Invisible Hand, what up? Part 1

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The Invisible Hand is perhaps the most well-known economics turn of phrase. During a recession, it may seem not only invisible, but missing altogether. What does it really mean? And, where is it these days? This post will cover the first question and we will explore the second question in a part 2 post.

Here’s economist Peter Leeson, author of The Invisible Hook: The Hidden Economics of Pirates, on the first question:

“In 1776 Scottish moral philosopher Adam Smith published a landmark treatise that launched the study of modern economics. Smith titled his book, An inquiry in the Nature of Cause of the Wealth of Nations. In it he described the most central idea to economics which he called the “invisible hand.” The invisible hand is the hidden force that guides economic cooperation. According to the Smith, people are self-interested; they’re interested in doing what’s best for them. However, often time, to do what’s best for them, people must also do what’s best for others.

The reason for this is straight forward. Most of us can only serve our self-interests by cooperating with others. We can achieve very few of our self-interested goals, from securing our next meal to acquiring our next pair of shoes, in isolation. Just think about how many skills you’d need to master and how much time you’re require if you had to produce your own milk or fashion your own coat, let alone manufacture our own car.

Because of this, Smith observed, in seeking to satisfy our own interests, we’re led, “as if by an invisible hand,” to serve others’ interests too. Serving others’ interests gets them to cooperate with us, serving our own. The milk producer, for example, must offer the best milk at the lowest price possible to serve his self interest, which is making money. Indirectly he serves his customers’ self-interest, which is acquiring cheap, high-quality milk. And on the other side of this, the milk producers’ customers, in their capacity as producers of whatever they sell, must offer the lowest price and highest quality to their customers, and so on. The result is a group of self-interest seekers, each narrowly focused on themselves but also unwittingly focused on assisting others.”

Here’s what Adam Smith, author of The Wealth of Nations, wrote:

“It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

That is, we pay the butcher and the baker a monetary price for their effort. We don’t tell them we are hungry and hope for the best; we give them the means to satisfy their own needs when we pay them. Thus, we ourselves had better find a way to satisfy someone else’s needs or else we won’t have the resources to pay for diner.

So that’s the invisible hand, the order in society generated by many people freely seeking their own, but only able to do so successfully by serving others.

In troubled economic times, the second question, ‘where is the invisible hand?’, comes to mind because something about the system seems not to be working. What’s blocked it or made the unseen force disappear? Has something bound the hand, or blocked its effect?

Part 2 will cover the question of why the invisible hand seems to be missing these days.

7 Responses

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  1. I find it interesting that in today’s society we seem to have lost the connection to this “invisible hand.” Is it that we are too caught up in ourselves that we forget others around us? Altruism may be a long forgotten thought but I believe that it is time we start shaking the invisible hand. I of course do not mean physically doing so, but rather believe that we should remember that it is important to take care of those around us. We should stop allowing jobs to continuously hemorrhage out of the economy. Make a stand for what is right. It is time to make sure the invisible hand in this great nation is shuck first.

  2. The “invisible hand” is really what makes our world function. It seems our lives have been made a little easier by the “invisible hand”. No longer do we have to produce our own food, make our own clothes, etc. We are able to specialize in a particular thing that we can do for someone else. We do tend to be self-centered and if we could look at our service as an opportunity instead of just a means of our survival then our relationships would be better and we would perhaps be able to extend our “invisible hand” to many more people than we currently do and we would all be more successful in the end.

  3. has the invisible hand ever really exisxted in the 1st place is the question. yes, there has always been a cycle of give to get that seemed pretty straight forward: give services to get paid, then give money to get goods. but these transactions have always been governed and regulated by an authority in the background making certain rules on how these transactions should be done, how business should be conducted, laws that must be followed to do business. and we see this authority come in play even more when a recession hits because instead of self regulating, as the invisible hand theory suggests, the authority actually steps into full view by doing a bail out of some sort to get the market back in a functional state.

  4. The “Invisible Hand” is Capitalism at its finest. The U.S. was built on the concept of free markets. The desire and ability to use one’s own skills, talents, and creativity to produce products and services that others would want to pay for, much like the butcher, brewer, or baker. And if the products or services were poorly make or inadequate, the people would purchase elsewhere, thus promoting competition. And competition is good – now the people can have choices. This free market concept also promotes employment. As businesses grow they will need to hire more people. Eventually, the demand and supply for a product or service will reach an equilibrium point that people would be willing to pay and suppliers willing to provide.

    I believe that the invisible hand is greed – and as Gordon Gecko from the movie Wall Street said, “Greed is good.” The problem is too much Government involvement. Yes, the boom and bust of the business cycle will have significant positive and negative impacts; however, in the long run, it’s self-correcting.

    You ask where the Invisible Hand is today. It’s in President Obama’s pocket.

  5. In the Star Wars universe “The Force” is an invisible energy field created by all living things. It surrounds us and penetrates us; it binds the galaxy together. In the field of economics “The Invisible Hand” is the natural force that guides free market capitalism through competition for scarce resources. In Star Wars a Jedi Knight uses The Force for the betterment of others without thought for himself even though those actions will often have a positive outcome for the Jedi as well. In the free market a participant will use The Invisible Hand acting entirely out of self-interest yet those actions leading to the exchange of goods and services enables others to better themselves at the same time.

  6. Invisible hand part one
    This article is how many businesses become successful. Wal-Mart for instance, started out by seeking the cheapest prices for its customers. Sam knew that in order for a business to succeed its customers needed to get the most utility form Wal-Marts goods, ceteris paribus. Unfortunately we live in an economy with many rules and regulations. The two obstacles I believe affect most businesses especially entrepreneurs are minimum wage and demand for labor at a cheap cost.

  7. The “Invisible hand” is key in the functionality of economics in our society. People are concerned with their own well being, and will choose options that have the least opportunity cost to themselves. The invisible hand has made people seem less selfish because it creates a situation where people do something that benefits others besides themselves. The invisible hand has made life a lot easier for us, you can now specialize in one trade instead of trying to be a Jane of All Trades. Some people may see the invisible hand as too restricting, there are going to be positives and negatives to almost everything in our world, but in this case I believe the benefits are greater. I personally wouldn’t want to have to make my own clothes, grow my own food, and make everything else that is a necessity for me and my family.

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