Adam Smith's Invisible Hand Theory

Adam Smith's Invisible Hand Theory

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Adam Smith is widely regarded as the father of modern economics and one of the greatest economists throughout the course of history. He is mainly famous for a two books that he wrote, these two books are considered thee base and infrastructure of the world of economics. The two books he wrote were, “The Theory of Moral Sentimental” and “The Wealth of Nations”. But although Adam Smith was such a great economic philosopher, he wasn’t a very good foreteller or future predictor. The economic scenario now is very different from the economic landscape of the 1700’s. Giant super-corporations can now govern the flow of the market, unlike Smith’s time’s. Even though elements of Smith’s ideas have changed over time, some of his beliefs remain important factors in economics to this day. One of those truly unique philosophies is the “Invisible Hand”.

Invisible Hand is the word most economists use to explain the self regulating nature of a market. So the “The Invisible Hand” is basically a combination of supply, demand, competition and all the other factors that affect a marketplace, provided the government doesn’t interfere.

( The section below can get confusing as you approach the end, pls. read it carefully.)
Here’s how the invisible hand works, for example bread prices rise, bread now costs a lot and people want to avoid buying it, or start buying bread from a competitor willing to cut his prices. Now other bakers want to find a more efficient method and try to cut prices, so that people buy their bread. The average market for bread drops. Now people want to buy bread, because its cheap, and because lots of people are buying bread, there’s a shortage of bread in the market. The bakers can now raise bread prices and increase their production quantity, so they raise the price of bread. With the raised prices they can afford more flour and invest in high efficiency automated machines. But again bread gets too expensive for the consumer, so they again start looking for a cheaper source of nutrition. And this cycle continues.( Amazingly! The invisible hand(in theory) also works in nature, for example, “the carbon cycle” which is the rise and fall in carbon dioxide levels in the atmosphere.

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All this might sound very realistic and obvious, but in reality, the invisible hand theory doesn’t work! Market forces like share trading, public ownership and other market complexities just can’t be taken care of by such a simple concept, which does not take all these forces into account. In today’s complex world, all the invisible hand is, is useful fiction.
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