The invisible hand

There are two important features of Adam Smith's concept of the "invisible hand". First, Smith was not advocating a social policy (that people should act in their own self interest), but rather was describing an observed economic reality (that people do act in their own interest).

 

Second, Smith was not claiming that all self-interest has beneficial effects on the community. He did not argue that self-interest is always good; he merely argued against the view that self-interest is necessarily bad.

 

The "invisible hand" refers to the ability of the market to correct for seemingly disastrous situations with no intervention on the part of government or other organizations.

 

If a product shortage were to occur, that product's price in the market would rise, creating incentive for its production and a reduction in its consumption, eventually curing the shortage. The increased competition among manufacturers and increased supply would also lower the price of the product to its production cost plus a small profit, the "natural price."

 

Human motives are ultimately out of self interest, the net effect in the free market would tend to benefit society as a whole.

 

Posed by free and open markets among nations. If markets were free and open, the question arose how would a nation keep its capitalists from moving their capital out of the nation and into other countries where labor could be bought for cheaper. The answer, Adam Smith says, is that they will act with a view toward their own particular nationalistic interests which happen to correspond with the "public interest" at home.

 

In this way, by "preferring the support of domestic to that of foreign industry," the capitalist will in a sense be "led by an invisible hand to promote an end which was no part of his intention."