosophy of a laissez-faire economy.

Free trade also makes countries wealthier because consumers are able to buy goods at the cost arranged by the producers. As said previous free trade permits some countries to specify certain goods. Consecutively for the homeland countries citizens are capable to collect these special goods at lower cost, because it is easier and cheaper to produce for that country. This benefits the individuals of a country (Smith, 1976, p232). But by imposing taxes this procedure is seriously affected. Smith also thought that any taxes that were involved in trade, reduce countries profits on both sides of trade. If no taxes are obligatory, countries would produce more income, in turn improving their capital as a country. This also provide countries the chance to focus in a certain product, making them a costume producer. One more benefit of free trade advocated by Adam Smith is that is not only delayed the amount of the markets, it permits for a great input of labor.

Adam Smith supposed that, “taxes forced with a view to stop, or even to reduce importation, are visibly as negative of the revenue of the customs as of the freedom of trade” (Smith 2000, ...