What Is The Invisible Hand Theory?

Invisible hand theory is a metaphor that was first written about by Adam Smith in his book 'An Inquiry into the Nature and Causes of the Wealth of Nations'. This is an economics book about the marketplace and the invisible hand is said to describe the self regulating marketplace. The invisible hand theory is sometimes referred to as the invisible hand of the market.

The theory revolves around;

• Self interest.

• Competition.

• Supply and demand models.

The way invisible hand theory is described is that there are companies, usually in more developed and thriving markets that self regulate. This self regulation helps with the selfish interest of the company that is self regulating but it also helps with the national interest as it keeps the trade within the country rather than the trade being taken outside for particular products.

Self regulation is where the quality and price of a product is constantly monitored by the company so that they can ensure that they are competitive within the market and have the correct quality of product to do the kind of business they wish to do. This level of quality will be decided by the market that they are selling into and will need to be at the same quality as other products within that market.

This is an advantage to the country although within the invisible hand theory, there are advantages like these that are not premeditated when the initial self regulation begins. There are many unplanned and unintended consequences that come from the invisible hand theory but according to Adam Smith, these are usually for the common good and the theory does provide many industries with different positives.

It is a metaphor... That in a free market an individual perusing their own self-interests tends to also promote the good of his community. en.wikipedia.org