The theory of the invisible hand is a metaphor that points to the market economy as a tool capable of achieving maximum social welfare while seeking self-interest.
The British economist Adam Smith coined the concept of an invisible hand in the eighteenth century to describe the natural self-regulating phenomenon of the free market. A process in which competition plays a primordial role in the search for efficiency and equity in the use of resources and the product of economic activity.
He argues that free competition is the best way to run the economy, because the possible contradictions and systematic problems that the market laws create can be solved by the “invisible hand” of the system.
The greater importance of the invisible hand increases as society develops and the division of labor grows. With the existence of this natural order makes government intervention unnecessary in most matters and it is precisely that Adam Smith is identified with the Laissez Faire. The work of government, therefore, should focus on internal and external defense, on administering justice and providing public goods, the rest should be done by the invisible hand.
The absence of the government in legislative work concerning the market is therefore one of the main bases of the economic theory elaborated by Adam Smith throughout his bibliographical work. For Smith, the leaders must deal with other areas of control more focused on defense or justice, leaving the market to operate freely.
The objective of the visible hand should be to promote the free market, and not to hinder it. There are many examples of well-designed and implemented policies that have reinforced the positive aspects of the free market, in a similar way to traffic rules, traffic signals or speed limits, which seek free traffic as well as efficient and secure .
Prices and profits tell entrepreneurs what they have to produce and what prices they should set for their products. High prices and high profits are touches of attention that warns them that they should start to produce some merchandise. Few gains or losses are alarm bells that haunt the businessman and shake him rashly until he stops producing.
The invisible hand is the metaphorical way in which the historical economist Adam Smith referred to the capacity of self-regulation that the free market has intrinsically according to its theories and studies. In his book “Theory of Moral Sentiments”, published in 1759, was the first place where this term came to light, although it achieved greater notoriety in his other book of 1776 “The Wealth of Nations.”
The visible hand can take many forms. One is monetary policy, the process by which the monetary authority of a country controls the supply and availability of money for the purpose of maintaining stability and economic growth.
In this way Smith indicated that the role of the market is basic and fundamental and that the less political or governmental control exists in the economies, the more easily they will find their ways and the maximum welfare. According to his ideas, the natural game of demand and supply is sufficient for the attainment of equilibrium of the economy and the natural fixation of prices.
The invisible hand presupposes that there is an inertia by which the market and its self-regulation leads individuals to make the best decisions for the majority of the population to achieve well-being. In other words, it is a sort of automatic control mechanism that compensates the actions taken as a whole regulating social conformations.
It is therefore assumed that the self-regulation provided to the markets helps to achieve an optimal market. For this, individuals must behave in a way that they can act without intermediation of the state and in the pursuit of their own interest.
The metaphor of the invisible hand also supposes that individuals are stimulated or arrested to produce or not to follow the level of prices that exist in the market. That is, prices and profits are already indicative enough to know when to participate in the market or not. If there are gains it is a stimulus for production, while losses lead individuals to quit.
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