What does Adam Smiths invisible hand mean?

Theory of Sentiment

The idea of the invisible hand presented by Adam Smith in The Wealth of Nations is an illustration of how the law of supply and demand benefits society as a whole in an indirect way.

Of Scottish origin, born in 1723, Smith is considered by many to be the father of modern economics. He taught at the University of Glasgow. The first mention of the expression “invisible hand” appeared in his first book, The Theory of Moral Sentiments (1759). His most famous book, The Wealth of Nations, was published in 1776 and was an immediate success. His ideas on the free market, free trade and the division of labor are to this day the foundation of economic science.

Take the case of an inventor who develops a prototype light bulb that consumes less energy than other bulbs. The inventor partly develops his light bulb in order to market it and earn money, i.e. he is pursuing his own self-interest. However, society as a whole will indirectly benefit from the invention because factories will be needed to build the new bulbs (providing jobs for workers) and ultimately improving the lives of those who can light their homes better and more economically.

Universidad de glasgow

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University of Edinburgh

Adam Smith’s most popular metaphor of the “invisible hand of the market” is often thought to describe an abstract regulatory mechanism of supply and demand that produces economic equilibrium. But a review of Smith’s texts reveals that this is a misinterpretation.

“A beautiful metaphor that refers to that force of many, but none in particular, that ends up ‘adjusting the market’.” This is how María López Pérez describes it in an article for El País (“The invisible hand does not exist”, in which she speaks of the market as an “unidentified entity, without responsibility or human identity but which has vital impulses that demand suffering, adjustments, payments from citizens”. But the misunderstanding of the invisible hand is not exclusive to the mainstream press. In his article published in Harvard Business Review (“There is no invisible hand”), Jonathan Schlefer – PhD in political science from the Massachusetts Institute of Technology (MIT) and researcher for Harvard University’s business school – states, “After more than a century of trying to prove the opposite, theorists investigating the subject concluded that there is no reason to believe that markets are oriented, as if by an invisible hand, toward an optimal equilibrium.”

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Inasmuch as every individual seeks as far as possible to invest his capital in national activity and to direct that activity so that its production attains the maximum value, every individual necessarily works to make the annual income of society the maximum possible. It is true that as a rule he does not attempt to promote the general interest, nor does he know to what extent he is promoting it. In preferring to engage in domestic rather than foreign activity he is only pursuing his own security; and in directing that activity to produce the maximum value, he is seeking his own profit; but in this case as in many others, an invisible hand leads him to promote an object which did not enter into his purposes. That this is so is not necessarily bad for society. In pursuing his own interest he will often promote that of society much more effectively than if he deliberately attempted to promote it.

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In his Theory of Moral Sentiments, Smith argues that, contrary to Thomas Hobbes’ assertion, psychological egoism is not the basis of all human behavior, but that it is to be found in the process of sympathy (or empathy), through which a subject is able to put himself in the place of another, even if he derives no benefit from it. This, together with rational selfishness, would indirectly lead to the general welfare of societies through the process of an invisible hand. Later, in The Wealth of Nations, Smith deepens or modifies this logic, indicating that this process is expressed through competition and other mechanisms that would be capable by themselves of allocating with efficiency and equity both the resources and the product of economic activity. (see economic efficiency). This apparent modification or contradiction in the proposal has given rise to the so-called Smith’s problem: “Smith’s problem” is the result of positivist readings that do not consider the general context or the interrelations between the different parts of Smith’s research program. In fact, it can be seen that there are very important analogies between the social configuration proposed in The Theory of Moral Sentiments and the harmony of the market in The Wealth of Nations, to the point that they are part of the same paradigm.”[1][2

What does Adam Smiths invisible hand mean?
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