The Invisible Hand is a theory first proposed by Adam Smith that suggests a laissez-faire, or hands off economy, is ideal. The idea is that the market and economy will self-regulate without the direct involvement of the government. People acting on their own, and with their own interest in mind, benefit the public’s interest. Those who buy and sell in a market who only think of their own gains actually drive the economy. Competitive pricing by sellers drives buyers to find the cheapest option while encouraging other sellers to either drop their prices or offer a better service. In a supply and demand relationship, the higher the supply the lower sellers drive their prices and the more competitive businesses get; and when the supply is low, then the market for importation rises and the economy benefits. As long as business keeps rolling and individuals continue to purchase goods at lower prices, then competition in the market will continue and the economy would not stall but continue to grow.
The term was first brought up in Smith’s work The Theory of Moral Sentiments in 1759 when discussing income distribution, but the idea was expanded upon in The Wealth of Nations in 1776. After his first book was written, Adam Smith went to France and observed the country’s laissez-faire economic philosophy and neoclassical economics. Neoclassical economics is an economic approach that focuses on the factors of supply and demand. With the Invisible Hand, supply and demand play a large part in the success of the economy because theoretically that is the driving factor behind the market since the government would not have any power over businesses or any imports. By Smith’s standards after the market is left alone to regulate itself, the economy will stabilize and generate its own success. However, the time it takes for an economy to reach an equilibrium between the supply and demand, and the individual/public interest can vary greatly. This unreliable time frame and risk of an unstable economy can result in governments pulling the plug on a hands off approach to take matters into their own hands.
The success of the Invisible Hand hinges on individuals always going for the cheapest option. Competition in the market depends on businesses trying to beat each other for the better deal and more customers. However, if consumers don’t consistently go for the cheaper business, then it would take much longer for a laissez-faire style economy to balance itself out. Additionally, the variables in today’s market versus that of Smith’s time greatly affect the Invisible Hand. Today’s market is full of advertising that can sway consumers to one product or another, despite any price differences. In the Invisible Hand theory it is also important that the government stay out of all economic affairs and leave the market unregulated. The actual likelihood of a government-free market is very low. If the economy takes too long to reach an equilibrium it can cause mass unemployment and panic. Instead of riding it out, governments tend to try and quell any panic by regulating any economic affairs; similar to how the US government bailed out AIG in 2008 following the stock market crash.