Invisibe Hand Theory

Topics: Adam Smith, Economics, Supply and demand Pages: 6 (2333 words) Published: April 8, 2013
A key thinker in political economy: Adam Smith and his Invisible Hand theory

Adam Smith’s contributions to the world in generally and to the economic in specifically cannot be denied. According to Brandon (2011), people, especially economic students likely recognize him from “the invisible hand metaphor, division of labor examples, or the promotion of earning honest profit”. These ideologies have been discussed for over 200 years and they are often accepted as the straightforward even though there are some counter-arguments refuting his ideas. This essay will analyze Smith’s well-known theory – the “invisible hand” metaphor and provide the application of this theory in Vietnam.

Adam Smith’s theories comprise of many fields such as philosophical, political and economic. In term of economic aspect, the “invisible hand” metaphor is one of the most famous ideologies of Smith that is still applied in the modern world. However, this metaphor seemed not as important as its implication in recent years. In fact, Smith just mentioned three times about this on three different books with different meanings. According to Kennedy (2009), the “invisible hand” appeared the first time in History of Astronomy (1758) implies the superstition about the existence of Roman God (Jupiter). This metaphor was remarked once in The Theory of Moral Sentiment (1959) which refers to the distribution of the produce by feudal lords to those working for them. It can be seen that the idea about market was not discussed in the above illusions. On the other hand, the concept of “invisible hand” stated in An Inquiry into the Nature and Causes of the Wealth of Nations (or with brief name - the Wealth of Nations, 1776) is quite similar to its meaning in the modern economy. Smith said “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it” (Smith, 1776). In other words, Adam Smith asserted that individuals should be free to pursue their interests (free market). He believes that the ambitions of maximizing the profits of individuals will lead them to find the most advantageous employment which may bring benefits to the society even without their intention. To illustrate this point, Smith said “it is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest” (Smith, 1776). That means the reason for supplying these products of entrepreneurs is to gain the profits, but it can be seen that consumers are also satisfy with this supply. Therefore, both suppliers and consumers or all people in generally can benefit from the “invisible hand”. One of the benefits of self-interest economy is the advance from competition. Firstly, the cost of goods is decided by the supply and demand and individual cannot impact these rates (Leroy, 2010). In accordance with Holcombe (2006), “invisible hand” has given a chance to market players to compete with each other. Thus, under the high pressure from free market, it is more difficult to maintain the survival of the businesses. In turn, the entrepreneurs have to decrease the prices of their commodities in order to compete with their rivals (Smith, 1962). As the result, setting competitive market prices is the advantage of applying “invisible hand” in the economy and consumers can have more power of choice. Moreover, competitive market has encouraged businesspeople to find the effective methods to improve the quality of their goods. As explained by Holcombe (2006), there is a small difference in quality of the products in the competitive market because no one is willing to buy lower-quality commodities which have the same prices as the better ones. Hence, the merchants have to consider the optimal combine of inputs and utilize them in efficient ways. Consequently, this leads to the innovation in producing qualitative and affordable products....
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