What does the invisible hand of the marketplace do

invisible handTable of ContentsIntroductionFast FactsRelated ContentMediaVideosMoreMore Articles On This TopicContributorsArticle HistoryHome Politics, Law & Government Economi

What does the invisible hand of the marketplace do

invisible handTable of Contents

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  • Article HistoryHome Politics, Law & Government Economics & Economic Systems

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invisible hand, metaphor, introduced by the 18th-century Scottish philosopher and economist Adam Smith, that characterizes the mechanisms through which beneficial social and economic outcomes may arise from the accumulated self-interested actions of individuals, none of whom intends to bring about such outcomes. The notion of the invisible hand has been employed in economics and other social sciences to explain the division of labour, the emergence of a medium of exchange, the growth of wealth, the patterns (such as price levels) manifest in market competition, and the institutions and rules of society. More controversially, it has been used to argue that free markets, made up of economic agents who act in their own self-interest, deliver the best possible social and economic outcomes.

Smith invokes the phrase on two occasions to illustrate how a public benefit may arise from the interactions of individuals who did not intend to bring about such a good. In Part IV, chapter 1, of The Theory of Moral Sentiments (1759), he explains that, as wealthy individuals pursue their own interests, employing others to labour for them, they are led by an invisible hand to distribute the necessities that all would have received had there been an equal division of the earth. In Book IV, chapter 2, of An Inquiry into the Nature and Causes of the Wealth of Nations (1776), arguing against import restrictions and explaining how individuals prefer domestic over foreign investments, Smith uses the phrase to summarize how self-interested actions are so coordinated that they advance the public interest. In those two instances, a complex and beneficial structure is explained by invoking basic principles of human nature and economic interaction.

Adam Smith

Read More on This TopicAdam Smith: Society and the invisible handThe theory of historical evolution, although it is perhaps the binding conception of The Wealth of Nations, is subordinated within...

However, on other occasions Smith employs the idea of the invisible hand without using the phrase itself. In the opening paragraph of chapter 2 of Book I of The Wealth of Nations, for example, he describes how the division of labour is not the result of far-seeing wisdom but a gradual outcome of a natural propensity to truck, barter, and exchange one thing for another. Later in the same treatise, he delineates how individuals are so guided by prices that the supply of goods tends to meet demand. More generally, Smith explains how the patterns of commerce, including the overall creation of wealth, arise out of individuals responding to and endeavouring to succeed in their own local circumstances.

Although Smith often refers to economic agents as self-interested, he does not mean to suggest that their motivations are selfish. Rather, the agents are motivated by beliefs and intentions that manifest their local knowledge and particular concerns (including those relating to their families) rather than some broader conception of a public good.F. Eugene Heath The Editors of Encyclopaedia Britannica

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