What is the Invisible Hand in Economics in simple words
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I need batteries sometimes, and it doesn’t really matter who I buy them from. I found them at a local store for $15, but then I checked on Amazon and found them for only $10. I decided to buy the cheaper batteries to save some money.
The local store probably isn’t going to sell as many batteries because they are more expensive. So, the store is going to have a harder time staying in business. Maybe they will find a way to lower their prices for batteries, or perhaps just sell other things instead. Either way, selling batteries at $15 isn’t working out well for them right now.
This is the invisible hand. No one is making it illegal for them to overcharge for batteries, but no one is making me pay the higher price. So their business decisions will be guided by the invisible hand of people making other purchasing decisions and choosing not to buy their batteries.
Now, apply this same logic to everything else. Food, services, jobs, etc.
People what to buy vanilla beans. It’s hard to grow vanilla beans, so people don’t want to do it. So there aren’t very many vanilla beans. There is high demand but low supply. The people with the vanilla beans realize they can raise their prices, since there’s not a lot of competition, and while not every can or wants to pay a higher price, someone will. The high price of vanilla beans makes people want to grow vanilla beans, since they can be sold for a high price. Now more people are growing vanilla beans, the supply increases, the price falls.
Eventually you reach an equilibrium: the right number of people are farming vanilla to produce a supply just big enough to satisfy the market. Produce any more and the price falls, making people want to quit vanilla farming and do something else. Produce any less and the price will go up, attracting people to vanilla bean farming.
Apply the same idea to the production of every good and service and you see that without any overall management or central planning the overall economy produces what everyone wants, as if by an “invisible hand”.
It’s a lie used to trick people into believing they aren’t being robbed blind and helping to falsify our economic strength
https://podcasts.apple.com/us/podcast/freakonomics-radio/id354668519?i=1000589333538
Podcast about Adam smith.. philosopher from the -1700’s where the term came from
“Better is the enemy of Good Enough”
Many people get by with Good Enough, but there are those who want Better. So, they try to find or create Better.
Consider Airplanes. The first airplanes went from here to there without killing you very often. Then people wanted airplanes that didn’t kill you so much and went places faster. This led to improvements in science, construction, metallurgy, and so on.
The pursuit of Better in a single field led to thousands of people working toward that goal by way of whatever they could contribute. This is the Invisible Hand working to inspire and coordinate (loosely) the actions of many toward a general purpose.
Economics isn’t just about money, it about the use of scarce resources. What constitutes “Better” and who decides?
In the 1930s the race was on to make more powerful AND reliable aircraft engines. Air cooled radial engines used cast cylinders with fins to dissipate the heat. It worked, but only up to a point, and then it melted. One manufacturer went from thick fins (casting) to thin fins by using saws to cut narrow gaps between the fins. More expensive? Yes. More reliable? Very much so!
Who decides? The customer. Many thick fin engines were still made for lower power applications. The thin fin ones went to the cutting edge type stuff, because there was a market for it.
The Invisible Hand moves toward where people (many or few) want to go.
A concept created to distance the actors from their actions. Bob can buy up the house and tell Joe “fuck you pay me double”. Then Bob says it’s the “invisible hand of the market”, not me being a leech.
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