Self-interest is a powerful motivator. As Adam Smith noted long ago, when directed by the invisible hand, self-interested individuals will have a strong incentive to undertake actions that promote the general prosperity of a community or nation. The “invisible hand” to which Smith refers is the price system. The individual “intends only his own gain” but he is directed by the invisible hand of market prices to promote the goals of others, leading to greater prosperity.
The principle of the “invisible hand” is difficult for many people to grasp. There is a natural tendency to perceive that orderly outcomes can only be achieved when someone is in charge or through directions from a centralized authority. Yet Adam Smith contended that pursuing one’s own advantage creates an orderly society in which demands are routinely satisfied without centralized planning. This order occurs because market prices coordinate the actions of self-interested individuals when private property and freedom of exchange are present. One statistic—the current market price of a particular good or service—provides buyers and sellers with what they need to bring their actions into harmony with the best possible information on the current actions and preferences of others. Market prices register the choices of millions of consumers, producers, and resource suppliers. They reflect information about consumer preferences, costs, and matters related to timing, location, and circumstances—information that in any large market is well beyond the comprehension of any individual or central-planning authority.
- At the end of the video, the narrator states that people are often too impatient to allow the invisible hand to work its magic and provide for equilibrium. For this reasons, governments often step in to try to “fix” things. While this is clearly the case in fact, do you think it is a good thing?
- The point of the idea of the invisible hand is that prices are constantly in flux, and sending information to buyers and sellers about changing conditions. When the government steps in, it assumes it knows better than buyers and sellers what is happening. Do you think this is the case? Or would you rely instead on the “wisdom of the crowd”? Put another way – do you think your school principal knows better what smartphones, sneakers, or hairstyles students prefer from moment to moment? Or do you and your friends have a better handle on changing tastes and preferences?
This reading is an excerpt from Certell’s Common Sense Economics eBook. Certell offers curriculum materials and eBooks free of charge for students and teachers. Click Here to download the Common Sense Economics Materials.
Mark Anderson. 2, Mar. 2012, The Invisible Hand of the Market [Digital image]. Retrieved from <smallbiztrends.com>.