"Invisible, Yet Invaluable: The Hand That Moves Markets"

Isha V Joshi
Dec 5, 2024
3 min read

Source: Investopedia

As Adam Smith quoted, “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 self-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.”

INTRODUCTION-

In 1776, the famous economist Adam Smith, who is also known as the 'Father of Economics' and the 'Father of Laissez-Faire', wrote in his book "An Inquiry into the Nature and Causes of the Wealth of Nations" about the concept of the invisible hand. The theory simply states that people acting in their own self-interest unknowingly contribute to the well-being of the economy. But how? Let's understand.

The Invisible Hand is a metaphor for some invisible forces that move the free market economy. Forces can sometimes be personal motives as well, which then lead to societal benefits. Unknowingly, personal motives such as profit maximization and job satisfaction lead to optimum utilization of resources and increases efficiency, acting as one of the driving forces. Thus, the theory of the Invisible Hand states that without too much government intervention, the market can self-regulate and achieve social benefits.

WHY THE INVISIBLE HAND STILL MATTERS:

"While the Invisible Hand is a historical concept, why does it remain a topic of discussion today? What makes it relevant in our modern world?"

Following are some of the reasons why this concept is still relevant in today's world:

It is considered as a backbone of the free market economy where individual decision-making decides the resource allocation.
It also fosters innovation, as businesses try to improve their offerings, which often leads to many positive outcomes.
It empowers consumers and entrepreneurs as businesses leverage the wide gaps, while consumers make informed choices.
In an interconnected economy we live in today this theory can operate across borders, benefiting consumers and producers worldwide.

The theory also creates some positive impacts in the real world we are living in today, such as new innovations by tech companies and a whole new world of the start-up ecosystem. The innovative digital payment system of UPI (Unified Payment Interface) is a classic example of positive impacts on the economy. Companies like Apple and Google develop high-quality, user-friendly financial tech products such as Google Pay and Apple Wallet. These systems help to increase their sales and attract more customers, leading to massive job creation and improving the quality of life, benefiting both businesses as well as consumers.

In India, companies like Zomato and Swiggy allow customers to pursue their self-interest, which benefits society by creating an efficient delivery system and marketplace. It has created an altogether a new gig economy worth Rs. 35,000 crores and created millions of job opportunities for unskilled and semi-skilled workers across India.

LIMITATIONS:

While Adam Smith stresses self-interest and Laissez-Faire Policy, the theory also faces certain limitations. For instance, during the 2008 financial crisis, Banks and Financial Institutions persuaded customers to invest in high-risk instruments by prioritizing their self-interest of profit maximization. After this, we all know what happened, which then led to a financial collapse affecting millions of jobs and the economy.

CONCLUSION-

As we conclude, the theory highlights how individuals' actions can be self-interest driven, which can lead to societal benefits. However, as we delve more into the world of modern economics, the theory still reminds us of the impact of personal choices on society. Whether as consumers, entrepreneurs, or policymakers, understanding this principle empowers us to contribute to a balanced and prosperous economic system. The government has initiated "EASE OF DOING BUSINESS" with the aim to reduce the regulatory burden on businesses, giving them a free landscape. With this initiative, the government is moving towards a high governance system.

“I would love to hear your thoughts as well. Drop your insights below!”

#AdamSmith #Economics #Freemarket #Marketeconomy #ishanomics #ishavjoshi