Invisible Hand

The Invisible Hand is an economic principle first promulgated by Adam Smith in his 1776 book The Wealth of Nations. The principle states that economic actors, in pursuing their own interests, collectively reach the most efficient outcome in an economy. The principle is derived from the principle of scarcity: that the majority of resources available in the world are not able to satiate the needs and desires of all humans.

Resources that are limited are called economics goods, while resources that are abundant and near-infinite, such as air, are referred to as free goods. Since economic goods are limited, economic actors must compete for these resources. Economies allocate these resources in different ways. In the capitalist system, allocation is made in a decentralized manner by private individuals who exchange goods on private terms and conditions. Thus, the overall outcomes of an economy are determined by an infinite amount of private transactions without centralized guidance. An individual economic actor, “by pursuing his own interest…frequently promotes that of the society more effectually than when he really intends to promote it”[1], hence the “Invisible Hand”. This is the foundational principle upon which the laissez-faire economic philosophy is based.

This is in contrast to an economy where the overall outcomes are dictated by a centralized authority, also known as a planned economy. Adam Smith argues against a planned economy, stating that he has,

“never known much good done by those who affected to trade for the publick good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.”[1]

[1]: Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford: Clarendon Press, 1976. Print.