Adam Smith
Adam Smith, dubbed “the father of modern Economics” was an 18th-century Scottish economist, philosopher, and author. In this book, “The Wealth of Nations”, he came up with the concept of the “invisible hand” in which he makes reference to how markets automatically correct themselves without external intervention from the government. He attacked the economic system of his day which restricted free trade through protectionism, economic restriction and legal barriers.
Smith’s ideas further develop into the importance of free markets, assembly-line production methods, and gross domestic product (GDP). All form the foundations for modern macroeconomics.
Invisible Hand
The invisible hand is a metaphor for the hidden forces that move the free market economy. With individual self-interest, freedom of production and consumption being the 3 key factors within an economy, society's best interests are fulfilled. The constant fluctuations of individual pressures on market supply and demand cause the natural movement of prices and the flow of trade is formed. Essentially, interdependence between consumer and producer motivates producers to make what is socially necessary, even though they may care only about their own well-being.
Analysis and example - Consider a small business facing intense competition. To best position itself in the market, the small business makes the decision to invest in higher quality materials for its manufacturing process as well as reduce its prices. Whereas, a bigger business may do so as a strategy to gain market share and drive sales, which for them would be in their own best interest. The invisible hand is at work because the wider market now has access to more affordable and higher-quality goods.
In another example, we can analyse the ripple effect a retail company may have when attempting to meet consumer demand. Consider a clothing store that projects demand for jackets as a result of the change in season. The clothing store will align with the jacket manufacturer to secure more jackets. Meanwhile, the jacket manufacturer will communicate with a raw materials distributor/farmer to ensure it has the materials it needs to create more jackets. We can see that each entity in this cycle is acting in its own best interest. However, each entity is also creating economic activity for other parties. Furthermore, these parties are lacing together a process that ends in consumers receiving the products they need. Though each individual selfish action taken by itself may not amount to much, the invisible hand assists in moving resources along the chain to deliver a final product.
The invisible hand is instrumental in forming market equilibrium without government or other forces pushing it into unnatural patterns. When supply and demand find equilibrium naturally, surpluses and shortages are prevented. In conclusion, the best interest of society is ultimately achieved via self-interest, freedom of production and consumption.
