What is the Invisible Hand in Economics in simple words
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The “invisible hand” is just the name given to the concept that with millions of individual actors acting in their own best interest, the markets will naturally gravitate towards the “best” versions of products/services and the most efficient use of money. There is no discrete entity guiding the economy (as was often the case historically) but rather an _invisible_ force that came about organically.
So, for example, there would be no central player telling people to use a particular metal for building tools over another metal. Rather, buyers would gravitate towards tools made of a particular metal because it was better _for each individual buyer_ and blacksmiths would gravitate towards making tools of that metal because _each individual blacksmith_ sold more tools that way. No one colluded or decided on that metal, but rather the individual choices of each person would guide the market in that direction.
Smith also never used the phrase “invisible hand of the market,” and advocated for strong anti-monopolistic regulations, distribution of excess profits to the poor and infirm, and a robust public education system— something that did not exist in the 18th century.
The commenter above eloquently distilled the idea of the invisible hand. The phrase appears this way in Wealth of Nations:
“By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it…”
The invisible hand explains self correcting behavior or incentives. In this case, self interested profit seeking leads to an optimal allocation of resources and investment.
If there is too much investment in farming and not enough in making steel, then too much food is produced and food prices decline. This reduces profits from farming and motivates resources towards making steel.
Okay i’ll try so In economics, the invisible hand is an invisible force that helps the market work without any outside influence or government control. It is the idea that individuals working in their own self-interest will make decisions that are good for the economy as a whole.
Its a natural force lol
The invisible hand makes you eat food when you’re hungry
The invisible hand makes you open reddit when you’re bored
The invisible hand makes you wear a sweater when you’re cold
The invisible hand makes you go to the grocery store when you need groceries
The invisible hand makes prices go up when too many people buy something in short supply
Same thing
“If a job needs doing then someone will do it so long as it is profitable.” That’s about as simply as I can get.
I’ll use an unrelated example. Video games.
Think of an open world game, where you have a questgiver in area A and your objective is in area B. There are multiple paths between A and B.
You pick up the first quest and travel to B via the main road, to avoid monsters. This path takes 10 minutes to travel from A to B, and 10 minutes back. However, on the second quest, instead of following the road, you cut through the forest to save some time, but encounter some monsters. This takes 9 minutes. You thought it would take 5, but those monsters slowed you down and you took 4 minutes to defeat them. On the third quest, you find a tunnel in the forest and it is clear of monsters. It’s winding, so it takes 8 minutes to traverse from A to B.
On all future quests, you take the tunnel because you know it is the fastest way over and no monsters to fight. A few players may take the road or cut through the forest, but everyone with experience in the areas will know to take the tunnel.
The invisible hand refers to both this behavior (an individual takes the path with the lowest costs) as well as the behavior of the aggregate entire population (most of the group chooses the fastest path). The invisible hand “guides” or “pushes” both individuals and societies to use the resources with the lowest cost.
If the monster population was to be reduced (i.e. lower NPC spawn rates), then the direct path through the forest would only be 5 minutes, maybe up to 8 if you do encounter a monster, but overall this path is suddenly better (lower time = lower cost), so the invisible hand will push the player toward the most efficient path.
It’s about utility, trade, and competition.
If I value my widget at 5 Utiles and a buyers money at 7, and a buyer values it at 7, then we trade. He values his money at 5, so he gives me his 5 worth of money, and I give him my 5 worth of widget. Now we both have something worth 7 instead of 5 and between the two of us 4 units of utility are created in society.
Now enter competition. Another guy can produce the same widget for 2 and sell it for 4. The buyer still values it at 7, so he pays 4 and gets seven. The new seller gains 2 like the other one but will sell more because it’s cheaper, and the buyer gains 3, so now 5 units of utility are created in society are created in stead of 4, and the new guy will gain market share and be more profitable potentially with the ability to produce even cheaper as he gets more efficient.
So now we have incentives in the market for the widget to produce goods for cheaper and or better depending on how the value relationship works out. More utility is created in society and products become more and more affordable and on the quality end products become more and more useful. Society progresses and quality of life improves. This is classic micro, and we owe the modern era to this process. “The invisible hand” drives society to increase utility which ultimately equates to a better quality of life. It’s important to note though that it’s is all
Based on perception of value. A unit of utility is a highly personal thing. Everyone’s will be different, but there are laws and averages we can rely on like “The law of diminishing marginal utility”.
Today, we call it market forces. Economics assumes that all participants in a market are rational actors. That is, they will do whatever ever is in their own best interest. That usually comes down to finding the right balance between cost and quality. Individuals and companies making choices about what to buy and sell and for what price is the force that drives changes in the economy
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